The Motley Fool had the opportunity to speak with Coventry Health Care
Rich Smith: Coventry Health Care is no ordinary company -- you've got a lot of moving parts, all of which are badly misunderstood among ordinary Americans, even those of us who depend on your (and your peer companies') services to keep us healthy. Let's start by giving readers a brief introduction to the company.
Dale Wolf: Coventry is a national managed health-care company based in Bethesda, Md., operating health plans, insurance companies, network rental/managed care services companies, and workers' compensation services companies. We provide a full range of risk and fee-based managed care products and services, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service products (POSs), Medicare Advantage, Medicare Prescription Drug Plans, Medicaid, Workers' Compensation services, and Network Rentals. We cater to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators in all 50 states, as well as the District of Columbia and Puerto Rico.
RS: More than one Motley FoolStock Advisor member suggested that HMOs and the like are essentially middlemen mediating between physicians on one side and patients on the other. Sketch out for us a few of the barriers to entry in this business. One member asked, "Can anybody with deep pockets and 50 servers compete for [your] business?"
DW: This is an important aspect for investors to understand when comparing today's managed-care industry to previous decades, making it more difficult for new capital to find its way in. Here are a few examples:
- Provider networks are a necessary asset to operate the business as building new networks would be a very time-consuming task.
- Operating systems are much more sophisticated than a decade ago, including Internet capabilities and connectivity with multiple constituents.
- The business has become more complex, making experienced management teams a true differentiator.
- The Health Insurance Portability and Accountability Act (HIPAA) has created operating and technology requirements that require significant investment.
- Product capabilities and variations have grown more voluminous and complex over the past decade.
- Financial and capital requirements have significantly increased due to the widespread adoption of "risk based capital" guidelines over the past decade.
In short, the business is much more advanced than a decade ago, making for a better product and value proposition delivered to our customers.
RS: Another Stock Advisor member wanted to ask you about a program offered by Excellus Blue Cross of New York and called "Consumer Driven Health Care," in which members use a health savings account to pay for health-care services. Can you explain to us what a health savings account is? And would Coventry consider the increase of such programs a threat to its own business model, or perhaps an opportunity that it would avail itself of to control the risk of "higher than expected utilization of health-care services?"
DW: By definition, a health savings account (HSA) is not a health-care product in and of itself. It is essentially a trust account that is funded with pretax dollars (by an individual and/or the employer) and is "attached" to a qualified high-deductible health plan (HDHP). The HSA account is used at the discretion of the individual consumer to pay for health-care costs, including deductibles, non-covered benefits, or amounts that would otherwise be out of pocket. Another type of "consumer-directed" product is the Health Reimbursement Account (HRA). Coventry views these as an important part of a product portfolio available to individuals and employer groups. We have had these products available as alternatives to the more traditional commercial managed-care products for years, providing more choices for the health-care purchaser.
RS: Before preparing these questions, I polled Motley Fool members for what they wanted to know about Coventry. One question that popped up repeatedly was the issue of scale. We've seen a lot of consolidation in this industry in recent years. Your own buyout of First Health. UnitedHealth Group's
DW: Well, 2005 was clearly a significant year for industry consolidation with the completion of a couple large industry mergers. In January 2005, Coventry completed its merger with First Health Group. Coventry has been a consolidator of smaller health plan and managed-care businesses over the past eight years. Although the activity in the M&A market ebbs and flows, we think this trend will continue over the long term. With respect to large publicly traded company mergers, there are too many variables to predict the future.
RS: So why should an investor consider Coventry versus competitors such as, say, Aetna
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