Insight, analysis & opinion from Joe Paduda
Merrill Goozner shows why he’s one of the best in his edition of HWR over at the Health Care Blog.
He’s also been kind enough to separate the wheat from the chaff for you, dear reader, leaving only the best for your reading pleasure.
When a high-flying stock hits the tank, owners get nervous. In some cases (Enron and Bear Stearns come to mind) that is an appropriate reaction. In others, the only reaction is to look with incredulity at the behavior of the ‘markets’ and the wise ones who steer their course.
Health plan stocks have taken a beating of late, a beating that in my mind is (for most companies) wholly unjustified. One of those with black and blues is Coventry. Here’s one perspective on that situation from the desk of Dale Wolf, Chairman and CEO of Coventry – (slimmed down for your reading efficiency) to Coventry employees, with my commentary interspersed.
“…Year-to-date stock prices in the U.S. are down by 8.1% as measured in the S&P 500 and 5.4% in the Dow Jones Industrial Average. On world markets, declines are even greater, as demonstrated by the 17.8% decline in the Dow Jones Euro Stock Index. Closer to home, our own stock is off 28.1% since the beginning of the year, as compared to a 35.3% decline for our peer group in managed care.
What’s driving all this?
Obviously, on the national and world scene, it’s a compilation of the factors outlined above, including the mind-boggling repercussions of previous irrational exuberance in housing prices and lending practices…
The managed care industry has been hit harder than overall equity markets. While one never knows for sure, it is clear that an upcoming election, and its prospects for how health care is financed in the future, clearly weighs on the minds of investors. (I agree with Mr. Wolf; although the future of health care reform is indeed cloudy, what is crystal clear is health plans will play the central role in any reform initiative that gets through Congress and is signed into law. Why investors don’t or won’t or can’t see this is puzzling). Notwithstanding all the other turmoil, this single fact was likely to have had a dampening effect on sector stock prices in 2008. (On top of that, the announcement two weeks ago by one of our competitors of an earnings shortfall sent investors into a tizzy about price discipline, reserve adequacy, the “underwriting cycle”, etc. While most of the companies in the industry have indicated they are not experiencing similar issues, it has been confusing to investors, and hence a major sell off.
(Coventry has been dinged for a failure to adequately forecast and price for this year’s particularly rough flu season. Flu, unlike overall medical trend, is a wild card, and by definition can’t be ‘predicted’ or priced for with a high degree of accuracy. Investors and analysts might as well blame crop insurers for damage caused by falling meteors)
So what happens next?
In the short run, I could speculate. (and does…) Certainly stable first and second quarter earnings will be positively viewed by investors. Encouraging prospects for 2009 will also be favorably viewed by investors. But, fears of the shifting political winds will continue to be a headwind. These various data points make it pointless for me to speculate when our company’s stock, and indeed that of the managed care industry, will return to normalcy…whatever that is.
But what I can be highly confident of is that, in the longer run, equity values will follow the fundamentals. Investors look for growth in earnings – over simplified, that is more or less all that matters. Our job, as stewards of their money, is to produce earnings growth. If we, as an industry but, more importantly, we as a company, continue to produce earnings growth north of 10% a year, we will be recognized by investors through appreciation in our share price. While I don’t know when and to what degree, I feel very confident that our current stock price is disjointed from the performance of our company, and if we continue to perform as we have, these will realign.
More importantly, other than buying back our stock with our free cash, which we have been doing as a company, there’s absolutely nothing we can do about our share price except to take care of our customers, find new sources of revenue, and thereby continue to grow the earnings of this company. While I understand completely that many of you have felt the sting of our declining equity prices in terms of your own financial security, I can assure you that there are many others in this country for whom the economy over the next number of months will produce a far worse result… ”
Disclosure – I don’t own Coventry stock. But with a PE of 10, I may well buy it.
One observation re Coventry – this is a company that, justifiably, prides itself on its ability to predict and price for medical trend. It is not expert in nor does it even emphasize medical management, chronic care management, outcomes assessment, provider profiling, or any other form of ‘managed care’. Coventry is expert at managing the balance between pricing and reimbursement.
If and when true reform with universal coverage becomes the law of the land, health plans will no longer be able to win by underwriting; they must be able to deliver a lower medical cost for their population along with higher levels of member satisfaction. This will be a problem for Coventry – a potentially big problem.
There are two leads to this story – FairIsaac confirming what we reported yesterday (their bill review unit was sold to Mitchell International), and an amazingly over-the-top example of corporatespeak.
We’ll do the serious stuff first.
The bill review unit sale will be completed sometime during FI’s Fiscal Q3. The price was not disclosed, but sources indicate it was “not close to eight figures” (FI sold several units for a total price of $65 million).
Approximately 200 FI employees will be affected, and the announcement did not give any clues as to their eventual disposition. We’ll keep you posted.
Now on to the corporatespeak. Here’s a passage that is so bad on so many levels that it is worthy of special consideration…(parens are mine)
“details of a reengineering plan designed to grow revenues (I think they just said that they’ll increase revenues by, wait for it, cutting staff and closing operations…) through strategic resource reallocation (uh, I think they mean tactical, except that doesn’t sound as smart) and improve profitability through significant cost reduction (we’re going to slash our way to profits!). Key components of the plan include rationalizing the business portfolio (dumping businesses we should not have bought in the first place), simplifying management hierarchy (laying off people), eliminating low-priority positions (laying off more people), consolidating facilities and aggressively managing fixed and variable costs.
It is bad enough when your company is sold, but this SAT-word-stuffed run-on justification for dumping a business and firing folks will fool no one, not even the author’s high school English teacher.
FI got out of bill review because they didn’t give the business enough resources and attention, and probably should not have bought it in the first place.
Fair Isaac will announce today that they have sold their workers comp and auto bill review unit to competitor Mitchell Medical.
And no, this isn’t an April Fool’s prank.
FI has been on the market, with several financial and strategic buyers looking over the property but no firm offers until one was proffered by IME and peer review firm MCN. Sources indicate MCN was the likely buyer, till Mitchell stepped back in (they had previously engaged and withdrawn) and in a matter of days consummated the deal.
The acquisition makes sense strategically; Mitchell dominates the auto claims business, and FI has solid share in WC as well as some auto business. What FI really needs is consistent, reliable investment in its technology, something the parent company was unlikely to continue.
Mitchell will now have a reasonable entre into the WC business, and eliminate one of its competitors for auto bill review.
For FI’s current clients, this is likely good news, as their uncertain future made for difficult decisions. We’ll have to wait and see what changes Mitchell makes; word is the execs (unnamed, to be sure) at FI will be fine. I’m just a bit curious about this; surely they must accept some share of the responsibility for some of the problems that has led to the sale.
Here’s hoping that the non-exec working folks don’t get tossed – not only would that be unfortunate, but there’s a lot of corporate and industry knowledge in those heads that Mitchell will need if it wants to grow the business.
THIS WAS A SPECIAL POST IN HONOR OF APRIL 1.
In a deal set to be announced later this week, billionaire Warren Buffett’s Berkshire Hathaway unit will be acquiring troubled health plan Wellpoint.
This may be the first of several deals, as Buffett’s empire is flush with cash ($40 billion in BH’s operations alone) and looking for opportunities in businesses related to its core insurance operations. Indications are the sage of Omaha has been carefully following the fortunes of the health plan sector for years; he had not moved previously because, as he stated in one of his legendary annual letters; “prices are way too rich for my modest resources”. The recent dramatic declines in valuation (the sector is down over 35%) appear to have wakened Buffett’s legendary bargain-hunting instincts.
Wellpoint’s stock is trading just above its 52 week low, at a PE of under 8. Although no price has been mentioned, analysts expect a premium of 15-20%. Given BH’s current equity position, and stable stock price, “this will be no problem for them; it will likely be an all stock deal, and any Wellpoint stockholder who doesn’t want to trade in their paper for part of Buffett’s empire is crazier than Henry Paulson” (Henri Bludgeon, Merrill Lynch).
What does this mean for you?
Watch and learn.
Here’s the full press release.
A recent poll finds that 68% of Republicans think the US’ health care system is the world’s best.
Huh?
Are they really so brainwashed by the likes of O’Reilly, Limbaugh, and Coulter that they can’t see the reality staring them in their collective face?
Do they believe John McCain’s ‘straight talk’?
The health care system that costs twice as much as the average developed country and takes all that cash and delivers results on a par with many third-word countries?
A reality marked by access only via the ER for the uninsured (at 47 million and counting)?
A reality marked by billions in dollars for drugs that don’t do what their manufacturers claim?
Or is it just that the self-described Republicans (and I’m only speaking about the survey respondents) are part of the shrinking population of the self-satisfied and self-absorbed who don’t care that their neighbors are losing jobs and therefore health insurance?
Or are they…
Regardless of the rationale, or lack thereof, it is brutally clear that the respondents are an isolated, unique group with beliefs that are wildly different from their fellow Americans. Because when you compare their views to those of independents, the differences are striking.
A few samples from the survey –
What does this mean?
GOP respondents are on one side of the chasm, with reality, and the independent voters who get that reality, on the other.
My post a few days ago complimenting Aetna on their progress in a number of areas struck a few nerves and elicited more than a few emails from ballistic providers (a couple of the printable ones are in the comment section of that post).
There’s a bit of conflation going on here – my comments were focused on the company’s overall strategy while several critics took the big healthplan to task for it’s poor contracting in workers comp (where the product is Aetna Work Comp Access, or AWCA).
Yet they have valid concerns, concerns that are consistent with problems experienced by Aetna’s WC customers, lousy provider directory data, providers refusing to accept WC patients, heavy handed contracting efforts.
I’ve posted on these issues months ago, yet these issues persist. One provider group in Pennsylvania is so frustrated that they contacted state regulators, only to find out that many other providers had the same problem. Now, they are banding together (albeit informally) and asking regulators to outlaw PPOs in the state.
Other complaints relate to Aetna’s practice of ‘negative affirmation’ (my term, but you can use it). Aetna sends their currently-contracted group health providers a letter stating that unless the provider responds within X days, they will be automatically enrolled in AWCA at their group health rates. In defense of Aetna, their contracts with the providers allow this, as does state law. And providers can opt out at any time, so the damage done is rather limited.
Aetna recently decided to use certified mail instead of regular post when sending these letters to providers – the last batch of letters, some 50,000 in all, went out certified about a month ago. When I discussed this with an Aetna exec, he agreed that the mailing of the negative affirmation letters likely contributed to the provider data issues; AWCA is hopeful that the new certified letter will help.
Still, it is a wonder that it took the big insurer this long. Two big payers view AWCA’s PA data as the worst they have ever encountered. Providers routinely get buckets of mail from networks, and it is certain that many of these ‘negative affirmation’ letters end up in the trash as junk. The WC payers get a contract load from AWCA, construct panels of providers, direct injured workers to these providers, who then either a) don’t accept WC, b) can’t spell WC, c) treat the injured worker and then scream when their bill is slashed and protest to the insurance commissioner et al.
Now that AWCA is the de facto network of choice (due to the Coventry deal), some payers’ concern is there may be little motivation for the company to clean up its act. Even less than it had before the deal was struck and AWCA was working hard to compete with Coventry – now it enjoys near-monopoly status in many states, a condition that some payers think makes it less likely it will invest in provider relations.
That’s not the case, according to AWCA. They are investing in the business – hiring more account managers and provider relations staff and continuing to work on their data issues. They have a ways to go, but appear to be committed to working at it.
If you are sensing a little ambivalence here, you’re right. Payers are notorious for blaming everything on vendors while accepting little responsibility themselves. Vendors suggest improvements in processes and systems that would improve results, only to be told its not a priority for the payer. And part of the negativity about AWCA is undoubtedly from payers that are not holding up their end of the deal.
Yet I expect more from Aetna. They should be better than CorVel and Coventry’s WC division. Here’s hoping they get there, and soon.
In my consulting practice, I work with large, really large, and small payers – insurers and self-insured employers, as well as managed care firms – on managed care, claims, and related issues.
One of the best claims-managed care programs I’ve come across is at a relatively tiny insurance company. They have (generally) excellent relations with providers, tightly integrated medical management, claims and bill review, a keen grasp of cost drivers, and highly effective specialty programs. Their network penetration (albeit in a network direction state) is just under 90%.
Their results are impressive.
Medical costs (on a per-claim basis) for lost time claims have dropped dramatically over the last two years. While the industry’s costs were going up by 7.5% (NCCI stats), their clients enjoyed a double-digit decrease in medical expense.
How is this possible? They don’t have access to the actuaries, statisticians, or clinical experts resident at larger payers. They can’t afford expensive IT initiatives, integration projects, and sophisticated rules engine-driven document management processes.
What they do have is focus, an open mind and willingness to try new things, a commitment to do the right thing, and very little patience for bureaucracy. They also have medical folks doing medical management – the adjuster has the final say, but it is rare that the clinician’s recommendation is overturned.
I’m convinced the reason this payer is as successful as they are starts with and is driven by their culture and commitment to doing the right thing. Too often big payers’ plans get bogged down in the cloying mud of committees, process, debate and discussion. Internal rivalries and turf battles suck the life out of promising ideas. Individuals are far more concerned with looking good and checking boxes off their annual goals than actually making sure the programs reduce costs and improve outcomes.
Meanwhile costs continue to go up and care is less than optimal.
What does this mean for you?
It doesn’t have to be that way.
In a word, No.
The industry-specific event that triggered the recent selloff in health plan stocks was teh announcement by Wellpoint that they underpriced their premiums for certain products. This was followed by Humana’s problem – their Medicare Part D program is under pressure due to higher utilization, and Coventry’s statements to the effect that the flu bug was depressing their results.
The credit market debacle hasn’t helped either.
I have no idea why markets move, or why a seemingly minor announcement about increased medical costs due to a flu problem (the very definition of a non-recurring event) would depress the earnings of an entire sector. If I bought and sold stocks (which I don’t, my broker does with no input from me) I’d be buying these stocks for several reasons.
First, national health care reform is coming, and these health plans are going to have a huge growth opportunity.
Second, Coventry is one of the better-managed health plans, and their valuation does not reflect their demonstrated ability to consistently excel operationally.
Third, in an increasingly concentrated market, I’d expect the big guys to snap up the smaller ones – which will drive up their stock rices. The recent drop-off in prices should, if anything, make this more likely. That said, the volatility and tightness in the credit markets may make deals tougher to pull off.
Fitch (the ratings agency) opines that the industry’s current EBITDA margins should remain around the 9% mark – consistent with past results
Now that McCain is the presumptive GOP Presidential nominee, I’ll be spending a bit more time analyzing his health care plan. I’ve examined his plan before, but the Senator has made some progress, refining concepts and defining specifics.
First, lets find out how much this trip on the ‘straight talk express’ will cost.
According to McCain’s website, the plan will “eliminate the bias toward employer-sponsored health insurance, and provide all individuals with a $2,500 tax credit ($5,000 for families) to increase incentives for insurance coverage.”
“All” evidently means just that – no income indexing, cap based on total taxpayer income, or any other means test. Folks making a gazillion bucks get the same credit as those earning income below the poverty level.
McCain would likely take the revenue created by repealing the employer tax breaks for health insurance (noted in his proposals) to fund his plan’s new health tax credits. The result? The cost of the tax credits would be $206 billion in FY 2009 and $3.6 trillion over 10 years.
Notably, nowhere on McCain’s website or in his policy papers does he say what the plan will cost. But his statements leave little doubt as to what he wants to do, and the Joint Committee on Taxation’s report on the McCain health plan clearly demonstrates the financial impact of his plan.
Equally notable, Douglas Holtz-Eakin, one of McCain’s key advisers agreed that his plan would increase the budget deficit, saying “It will make deficits expand up front, no question…” (Holtz goes on to say that helping corporations helps workers…)
McCain’s plan will cost more than either the Clinton or Obama plans. To figure out whether it will be worth it, we’ll have to consider whether the $2500/5000 credit will be enough to help folks actually buy insurance and reduce the number of uninsured.
