That’s a question I’ve been asked a couple dozen times over the last two weeks.
For several reasons I don’t see Aetna selling the Coventry workers comp business.
1. It generates a ton of cash.
While the financials are a bit murky, the workers comp business almost certainly generates more than a quarter billion dollars in cash flow. Cash is king in the run-up to 2014, as health plans desperately need funds to prepare for the post-reform world. Acquisitions, investments in IT and care management, and free funds to deploy in as-yet-unknown areas are all going to require plans have lots of cash on hand.
2. It requires no time energy or thought
While senior management at Aetna is focused on reform, the work comp business requires little attention. President David Young and his staff have shown themselves quite capable of keeping things moving along, despite almost no investment into the business. While it is unlikely they’ll be able to keep all their clients without that investment, for now the WC business is the epitome of low maintenance.
3. They can’t sell the most profitable piece – the network
The network generates the lion’s share of the margin; if Aetna wanted to sell the WC business it is hard to see how it could transfer the network’s provider contracts to the new owner as most are a combined WC/group/governmental contract. Sure, Aetna could guarantee access to their contracts going forward for some period certain, but given Aetna’s history with workers comp, any buyer would be very reluctant to bet the future of their investment on that guarantee.
4. Coventry’s WC business has been losing customers
With ACE/ESIS the latest to move from Coventry to other entities for most managed care services (Progressive Medical for PBM, ACS/CompIQ for bill review, multiple networks for PPO), a sale would likely not generate near enough cash to make the transaction worthwhile (compared to the ongoing cash flow). Yes, it’s possible Aetna would want to sell it before more customers depart, but the multiple would likely be insufficient as any buyer would discount future earnings based on projected customer losses.
(while I’m no fan of Coventry WC, there’s no question the lack of investment on the part of Coventry WC’s parent company has made it quite difficult for management to continue improving services and product offerings)
That said, it is possible Aetna will explore selling the unit off – and given the private equity industry’s newfound passion for workers comp services, it is certain Aetna CEO Mark Bertolini’s voice mail is stuffed with friendly just-touching-base messages from PE execs.
Those PE execs will likely be waiting a long while for a return call.
What does this mean for you?
Business as usual for Coventry WC.
Sep
10
Joe, CVH’s WC division will be sold within a year for several reasons:
1. Aetna has already decided not to be in Comp
2. Aetna didn’t buy CVH for comp they bought it for medicare/medicaid
3. No one at Aetna knows anything significant about comp to know what to do
4. Aetna is a $34b busines pre CVH and CVH comp at $800m rev around is small potatoes.
5. Think your profit calculations are a little high but not out of reason
6. PE loves the story in Comp more than Aetna does.
7. Aetna doesn’t want to be distracted
David,
We’ll have to disagree on that. Your points, while mostly salient, miss the two key issues;
1) declining business for Cvty WC means any sale price would have to be balanced against future earnings stream; and
2) that future earnings stream is largely dependent on provider contracts that are Cvty-based.
With David Young gone and now I see Gelb gone, are you changing your thinking here?