Coventry Health Care (CVH)

TOP CONTRIBUTORS

Greg Hollander

Thomas Shyr

Coventry Health Care, Inc. (NYSE: CVH) is a health insurance company. CVH provides both risk-based (CVH assumes all costs and risks in exchange for monthly premiums) and administrative only services (billing and processing for self-insuring companies).

Historically, the company has focused on providing risk based health insurance policies to individuals and smaller-midsized corporation's. However, in 2005, the company departed from this strategy when it acquired First Health, a provider of administrative only services to large corporations. While the acquisition diversified CVH's business and transformed the company from a regional player to a national franchise, it also brought with it considerable risk. The administrative services only business is largely one of scale, where high fixed costs and thin margins make large volumes necessary for profitability. As a relatively smaller player in the industry, CVH is at a decided disadvantage to its larger competitors. Meanwhile, roughly a third of CVH's revenue come from Medicare and Medicaid, and the company plans to increase this by over 50% in next few years.

Company Overview

Business Financials

Coventry has had steadily and persist growth in its revenues for over a decade. Since 1994, Coventry has had 15 consecutive years of revenue growth. In 2009, Coventry posted total revenues of $14 billion, an increase from the previous year's revenues of $12 billion.

Coventry's net income has been less consistent. While the company had increasing net incomes between 1999 and 2007, its net income has been declining since. Between 2008 and 2009 Coventry's net income declined from $383 million to $242 million.

Business Segments

The Commercial Division

This segment primarily provides benefits through health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point of service (POS) products to employer groups in a variety of geographical markets. Under these plans, Coventry risks all medical and administrative costs in exchange for a monthly premium fee. The division also offers administrative services only (ASO) plans, in which the customer pays a smaller fee in exchange for Coventry taking on all administrative costs, but the customer incurs their own medical costs.

The Individual Consumer and Government Division

This segment primarily provides health benefits to individuals participating in the Government’s Medicare and Medicaid programs. Under these services, Coventry assumes medical and administrative risk for individuals in exchange for premium payments from state and federal governments. The division also provides fee-for-service activities to governments, such as pharmacy and clinical management.

Specialty Business Division

The specialty business division provides workers’ compensation services such as access to a provider network, bill review services, and independent medical exams on a fee-for-service basis.^[1]

Trends and Forces

Reduced government funding for Medicare and Medicaid threatens Coventry’s profit margins

Revenue from Medicare and Medicaid premiums, all paid by state and federal governments, accounted for over 33% of Coventry’s managed care premium. However, the 2006 Deficit Reduction Act included a plan to cut Medicaid funding by over $4.8 billion before 2011.^[2] Additional legislature of this form would either hurt Coventry’s profit margins, or force them to cut benefits, which would potentially decrease enrollment in the long-term.

Current credit crisis threatens competitors’ investments, giving Coventry a competitive advantage

Given the current credit market turmoil in the United States, companies with a large proportion of their income invested in risky assets are facing lesser cash availability for infrastructure growth and subsidiary acquisitions. Other competitors, such as Aetna, Sierra, and Humana, all invested over 30% of their income over this same period.^[3] However, investment income represented under 16% of Coventry's pretax income, allowing them to continue to use cash and cash equivalents to acquire new subsidiaries, expand their sales force, and diversify their customer base, even when the market forces competitors to limit their expenditures.

Acquisitions of firms offering ASO plans threaten Coventry's overall margins

The acquisition of First Health in 2005 allowed Coventry to expand its offering of Administrative Services Only (ASO) plans with its subsidiary's membership. However, due to the economies of scale associated with administrative infrastructure, the administrative services industry is generally dominated by larger companies than Coventry. Without these same economies of scale, Coventry's overall profit margins are being hurt by ASO plans.

Competition

Coventry’s Commercial Division faces a highly competitive industry that competes on the prices and comprehensiveness of benefits, location and choice of health care providers, quality of customer service, and reputation.^[4] Its greatest competition comes from geographically diverse, national account companies such as Aetna (AET) and UnitedHealth Group (UNH). It also faces competition from such companies as CIGNA Corporation (CI) and Sierra Health Services (SIE).

As Medicare and Medicaid are sponsored by government funding, companies insuring these individuals generally compete primarily on the comprehensiveness, quality, and availability of their benefits and customer service. Top competitors to Coventry’s Individual and Government division include Humana (HUM), WellPoint Health Networks (WLP), and Aetna.

References

1. ↑ CVH 2007 10-K, Item 1: Business, pg 2
2. ↑ CVH 2007 10-K, Risk Factors, pg 20
3. ↑ Stiffel Nicolaus Report, CVH, 08/16/2007
4. ↑ CVH 2007 10-K, Risk Factors, pg 20