Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Coventry goes national with acquisition of First Health

Reprints

BETHESDA, Md.-Coventry Health Care Inc. will purchase First Health Group Corp. in a $1.8 billion deal in an effort to become a national player in the managed care market.

Bethesda, Md.-based Coventry said its acquisition of Downers Grove, Ill.-based First Health-announced last week-will enable it to operate nationwide and will add about 1.5 million health plan enrollees to its current rolls of 3 million, giving it greater negotiating clout with providers.

"Coventry Health Care has built a very successful market position in 15 markets throughout the United States. The acquisition of First Health enables us to extend our success beyond our existing borders," said Allen Wise, Coventry's chief executive officer, in a statement.

Stock analysts and others say, though, that Coventry could face difficulties folding First Health into its operations.

"It looks to be a transaction that will be full of integration challenges," said John Ward, chairman of the Cincinnati-based Ward Group.

One such challenge is the size of First Health, which has about half as many health plan members as Coventry. While prior acquisitions have helped to fuel Coventry's growth, those transactions involved mostly small, single-market health maintenance organizations that were purchased with internal cash holdings, analysts note.

In addition, First Health's business operations are very different than Coventry's; its main focus has been providing products and services to self-funded clients, while Coventry's major base is providing fully underwritten commercial health plans.

"First Health looks to me like less of an insurance company and more of a service company," Mr. Ward said. "It's not really obvious what the business case is of a HMO acquiring a services company in markets that are not overlapping."

The First Health acquisition will also thrust Coventry into lines of business, such as workers compensation, in which it has little or no experience.

"It definitely is a different strategic direction they're taking the company in," said Stephen Zaharuk, vp and senior analyst for Moody's Investors Service in New York.

Still, the transaction will result in a national health benefits company that will provide health insurance and administrative services to commercial and government clients in all 50 states, Puerto Rico and the District of Columbia. First Health will operate as a subsidiary of Coventry.

Coventry, which had $4.5 billion in revenues last year, currently provides managed care products and services to members in 15 markets throughout the Midwest, Mid-Atlantic and Southeastern states, while First Health, with 2003 revenues of $890 million, provides health plan services such as preferred provider organizations to large, multisite employers.

Coventry officials said the company would be out of the acquisition market in 2005 while it focuses on integrating First Health's operations. Douglas Meyer, senior director of Fitch Ratings in Chicago, called the decision "prudent," noting that company officials are "going to have their hands full for a while" with this transaction.

There are, experts say, positives for Coventry, namely, opening up new markets and new business for the company on the national level. However, they stress that Coventry still will be dwarfed in size by other national managed care companies such as UnitedHealth Group Inc.

The major managed care companies are having a difficult time growing membership organically, so they usually try to grow through acquisition, as seen in this deal, Mr. Meyer said.

In addition, the focus on self-funded business is increasing because that business may have more growth potential than fully insured products.

"They're getting into a business that is showing better growth prospects, at least over the near term," Mr. Meyer said.

The transaction also will achieve substantial savings for the combined entity in several ways, including the elimination of duplicate corporate costs and the achievement of provider network savings, Coventry said. The combined company is expected to achieve annual operating savings of about $20 million to $30 million in 2005, $40 million to $60 million by the end of 2006, and more than $100 million by the end of 2007.

Coventry may be able to pass on these savings to its employer clients, Mr. Ward said. "To the extent they're able to integrate cost management tools, there may be potential to offer some benefits to the employers that way," he said. "I don't think, at the premium level, there is going to be much of an impact."

Concerns about the transaction were reflected in actions by the ratings agencies last week. A.M. Best Co. has placed its B++ and B+ financial strength ratings of the insurance subsidiaries of Coventry under review with negative implications. Best has also placed its A- financial strength ratings of the insurance subsidiaries of First Health under review with negative implications. Best said it would determine the appropriate rating action after meeting with company management and completing its review.

In addition, Standard & Poor's Corp. placed its BBB- counterparty credit ratings on Coventry and First Health under review with negative implications.

The integration of the two firms will come at a time when Coventry will be making some changes among the ranks of its top executives.

Mr. Wise, Coventry's CEO, is scheduled to retire and be replaced by Chief Financial Officer Dale Wolf effective Jan. 1, 2005. The company said it would announce who will succeed Mr. Wolf as CFO within the next 30 days.