Coventry's busy week includes $278 million 2Q charge, acquisition

Coventry Health Care suffered a financial blow as a federal court deferred to Louisiana state courts in a class-action lawsuit, but that didn't stop the Bethesda, Md.-based health insurer from setting its sights on acquiring another health insurer. Coventry will record a pre-tax second-quarter 2010 (2Q10) charge of $278 million (approximately $1.18 per diluted share). The one-time charge is the result of two court decisions.

First, the Court of Appeal, Third Circuit for the State of Louisiana, affirmed a Louisiana trial court's decision to grant summary judgment against Coventry preferred provider organization (PPO) subsidiary First Health Group Corp. Inc. (FHGC) for $262 million in a provider class-action lawsuit. FHGC allegedly failed to provide adequate notice (under Louisiana's Any Willing Provider Act) of rate discounts to healthcare providers that provided care to injured workers with workers' compensation claims. The Louisiana law requires that PPOs give prior notice that they will reimburse at lower PPO contract rates rather than higher mandated workers' comp rates by furnishing PPO cards to injured workers or by giving providers 30 days' advance written notice of discounts, reports Managed Care Matters.

Second, a federal court declined to get involved in the state-based class-action litigation. Coventry explained its dilemma in a Securities and Exchange Commission (SEC) filing: "FHGC previously obtained an order from in federal court that enjoined, barred and prevented any of the provider plaintiffs or their counsel from pursuing any claim against FHGC before any court under Louisiana's Any Willing Provider Act, including Louisiana state court. On June 23, 2010, the federal court denied a motion by Coventry to enforce the federal court's prior judgments and requesting sanctions against the provider plaintiffs for violating the federal court's judgments barring and enjoining them from pursuing their claims against FHGC in the Louisiana state courts. In denying Coventry's motion, the federal court stated, among other things, that it would defer to the Louisiana state courts on the ability of the provider plaintiffs to pursue claims on behalf of the class when opposed their own individual claims have been dismissed and enjoined."

Coventry plans to file a motion for rehearing in Louisiana state court, as well as exploring other appeal options. "Coventry does not believe the decision is supported by the facts or the law," the insurer said in a statement. "The company believes that it has available resources to pay any final unappealable judgment in this litigation."

Michael Kleinman, vice president of investor relations for WellPoint Inc., recently suggested during an investor conference that health reform would spur the transformation of the health insurance market into an "oligopoly," according to Bloomberg Businessweek. "There are going to be smaller insurers that are not going to be able to survive in this marketplace," he said.

Despite the legal wrangling in Louisiana, Coventry is taking steps to get the scale necessary to ensure its place at that smaller table. Coventry has signed a definitive agreement to acquire the insurance subsidiary of St. Louis-based Sisters of Mercy Health System, reports the St. Louis Post-Dispatch. MHP Inc. (aka Mercy Health Plans) has approximately 90,000 commercial risk members, 60,000 commercial self-funded members, and 30,000 Medicare Advantage coordinated-care members in Missouri and northwest Arkansas. The acquisition will give Coventry more than 1.2 million members in its six-state Midwest region, where it competes against UnitedHealthcare and Blue Cross Blue Shield plans.

Coventry didn't release financial details of the transaction. Industry estimates put the sales price at under $300 million, possibly in the $100 to $200 million range, according to Reuters. As part of the deal, Coventry will enter into what it describes as "a long-term provider and customer relationship with Sisters of Mercy Health System and its affiliates." Coventry expects to complete the purchase within 90 to 120 days and anticipates the acquisition will be "slightly accretive to earnings in 2011." Mercy "has kind of a break-even financial performance currently, so it's something that Coventry would hope to improve over time," Coventry spokesman Jon Kunkle told the Post-Dispatch.

To learn more:
- read these Coventry press releases: release 1, release 2 and release 3
- read Coventry's SEC filing on the lawsuit
- access the state appeals court's decision here
- read this Managed Care Matters blog post
- read the Bloomberg Businessweek article
- read this St. Louis Post-Dispatch article
- read the Sisters of Mercy press release
- read this St. Louis Business Journal article
- read this Reuters report