Coventry Health Care, Inc.

6705 Rockledge Drive, Suite 900
Bethesda, Maryland 20817
U.S.A.
Telephone: (301) 581-0600
Fax: (301) 493-0752
Web site: http://www.cvty.com

Public Company
Incorporated: 1986 as Coventry Corporation
Employees: 3,985
Sales: $3.6 billion (2002)
Stock Exchanges: New York
Ticker Symbol: CVH
NAIC: 621491 HMO Medical Centers

Coventry Health Care, Inc. is a managed healthcare company based in Bethesda, Maryland. The company operates in 14 midwestern, mid-Atlantic, and southeastern states, serving more than 2.1 million members enrolled in health plans under the names Coventry Health Care, Coventry Health and Life, Carelink Health Plans, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, Southern Health, and Well-Path. Coventry targets secondary markets that major health insurers ignore, and in recent years has fueled its growth by acquiring health plans owned by hospitals. By taking advantage of its medical claims and health provider networks, Coventry is able to make these plans more profitable. Unlike the major health insurers, Coventry will customize coverage for large employers looking to create self-insured plans. Coventry plans also include point of service, HMOs, PPOs, and Medicare and Medicaid products.

Coventry's Founder a 1960s Harvard Physics Student

Coventry Health Care was founded by Tennessee's current governor, Phil Bredesen, who grew up in a small town in upstate New York. In 1961 he entered Harvard University to study physics like his father, but before graduating decided that he was not suited for a career in the field. Instead he took a job as a computer programmer for Itek Corporation and also became involved in politics. In 1970 he quit his job for an unsuccessful bid to become Massachusetts state senator. Bredesen then took a position with a pharmaceutical company, G.D. Searle & Co., and worked overseas, where he married Andrea Conte, a Searle's colleague who trained nurses how to use computers. While the couple was working in Saudi Arabia, Conte was offered a job as corporate nurse consultant by Nashville's Hospital Corporation of America. To join his wife in Nashville, Bredesen quit Searle and took a job negotiating management contracts with hospitals for Hospital Affiliates International. In 1980, with the birth of his son, Bredesen decided to strike out on his own and fulfill a dream of running his own business. With funding provided by four founders of Hospital Affiliates, he launched Healthplans, which later became known as HealthAmerica, a company that acquired and ran HMOs. The company grew rapidly and went public, but it ran into trouble in 1986 when the entire health insurance industry encountered a rough patch that sent stock prices tumbling. Although Bredesen wanted to ride out the downturn, the HealthAmerica founders, who maintained a controlling interest, insisted that he sell the company. In 1986 Bredesen found a buyer in Maxicare Health Plans Inc., pocketing $47 million for himself.

Formation of Coventry Corporation in 1986

Now wealthy, Bredesen in 1986 cofounded Coventry Corporation with Joseph P. Williams, former CFO of Health-America. Williams served as CEO while Bredesen held the chairmanship, although he increasingly devoted his time to politics. He stepped down as chairman in 1990 but stayed on as a director. In 1987 he lost a runoff election to become mayor of Nashville, a post he won in a landslide in 1991. He was unsuccessful in his attempt to be governor in 1991, won a second term as Nashville's mayor, then in 2002 he tried for the governorship again. This time he won, and the New York native became Tennessee's 48th governor.

As Bredesen had done with HealthAmerica, Coventry looked to grow by external means. In 1987 it paid $23 million in cash plus stock to acquire American Service Life Insurance Company; American Service Underwriters, Inc.; American Service Telemarketing, Inc.; Private Enterprise Managements, Inc.; as well as the assets of American Service underwriters. In 1988 Coventry completed two transactions. Paying nearly $1.5 million in cash, plus stock and other considerations, it acquired the Jess Jordan Agency. Coventry also picked up an 80 percent stake in Penn Group Corporation, a company newly formed to purchase Bredesen's original HMO, HealthAmerica Pennsylvania Inc., a health plan provider in Harrisburg and Pittsburgh, for $8 million. Coventry's largest deal in its early history was the 1990 $40 million cash and stock acquisition of Group Health Plan, Inc. To fund further growth Coventry made an initial public offering of stock in 1991.

Coventry adjusted its business mix in 1992 when management elected to discontinue the operations of American Service Company in order to focus on running HMOs. Coventry's plan was to view its current markets—Pittsburgh, central Pennsylvania (Harrisburg), and St. Louis—as hubs from which to expand the business. In this regard, Coventry acquired Healthpass, Inc., a provider organization affiliated with the Pennsylvania State University, located in central Pennsylvania, in a transaction valued at approximately $1.4 million. In the western part of the state, Coventry expanded through the acquisition of Riverside Health Plan, adding Beaver County, paying $3.9 million in debt and assuming liabilities in the $5 million range. From its St. Louis hub, Coventry also began to make inroads into southern Illinois. Although the company was interested in entering other markets, it was clearly focused on markets with no more than three million residents.

In the 1990s a large number of hospitals launched their own health plans and HMOs. By the middle of the decade they totaled nearly 3,300, but most proved to be money-losing ventures that hospitals were soon interested in unloading, thus providing a company like Coventry with ample acquisition targets and promising new markets to enter. In 1994 Coventry paid $50 million in cash to buy the remaining 20 percent interest it did not own of Penn Group Corporation. It also paid $3.7 million to acquire four physical group practices. In December 1994 Coventry used $75 million in stock to acquire Southern Health Management Corporation, based in Richmond, Virginia. Founded in 1984, the physician-owned HMO had 45,000 members in Richmond and central Virginia. As a result, Coventry gained a foothold in the southeastern market, with Richmond joining Pittsburgh, St. Louis, and Harrisburg as regional hubs. The company now boasted a total membership of 548,000. Coventry's balance sheet also reflected an upward trend. Revenues grew from $642 million in 1993 to nearly $777 million in 1994, with net income improving from $22 million to $29.3 million during the same period.

Coventry completed a major acquisition in July 1995 when it added Jacksonville, Florida-based HealthCare USA for $45 million in stock. HealthCare USA operated a 28,000-member Medicaid HMO in Jacksonville as well as Medicaid networks in St. Louis and Birmingham, Alabama, thereby adding the Medicaid risk product to Coventry's offerings and greatly extending the company's reach in the Southeast. Coventry began marketing its Medicaid product in the St. Louis and Missouri markets at the end of 1995 and rolled it out to western and central Pennsylvania in early 1996. By the end of 1996 Coventry had some 120,000 members enrolled in its Medicaid risk product.

Coventry suffered a major setback in 1995 when it lost two major accounts in the western Pennsylvania market and found itself saddled with excess capacity in 1996. Furthermore, in 1996 and into the early months of 1997 the company found that it had underpriced its health plans, while at the same time enrollments failed to keep pace with projections and administrative costs escalated. As a result, after barely breaking even the year before, Coventry posted a loss of more than $61.2 million in 1996, despite cracking the $1 billion mark in annual revenues. Much of the loss, some $40 million, was charges the company elected to take in order to increase its reserves and restructure its finances. The company took a number of steps to remedy the situation. It sold off a St. Louis-based dental insurance plan as well as nine medical centers in St. Louis to BJC Health System. The two parties then formed a ten-year strategic partnership that allowed Coventry to focus on marketing and management functions rather than the facilities themselves. Likewise, Coventry sold its group medical practices in Pittsburgh. Moreover, Coventry decided to close its Florida Medicaid HMO plan after attempts to sell the business proved unsuccessful. Due to its losses Coventry defaulted on some of its $90 million in debt, resulting in a restructuring of the covenants with bankers. A key to negotiating a one-year loan agreement that stabilized the company's finances was a letter of intent from investment firm E.M. Warburg, Pincus Ventures to invest $40 million in Coventry.

Coventry Merging with Principal Health Care in 1997

With its house in order, Coventry returned to profitability in 1997, earning nearly $12 million on revenues in excess of $1.22 billion. In November 1997 it merged with Principal Health Care, a managed care company that was enduring a plight similar to what Coventry had just overcome. The Bethesda, Maryland-based company, a subsidiary of Des Moines, Iowa-based Principal Financial Group, had lost more than $40 million in 1996 and during the first three quarters of 1997 lost some $15 million more. The $375 million stock swap, which closed in 1998, created a $2.4 billion company with 1.9 million members located in 18 markets. Coventry received a 60 percent ownership stake in the merged entity, which subsequently changed its name to Coventry Health Care. The company also decided to move its headquarters to Principal Health Care's offices in Bethesda. Bredesen expressed some displeasure over the change of address, although he said he understood the rationale. Because he could not spare the time to travel to Maryland for meetings he opted to resign from the Coventry board.

Company Perspectives:

What makes us unique in the competitive health benefit marketplace? We focus on doing the basics of our business better than other companies by maintaining financial security, upholding high quality standards, promoting provider choice, providing superior customer service and being innovative in all areas of business. We commit to do all of this with the highest degree of integrity.

In 1998 Coventry completed a number of transactions to improve the company's fiscal health following the Principal Health Care merger. Principal Health Care of Illinois was sold to First American Group for $4.3 million cash, and Principal Health Care of Florida Inc. was sold to Blue Cross Blue Shield of Florida, Inc. for $95 million in cash. In addition, in December 1998 Coventry acquired Healthcare America Plans, Inc., which was then merged with the operations of Principal Health Care of Kansas City, Inc. For the year, Coventry generated more than $2.1 billion in revenues. Although it posted a loss of $11.7 million, the company, after digesting the Principal Health Care merger, was clearly poised for strong growth.

Coventry was now able to grow aggressively via acquisitions; it was especially keen on buying and turning around unprofitable health plans that hospitals were increasingly looking to unload. In 1999 Coventry paid approximately $8.4 million to add Carelink Health Plans, serving West Virginia, and $1.8 million to acquire Kaiser Foundation Health Plan, serving North Carolina. In 2000, Coventry paid $3.9 million for PrimeONE, Inc., another West Virginia managed care company. It added to its St. Louis business by buying the 11,800-member Medicaid business of Prudential Health Care Plan at a cost of approximately $100 per member. Coventry also acquired Maxicare Louisiana, Inc. in a $3.5 million deal, and paid $21.2 million for WellPath Community Health Plans, a subsidiary of Duke University Health System. In addition in 2000 Warburg, Pincus invested $100 million in Coventry, giving the investment firm a stake of nearly 31 percent. For the year Coventry saw its revenues improve to more than $2.6 billion and net income grow to $61.3 million after sales of $2.16 billion and earnings of $43.4 million in 1999.

In 2001 Coventry added the commercial membership of Health Partners of the Midwest at a cost of $4.8 million. It also paid nearly $15 million to acquire Blue Ridge Health Alliance, Inc. and its QualChoice of Virginia Health Plan, Inc. subsidiary, which was primarily owned by the University of Virginia Medical Center. QualChoice was typical of the type of acquisition in which Coventry now specialized. Established in 1994 by the University of Virginia Medical Center, the HMO had lost $30 million, prompting the University of Virginia to put the business up for sale. Although its acquisition pace slackened somewhat, Coventry continued to supplement its holdings in 2002. It added New Alliance Health Plan of Erie, Pennsylvania. The 47,000-member health plan was the only employer-owned HMO in the country, having been taken over by businessman Joseph Prischak, owner of Plastek Group, a slate of plastics, toolmaking, and transportation companies. Coventry also acquired Mid American Health Partners Inc. in 2002, adding 121,400 HMO members in Missouri and Kansas.

Coventry saw revenues grow to $3.15 billion in 2001 and nearly $3.58 billion in 2002, while net income grew at an even more impressive rate, with $84.4 million recorded in 2001 and $145.6 million in 2002. It was clear that Coventry was a well-run company that had found its niche in the healthcare field and was well positioned for long-term success.

Key Dates:

1986:

Coventry Corporation is founded in Nashville, Tennessee.

1988:

HealthAmerica Pennsylvania Inc. is acquired.

1991:

The company goes public.

1998:

Coventry merges with Principal Health Care, and moves headquarters to Bethesda, Maryland.

2000:

WellPath Community Health Plans is acquired.

Principal Subsidiaries

HealthAmerica Pennsylvania, Inc.; Southern Health Services, Inc.; Carelink Health Plans, Inc.; HealthCare USA of Missouri, L.L.C.; Coventry Health Care Management Corporation; Healthcare America, Inc.; WellPath Community Health Plans, Inc.

Principal Competitors

Aetna Inc.; CIGNA Corporation; United Health Group Corporation.

Further Reading

Banstetter, Trebor, "Tennessee Health Care Firm's Profits, Shares Continue to Drop," Nashville Banner, February 25, 1997.

Jarboe, Kathleen Johnston, "Bethesda-Based Coventry Health Care Acquires Yet Another HMO," Daily Record, September 17, 2002, p. A3.

Lau, Gloria, "Coventry Health Care Inc.," Investor's Business Daily, June 11, 2003, p. A10.

Niedzielski, Joe, "Principal, Coventry Health Operations Wed," National Underwriter, November 10, 1997, p. 66.

Wissner, Sheila, "Tennessee Governor Candidate Profiles: Phil Bredesen, The Early Years," Tennessean, September 29, 2002.

—Ed Dinger