The latest on Coventry’s work comp results

The healthplan company’s Q2 earnings were released last week. If you were looking for any insights into their comp business, the Coventry release wasn’t the place to look; there was no mention of workers comp results – this despite the sector’s three-quarters of a billion dollars in revenue and outsized contributin to margin.
The big news – actually it was pretty much the only news – was not related to operations, but rather the settlement of the Louisiana lawsuit. Coventry added $0.68 to EPS after the May 31 definitive settlement agreement reduced the company’s liability in the class-action lawsuit. Originally, Coventry had reserved for the full amount of their liability, which came to $1.18 a share; the definitive agreement resulted in a substantial reduction in the company’s liability. As to the merit of the suit, my take is Coventry was mistreated; this suit couldn’t have succeeded in many places other than Louisiana, where providers’ legal power is all out of proportion to any harm they may suffer.
The workers comp operating results appear to be pretty flat, notwithstanding CFO Randy Giles’ statement that Coventry “increased our fee revenue guidance slightly for the second consecutive quarter, driven by our Workers’ Compensation Services business. We continue to be pleased with this ability of these businesses and the very valuable nonregulated earnings that they produce for the company.” (thanks to seeking alpha for the transcript)
While the company does not break out WC financials from the rest of the business, the workers comp sector is the lion’s share of the “Other Management Services” product type. Sources indicate comp is about 88% of that sector’s revenue, making Q2 revenue somewhere in the $195-$199 million range, up slightly over Q1’s $191.6 million, (which was a 4% increase over the prior year’s quarter).
Coventry remains enthusiastic about this business, characterizing its offering as the “Most complete national offering…[with a] Long-term penetration opportunity…CVH offers unparalleled integrated capabilities…[in a] fragmented industry ripe for consolidation…] (from a June 2011 Investor Presentation)
I’d disagree with their characterizations in several ways. First, Coventry is a network and bill review company first and foremost. While it does have offerings in complementary product lines, they aren’t nearly as robust, and certainly nowhere near as dominant as their PPO (their bill review operation is far from industry-dominating). Second, Coventry’s work comp revenue is growing primarily via price increases; the company has lost business of late (Broadspire’s very public split being the most noticeable) and Anthem Wellpoint’s network offering is gaining traction both within, and outside, California.
Second, their integrated capabilities are not “unparalleled” — far from it. Moreover, the market doesn’t see the value of integrating what are pretty different services under one vendor. To the extent that Coventry has been able to sell combinations of services, they’ve been doing this by offering deals – “you buy our PBM offering and we’ll offer a price reduction in these other areas.”
Finally, Coventry is not investing in this business – in fact they’re harvesting margin from workers comp, margin they need to prepare for the post-2014 world of health reform. Don’t expect them to spend anything they absolutely don’t have to on workers comp; this is a cash producer, not a long term growth business.