Coventry's $278 Million Miscue

Friday, July 9, 2010 | 0

By Joe Paduda
Health Strategy Associates

Coventry Health will be taking a $278 million charge against earnings to cover the company's fine plus interest and legal costs resulting from last week's Louisiana appellate court ruling in a workers' comp PPO network case.

On a per-share basis, the bill is $1.18 pre-tax.

The charge will be partially offset by improved earnings from other sectors, including Medicare Advantage Private-Fee-for-Service. According to Zacks, the "2010 EPS outlook was also revised to $1.57−$1.72 in view of the impact of the charge, down from the prior range of $2.35−$2.50 per share. Excluding the charge, Coventry anticipates the EPS outlook to increase by 40 cents per share to range between $2.75 and $2.90."

Since moving back into the executive suite over a year ago, CEO and Chairman Allen Wise has done an excellent job turning the company around refocusing the company on its core businesses, shedding underperforming and inefficient operations and profit centers, even revamping the way the company negotiates provider contracts to focus on Medicaid, Medicare, group, and individual health businesses.

The quarter-billion dollar charge is undoubtedly the subject of much discussion at the company's executive committee meetings, as it will suck cash out of the coffers that would have been used to acquire more regional health plans and help Coventry prepare for the post-reform health insurance world. It is also notable as it comes from a division, workers' comp, which heretofore had been a cash machine, generating significantly more profits than its rather modest top line would predict.

For now, Coventry appears to be weathering the storm, recently announcing the acquisition of a couple of regional health plans and predicting continued improvements in operating earnings.

Whether this continues may depend in some part on the outcome of the company's appeal of the Louisiana case.

Joe Paduda is owner of Health Strategy Associates, an employer's consulting firm in Connecticut. This column was reprinted with his permission from his blog, http://www.joepaduda.com.