Coventry – getting with the post-reform program

Coventry earnings call this morning was notable in at least two ways – more discussion about underlying cost drivers, utilization trends and management thereof, and the growing importance of low cost delivery systems from management.
And more evidence that (most) financial analysts don’t understand this business.
Here’s my view on the takeaways from the call.
The per-share earnings charge of $1.18 (from work comp PPO litigation in Louisiana) was the subject of a good deal of discussion during Coventry’s Q2 2010 earnings call this morning, but has to be considered in the context of the overall solid performance of the company.
Coventry actually increased guidance for the full year, marking another improvement in financials for the company that has been on a steady upward trend since CEO/Chair Allen Wise resumed his post a year and a half ago.
Commercial group membership grew nicely, while MLR (medical loss ratio) guidance decreased for the entire year. Coventry expects medical costs to increase in the second half of 2010, consistent with past experience.
In the prepared remarks part of the call, management diiscussed the implications of health reform, asserting the company’s recent results show it is well prepared for reform as it is able to control MLR while maintaining membership and expanding the company’s footprint in selected markets (the Mercy deal is an example)
The company’s statement noted Wise’s enthusiasm for results and performance of the company’s clinical management programs.
Clarity around MLR regulations was the first question – unsurprisingly, given the new regulations regarding limits on insurers’ administrative and other fees. Wise noted that the cost structure in one market in particular was going to improve by shrinking the company’s network, selecting more cost effective delivery systems/health systems. This marked a significant change from calls as recently as last year at this time. Coventry is clearly seeking to partner with more cost efficient health systems; as Wise put it, ‘we need to stop fighting over nickels and focus on overall costs’. [paraphrasing]
This was followed by a question about health plan utilization trends – overall utilization appears to have tapered off industry-wide, the question is why? Wise admitted Coventry doesn’t know, although they’ve spent a lot of time looking at this and their preliminary conclusion is the high deductibles and copays are leading to lower utilization, coupled with expiring COBRA benefits for some employees laid off quite a while ago.
Going forward, Wise sees the market as getting more competitive, making customer service and managing the little things critical to survival and success.
Wise thinks the group health product pendulum has swung back to mid-eighties model where networks are smaller, there’s less choice, and better control over cost and utilization. Coventry’s going to offer products with smaller networks based on provider systems with documented better outcomes and lower costs. They will preferentially look to buy provider-owned plans as they tend to have better cost structures than non-provider-owned plans. The analyst who asked the question wasn’t particularly interested in what Coventry was doing, but rather focused on pricing implications given the MLF regs coming out shortly.
That’s another example of how most of the analysts following this business are out of their depth. The real issue, the key to success, for Coventry and every other health plan, is how they are going to compete in a post-reform world. Price is a result of cost structure, and the failure of the analysts to focus on cost and cost drivers shows how disconnected the analysts are.
Another analyst asked if other health plans are pursuing similar acquisition strategies. Wise noted that there just aren’t that many potential acquisition targets that have good cost structures, fit geographically, and are provider-owned.
The company will be revamping its individual health product offering – in response to a question, Wise noted that the company’s distribution, IT, and benefit design are all works in progress, and there’s still a ways to go.
More to come after I review the transcript