Coventry Health Care (CVH)

Q2 2012 Earnings Call

July 27, 2012 8:30 am ET

Executives

Drew Asher - Senior Vice President of Corporate Finance

Allen F. Wise - Executive Chairman and Chief Executive Officer

Randy P. Giles - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Compare to:
Previous Statements by CVH
» Coventry Health Care's CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Coventry Health Care's CEO Discusses Q4 2011 Results - Earnings Call Transcript
» Coventry Health Care's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Good morning, and welcome to today's Coventry Health Care's Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] Today's call will begin with opening remarks by Chairman and Chief Executive Officer of Coventry Health Care, Mr. Allen Wise, after a brief forward-looking statement read by Mr. Drew Asher.

Please go ahead, Drew.

Drew Asher

Ladies and gentlemen, during this call we will make forward-looking statements. Certain risks and uncertainties, including those referenced in our press release and described in the company's annual report on Form 10-K for the year ended December 31, 2011, the company's quarterly report on Form 10-Q for the quarter ended March 31, 2012, and all subsequent filings with the SEC, may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Allen?

Allen F. Wise

Good morning, and thank you for your interest in Coventry Health Care. Earlier today, we reported earnings per share of $0.65 for the quarter bringing year-to-date earnings per share to $1.85. The quarter was marked by significant improvement in Medicaid performance, sequential growth in Medicare products, continued SG&A leverage and cash deployment for share repurchase. We are on track for our 2012 EPS forecast of $3.10 to $3.30 per share and therefore, are again reiterating [ph] full year 2012 guidance.

I'll cover some of our business highlights and perhaps, more importantly, where we feel we're headed for tomorrow. Let's start with government programs, which now represents about 1/2 of the company's revenue. You may recall from the first quarter that our Medicare Advantage business, spanning 15 states, had an excellent annual enrollment period with 13% sequential membership growth in the first quarter of 2012.

Since Q1, we've continued to add membership each month in our Medicare Advantage business, and we're at 253,000 members at the end of the second quarter. We are well positioned in our Health Plan footprint from a cost structure, distribution and product standpoint and as such, expect to continue the growth and strong performance as we look multiple years ahead. During Q2, we followed our bids for 2013, and we're quite optimistic about the future serving the senior population.

The story is similar for Medicare Part D. We experienced significant growth in Q1, followed by continued growth in each month of the second quarter. In fact, Medicare Part D grew by 36,000 members in Q2, averaging growth of about 12,000 members per month. We expect to continue growing throughout 2012 based on our positioning of our Value Plus product and the attractive value proposition we've been able to create for the senior population. To round up Medicare, the margins on these products continue to be on track with our forecast and consistent with prior years.

In Medicaid, coming into 2012, we experienced substantial growth, effectively doubling our revenue to about $2.9 billion, led by the 2011 Kentucky win, the FHP acquisition and organic wins in both Nebraska and Pennsylvania. Our challenge is to manage that growth and demonstrate that we're able to improve and manage bottom line performance.

Continuing the bottom line performance thought, I'd like to continue the Medicaid discussion with a much more in-depth review of Kentucky. You may remember during Q1 conference call, when I advised you that after 5 months of data, it was obvious to us that we had severe earnings pressure and other challenges with regard to our 32-month contract with the Commonwealth of Kentucky with approximately 230,000 members. At that time, I identified some of our major problems in the areas of adverse risk selection, especially in Regions 7 and 8, lack of compensation from the Commonwealth for past due payments to hospitals due to errors or omissions in the data book and the challenge of managing the health and care of a very large population with limited preparation time. These problems are exacerbated by the fact that there's not been a managed care program in Kentucky previously and the fact that there wasn't permanent leadership in the cabinet for health and family services in the early days of the program. Our challenges were made even more difficult to litigation due to litigation from one of the largest provider groups in Region 8 that prevent us from exercising the 30-day notice of termination provision, even though our agreement clearly allowed us to do so, almost a perfect storm.

Well, enough history, and I'm pleased to report that we're making very significant progress in many, if not most of the areas, which created a very poor financial result during the first 5 months of the contract. First, there's now permanent leadership at the cabinet level for health and family services, which is resolved within the necessary and meaningful dialogue to develop a program that works for both Coventry and the Commonwealth of Kentucky.

Second, we received a partial adjustment regarding risk-adjusted revenue, which we were contractually owed. And this revenue produced perspective relief beginning April 1, 2012.

Read the rest of this transcript for free on seekingalpha.com