Wednesday, June 18, 2008

Coventry Health Care--What the Heck Is Going On?

When WellPoint, Humana, United, and others had earnings warnings this spring I pointed out their issues were largely unrelated and amounted to more rounding errors as the helpful five year deceleration in health care trend came to an end and the business just wasn't as easy.

But today, Coventry hit us with a 300 - 340 basis point adjustment in their expected Medicare Advantage medical loss ratio for the second quarter. They pointed to a problem with private fee-for-service (PFFS) claims coming in from prior periods. Because PFFS does not rely on provider networks the claim patterns look a lot more like old time fee-for-service--and this block is acting like it.

The hit to PFFS has to be a lot bigger than 300 bps because that is the impact on their whole MedicareAdvantage block--of which their PFFS is only one part.

They also said their commercial MLR popped in the second quarter. They are estimating a second quarter MLR about 200 bps higher than its overall first half MLR.

This puts a lot of doubt into the sector and one has to expect health plan stocks are going to get hammered tomorrow morning on Wall Street.

The other health plans are going to have to reaffirm their prior earnings guidance real soon or they will pay a big price in the stock market--especially those who have made a big play in PFFS Medicare.

Either Coventry has lost control of their financials or the sector is seeing something big--neither being a good development.

Generally, I have not seen anything in the health plan market recently that would lead me to believe something major is going on that would affect everyone in the sector. However, PFFS by its very nature is a business you drive by looking out the rear view mirror. I think it is important for the other big PFFS players to clarify their outlook.

Hate to see what Coventry's numbers would look like if the Dems do cut private fee-for-service. If Coventry can't make money at 117% of what Medicare gets for the same seniors how will they make money?

This is scary.

Prior post: What Good Has Private Medicare Done for Shareholders?

Joe Paduda's great post phone conference take on Thursday morning.


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