Saturday, July 26, 2008

Required Reading for Health Care Analysts and Coventry Health's "Sort of" Informative Conference Call

Joe Paduda, writing over at Managed Care Matters, has a post any health plan investor should read.

He laments that the analysts just weren't asking the right questions and weren't tough enough during last week's Coventry Health earnings call.

With my 35 years in the health insurance business, I have to agree with him. He's dead on.

Beyond Joe's comments, I noted that management used the precise term "sort of," as in "we are still sort of really in the cycle that this sort of... it's about sort of forward-looking into the fourth quarter," "sort of coded, billed and reimbursed," "sort of hurt their revenue cycle," "sort of going on last year," "sort of the statistical fluctuation of a severity spike," "sort of where we have the coordinated care networks," and other precise actuarial references using the term "sort of" literally dozens of times (63 by my computer's count of the transcript)--and the analysts just said, "thank you," for all this "sort of" detailed explanation.

"Thank you?" For what? Talk about an easy audience!

No investor should have been surprised by the recent turn in HMO earnings--and that has nothing to do with the notion that there is some kind of underwriting cycle out there. Things are a lot more complicated than that.

Here are the first few paragraphs from Joe's post:
Coventry earnings call - the analysts blew it

I think I've figured out why analysts have been unable to accurately forecast health plan financials - they don't know what questions to ask.

That's the only conclusion I can draw after listening to the latest earnings call from Coventry Health. The mid-tier health plan company is still reeling a bit from last month's announcement that it had been surprised by a sharp increase in medical costs, an increase that evidently had caught management by surprise.

Folks, this is a health plan company - one that claims "We deliver exceptional value every day, driving solutions that help people enjoy optimal health."

One might think that a health plan company makes money by managing medical care for hundreds of thousands of Americans. Near as I can tell, Coventry isn't a health plan, it is a transaction processor that makes money by pricing its insurance far enough above medical costs to administer the plans and make a bit of margin.

And from the questions that were asked, and the ones that weren't, it is pretty obvious Wall Street analysts think Coventry is a transaction processor as well. Out of the twenty or so questions after the management presentation, there was one - yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in the 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.

That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.

You can read the rest of his post that includes a pretty good list of the questions that should have been asked.

Recent post on this blog: Underwriting Cycle or Medical Trend Rate Cycle?

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