Coventry Returns to Health

It looks like Coventry Health Care (NYSE: CVH  ) is a prescription for what ails you.

The managed-care provider reversed a recent trend of stagnant membership growth and worsening loss ratios in the fourth quarter to churn out revenues and profits that exactly matched analyst expectations. Compared with UnitedHealth (NYSE: UNH  ) and Wellpoint (NYSE: WLP  ) -- each of which had a rather sickly quarter, with one lowering guidance and the other increasing loss ratios -- Coventry Health Care looked in peak condition.

Health plan membership grew by 6,000 to 2.52 million members, and that number should receive an additional boost since Coventry just announced it was taking over Concentra's workers' comp managed-care services in a $387 million cash deal. According to Concentra's website, it completed more than 5.9 million patient visits in 2004, including half a million workers' comp injuries, and reviewed and repriced more than $14 billion in medical bills.

The rise in membership numbers should help allay investor concerns that Coventry may start bidding too low for new business, which might cause it to have to pay out higher percentages of premiums. Coventry reports that medical loss ratios also improved almost across the board.

A medical loss ratio (or MLR) is the fraction of premiums paid out in claims. Coventry's health plan MLRs improved by 50 basis points over 2005, shrinking to 77.3% from 77.8%, while commercial MLRs improved 10 basis points and Medicare MLRs improved a remarkable 350 basis points. It was only in the Medicaid segment that the medical loss ratio remained consistent with the prior period's numbers.

When a company reports rising membership rolls and rising loss ratios, it suggests that company is cutting profits to win business. Aetna (NYSE: AET  ) did that last year, and Wellpoint is on the watch list this time around.

Coventry seems to be clear of this infectious disease at this time, but it also has to be careful that its MLRs don't fall so low that it is actually denying benefits to patients who need care. That's one of the problems with the medical loss ratio as a guidance tool: Higher ratios mean the company is providing more benefits, but at the expense of profits. Conversely, the lower the ratio falls, the more profits the company achieves, but at a cost of benefits provided.

So far, Coventry is managing its own health properly, as it continues to be the low-cost provider. That's leading it to forecast 10% to 18% revenue growth in the first quarter, but only a 1% to 4% rise in profits, because it plans on taking a one-time charge for debt refinancing.

Looks like the managed-care company is ready to refill its prescriptions for investors.

Coventry Health Care was recommended by Tom Gardner for his Motley Fool Stock Advisor subscribers. UnitedHealth is a recommendation of both Stock Advisor and Motley Fool Inside Value.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.