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Coventry Health Suddenly Looks Like a Target -- If Anyone is Buying

For the third quarter in a row, unexpectedly high medical costs appear to have taken the management of Coventry Health Care by surprise. The cost, this time, was severe: shares of the health-insurance firm lost more than half their value today, meaning that while Coventry was worth more than $4 billion yesterday, today it's valued at only a little more than $2 billion.

Coventry Health: On the Block?Among other things, a stock drop that sudden and that huge often turns a company into a takeover target. Given the steady membership declines many insurers are seeing -- at least among the fully insured population -- you might think that snapping up a company like Coventry could do a lot to bolster that highly profitable segment at another, healthier insurance company.

There are just two problems. First, the ongoing financial crisis has rendered most insurers preternaturally cautious, which would naturally disincline them to spend large sums on an acquisition -- even a cheap one. Even were they inclined to take risks now, odds are good that they'd have trouble raising the funds to finance any transaction.

Second, any potential acquirer would also have to figure out just how fundamentally Coventry is really broken. And that's a question Coventry itself seems to have trouble coming to grips with.

In fact, the company's inability to get a handle on its medical costs is telling on a number of levels. The first, and least enlightening, is what it says about the company's financial management, since had it anticipated this trend, it could have raised insurance premiums higher and faster to counter heavier spending on its members' medical claims. This is actually the sort of countermove that Wall Street usually cheers.

More to the point, though, is the fact that Coventry seems to have no idea what's causing its cost crunch. As I've discussed before, this isn't necessarily surprising for a company that seems to regard itself as more of a transaction processor than a health plan. Ideally, of course, a health plan would know more about the health of its members, could identify precisely why healthcare costs are escalating, and might even devise counterstrategies aimed at keeping its members out of the hospital -- and costs down. Near as I can tell, Coventry fails on all three counts.

Perhaps I'm naive, but I still find it kind of shocking given the basic catch-22 of the health-insurance industry these days. That goes something like this: Higher medical costs lead to premium hikes, which in turn cause more employers (and healthier employees) to abandon their coverage, thus both shrinking the market and driving up medical costs as a percentage of premiums (the dreaded "medical-loss ratio"). Lather, rinse, and repeat enough times, and you have no health-insurance industry left.

Coventry's situation isn't dramatically different from that of most other major insurers; it's just exacerbated in the short run by the fact that it seems incapable of either jacking up premiums fast enough or ridding itself of sicker (and thus more expensive) members cleverly enough. Absent some other way of getting a grip on rising medical spending, though, Coventry's business is headed the same way as that of everyone else -- it just seems likely to crater a bit earlier.

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