More questions about Coventry-First Health deal

The analysts continue to question the acquisition of First Health by Coventry Healthcare.
Wachovia analysts are among those who appear to be reserving judgement in their latest pronouncements (as noted in Maryland’s “Business Gazette”):
“The deal “marks a turning point in Coventry’s evolution,” the Wachovia report said. Coventry has historically been a regional managed care company operating locally concentrated health plans in several markets, and its customers have largely been small employers with some municipalities and local divisions of larger employers.
“With the acquisition of First Health, Coventry will change the profile of the company dramatically,” the report said. “For investors, the combined company will look like another multimarket managed care company trying to compete.”
First Health has a national preferred provider organization and a workers’ compensation business and does some pharmacy benefit manager services, areas that require different management skills than Coventry is accustomed to, according to Wachovia. In addition, First Health has had difficulty competing with the largest managed care companies such as UnitedHealth, Aetna and BlueCross BlueShield plans. ”
The challenge of integration will be met by one of the stronger management teams in the industry. The Gazette’s article goes on to note:
“We have always been impressed by Coventry’s management and are confident that the company’s internal candidates will be strong,” according to the Wachovia report. The analysts cited McDonough’s previous stint as CEO of a division of UnitedHealth, which has similar products to First Health.
Thomas A. Carroll, an analyst with Legg Mason in Baltimore, called Coventry’s leadership “one of the best management teams in the business.”
So what are the issues facing Coventry?
— Coventry is a regional HMO firm, with particular strength in small group fully insured business; FH is a national firm with a very large customer (MailHandler’s program as well as other large self-insured customers, and is also a major player ($194 million in 2003) in a business (Workers Compensation) that is foriegn to Coventry.
–Further, FH deals primarily with large-self insured group health customers, a market segment that Coventry has not pursued aggressively.
–Weak management at FH. Statements in the analyst’s reports as well as by Coventry management during the investor telecon on the day the acquisition was announced lead me to believe Coventry does not view FH management as up to the task. This, coupled with the large payday for 16 FH executives (splitting over $20 million between them) leads me to speculate the senior level at FH will not be around much longer.
–There were also rumblings in the market that FH was looking for an acquirer for some time; the Gazette goes on to quote Wachovia’s report; “Even without the acquisition, we have doubts about First Health’s ability to grow or even maintain recent results,” the analysts wrote. While Coventry “has bought ‘fixer-upper’ plans in the past, the repair of [First Health] will require a different set of tools.”
Coventry’s management takes a markedly different view from these reports, a view that is best summarized as “the acquisition of First Health by Coventry = the whole is greater than the sum of the parts.” After the hit the stock has taken, Coventry responded with a detailed explanation/defense of the deal at an analysts’ meeting in early November. Again, the main point appears to be that the new markets and national scope will enhance Coventry’s future earnings potential.


Spitzer Update…

The investigations begun by Eliot Spitzer of broker-insurer business practices have not only spread from property and casualty insurance to other lines, but to other states, and now it appears there may be international repercussions as well.
The investigations and subpeonae appear to be increasing on a daily basis, with each morning beginning with an annoucement of additional targets. Employee benefits insurers and brokers are now coming under scrutiny, while the number of P&C carriers facing subpoenae has increased again today with St. Paul/Travelers the latest subject. Chubb is also under investigation, while also facing allegations concerning their relationship with their auditors, Ernst and Young.
Expect this to continue, as Attorneys General throughout the country seek to ensure their consituents are protected, simultaneously demonstrating their diligence. This last comment may be viewed as cynical, but undoubtedly any regulator worthy of the post will want to be sure they are viewed as aggressively pursuing this hot issue.
Undoubtedly the ramifications will continue to be felt – latest rumors have the Mercer Consulting entity splitting off from parent Marsh…
Notably, the highly publicized nature of the charges has drawn the attention of federal regulators, with the recent release of a GAO report on federal regulation of financial services. Included in the report is a discussion of the potential for changes in the role of the feds in insurance regulation.
This issue will not go away anytime soon.


More on contingent commissions

I recently had a conversation with an attorney at a major insurer regarding the “Spitzer investigations.” When asked his opinion of the emerging scandal, he all but brushed it off, saying “these risk managers knew what was going on all along.”
My reaction was one of disbelief mixed with alarm. Disbelief at the cavalier brush off of what is becoming a rapidly growing scandal, and alarm that this attorney thought it was OK as long as the victims knew they were being victimized. I also felt somewhat na


Fallout from the Spitzer investigations

In the last two days I have been interviewed by two separate publications (Kiplinger’s and Risk and Insurance) regarding the potential impact of the Spitzer investigations into contingent commissions, bid-rigging, and other unethical and inappropriate activities in the insurance industry. Both publications were seeking information about the potential fallout, impact on policyholders and insurers, and prognostication about on whom the next shoe would drop.
Here’s the summary in brief.
This investigation has just gotten started. Garamendi in California and Blumenthal in Connecticut are but two of the other State Attorneys General who are beginning their own investigations.
Although Spitzer started with P&C insurance, the insurance investigations have expanded significantly. Expect to see more subpoenas of life and health insurers, especially those with significant blocks of AD&D, STD, LTD, and life business.
While the life and health industry will be a target, it is unlikely that the practices that have so enraged Mr. Spitzer et al are as prevalent on this side of the business as they evidently are in the P&C world.
Those who pooh-pooh the contingent commission and sham bidding practices by claiming that risk managers and their colleagues knew what was going on are whistling past the graveyard. These are precisely the kind of back-room, clubby relationships that have led to the drastic reforms in the mutual fund and investment banking industries.
There are many other relationships in the insurance world that share similar traits with these alleged offences. TPAs that receive payments from managed care firms, providers that steer patients to their own imaging clinics, and the “percentage of savings” fee system are but a few that come to mind.
Finally, AIG was recently indicted by Spitzer. This was the first indictment directed against a corporate entity rather than an individual. As the Wall Street Journal recently noted, no financial services company has survived an indictment. While it would be wildly inappropriate to suggest that the very existence of AIG is at risk, it would also be foolhardy to think that the company will emerge unscathed.