Coventry – a good Q1 2010, but what about the future…

Coventry released its Q1 2010 financials today, and looking at the numbers one would have to be a naysayer to find fault. The company is successfully exiting the Medicare Private Fee for Service business, growing its Medicare, Medicaid, and Part D revenues, and has also seen an increase in commercial membership.
From a financial perspective, earnings are on a solid path and guidance is up over previous numbers. Medical Loss Ratios are well under control across all products, reserve development has been positive, enrollment in governmental programs is strong, and commercial membership is up by a bit.
While one would think it’s all good, I’m less sanguine.
Commercial membership was up due to an acquisition in Kansas, a region of growing interest at Coventry. Same store growth was actually negative by 20,000 members – not surprising given the economy, but nonetheless something to watch.
MLRs are being ‘managed’ more by rate increases than by ‘managing’ the medical; while Chairman and CEO Allen Wise talked a bit about the need to be the low cost provider, there wasn’t much – if any – discussion of exactly how Coventry was going to do this beyond identifying good providers and narrowing their networks to focus on those providers.
That’s all well and good, but any health plan can figure out who the ‘good’ providers are and strike a deal, and many of Coventry’s competitors are quite a bit larger, have lots more members, and therefore have greater leverage.
The skills, assets, and capabilities a health plan will need to survive and prosper in the future are fundamentally different from those that Coventry has deployed so adroitly in the last few quarters. Successful healthplans will be those with:
– market share that enables them to negotiate from a position of strength in each geographic market
– a strong, positive brand image in the employer and individual sectors
– skill and deep knowledge in medical management, including data mining and especially chronic care management
Less successful healthplans will:
– not be among the market leaders in their geographic targets
– have long and highly successful traditions of risk selection and underwriting, attributes that are of far less importance in the brave new post-reform world
– be late to the medical management party, with a culture more akin to the old indemnity insurance companies than a true Health Maintenance Organization.
When you step back and look at what’s made Coventry’s resurgence possible, it’s fairly simple – getting out of unprofitable businesses, risk selection and underwriting, careful management of the Medical Loss Ratio through pricing.
All valuable and necessary, but not nearly as important in the future as brand, share, and medical management

So what’s the future hold for Coventry?
Corporate culture is brutally hard to change, and Coventry’s culture is built on risk selection, tough price negotiation with providers, and an intense focus on the numbers. While one would think these are assets in any market and some of those skills are indeed critical in any market, some will actually be counterproductive in the post-reform world.
Despite what Coventry’s leadership says, and I’m sure believes, Coventry is not now, and will never be, the low cost supplier in most of their markets – they just don’t have the negotiating leverage with providers. In the past this was OK; what they didn’t have in buying power they more than compensated for with admirable skill in risk selection.
Coventry appears to be working closely with Wichita Kansas health care system Via Christi; owners of the HMO just bought by Coventry, and the provider for a new Medicare Advantage product offered by Coventry as well. If Coventry is going to be successful they are going to have to build lots of similar relationships fairly quickly. I would be remiss if I didn’t note that Coventry’s HMO/PPO share in the state is second (at 19%) to the Blues at 37%.
That skill will be of very little value in the future.