Coventry’s 2011 financial results

Coventry Health announced their full-year 2011 results this morning; I’d have to sum it up as quite positive, driven primarily by big Medicaid and Medicare revenue increases. There’s no question where management is focused – with CMS programs accounting for half of the company’s revenue and essentially all of their growth, management’s focus on the call was almost exclusively on governmental programs with some discussion of the impact of health reform.
Most interesting was the continuation of lower medical utilization and lower medical costs into Q4, especially in the inpatient admissions and days across both Medicare and commercial populations. Chairman Alan Wise did note there’s been a slight uptick in physician utilization, but this was outweighed by the decline in facility services.
Geographically, it is increasingly clear Coventry is focusing on their core Midwest states, with expansions in governmental programs, deals with provider systems, and specifically successful efforts to increase their Medicaid business in Kansas, Missouri, Nebraska, and (not strictly speaking a midwest state) Kentucky.
The commercial business is not faring as well, with essentially flat membership for the year; premium increases resulted in an 8% uptick in revenue. The work comp sector is not growing much – more on that below.
Coventry’s utilization trend was consistent with other payers, yet their overall cost trend is a couple points higher than other health plans at high single digits. This appears to be unit cost driven (no surprise), although CFO Randy Giles did state health reform increased trend by up to 200 basis points specifically from eliminating deductibles and copays for preventive services. Seems like an awful lot to me; I can’t see how preventive care deductibles and copays could possibly amount to 200 basis points in losses.
Coventry re-negotiated their Medco pharmacy contract (for their non-workers comp business) and got better terms and an extension, with Medicare through 2015 and commercial a year longer.
On the workers comp front, the loss of a large customer dropped revenue 3%; word is that was the ESIS contract. Management did note that the $1.1 billion in management services/fee revenue is higher margin and provides cash for investment and acquisition activities.
Charles Boorady did ask the only question about workers comp, asking what drove the loss of the large customer – Mike Barr [sp?]is the new manager of the overall services business so Wise deferred to him. WC is an area they’re looking to grow, as it is unregulated revenue it is a ‘great place to be’. Barr said they lost their second largest group due to a competitive environment, noting there was “nothing specific with WC that created the issue, as a line it runs well.” [paraphrase] He went on to note Coventry is centralizing some operations to consolidate especially in areas where there’s no network.
Management said that while Coventry lost the overall contract, some employers (likely administered by ESIS) are looking to come back and work directly with Coventry, and Coventry is working on those opportunities. In commenting on the work comp sector, Wise said it is a stable and slightly growing business, it is an accident based business and in tough environment it has continued to add revenue slightly and ebitda a bit. In response to a question, Barr said they lost the business on price.
What are the key takeaways?
Governmental business is increasingly important – and that’s where the focus will be for the foreseeable future.
Coventry’s trend seems to be just a tad higher than their larger competitors.
MLR rules and the effect thereof are still working their way thru the system; it will be interesting to see how small employers react when they get their rebate checks later this year.
Expect Coventry’s work comp sector to push hard to increase revenue from existing and add new customers.

How’s your PR?

Probably lousy, maybe okay, and just possibly pretty good.
Last week I received a PR email from a work comp services company that had me shaking my head. After I reattached my jaw.
I won’t get into the generalities, much less the details, but it was just not helpful to the company behind it.
Public relations is (pick one or more)
– grossly misunderstood,
– complicated and complex,
– overly involved and time-consuming,
– usually poorly done,
– not worth the money, and/or
– critically important.
My vote is “most of the above”, especially when we’re talking health care/work comp/health insurance.
Public relations deals with a couple areas – building brand and addressing problems. PR is MUCH more important for building brands than advertising – advertising claims aren’t credible, it’s much more expensive on a cost-per-impression basis, and no one believes advertising (especially when it’s from an entity you haven’t heard of or don’t have a solid brand impression of).
There’s a lot of attempted differentiation in the managed care space, but the differentiation exists mostly in the minds of the execs leading the vendors’ efforts. What they see as a definite, valuable, obvious difference their market either a) doesn’t see or b) doesn’t care.
I can’t remember all the times I’ve heard “the market just doesn’t get it” from a CEO lamenting their inability to break thru the clutter and get the market to understand just how great their product/service offering really is. But here’s the key – the CEOs are right, sort of: the market doesn’t get it because it hasn’t been explained to them in a way that will resonate and stick.
The way PR works in building brand is
– credible third party sources
– discuss, debate, define,
– an innovative product or service,
– in mass media, online vehicles, or public forums.
How that happens is the tough part. Press releases about relatively unexciting issues don’t work to build brand (they can have other uses); some press releases (such as the one mentioned in the lead) hurt the brand by confusing the reader, clouding the message, or because they’re just plain unprofessional.
What works is discussion of that brand, product or service by credible sources. But you can’t just get a reporter or writer to blather on about yet another predictive modeling approach, surveillance company, UR firm, disease management concept, network enhancement.
What reporters want to write about is stuff that’s new, different, exciting, fresh. They’re bored to tears writing up stuff they’ve written about countless times; they want something that’s really new, really different, really interesting.
So here’s the hard part, where most companies make a critical mistake. Writers and reporters don’t care what YOU think is new and innovative. It has to be really new and innovative, obviously so. And, except in rare circumstances, if it takes more than fifteen seconds to explain and they still don’t think it’s cool, you’re toast.
That’s where the hard work of PR comes in. Developing and refining your approach, critically thinking about positioning, getting past long-held ego-based self-held ideas about how great/important/innovative your company is, and instead looking in from outside, comparing what you do and how you do it to competitors, and paring down your message to its core.
What does this mean for you?
Most won’t be able to do this, as it can be painful. But those who can, and do, will be much more successful.

Health inflation is down because…

We now know one of – if not the – major reasons health care cost trends have moderated – people aren’t getting care.
– Physician visits were down 8% year over year
– 77% of people delayed visits to the dentist due to cost
– a quarter didn’t get prescriptions filled due to cost.
All this didn’t happen last year, but the trends seem pretty clear.
As we noted last month, this has been good great news for health insurers, who’ve seen profits soar as medical costs for 2010 came in lower than projections, and that trend continued into this year. That said, at least one – UnitedHealth, is forecasting a return to somewhat higher utilization in the current quarter.
I’m not sure that’s going to happen.
Other than an obvious driver of utilization – fewer people with insurance means more people putting off care of all types – there’s one other factor that is almost certainly contributing to the drop off in demand for services – high deductible accounts. More accurately, accounts that don’t have any funds in them.
According to a report released in January by the Employee Benefit Research Institute, at the end of last year the average balance in HSA accounts dropped to $1355. With the number of accounts increasing about 14% from 2009 to 5.7 million, it’s not surprising that the average balance would drop as new accounts would probably have lower balances than older accounts.
But remember that these accounts are meant to fund care up to the deductible, which can range from a thousand dollars to well over five thousand dollars. If there isn’t enough money in the account to cover the deductible, people may be putting off care to save their dollars for when they really need them.

Medical costs are flat; premiums are way up – why?

I’m not the only one befuddled by the disconnect between private health insurance premiums and costs – you’ve probably seen the headlines screaming about health insurance costs going up, but you may have missed the way-back-in-the-business-section blurb about underlying costs moderating last year.
For some reason, most of the main stream media, including the editorial writers at the New York Times, are missing the real story here.
According to today’s NYT, the main reasons costs went up, “analysts say, were increased medical care costs and higher profits for insurance companies, which charged a lot more in premiums than they paid out for medical services.”
I don’t see how an underlying medical trend of one percent, coupled with another point and a half increase due to new requirements from health reform, could possibly be considered a “main factor”, especially when together they accounted for less than a third of total overall premium increases of nine percent.
Reform’s contribution

Some are yowling about the impact of the Accountable Care Act on health insurance costs – but their noise is driven much more by ideological positions and not careful analysis.
The two parts of ACA that affected premiums in 2011 a) required insurers to maintain coverage on children up to age 26; and b) required most insurance plans cover preventive services like cancer screening and immunizations at no cost to patients. About 2.3 million ‘new’ young adults were covered by their parents’ policies and 28 million workers and dependents got the preventive care coverage.
Why aren’t medical costs increasing?
My sense is the explosion in high deductible plans is, indeed, keeping a lid on health care costs. Many of the folks with these plans don’t have enough money in their health savings accounts to cover those deductibles, which are often about $5000. Thus, while they ‘have insurance’, they don’t have access to care. They are putting off tests and routine visits, not buying their medications, holding off on elective surgery, and otherwise delaying care. Undoubtedly some of those foregone services will not affect their health status, but it is also highly likely that some people will find their delay and deferral has quite negative consequences.
So why are premiums up so much?
Simply put, because there’s nothing (except the ACA’s medical loss ratio requirements) preventing insurers from increasing premiums as they see fit. Remember for-profit health plans’ primary obligation is to create and protect wealth for their owners. That’s not a value statement or objection, but a confirmation of reality. Not for profit health plans have to generate positive cash flow as well, but most of their providers are ‘for profit’ and therefore looking to maximize their earnings.
As long as employers are going to provide coverage for employees and help pay the premiums, why wouldn’t insurers increase premiums? Sure, every year more and more employers drop coverage, but that’s going to change in 2014 when they are required to offer insurance (well, sort of).
What looks increasingly likely is more health plans will hit the maximum medical loss ratio threshold, wherein they will have to refund money to policyholders. But that’s of little comfort to employers and families facing premiums up yet another nine percent…
What does this mean for you?
Family premiums will be over $30,000 a year in eight year
Merrill Goozner has another take on the issue, one well worth considering.

Health insurance premiums up, but costs aren’t. Huh?

It was all over the news yesterday and this morning- health insurance premiums are going up at near-double-digits. Front page in the NYTimes, and a top story in hundreds of other media outlets.
Premiums were up nine percent, yet health care costs (for commercial insurers) had increased less than two percent in 2010.
What gives?
The bad news was triggered by another in the never-ending series of great research from the Kaiser Family Foundation on all things health care related. This latest report contains much in the way of valuable information, but we’re going to focus on the biggie – insurance premiums increased 9 percent this year, and now top $15,000.
Premiums increased 113% over ten years; if this rate persists, and there’s no reason to think it won’t, we’re looking at family premiums above thirty thousand dollars in less than a decade.
But just a couple days ago, Mark Farrah and Associates reported commercial health plans’ medical trend rates were at a historical low.
So, how can premiums go up nine percent while underlying costs only increased two percent? How does that work? Premiums go up more than four times as fast as the cost of goods sold?
According to the piece in the NYTimes,

“Aetna and United Health/Oxford said their requested rate increases in New York largely reflected actual hospital, physician and pharmacy costs. “Our rate requests are simply keeping pace,” said Maria Gordon Shydlo, a spokeswoman for United Health Group/Oxford.”

Yet MFA’s research indicates that those costs didn’t increase anywhere near nine percent in 2010. Health plans are saying that costs will increase faster this year for myriad reasons, and therefore they have to stay in front of those increases. That may be true, and it also may well be true that health plans are looking to sock away as much cash as possible for the investments they’re making to prepare for the post-reform world.
But that’s beside the point. Which is, could your business operate this way?

Medical inflation’s down – should we start cheering?

Health plan medical trend was up a paltry 1.7% in 2010, the lowest rate in memory. On a per member – per month (PMPM) basis, medical trend was just barely above one percent, and by far the lowest rate seen over the last decade – and probably for many decades before
What’s driving the lower trend rate reported by Mark Farrah and Associates?
Among the contributors cited in the report were:
– increased cost sharing due to a higher percentage of insureds enrolled in high deductible plans, requiring insureds to fund the first several thousand of health expenses (many insureds don’t have the funds set aside to cover their deductible)
– a milder flu season
– reduction in reserves for prior year claims (health plans set aside too much money at the end of the last plan year to cover claims that were ‘incurred but not reported’ (IBNR))
– impact of the economy and employment-related issues.
The PMPM figure is by far the most significant – After a decade in which the lowest trend rate was 4.9%, and the average trend was almost 8%, 2010 saw medical trend dip below the overall CPI – an event so rare as to be unprecedented.
The good news is trend was way low last year. The bad news is medical costs PMPM are still up almost $100 from 2002 – 2010.
What does this mean for you?
re medical 2010 was a ‘good’ year – but a lot of that was because the economy was in the tank and people couldn’t afford care. As the economy improves, we’ll likely see trend held down because care is still unaffordable.

Health plans are doing well – very well

As the economy started to recover and health reform measures began to be implemented in Q1 2011, health plans benefited with increased enrollment. According to industry analysts Mark Farrah Associates, “The Commercial sector saw a net gain of 1.6 million members between December 2010 and March 2011. In comparison, the Commercial sector gained approximately 388,000 between December 2009 and March 2010.” The increase contributed to an overall membership gain of 1.1% for the top seven health plans/insurers.
Across all seven health plans, which account for 41% of membership in the country, the news was generally positive especially on the profit side. Profits were up almost across the board, with United HealthGroup enjoying a 7.95% margin and Kaiser, Wellpoint, and Aetna all seeing net profits in excess of six percent. The good news continued in the second quarter; Kaiser saw a sixty-plus percent jump in profits in Q2; Cigna and Humana each had profit increases of more than thirty percent.
The PPACA’s requirement that health plans provide coverage for dependents up to age 26 added about 280,000 members for Wellpoint and less than 100k for Aetna over the year ended Marh 2011.
Medicare and Medicaid enrollment also saw gains; Medicaid’s increase was a bit more than commercial’s at 2.3%. In contrast, Medicaid grew by 13.6% during the recession, which economists consider ran from December 2007 to December 2009.
What does this all mean?
PPACA has already contributed to increased revenues for health plans
. Margins are solid across the board and look to be growing.
Membership is also on the upswing, driven partially by governmental programs but primarily by substantial increases on the commercial side.
Overall, it’s a good time to be in the health insurance business. That said, there’s a very, very different world coming and health plans will need all the free cash they can accumulate to prepare for health reform’s dramatic changes to their business models.

Get ready for big changes in provider reimbursement

Now that the debt limit deal is done, the hard stuff starts. While there’s been a lot of focus on the Pentagon budget and lack of revenue increases, the real heavy lifting will come when the super-committee convenes to figure out how to save the next $1.2 trillion. And their focus will be on Medicare, Medicaid, and provider reimbursement.

Because that’s where the ‘super-committee’ is going to have to find a big chunk of the additional savings required by the deal.
With Medicare and Medicaid accounting for a large and ever-increasing part of the deficit, by necessity the super-committee is going to have to look at provider reimbursement. As Bob Laszewski points out, they don’t have time to fundamentally alter reimbursement methodology, can’t change the eligibility parameters under the terms of the deal, and they are starting from a deficit projection that assumes the pending 29.5% cut in physician reimbursement is actually going to happen.
The 29.5% alone accounts for about $300 billion, so the super-committee has to find another $1.2 trillion on top of that $300 billion.
Where’s it going to come from?
Physician reimbursement under Medicare and Medicaid is going to get hammered.
Hospitals are going to see substantial cuts in reimbursement as well.
Pharma and PBMs participating in Part D are another big target, and one with less political pull in DC.
Insurers heavy in Medicare Advantage have been reporting nice earnings of late; that’s not going to escape the notice of deficit-cutters in Washington.
Expect to see means testing for Medicare as well.
What are the chances we see substantial cuts in reimbursement? I’d say about 100%.
Without higher revenues and given the requirements of the debt limit deal, there’s no other place to cut the hundreds of billions needed, and do so by Thanksgiving.
What does this mean for you?
Cost-shifting was a problem before this deal. It is about to become THE problem for private payers and workers comp insurers.

Consumerism in health care – no panacea, a little promise

Austin Frakt’s piece discussing the latest research findings tells us what we’ve long suspected – high deductible plans don’t seem to reduce cost trends.
Frakt highlights an analysis by Katherine Swartz of the Robert Wood Johnson Foundation, an analysis that reads in part:

the CDHP [consumer directed health plan, which uses a very high deductible] was not able to controlmedical expenditures over time and it appears that the enrollees in the CDHP spent more on hospital care than enrollees in the traditional plans…The findings from these three studies are consistent with expectations about deductibles — once the deductible has been met, there are no longer strong incentives for an enrollee to be concerned about further health care expenditures. […]
Health plans with high deductibles and uniformly applied co-payments or coinsurance rates are oftenreferred to as “blunt instruments” for reducing unnecessary health care expenditures because evidenceis mounting that people reduce both essential and nonessential care…uniformly applied cost-sharing particularly causes people to reduce their use of prescription drugs, which in turn seems to lead to use of more expensive types of care that are indicative of adverse events and poor health outcomes. [emphasis added]

Those who’ve been watching the evolution of CDHPs for some time are not surprised. In fact, we knew as long as five years ago that CDHPs = lower drug costs = more hospitalization
. There are several other problems w CDHPs – chief among them the fact that the people who spend the most dollars on health care will not alter their spending habits on iota due to a CDHP.
Here’s a discussion from a previous post.
The underpinnings of CDHPs lie in the economic theory of “Moral Hazard.” Journalist-author Malcolm Gladwell describes this as the belief that “insurance can change the behavior of the person being insured” and notes that it is popular among many economists and think-tank types and, consequently, has been influential in shaping health care delivery systems. The idea is that if insurance covers the bills, people are more likely to seek care and run up unnecessary costs.
The Moral Hazard theory falls short when confronted by the rather uncomfortable reality of actually having health care services rendered to one’s own person. Why would anyone want to subject themselves to surgery or hospitalization if there were an option to avoid it and just go fishing instead?
But on the surface, the concept makes some sense. Most people would be careful about getting an MRI if they knew they had to foot the bill, but perhaps too careful. People will not simply avoid discretionary care; they will avoid necessary care, as several studies indicate. One Rand Corporation study concludes that when individuals are required to pay more for prescription drugs, they don’t take them as they should. This leads to nasty physical and financial problems, such as more strokes, which cause lots of pain and cost lots of money to fix when a few blood-pressure pills might have sufficed. As far as drug copays go, increasing consumers’ costs actually drives up total medical expenses. It’s not a great leap to think individuals with high deductibles will likely wait before scheduling an appointment with their physician to see if a problem just goes away on its own. In a time when the Centers for Disease Control describe diabetes as “a runaway train,” is it economically wise to foster measures that discourage preventive care?
The coup de gras for CDHP is its old nemesis, the real world. CDHP’s fatal flaw is that the “consumer” part is directed at the wrong people. Half of U.S. health care costs are spent on five percent of the population. A deductible has little impact on the purchasing behavior of these folks; they’ll blow through a few thousand bucks in a couple of months
Conversely, over two-thirds of Americans spend less than a thousand dollars a year on health care. The only effect a high deductible will have on these folks is to discourage the use of preventive care.
Consumerism is not all bad – health care shouldn’t be “free” for anyone. Requiring people to share in the cost of their care should be a part of any serious reform effort. The fix for CDHP is relatively simple – get rid of high deductibles, which are unaffordable for many and may well discourage preventive care, and replace them with coinsurance per service to ensure patients have some financial skin in the game. Insurance companies should keep an income-indexed out-of pocket-maximum, while covering preventive services and maintenance medications at very low copays to encourage their use.
I”d add that employers really interested in reducing costs over the long term do have another alternative – buy a CDHP plan, and then fund the deductibles. One company has saved their clients significant dollars with this hybrid approach.

Coventry’s 2010 earnings – the numbers

Coventry’s 2010 earnings report is out, and the news was generally pretty good. Revenues are down considerably, but that’s due to the company’s decision to exit Medicare private Fee for Service; operating earnings are up for the year (from 3.6% of revenues to 5.9% for the year, and 5.4% to 7.8% for the last quarter) and EPS is up nicely as well.
The numbers are a bit misleading, as there were two significant ‘one-time’ events that greatly affected results. According to the press release;
“These results include a favorable impact from the MA-PFFS product of $0.45 EPS and an unfavorable impact from the previously announced Louisiana provider class action litigation of $1.18 EPS [this is from their workers comp network business]. Excluding the impact of MA-PFFS results(1) and the provider class action charge(2), core earnings for the year were $546.4 million, or $3.70 EPS.”
Medical loss ratios (MLR) were down almost across the board, in every product line, with Medicare Part D dropping to 64.7% last quarter. If Coventry’s experiencing the same situation as its much larger competitors, the overall MLR improvement appears to be due in large part to lower utilization.
From a strategy standpoint, I’m going to be listening carefully later today when company execs discuss the future. Two deals in smaller, midwestern markets have been consummated, and I’d expect there will be more as CVTY seeks to gain scale in markets where it can compete – read, avoid markets where the Blues, UHG, Aetna, and Wellpoint dominate. Coventry’s cash position is quite good, with about $850 million in the bank and other liquid assets. I’d expect some of this will be allocated to deals similar to the Wichita transaction.
More on strategy in a post later this week…
Workers comp
Comp revenues appear to be relatively flat.
While not split out separately, they can be tracked in the “Other Management Services” line which also includes rental network revenues.
The total line was up less than one percent year over year, reflecting Coventry’s enviable – but limiting – position as the dominant provider of work comp network and related services. According to an informed source, total WC revenues are likely in the $750 million range.