UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _________________

 

COMMISSION FILE NUMBER 1-16477

 

COVENTRY HEALTH CARE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-2073000

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (301) 581-0600

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer x Accelerated filer o Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Class

 

Outstanding at October 31, 2007

 

 

 

Common Stock $.01 Par Value

 

154,880,057

 

COVENTRY HEALTH CARE, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1: Financial Statements

 

 

 

Consolidated Balance Sheets

at September 30, 2007 and December 31, 2006

 

3

 

 

Consolidated Statements of Operations

for the quarters and nine months ended September 30, 2007 and 2006

 

4

 

 

Condensed Consolidated Statements of Cash Flows

for the nine months ended September 30, 2007 and 2006

 

5

 

 

Notes to the Condensed Consolidated Financial Statements

 

6

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

22

 

ITEM 4: Controls and Procedures

 

22

PART II: OTHER INFORMATION

 

22

 

ITEM 1: Legal Proceedings

 

22

 

ITEM 1A: Risk Factors

 

22

 

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

ITEM 3: Not Applicable

 

23

 

ITEM 4: Not Applicable

 

23

 

ITEM 5: Not Applicable

 

23

 

ITEM 6: Exhibits

 

23

 

SIGNATURES

 

24

 

INDEX TO EXHIBITS

 

25

 

 

 

 

2

PART I. FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

September 30,

 

December 31,

 

2007

 

2006

ASSETS

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,725,336 

 

$

1,370,836 

Short-term investments

 

143,101 

 

 

292,392 

Accounts receivable, net

 

274,493 

 

 

209,180 

Other receivables, net

 

280,575 

 

 

164,829 

Other current assets

 

130,501 

 

 

97,145 

Total current assets

 

2,554,006 

 

 

2,134,382 

 

 

 

 

 

 

Long-term investments

 

1,338,612 

 

 

1,130,572 

Property and equipment, net

 

316,973 

 

 

315,105 

Goodwill

 

2,564,214 

 

 

1,620,272 

Other intangible assets, net

 

607,394 

 

 

388,400 

Other long-term assets

 

91,957 

 

 

76,376 

Total assets

$

7,473,156 

 

$

5,665,107 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Medical liabilities

$

1,629,328 

 

$

1,121,151 

Accounts payable and other accrued liabilities

 

547,551 

 

 

460,489 

Deferred revenue

 

102,937 

 

 

60,349 

Current portion of long-term debt

 

 

 

10,000 

Total current liabilities

 

2,279,816 

 

 

1,651,989 

 

 

 

 

 

 

Long-term debt, net

 

1,661,924 

 

 

750,500 

Other long-term liabilities

 

385,089 

 

 

309,616 

Total liabilities

 

4,326,829 

 

 

2,712,105 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value; 570,000 authorized

 

 

 

 

 

189,652 issued and 155,331 outstanding in 2007

 

 

 

 

 

187,630 issued and 159,441 outstanding in 2006

 

1,897 

 

 

1,876 

Treasury stock, at cost; 34,321 in 2007; 28,189 in 2006

 

(929,823)

 

 

(563,909)

Additional paid-in capital

 

1,682,664 

 

 

1,571,101 

Accumulated other comprehensive loss

 

(1,064)

 

 

(3,519)

Retained earnings

 

2,392,653 

 

 

1,947,453 

Total stockholders’ equity

 

3,146,327 

 

 

2,953,002 

Total liabilities and stockholders’ equity

$

7,473,156 

 

$

5,665,107 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

3

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed care premiums

 

$

2,202,220

 

$

1,695,952

 

$

6,241,585

 

$

5,133,411

 

Management services

 

 

320,428

 

 

213,184

 

 

850,052

 

 

659,351

 

Total operating revenues

 

 

2,522,648

 

 

1,909,136

 

 

7,091,637

 

 

5,792,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical costs

 

 

1,739,620

 

 

1,333,846

 

 

5,001,598

 

 

4,111,296

 

Cost of Sales

 

 

30,198

 

 

-

 

 

57,807

 

 

-

 

Selling, general and administrative

 

 

470,894

 

 

322,649

 

 

1,283,223

 

 

984,167

 

Depreciation and amortization

 

 

36,068

 

 

28,360

 

 

100,025

 

 

83,710

 

Total operating expenses

 

 

2,276,780

 

 

1,684,855

 

 

6,442,653

 

 

5,179,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

 

245,868

 

 

224,281

 

 

648,984

 

 

613,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

19,182

 

 

13,156

 

 

56,021

 

 

39,321

Other income, net

 

 

38,294

 

 

27,576

 

 

106,893

 

 

74,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

264,980

 

 

238,701

 

 

699,856

 

 

648,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

96,264

 

 

91,184

 

 

258,097

 

 

244,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

168,716

 

$

147,517

 

$

441,759

 

$

403,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.10

 

$

0.93

 

$

2.84

 

$

2.54

 

Diluted earnings per share

 

$

1.08

 

$

0.92

 

$

2.80

 

$

2.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

153,825

 

 

157,891

 

 

155,305

 

 

158,760

 

Effect of dilutive options and restricted stock

 

 

2,206

 

 

2,545

 

 

2,523

 

 

2,939

 

Diluted

 

 

156,031

 

 

160,436

 

 

157,828

 

 

161,699

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

4

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

2007

 

 

2006

Net cash from operating activities

$

853,264 

 

$

750,525 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures, net

 

(31,080)

 

 

(47,678)

 

Proceeds from sales of investments

 

698,648 

 

 

984,999 

 

Proceeds from maturities of investments

 

274,111 

 

 

442,590 

 

Purchases of investments

 

(839,347)

 

 

(1,037,171)

 

Payments for acquisitions, net of cash acquired

 

(1,191,775)

 

 

(34,872)

Net cash from investing activities

 

(1,089,443)

 

 

307,868 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of stock

 

46,820 

 

 

22,201 

 

Payments for repurchase of stock

 

(379,502)

 

 

(268,696)

 

Excess tax benefit from stock compensation

 

29,944 

 

 

21,931 

 

Proceeds from issuance of debt, net

 

1,153,917 

 

 

 

Payments for retirement of debt

 

(260,500)

 

 

(10,000)

Net cash from financing activities

 

590,679 

 

 

(234,564)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

354,500 

 

 

823,829 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,370,836 

 

 

391,646 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

1,725,336 

 

$

1,215,475 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A.

BASIS OF PRESENTATION

 

The condensed consolidated financial statements of Coventry Health Care, Inc. and its subsidiaries (“Coventry” or the “Company”) contained in this report are unaudited but reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods reflected. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10–K for the year ended December 31, 2006.

 

B.

  SIGNIFIGANT ACCOUNTING POLICIES

 

Cost of Sales

 

Cost of sales is a new line on our statements of operations this year and is a direct result of the Concentra, Inc. (“Concentra”) acquisition. Cost of sales consists of the expense for prescription drugs provided by the Company’s workers’ compensation pharmacy benefit manager and for the independent medical examinations performed by physicians on injured workers. These costs are associated with fee-based products and this amount excludes the cost of drugs related to our risk products recorded in medical costs.

 

Recent Accounting Pronouncements

 

In May 2007, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (“FSP”) FIN 48-1 Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

 

C.

ACQUISITIONS

 

During the nine months ended September 30, 2007, the Company acquired the following businesses for a total cost of approximately $1.2 billion, which was paid in cash, including $34.2 million paid into an escrow account pending final settlement.

 

 

The workers’ compensation managed care services businesses of Concentra Inc. (“Concentra”) which were acquired effective April 1, 2007, and include a preferred provider organization (“PPO”), provider bill review, pharmacy benefit management, field case management, telephonic case management and independent medical exam businesses.

 

 

Certain group health insurance businesses from Mutual of Omaha (“Mutual”) which were acquired effective July 1, 2007, including Mutual’s commercial employer group health business in Nebraska and Iowa, as well as its national Federal Employees Health Benefits administration business, representing approximately 233,000 members in total.

 

 

Florida Health Plan Administrators, LLC, owner of Vista Healthplans (“Vista”) which was acquired effective September 10, 2007. Vista is a Florida-based diversified health plan serving approximately 294,000 members consisting of 150,000 commercial employer group members, 32,000 individual members, 28,000 Medicare Advantage HMO members and 84,000 state program members. Approximately 85% of the membership is in the south Florida market with the remainder in north central Florida and the state’s panhandle.

 

As a result of these acquisitions and based on the preliminary purchase price allocation, we recorded $949.1 million of goodwill, of which, $291.2 million is expected to be deductible for tax purposes. The allocation of the purchase price is preliminary and is based upon information that was available to management at the time the consolidated financial statements were prepared. Accordingly, the allocation may change. We also recorded $236.3 million of identifiable intangibles, subject to amortization, with a weighted average useful life of 10.3 years. The value and estimated lives are preliminary and are subject to change based upon the results of the final valuation.

 

6

The acquisitions were accounted for using the purchase method of accounting and, accordingly, the operating results have been included in the Company’s consolidated financial statements since the date of acquisition. The following unaudited pro-forma condensed consolidated results of operations assumes the acquisitions occurred on January 1, 2007 and 2006 (in millions, except per share data):

 

Pro Forma:

 

 

 

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

2007

2006

 

2007

2006

 

 

 

 

 

 

Operating revenues

$  2,752.2

$  2,294.2

 

$  8,063.5

$  6,926.5

Net earnings

$     171.6

$     142.5

 

$     453.6

$     397.3

Earnings per share, basic

$       1.12

$       0.90

 

$       2.92

$       2.50

Earnings per share, diluted

$       1.10

$       0.89

 

$       2.87

$       2.46

 

The pro forma amounts represent historical operating results of the Company and the acquisitions and include the pro forma effect of the amortization of finite lived intangible assets arising from the purchase price allocation, interest expense related to financing the acquisitions and the associated income tax effects of the pro forma adjustments. The pro forma amounts assume that debt issuance and debt refinancing that occurred in 2007, which coincided with the acquisitions, would have occurred at the beginning of 2006. In addition, the pro forma amounts exclude $32.1 million in acquisition related costs that were incurred as a result of the acquisition. The pro forma amounts are presented for comparison purposes and are not necessarily indicative of the operating results that would have occurred if the acquisitions had been completed at the beginning of the periods presented, nor are they necessarily indicative of operating results in future periods.

 

In addition to the acquired businesses discussed above, effective February 1, 2007, the Company completed its purchase of approximately 26,500 members from FirstGuard Health Plan Missouri, Inc., a wholly-owned subsidiary of Centene Corporation.

 

D.

DEBT

The Company’s outstanding debt as of September 30, 2007, and December 31, 2006, consists of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

2007

 

2006

8.125% Senior notes due 2/15/12

 

$                   -

 

$   170,500

5.875% Senior notes due 1/15/12

 

250,000

 

250,000

6.125% Senior notes due 1/15/15

 

250,000

 

250,000

5.95% Senior notes due 3/15/17, net of unamortized discount

 

398,600

 

-

of $1,400 at September 30, 2007

 

 

 

 

6.30% Senior notes due 8/15/14, net of unamortized discount

 

398,324

 

-

of $1,676 at September 30, 2007

 

 

 

 

Revolving Credit Facility due 7/11/12, 6.26% weighted

 

365,000

 

-

average interest rate for the period ended September 30, 2007.

 

 

 

 

5-year Term loan

 

-

 

90,000

Total Debt

 

$   1,661,924

 

$  760,500

 

On February 15, 2007, the Company redeemed all $170.5 million of its outstanding 8.125% Senior Notes due February 15, 2012. The Company redeemed the notes at a redemption price equal to 104.1% of the principal amount plus interest accrued on the redemption date. As a result of the redemption, the Company recognized $6.9 million of interest expense for the premium paid on redemption and wrote off $2.2 million of deferred financing costs related to the senior notes. The funds for payment of the redemption price were provided by cash on hand.

 

On March 20, 2007, the Company completed the sale of $400 million aggregate principal amount of its 5.95% Senior Notes due March 15, 2017 (the “10-year Notes”) at the issue price of 99.63% per Note. The 10-year Notes were offered and sold by the Company pursuant to a shelf registration statement with the Securities and Exchange Commission. The 10-year Notes are senior unsecured obligations of Coventry and rank equally with all of its other senior unsecured indebtedness.

 

7

On July 11, 2007, the Company executed an Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility provides for a five-year revolving credit facility in the principal amount of $850.0 million, with the Company having the ability to request an increase in the facility amount up to an aggregate principal amount not to exceed $1.0 billion. The obligations under the Credit Facility are general unsecured obligations of the Company. The Company drew $80.0 million under the Credit Facility to pay off the Company’s $80.0 million five-year term loan and drew an additional $285.0 million to help fund the Vista acquisition payment.

 

On August 27, 2007, the Company completed the sale of $400 million aggregate principal amount of its 6.30% Senior Notes due 2014 (the “7-year Notes”) at the issue price of 99.575% per Note. The 7-year Notes were offered and sold by the Company pursuant to a shelf registration statement with the Securities and Exchange Commission. The 7-year Notes are senior unsecured obligations of Coventry and rank equally with all of its other senior unsecured indebtedness.

 

The Company’s credit facility requires compliance with a leverage ratio, and its senior notes and credit facility contain certain covenants and restrictions regarding additional debt, dividends or other restricted payments, transactions with affiliates, disposing of assets and consolidations or mergers. As of September 30, 2007, the Company was in compliance with the applicable covenants under the senior notes and credit facility.

 

E.

CONTINGENCIES

 

The Company was a defendant in the provider track of the In Re: Managed Care Litigation filed in the United States District Court for the Southern District of Florida, Miami Division, Multi-District Litigation (“MDL”), No. 1334, in the action captioned, Charles B. Shane., et al., vs. Humana, Inc., et al. This lawsuit was filed by a group of physicians as a class action against Coventry and nine other companies in the managed care industry. The plaintiffs alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO and aiding and abetting a scheme to violate RICO. In addition to these federal law claims, the complaint included state law claims for breach of contract, violations of various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit. The trial court dismissed several of the state law claims and ordered all physicians who had an arbitration provision in their provider contracts to submit their direct RICO claims and their remaining state law claims to arbitration. As a consequence of this ruling, the plaintiffs who had arbitration provisions voluntarily dismissed their claims that were subject to arbitration. In its order, the trial court also held that the plaintiffs’ claims of (1) conspiracy to violate RICO and (2) aiding and abetting violations of RICO were not subject to arbitration. The trial court then certified various subclasses of plaintiffs with respect to these two federal law claims.

 

Seven defendants entered into settlement agreements with the plaintiffs, which received final approval from the trial court. On June 16, 2006, the trial court filed an order in the Shane lawsuit which granted summary judgment on all claims in favor of the Company. The trial court also granted summary judgment on all claims in favor of two other defendants. The plaintiffs appealed the trial court’s summary judgment order to the Eleventh Circuit Court of Appeals. By an order dated June 13, 2007, the Eleventh Circuit affirmed the trial court’s order granting summary judgment in favor of the Company. The plaintiffs did not request reconsideration of the decision from the Eleventh Circuit nor did they seek to appeal the decision to the U.S. Supreme Court. The Shane lawsuit has triggered the filing of copycat class action complaints by other health care providers such as chiropractors, podiatrists, acupuncturists and other licensed health care professionals. Each of these actions has been transferred to the MDL and have been designated as “tag-along” actions. The trial court has entered an order which has stayed all proceedings in the tag-along actions. Although the Company can not predict the outcome, management believes that the tag-along actions will not have a material adverse effect on its financial position or its results of operations. Management also believes that the claims asserted in these lawsuits are without merit and the Company intends to defend its position.

 

F.

STOCK-BASED COMPENSATION

 

Stock Options

 

The Company granted 2.1 million stock options during the during the nine months ended September 30, 2007. The Company recorded compensation expense related to stock options of approximately $9.3 million and $8.3 million for the quarters ended September 30, 2007 and 2006, respectively, and $26.5 million and $22.0 million for the nine months ended September 30, 2007 and 2006, respectively. The total intrinsic value of options exercised was $16.2 million and $19.2 million for the quarters ended September 30, 2007 and 2006, respectively, and $69.0 million and $51.2 million for the nine months ended September 30, 2007 and 2006, respectively. As of September 30, 2007, there was $77.1 million of total unrecognized compensation cost (net of expected forfeitures) related to nonvested stock option grants which is expected to be recognized over a weighted average period of 2.6 years.

 

8

The following table summarizes stock option activity for the nine months ended September 30, 2007:

 

 

 

Shares

Weighted-Average
Exercise Price

Aggregate
Intrinsic Value

 

 

(in thousands)

(in thousands)

 

 

 

 

 

Outstanding at January 1, 2007

 

11,301 

$ 35.56

 

Granted

 

2,086 

$ 59.34

 

Exercised

 

(1,985)

$ 22.92

 

Cancelled and expired

 

(404)

$ 48.14

 

Outstanding at September 30, 2007

 

10,998 

$ 41.89

$ 223,441

Exercisable at September 30, 2007

 

4,925 

$ 32.09

$ 148,328

 

The Company continues to use the Black-Scholes-Merton option pricing model and amortizes compensation expense over the requisite service period of the grant. The methodology used in 2007 to derive the assumptions used in the valuation model is consistent with that used in 2006. The following average values and weighted-average assumptions were used for option grants:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2007

 

September 30, 2006

 

September 30, 2007

 

September 30, 2006

 

 

 

 

 

 

 

 

Black-Scholes-Merton Value

$ 14.65

 

$ 17.13

 

$ 16.82

 

$ 17.53

Dividend yield

0.0%

 

0.0%

 

0.0%

 

0.0%

Risk-free interest rate

4.6%

 

4.9%

 

4.8%

 

4.9%

Expected volatility

25.4%

 

31.9%

 

25.3%

 

34.0%

Expected life (in years)

3.8

 

3.8

 

4.1

 

4.0

 

Restricted Stock Awards

 

The Company awarded 0.6 million shares of restricted stock in the nine months ended September 30, 2007. The value of the restricted shares is amortized over various vesting periods through 2011. The Company recorded compensation expense related to restricted stock grants, including restricted stock granted in prior periods, of approximately $7.6 million and $6.5 million for the quarters ended September 30, 2007 and 2006, respectively, and $21.9 million and $19.1 million for the nine months ended September 30, 2007 and 2006, respectively. The total unrecognized compensation cost related to the restricted stock was $52.5 million at September 30, 2007, and is expected to be recognized over a weighted average period of 2.2 years. The total fair value of shares vested during the nine months ended September 30, 2007 and 2006 was $36.5 million and $ 34.5 million, respectively.

 

The following table summarizes restricted stock award activity for the nine months ended September 30, 2007:

 

 

 

 

 

Weighted-Average

 

 

Shares

 

Grant-Date Fair

 

 

(in thousands)

 

Value Per Share

 

 

 

 

 

Nonvested, January 1, 2007

 

1,278 

 

$ 40.91

Granted

 

598 

 

$ 59.41

Vested

 

(616)

 

$ 37.57

Forfeited

 

(72)

 

$ 46.25

 

 

 

 

 

 

 

 

 

 

Nonvested, September 30, 2007

1,188 

 

$ 52.04

 

G.

SHARE REPURCHASE PROGRAM

 

In February 2007, the Company’s Board of Directors approved an increase to the share repurchase program in an amount equal to 5% of the Company’s then outstanding common stock, thus increasing the Company’s repurchase authorization by 7.9 million shares. Under the share repurchase program, the Company purchased 6.5 million shares of the Company’s common stock during the nine months ended September 30, 2007, at an aggregate cost of $370.2 million. The company did not purchase any shares of its common stock during the three months ended September 30, 2007. As of September 30, 2007, the total remaining number of common shares the Company is authorized to repurchase under this program is 7.5 million.

 

9

H.

INCOME TAXES

 

In July 2006, the Financial Accounting Standards Board (FASB) issued "Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109", which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by applicable taxing authorities. The benefit recognized is the amount that has a greater than 50% likelihood of being realized upon final settlement of the tax position. The Company adopted FIN 48 effective January 1, 2007. The change in net assets, because of applying this pronouncement, is considered a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings.

 

The cumulative effect of implementing FIN 48 was a decrease of $3.4 million in reserves for uncertain tax positions, which was accounted for as an increase to the beginning balance of retained earnings. As of the effective date of January 1, 2007, the balance of the Company’s total gross unrecognized tax benefit was $26.6 million, of which $15.1 million would affect the effective income tax rate if recognized. Interest and penalties accrued as of January 1, 2007, net of related tax benefit was $6.2 million.

 

Penalties and tax-related interest expense are reported as a component of income tax expense. For the nine months ended September 30, 2007, the total amount of income tax-related accrued interest and penalties, net of related tax benefit, included in income tax expense was $3.1 million.

 

Coventry Health Care, Inc. and its subsidiaries are subject to U.S. federal income tax as well as state and local income tax in various jurisdictions. Tax years 2003-2006 remain open to examination by these tax jurisdictions. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

 

I.

COMPREHENSIVE INCOME

 

Comprehensive income was as follows (in thousands):

 

 

 

Quarters Ended September 30,

 

Nine Months Ended September 30,

 

 

2007

 

2006

 

2007

 

2006

Net earnings

$ 168,716 

 

$ 147,517 

 

$ 441,759 

 

$ 403,951 

Other comprehensive income:

 

 

 

 

 

 

 

 

Holding gain:

14,107 

 

15,635 

 

4,993 

 

671 

 

Reclassification adjustment

(43)

 

(2)

 

(968)

 

455 

 

Sub-total

14,064 

 

15,633 

 

4,025 

 

1,126 

 

 

 

 

 

 

 

 

 

 

Tax provision

(5,485)

 

(6,096)

 

(1,570)

 

(439)

 

 

 

 

 

 

 

 

 

Comprehensive income

$ 177,295 

 

$ 157,054 

 

$ 444,214 

 

$ 404,638 

 

The unrealized gain on the Company’s investment portfolio for the quarter and nine months ended September 30, 2007 was primarily a result of a decrease in interest rates during the third quarter.

 

J.

OTHER

 

Earnings Per Share - Basic earnings per share are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share assume the exercise of all options and the vesting of all restricted stock using the treasury stock method. Potential common stock equivalents to purchase 4.2 million and 4.9 million shares for the quarters ended September 30, 2007 and 2006, respectively, and 3.4 million and 3.8 million shares for the nine months ended September 30, 2007 and 2006, respectively, were excluded from the computation of diluted earnings per share because the potential common stock equivalents were anti-dilutive.

 

Other Income - Other income includes interest income of $36.9 million and $26.2 million for the quarters ended September 30, 2007 and 2006, respectively, and $102.7 million and $70.1 million for the nine months ended September 30, 2007 and 2006, respectively.

 

10

K.

     SEGMENT INFORMATION

 

In an effort to further integrate the First Health business acquired in January of 2005, the Company in 2007 has realigned into new operating units which are based on the product sold. The Company’s new organizational structure capitalizes on existing synergies and brings enhanced focus on areas of growth opportunities. As a result of the new organizational structure, the Company’s reportable segments have changed. The Company has three reportable segments: Commercial, Individual Consumer & Government, and Specialty. Each of the Company’s three new segments is managed separately and separate operating results are available that are evaluated by the chief operating decision maker. The Commercial Business Division is comprised of all of the Company’s commercial employer-focused businesses, including the traditional health plan group risk and ASO products as well as the National Accounts, Federal Employees Health Benefit Plans (FEHBP), and Network Rental businesses. The Individual Consumer & Government Division contains the Company’s individual consumer products and all Medicare and Medicaid products. The Specialty Division includes the Company’s workers’ compensation services businesses.

 

The Commercial Business Division provides commercial HMO, PPO and POS products to a cross section of employer groups of all sizes through its health plans. HMO products provide comprehensive health care benefits to members primarily through a primary care physician. PPO and POS products permit members to participate in managed care but allow them the flexibility to utilize out-of-network providers in exchange for increased out-of-pocket costs. Additionally, the Commercial Business Division provides network rental services and other managed care products through a national PPO network to national, regional and local third party administrators and insurance carriers.

 

The Individual Consumer & Government Division provides comprehensive health benefits to members participating in the Medicare Advantage HMO, Medicare Advantage PPO, Medicare Advantage Private-Fee-For-Service, Medicare Prescription Drug, and Medicaid programs and receives premium payments from federal and state governments. This division also provides commercial fully-insured managed care services on an individual basis and offers products and services more specialized to the needs of state governments such as pharmacy benefit management, clinical management and fiscal intermediary services on a fee-for-service basis.

 

The Specialty Business Division currently provides workers’ compensation managed care services on a fee-based basis, including access to our provider network, pharmacy benefits management, field case management, telephonic case management, independent medical exam and bill review capabilities. This division includes the workers’ compensation managed care services businesses acquired from Concentra on April 2, 2007. See Note C to the Condensed Consolidated Financial Statements for additional information related to the Concentra acquisition.

 

The Company evaluates performance and allocates resources based on gross margin. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Footnote A in Item 8 of the Company’s 10-K for the year ended December 31, 2006.

 

11

The table below summarizes the Company’s reportable segments (in thousands) through gross margin and includes a medical loss ratio (“MLR”) calculation. “Other” represents the elimination of fees charged between segments. Disclosure of total assets by reportable segment has not been included as such assets are not reported on a segment basis internally by the Company and are not reviewed separately by the Company’s chief operating decision maker.

 

 

Quarter Ended September 30, 2007

 

 

 

Individual

 

 

 

 

 

 

 

 

 

Consumer &

 

 

 

 

 

 

 

Commercial

 

Government

 

Specialty

 

Other

 

Total

Operating Revenue:

 

 

 

 

 

 

 

 

 

Managed care premiums

$ 1,202,281

 

$   999,939

 

$               -

 

$               -

 

$ 2,202,220

Management services

119,798

 

45,267

 

156,805

 

(1,442)

 

320,428

Total operating revenues

1,322,079

 

1,045,206

 

156,805

 

(1,442)

 

2,522,648

Medical Expenses

947,842

 

792,050

 

-

 

(272)

 

1,739,620

Cost of Sales

-

 

-

 

30,198

 

-

 

30,198

Gross margin

$    374,237

 

$  253,156

 

$  126,607

 

$   (1,170)

 

$  752,830

MLR

78.8%

 

79.2%

 

n/a

 

n/a

 

79.0%

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 2006

 

 

 

Individual

 

 

 

 

 

 

 

 

 

Consumer &

 

 

 

 

 

 

 

Commercial

 

Government

 

Specialty

 

Other

 

Total

Operating Revenue:

 

 

 

 

 

 

 

 

 

Managed care premiums

$ 1,144,349

 

$  551,603

 

$               -

 

$               -

 

$ 1,695,952

Management services

117,761

 

45,983

 

51,084

 

(1,644)

 

213,184

Total operating revenues

1,262,110

 

597,586

 

51,084

 

(1,644)

 

1,909,136

Medical Expenses

887,255

 

447,253

 

-

 

(662)

 

1,333,846

Cost of Sales

-

 

-

 

-

 

-

 

-

Gross margin

$    374,855

 

$  150,333

 

$    51,084

 

$      (982)

 

$   575,290

MLR

77.5%

 

81.1%

 

n/a

 

n/a

 

78.6%

 

 

Nine Months Ended September 30, 2007

 

 

 

Individual

 

 

 

 

 

 

 

 

 

Consumer &

 

 

 

 

 

 

 

Commercial

 

Government

 

Specialty

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

Managed care premiums

$ 3,470,084

 

$ 2,771,501

 

$               -

 

$               -

 

$ 6,241,585

Management services

349,947

 

141,587

 

362,682

 

(4,164)

 

850,052

Total operating revenues

3,820,031

 

2,913,088

 

362,682

 

(4,164)

 

7,091,637

Medical Expenses

2,716,257

 

2,286,171

 

-

 

(830)

 

5,001,598

Cost of Sales

-

 

-

 

57,807

 

-

 

57,807

Gross margin

$ 1,103,774

 

$   626,917

 

$   304,875

 

$   (3,334)

 

$ 2,032,232

MLR

78.3%

 

82.5%

 

n/a

 

n/a

 

80.1%

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2006

 

 

 

Individual

 

 

 

 

 

 

 

 

 

Consumer &

 

 

 

 

 

 

 

Commercial

 

Government

 

Specialty

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

Managed care premiums

$ 3,433,723

 

$ 1,699,688

 

$               -

 

$               -

 

$ 5,133,411

Management services

369,536

 

137,684

 

157,046

 

(4,915)

 

659,351

Total operating revenues

3,803,259

 

1,837,372

 

157,046

 

(4,915)

 

5,792,762

Medical Expenses

2,672,012

 

1,441,274

 

-

 

(1,990)

 

4,111,296

Cost of Sales

-

 

-

 

-

 

-

 

-

Gross margin

$ 1,131,247

 

$    396,098

 

$   157,046

 

$   (2,925)

 

$ 1,681,466

MLR

77.8%

 

84.8%

 

n/a

 

n/a

 

80.1%

 

 

12

L.

      SUBSEQUENT EVENTS

 

In October 2007, the Company received notice from the Centers for Medicare and Medicaid Services (“CMS”) of the final settlement for the 2006 contract year for its Part D Medicare program which represents a payback to CMS of approximately $395.0 million. This amount, which is fully accrued as a liability on the Company’s consolidated balance sheet as of September 30, 2007, is expected to be paid back to CMS during the fourth quarter of 2007 through withholdings on payments that the Company normally receives.

 

13

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Quarters Ended September 30, 2007 and 2006

 

This Form 10–Q contains forward-looking statements which are subject to risks and uncertainties in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically include assumptions, estimates or descriptions of our future plans, strategies and expectations, and are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “intend,” “seek,” or other similar expressions. Examples of these include discussions regarding our operating and growth strategy, projections of revenue, income or loss and future operations. Unless this Form 10–Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “our Company,” “the Company” or “us” as used in this Form 10-Q refer to Coventry Health Care, Inc. and its subsidiaries.

 

These forward–looking statements may be affected by a number of factors, including, but not limited to, the “Risk Factors” contained in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10–K for the year ended December 31, 2006. Actual operations and results may differ materially from those forward-looking statements expressed in this Form 10–Q.

 

The following discussion and analysis relates to our financial condition and results of operations for the quarters and nine months ended September 30, 2007 and 2006. This discussion should be read in conjunction with the condensed consolidated financial statements and other information presented herein as well as in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10–K for the year ended December 31, 2006, including the critical accounting policies discussed therein.

 

Summary of Third Quarter 2007 Performance  

 

 

Revenue increased 32.1% over the prior-year quarter.

 

Commercial Health Plan membership increased 152,000 from the prior-year quarter, primarily due to the members acquired through the acquisition of Vista Health plans and of certain group health businesses from Mutual of Omaha.

 

Individual Consumer & Government membership increased 407,000 from the prior-year quarter, primarily due to the organic growth from Medicare Private-Fee-For-Service (“PFFS”), the 144,000 members acquired through the Vista acquisition, as well as organic growth from Individual, Medicare Advantage HMO and PPO and Medicare Part D (“Part D”) business.

 

Selling, general and administrative expenses were 18.7% of operating revenue, compared to 16.9% from the prior-year quarter.

 

Operating margin was 9.7% compared to 11.7% from the prior-year quarter.

 

Diluted earnings per share increased 17.4% from the prior-year quarter.

 

Placed $400 Million of 7-year Senior Notes at a coupon rate of 6.30% and expanded our capacity and improved the terms of our Revolving Credit Facility.

 

Acquisitions

 

During the nine months ended September 30, 2007, we acquired the following businesses for a total cost of approximately $1.2 billion, which was paid in cash.

 

 

The workers’ compensation managed care services businesses of Concentra Inc. (“Concentra”) which were acquired effective April 1, 2007, and include a preferred provider organization (“PPO”), provider bill review, pharmacy benefit management, field case management, telephonic case management and independent medical exam businesses.

 

 

Certain group health insurance businesses from Mutual of Omaha (“Mutual”), which were acquired effective July 1, 2007, including Mutual’s commercial employer group health business in Nebraska and Iowa, as well as its national Federal Employees Health Benefits administration business, representing approximately 233,000 members in total.

 

 

Florida Health Plan Administrators, LLC (“Vista”), owner of Vista Healthplans, was acquired effective September 10, 2007. Vista is a Florida-based diversified health plan serving approximately 294,000 members consisting of 150,000 commercial employer group members, 32,000 individual members, 28,000 Medicare Advantage HMO members and 84,000 state program members. Approximately 85% of the membership is in the south Florida market, with the remainder in north central Florida and the state’s panhandle.

 

In addition to the acquired businesses discussed above, effective February 1, 2007, the Company completed its purchase of approximately 26,500 members from FirstGuard Health Plan Missouri, Inc., a wholly-owned subsidiary of Centene Corporation.

 

14

Membership

 

The following tables present our membership as of September 30, 2007 and 2006 (amounts in thousands).

 

Membership by Product

Q3 2007

Q3 2006

Commercial group risk(1)

1,572

1,462

Health plan ASO

737

615

Other ASO(2)

792

872

Total Commercial Division

3,101

2,949

 

 

 

Medicare Advantage(3)

286

79

Medicare Part D

717

687

Total Medicare

1,003

766

 

 

 

Medicaid risk

478

373

Individual

84

19

Total Individual Consumer & Government Division

1,565

1,158

 

 

 

Total Membership

4,666

4,107

 

 

 

(1) “Commercial Group Risk” membership includes our health plan commercial group business and a small group PPO insurance block which was previously imbedded within our First Health segment.

(2) “Other ASO” membership includes active National Accounts and FEHBP administrative services business.

(3) Medicare Advantage” membership includes Medicare Advantage HMO, Medicare Advantage PPO and Medicare Advantage PFFS results.

 

 

Commercial Division membership increased 152,000 from the prior-year quarter, primarily due to the members acquired through the acquisitions of Vista and of certain group health businesses from Mutual.

 

Individual Consumer & Government membership increased 407,000 from the prior-year quarter, primarily due to our new PFFS product. Commencing January 1, 2007, we offered Medicare Advantage Private Fee for Service plans to individuals in 43 states under the name Advantra Freedom. The increase in membership related to PFFS was 169,000 during the nine months ended September 30, 2007. Membership also increased from the prior year quarter due to the members acquired through the acquisition of Vista and FirstGuard. Additionally, we had organic growth in our Individual, Medicare Advantage HMO and PPO and our Part D businesses.

 

Results of Operations

Consolidated Financial Results

 

The following table is provided to facilitate a more meaningful discussion regarding the comparison of our operations for the quarters and nine months ended September 30, 2007 and 2006 (in thousands, except EPS and membership).

 

 

 

Quarters Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

Increase

 

 

September 30,

Increase

 

 

2007

 

2006

(Decrease)

 

 

2007

 

2006

(Decrease)

Consolidated Business

 

 

 

 

 

 

 

 

 

 

 

Total operating revenues

$

2,522,648

$

1,909,136

32.1%  

 

$

7,091,637

$

5,792,762

22.4% 

Operating earnings

$

245,868

$

224,281

9.6%  

 

$

648,984

$

613,589

5.8% 

Operating earnings as a % of
         revenue

 

9.7%

 

11.7%

(2.0%)

 

 

9.2%

 

10.6%

(1.4%)

Net earnings

$

168,716

$

147,517

14.4%  

 

$

441,759

$

403,951

9.4% 

Diluted earnings per share

$

1.08

$

0.92

17.4%  

 

$

2.80

$

2.50

12.0% 

Selling, general and administrative

as a % of revenue

 

18.7%

 

16.9%

1.8%  

 

 

18.1%

 

17.0%

1.1% 

 

15

Quarters Ended September 30, 2007 and 2006

 

Managed care premium revenue increased in both our Individual Consumer & Government and Commercial divisions. The growth resulted primarily from sales of new products, growth in existing products and from acquisitions. In 2007, we began selling our new PFFS products and have increased sales of our individual product. Increasing membership in both our Part D and Medicare Advantage products contributed to our managed care premium growth as well. Medicaid premium revenue increased as a result of rate increases in Missouri, our largest Medicaid market, effective July 1, 2007. Additionally, we completed several acquisitions during 2007. Those include acquisitions of Medicaid membership in our Missouri market effective February 1, 2007, an acquisition of Mutual of Omaha’s commercial employer group health business in Nebraska and Iowa on July 2, 2007, and an acquisition of Vista Health Plans on September 10, 2007.

 

Management services revenue increased compared to the prior year quarter as a result of acquisitions. Those acquisitions included Concentra and Mutual’s national Federal Employees Health Benefits administration business. This increase was partially offset by membership losses in our Commercial Division’s National Accounts business.

 

Medical costs increased almost exclusively as a result of new business discussed above. Medical costs as a percentage of premium revenue increased 0.4% compared with the prior year quarter. This change is discussed in detail in the segment disclosures below.

 

Cost of sales is a new line on our statements of operations and is a direct result of the Concentra acquisition. Cost of sales consists of the expense for prescription drugs provided by our workers’ compensation pharmacy benefit manager and for the independent medical examinations performed by physicians on injured workers. These costs are associated with fee-based products and excludes the cost of drugs related to our risk products, which are recorded in medical costs.

 

Selling, general and administrative expense increased primarily due to operating costs associated with our recent acquisitions of Concentra, Mutual, and Vista, as well as costs related to the introduction of our new Medicare Private-Fee-For-Service business in 2007. The additional Medicare Private-Fee-For-Service costs are primarily made up of sales commissions paid to brokers, but also include wages and other enrollment costs. The increase in total selling, general and administrative expense is also attributable to increased salary and benefit expense as we position the Company for future growth initiatives and as we incur normal annual compensation increases.

 

Depreciation and amortization increased primarily as a result of the expense associated with the fixed assets and identifiable intangible assets acquired with our acquisitions this year, as well as a result of an increase in property and equipment over the past twelve months.

 

Interest expense increased as a result of the issuance of debt during the current year, details of which are discussed below in our discussion of liquidity. This increase was partially offset by the redemption, during the first quarter of 2007, of our $170.5 million of 8.125% senior notes due February 15, 2012.

 

Other income increased primarily as a result of a larger investment portfolio and higher interest rates.

 

Our provision for income taxes increased due to an increase in earnings. The effective tax rate was 36.3% in the third quarter of 2007 compared to 38.2% for the same period in 2006.

 

Nine Months Ended September 30, 2007 and 2006

 

Managed care premium revenue increased in both our Individual Consumer & Government and Commercial divisions. The growth is a result of new products, growth in existing products as well as from the acquisitions described above. Partially offsetting the increase was a decline in same store Commercial risk membership over the prior year period, also described above.

 

Management services revenue increased compared to the prior year period as a result of the acquisition of Concentra and Mutual described above. This increase was partially offset by membership losses in our Commercial Division’s National Accounts business.

 

Medical costs increased almost exclusively as a result of new business in both our Individual Consumer & Government Division and Commercial Division discussed above. Medical costs as a percentage of premium revenue were unchanged from the prior year period.

 

Selling, general and administrative expense increased primarily due to operating costs associated with our recent acquisitions of Concentra, Mutual and Vista, as well as costs related to the introduction of our new Medicare Private-Fee-For-Service business in 2007. The increase in total selling, general and administrative expense was also attributable to increased salary and benefit expense as we position the Company for future growth initiatives and as we incur normal annual compensation increases.

 

16

Depreciation and amortization increased as a result of the expense associated with the fixed assets and identifiable intangible assets acquired with the recent acquisitions, as well as a result of an increase in property and equipment over the past twelve months.

 

Interest expense increased primarily as a result of the redemption during the first quarter of 2007 of our $170.5 million of outstanding 8.125% senior notes due February 15, 2012. The Company redeemed the notes at a redemption price equal to 104.1% of the principal amount plus interest accrued on the redemption date. As a result of the redemption, we recognized $6.9 million of interest expense for the premium paid on redemption and wrote off $2.2 million of deferred financing costs related to the senior notes. The increase is also a result of the issuance of debt during the current year, details of which are discussed below in our discussion of liquidity.

 

Other income increased primarily as a result of a larger investment portfolio and higher interest rates.

 

Our provision for income taxes increased due to an increase in earnings. The effective tax rate decreased to 36.9% compared to 37.8% for the same period in 2006 primarily as a result of a change in the proportion of Company earnings in states with lower tax rates.

 

Business Segments

 

In an effort to further integrate the First Health business acquired in January of 2005, we have realigned into new operating units, which are based on the product sold. Our new organizational structure, effective January 1, 2007, capitalizes on existing synergies and brings enhanced focus on areas of growth opportunities. As a result of the new organizational structure, our reportable segments have changed. Each of our three new segments is managed separately and separate operating results are available that are evaluated by the chief operating decision maker. The Commercial Business Division is comprised of all of our commercial employer-focused businesses including the traditional health plan group risk and ASO products as well as the National Accounts, FEHBP, and Network Rental businesses. The Individual Consumer & Government Division contains the individual consumer products and all Medicare and Medicaid products. The Specialty Division currently includes our workers’ compensation services businesses. For additional detail regarding the Company’s segments, please refer to Note K to the Condensed Consolidated Financial Statements located in Part I, Item 1 of this Form 10–Q.

 

Operating Revenues (in thousands)

 

Quarters Ended September 30,

Increase

 

Nine Months Ended September 30,

Increase

 

2007

2006

(Decrease)

 

2007

2006

(Decrease)

Commercial group risk premiums

$1,202,281 

$ 1,144,349 

$ 57,932 

 

$ 3,470,084 

$ 3,433,723 

$ 36,361 

Commercial ASO

119,798 

117,761 

2,037 

 

349,947 

369,536 

(19,589)

Total Commercial Division 

1,322,079 

1,262,110 

59,969 

 

3,820,031 

3,803,259 

16,772 

Medicare risk premiums

738,817 

350,886 

387,931 

 

2,064,923 

1,107,666 

957,257 

Medicaid risk premiums

234,313 

192,500 

41,813 

 

650,390 

571,781 

78,609 

Individual risk premiums

26,809 

8,217 

18,592 

 

56,188 

20,241 

35,947 

Medicaid ASO

45,267 

45,983 

(716)

 

141,587 

137,684 

3,903 

Total Individual Consumer & Gov't

Division

1,045,206 

597,586 

447,620 

 

2,913,088 

1,837,372 

1,075,716 

Total Specialty Division 

156,805 

51,084 

105,721 

 

362,682 

157,046 

205,636 

Eliminations

(1,442)

(1,644)

202 

 

(4,164)

(4,915)

751 

 

 

 

 

 

 

 

 

Total Revenue 

$2,522,648 

$ 1,909,136 

$ 613,512 

 

$ 7,091,637 

$ 5,792,762 

$1,298,875 

 

Gross Margin (in thousands)

 

Quarters Ended

September 30,

Increase

 

Nine Months Ended

September 30,

Increase

 

2007

2006

(Decrease)

 

2007

2006

(Decrease)

Commercial Division

$  374,237 

$  374,855 

$        (618)

 

$  1,103,774 

$  1,131,247 

$   (27,473)

Individual Consumer & Gov't Division

253,156 

150,333 

102,823 

 

626,917 

396,098 

230,819 

Specialty Division

126,607 

51,084 

75,523 

 

304,875 

157,046 

147,829 

Other

(1,170)

(982)

(188)

 

(3,334)

(2,925)

(409)

Total  

$ 752,830 

$ 575,290 

$ 177,540 

 

$ 2,032,232 

$ 1,681,466 

$ 350,766 

 

 

17

Revenue and Medical Cost Statistics

 

 

Quarters Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

Increase

 

 

September 30,

Increase

 

 

2007

 

2006

(Decrease)

 

 

2007

 

2006

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

Managed Care Premium Yields (per member per month):

 

Health plan commercial risk (1) (2)

$

274.16

$

262.34

4.5%  

 

$

272.23

$

259.49

4.9% 

 

Medicare Advantage risk (3)

$

737.59

$

855.05

(13.7%)

 

$

775.49

$

848.59

(8.6%)

 

Medicare Part D

$

62.24

$

71.97

(13.5%)

 

$

86.74

$

94.46

(8.2%)

 

Medicaid risk

$

188.36

$

170.90

10.2%  

 

$

180.11

$

166.49

8.2% 

Medical Loss Ratios:

 

Health plan commercial risk (1) (2)

 

78.8%

 

77.6%

1.2%  

 

 

78.3%

 

77.9%

0.4% 

 

Medicare Advantage risk (3)

 

80.7%

 

81.2%

(0.5%)

 

 

80.7%

 

80.9%

(0.2%)

 

Medicare Part D

 

66.7%

 

76.7%

(10.0%)

 

 

83.6%

 

90.2%

(6.6%)

 

Medicaid risk

 

85.1%

 

85.1%

-  

 

 

87.7%

 

85.0%

2.7% 

 

Total 

 

79.0%

 

78.6%

0.4%  

 

 

80.1%

 

80.1%

-  

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Data excludes Individual business (under 65 years of age).

(2) Data excludes a small group PPO insurance block which was previously reported within First Health.

(3) “Medicare Advantage” data includes Medicare Advantage HMO, Medicare Advantage PPO, and Medicare Advantage PFFS results.

 

Commercial Division

 

Quarters and Nine Months Ended September 30, 2007 and 2006

 

Commercial group risk premium revenue increased for the quarter and nine months ended September 30, 2007 from the same periods in 2006 as a result of the acquisitions of Mutual and Vista, which accounted for $48.5 million in current quarter revenue. The increase was also a result of an increase in average premium yields per member per month in our commercial group risk business. Commercial premium yields increased as a result of rate increases that occurred throughout all markets. This increase was partially offset by membership declines in our same store commercial group risk business. However, a portion of those members changed from our risk products to our non-risk products. Commercial management services revenue declined for the nine month period in 2007 due to membership losses in our national accounts non-risk business, partially offset by an increase in our commercial health plan ASO membership.

 

The gross margin decreased as a result of the decline in commercial management services revenue discussed above and the increase in the Health Plan Commercial medical loss ratio for the nine month period in 2007 compared to the same period of 2006. The increase in the medical loss ratio is a result of the inclusion of the acquired Mutual of Omaha business in the third quarter of 2007, as well as the low medical loss ratio experienced by our Louisiana health plan in 2006, which was driven by the unique circumstances that existed in the Louisiana market at that time.

 

Individual Consumer & Government Division

 

Quarters and Nine Months Ended September 30, 2007 and 2006

 

Government revenue increased for the quarter and nine months ended September 30, 2007 from the same periods in 2006 as a result of membership from our new Medicare PFFS business, as well as the increased Part D, Medicaid and Individual membership, both organic and acquired. Part D revenue includes adjustments attributable to the estimation of Centers for Medicare & Medicaid Services (“CMS”) Risk Sharing payments. The quarter ended September 30, 2007 includes a reduction of revenue of $68.7 million, while the nine months ended September 30, 2007 includes a reduction of revenue of $34.2 million. The reduction of revenue of $34.2 million for the nine months ended September 30, 2007, represents the amount we would pay to CMS if we settled with CMS as of the end of the third quarter. We expect the Part D program to be profitable on a full-year basis and, as a result, expect that the reductions to revenue for the CMS risk-share related to the 2007 contract year will continue through the year.

 

18

Medicare Advantage risk premium yields per member per month decreased as a result of the addition of our new Medicare Private-Fee-For-Service business, which has a lower premium yield than our existing Medicare Advantage business, since our individually distributed PFFS products generally do not include a pharmacy benefit. This average premium yield decrease was partially offset by the rate increases from the annual competitive bid filings for our Medicare Advantage products, as well as from increases in risk factor adjustment scores for certain of our Medicare products. Part D premium yields have declined for both the three and nine months ended September 30, 2007 compared to the same periods in 2006 primarily due to the lower CMS risk sharing accruals as well as the annual competitive bid filings for our Part D products. The nine months ended September 30, 2007 included a reduction of revenue of $34.2 million compared to additional revenue of $15.7 million for the same period in 2006. This change is a result of the improved profitability of the Part D program, which is discussed below. Medicaid premium yields increased as a result of rate increases in Missouri, our largest Medicaid market, effective July 1, 2006 and July 1, 2007.

 

The increase in gross margin was driven by the increased business discussed above and was offset by the increased medical costs associated with this increased business. Part D medical costs as a percentage of premium revenue have decreased over the prior year quarter as a result of favorable pharmacy cost trend due to re-negotiated pharmaceutical contracts resulting from higher enrollment and as a result of members moving to generic drugs. Medicaid medical costs as a percentage of premium revenue increased over the prior year nine month period as a result of an increase in large claims incurred in our Missouri market.

 

Specialty Division

 

Quarters and Nine Months Ended September 30, 2007 and 2006

 

Specialty revenue has increased primarily as a result of the acquisition of Concentra during the second quarter of 2007.

 

Liquidity and Capital Resources

 

Liquidity

 

Our investment guidelines require our fixed income securities to be investment grade in order to provide liquidity to meet future payment obligations and minimize the risk to the principal. The fixed income portfolio, which includes government and corporate securities but excludes cash and cash equivalents, has an average quality rating of “AA+” and an average duration of 3.0 years as of September 30, 2007. Typically, the amount and duration of our short-term assets are more than sufficient to pay for our short-term liabilities and we do not anticipate that sales of our long-term investment portfolio will be necessary to fund our claims liabilities.

 

Our cash and investments, consisting of cash and cash equivalents and short-term and long-term investments, but excluding deposits of $67.2 million restricted under state regulations, increased $402.5 million to $3.1 billion at September 30, 2007 from $2.7 billion at December 31, 2006.

 

We have classified all of our investments as available–for–sale. Our investments at September 30, 2007 mature according to their contractual terms, as follows, in thousands (actual maturities may differ because of call or prepayment rights):

 

 

 

Amortized

 

Fair

As of September 30, 2007

Cost

 

Value

Maturities:

 

 

 

 

 

 

Within 1 year

$

225,907

 

$

225,898

 

1 to 5 years

 

390,205

 

 

390,517

 

5 to 10 years

 

308,182

 

 

308,234

 

Over 10 years

 

503,793

 

 

501,584

Total

$

1,428,087

 

 

1,426,233

 

Equity investment accounted for under the equity method

 

 

55,480

Total short-term & long-term investments

 

$

1,481,713

 

Temporary declines in value of investments classified as available-for-sale are netted with unrealized gains and reported as a net amount in a separate component of stockholders’ equity. A decline in fair value below amortized cost that is judged to be other–than–temporary is accounted for as a realized loss and the write down is included in earnings. Realized gains and losses on the sale of investments are determined on a specific identification basis.

 

19

The demand for our products and services is subject to many economic fluctuations, risks and uncertainties that could materially affect the way we do business. Please refer to the section entitled “Risk Factors” in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10–K for the year ended December 31, 2006, for more information. Management believes that the combination of our ability to generate cash flows from operations, cash and investments on hand and the excess funds held in certain of our regulated subsidiaries will be sufficient to fund continuing operations, capital expenditures, debt interest costs, debt principal repayments and any other reasonably likely future cash requirements.

 

Cash Flows

 

Net cash from operating activities is primarily driven by net earnings and an increase in medical liabilities. The increase in medical liabilities was driven primarily by $262.3 million related to the new PFFS business. We added an additional 44,000 PFFS members during the current quarter. The nature of our business is such that premium revenues are generally received up to two months prior to the expected cash payment for the related medical costs. This results in strong cash inflows upon the implementation of a benefit program. Offsetting these operating cash inflows was a decrease in accounts payable and other accrued liabilities, which was driven by a decrease in income taxes payable as a result of tax payments made during the nine months exceeding the tax provision, and an increase in other receivables, which was primarily a result of an increase in pharmacy rebate receivables related to the Part D business.

 

Net cash flow from investing activities for the nine months ended September 30, 2007 was an outflow due to the payments made for the Vista, Concentra and Mutual of Omaha transactions.

 

Projected capital expenditures in 2007 of approximately $55-$65 million consist primarily of computer hardware, software and other equipment.

 

On February 15, 2007, we redeemed all $170.5 million of our outstanding 8.125% senior notes due 2012. We redeemed the senior notes at a redemption price equal to 104.1% of the principal amount plus interest accrued on the redemption date. The funds for payment of the redemption price were provided by existing cash. On March 20, 2007, we completed the sale of $400 million aggregate principal amount of its 5.95% Senior Notes due 2017 (the “10-year Notes”) at the issue price of 99.63% per Note. The 10-year Notes were offered and sold pursuant to a shelf registration statement with the Securities and Exchange Commission. The notes are senior unsecured obligations of Coventry and rank equally with all of its other senior unsecured indebtedness.

 

In February 2007, our Board of Directors approved an increase to Coventry’s share repurchase program in an amount equal to 5% of the Company’s then outstanding common stock, thus increasing our repurchase authorization by 7.9 million shares. Under the share repurchase program, we purchased 6.5 million shares of our common stock during the nine months ended September 30, 2007, at an aggregate cost of $370.1 million. As of September 30, 2007, the total remaining number of common shares that we are authorized to repurchase under this program is 7.5 million.

 

On April 2, 2007, we completed our acquisition, as described earlier, of the workers’ compensation managed care services businesses of Concentra in an all-cash transaction for approximately $396.4 million.

 

On July 2, 2007, we completed the acquisition of certain group health insurance businesses, as described earlier, from Mutual of Omaha for approximately $110.9 million in an all-cash transaction.

 

On July 11, 2007, we executed an Amended and Restated Credit Agreement. The Credit Agreement provides for a five-year revolving credit facility in the principal amount of $850.0 million, and provides us with the ability to request an increase in the facility amount up to an aggregate principal amount not to exceed $1.0 billion. The obligations under the Credit Agreement are general unsecured obligations of the Company. We drew $80.0 million under the credit facility to pay off our $80.0 million five-year term loan and we drew an additional $285.0 million to help fund the Vista acquisition discussed previously.

 

On August 27, 2007, we completed the sale of $400 million aggregate principal amount of its 6.30% Senior Notes due 2014 (the “7-year Notes”) at the issue price of 99.575% per Note. The 7-year Notes were offered and sold pursuant to a shelf registration statement with the Securities and Exchange Commission. The 7-year Notes are senior unsecured obligations of Coventry and rank equally with all of its other senior unsecured indebtedness.

 

In October 2007, we completed the acquisition, as described earlier, of Vista for an aggregate purchase price of approximately $685.8 million, including $34.2 million paid into an escrow account pending final settlement.

 

20

Health Plans

 

Our regulated HMO and insurance company subsidiaries are required by state regulatory agencies to maintain minimum surplus balances, thereby limiting the dividends our parent Company may receive from our regulated entities. During the nine months ended September 30, 2007, we received $393.0 million in dividends from our regulated subsidiaries and made capital contributions of $25.4 million.

 

The majority of states in which we operate health plans have adopted a risk-based capital (“RBC”) policy that recommends the health plans maintain statutory reserves at or above the ”Company Action Level,” which is currently equal to 200% of their RBC. The State of Florida does not currently use RBC methodology in its regulation of domestic insurance companies. Some states in which our regulated subsidiaries operate require deposits to be maintained with the respective states’ departments of insurance. The table below summarizes our statutory reserve information, as of September 30, 2007 and December 31, 2006 (in millions, except percentage data):

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

Regulated capital and surplus

 

$  1,037.2

 

$  1,055.3

(a)

200% of RBC

 

$     424.2

(b)

$     424.2

(a)

Excess capital and surplus above 200% of RBC

 

$     613.0

(b)

$     631.1

(a)

Capital and surplus as percentage of RBC

 

489%

(b)

498%

(a)

Statutory deposits

 

$       67.2

 

$       56.4

 

 

 

 

 

 

 

(a) unaudited

 

 

 

 

 

(b) As described above, the State of Florida does not have an RBC requirement.

Accordingly, statutory reserve information for Florida has been excluded.

 

The decrease in capital and surplus for our regulated subsidiaries is primarily a result of dividends paid to the parent company during the nine month period ending September 30, 2007, and is partially offset by our regulated subsidiaries earnings during 2007 as well as the inclusion of the Vista and Mutual acquisitions.

 

We believe that all of our subsidiaries that incur medical claims maintain more than adequate liquidity and capital resources to meet these short-term obligations as a matter of both Company policy and state insurance regulations.

 

Excluding funds held by entities subject to regulation and excluding our equity method investments, we had cash and investments of approximately $397.1 million and $563.1 million at September 30, 2007 and December 31, 2006, respectively. The decrease was primarily due to payments made for the Vista, Concentra and Mutual acquisitions and payments made for share repurchases during the nine months ended September 30, 2007. These payments were partially offset by the proceeds from the sale of our 7-year and 10-year Senior Notes, dividends received from our regulated subsidiaries, and additional borrowings on our credit facility.

 

Contractual Obligations

 

As a result of the acquisitions described earlier, we have assumed contractual obligations for operating leases with future payments through 2016 of approximately $58.1 million.

 

Outlook

 

In October, we concluded negotiations regarding our contract as plan administrator to the Mail Handler’s Benefit Plan and received all required approvals to renew this arrangement for six more years with a possibility of a renewal of up to 10 years if certain performance milestones are met. To facilitate a long-term renewal, we did make concessions on the level of fees in this contract. As a result of the renegotiations, the addition of the Mutual of Omaha FEHBP business and the loss of some smaller federal accounts in 2008, we estimate that FEHBP fee revenue will decline approximately $50 million in 2008 as compared to 2007.

 

In October, we received notice from CMS of the final settlement for the 2006 contract year for our Part D Medicare program which represents a payback to CMS of approximately $395.0 million. This amount, which was fully accrued as a liability on our consolidated balance sheet as of September 30, 2007, is expected to be paid back to CMS during the fourth quarter of 2007 through withholdings on payments that the Company normally receives.

 

21

Legal Proceedings

 

Refer to Part II, Item 1, “Legal Proceedings.”

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

These disclosures should be read in conjunction with the condensed consolidated financial statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other information presented herein as well as in “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10–K for the year ended December 31, 2006.

 

No material changes have occurred in our exposures to market risk since the date of our Annual Report on Form 10–K for the fiscal year ended December 31, 2006.

 

ITEM 4: Controls and Procedures

 

We have performed an evaluation as of the end of the period covered by this report of the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934), under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a–15(f) promulgated under the Securities and Exchange Act of 1934) during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1: Legal Proceedings

 

We were a defendant in the provider track of the In Re: Managed Care Litigation filed in the United States District Court for the Southern District of Florida, Miami Division, Multi-District Litigation (“MDL”), No. 1334, in the action captioned, Charles B. Shane., et al., vs. Humana, Inc., et al. This lawsuit was filed by a group of physicians as a class action against Coventry and nine other companies in the managed care industry. The plaintiffs alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO and aiding and abetting a scheme to violate RICO. In addition to these federal law claims, the complaint included state law claims for breach of contract, violations of various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit. The trial court dismissed several of the state law claims and ordered all physicians who had an arbitration provision in their provider contracts to submit their direct RICO claims and their remaining state law claims to arbitration. As a consequence of this ruling, the plaintiffs who had arbitration provisions voluntarily dismissed their claims that were subject to arbitration. In its order, the trial court also held that the plaintiffs’ claims of (1) conspiracy to violate RICO and (2) aiding and abetting violations of RICO were not subject to arbitration. The trial court then certified various subclasses of plaintiffs with respect to these two federal law claims.

 

Seven defendants entered into settlement agreements with the plaintiffs, which received final approval from the trial court. On June 16, 2006, the trial court filed an order in the Shane lawsuit which granted summary judgment on all claims in favor of Coventry. The trial court also granted summary judgment on all claims in favor of two other defendants. The plaintiffs appealed the trial court’s summary judgment order to the Eleventh Circuit Court of Appeals. By an order dated June 13, 2007, the Eleventh Circuit affirmed the trial court’s order granting summary judgment in favor of the Company. The plaintiffs did not request reconsideration of the decision from the Eleventh Circuit not did they seek to appeal the decision to the U.S. Supreme Court. The Shane lawsuit has triggered the filing of copycat class action complaints by other health care providers such as chiropractors, podiatrists, acupuncturists and other licensed health care professionals. Each of these actions has been transferred to the MDL and have been designated as “tag-along” actions. The trial court has entered an order which has stayed all proceedings in the tag-along actions. Although we can not predict the outcome, we believe that the tag-along actions will not have a material adverse effect on our financial position or our results of operations. Management also believes that the claims asserted in these lawsuits are without merit and the Company intends to defend its position.

 

ITEM 1A: Risk Factors

 

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

 

22

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table shows our purchases of our common stock during the quarter ended September 30, 2007 (in thousands, except per share information).

 

 

 

Total Number of Shares Purchased (1)

 

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans

Maximum Number of Shares That May Yet Be Purchased Under The Plan or Program (2)

  

 

 

 

 

 

July 1-31, 2007  

-

$

-

-

7,522

August 1-31, 2007  

-

$

-

-

7,522

September 1-30, 2007

1

$

57.75

-

7,522

  

 

 

 

 

 

Totals  

1

$

57.75

-

7,522

  

 

 

 

 

 

(1)     Includes shares purchased in connection with the vesting of restricted stock awards to satisfy employees' minimum statutory tax withholding obligations.

(2)     These shares are under a stock repurchase program previously announced on December 20, 1999, as amended. In February 2007, our Board of Directors approved an increase to the repurchase authorization in an amount equal to 5% of our outstanding common stock, thus increasing our repurchase authorization by 7.9 million shares.

 

ITEM 3: Not Applicable

 

ITEM 4: Not Applicable

 

ITEM 5: Not Applicable

 

ITEM 6: Exhibits

 

Exhibit

 

 

No.

 

Description of Exhibit

 

 

 

4.1

 

First Supplemental Indenture between Coventry Health Care, Inc. and Union Bank of California, N.A., dated August 27, 2007, (incorporated by reference to the Company’s Current Report on Form 8-K dated August 27, 2007) to that certain Indenture, dated as of March 20, 2007, between the Company and The Bank of New York, as trustee, which is incorporated by reference herein to the Company’s Current Report on Form 8-K dated March 20, 2007.

 

 

 

4.2

 

Officers’ Certificate pursuant to the Indenture, setting forth the terms of the Notes. (Incorporated by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K dated August 27, 2007).

 

 

 

31.1

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director.

 

 

 

31.2

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

 

 

 

32

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director and Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

 

 

23

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

 

 

 

COVENTRY HEALTH CARE, INC.

 

 

 

 

 

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

Date:

Nov 9, 2007

 

By: /s/ Dale B. Wolf

 

 

 

 

Dale B. Wolf

 

 

 

 

Chief Executive Officer and Director

 

 

 

 

 

 

 

 

 

 

 

Date:

Nov 9, 2007

 

By: /s/ Shawn M. Guertin

 

 

 

 

Shawn M. Guertin

 

 

 

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

 

 

 

 

 

 

 

 

 

Date:

Nov 9, 2007

 

By: /s/ John J. Ruhlmann

 

 

 

 

John J. Ruhlmann

 

 

 

 

Senior Vice President and Corporate Controller

 

 

 

 

24

 

INDEX TO EXHIBITS

Reg. S-K: Item 601

 

Exhibit

 

 

No.

 

Description of Exhibit

 

 

 

4.1

 

First Supplemental Indenture between Coventry Health Care, Inc. and Union Bank of California, N.A., dated August 27, 2007, (incorporated by reference to the Company’s Current Report on Form 8-K dated August 27, 2007) to that certain Indenture, dated as of March 20, 2007, between the Company and The Bank of New York, as trustee, which is incorporated by reference herein to the Company’s Current Report on Form 8-K dated March 20, 2007.

 

 

 

4.2

 

Officers’ Certificate pursuant to the Indenture, setting forth the terms of the Notes. (Incorporated by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K dated August 27, 2007).

 

 

 

31.1

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director.

 

 

 

31.2

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

 

 

 

32

 

Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director and Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

 

 

 

 

25

 

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dale B. Wolf, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Coventry Health Care, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

    1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    3. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

    4. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

    1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



By: /s/ Dale B. Wolf


Dale B. Wolf
Chief Executive Officer and Director
Date: November 9, 2007

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Shawn M. Guertin, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Coventry Health Care, Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

    1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    3. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

    4. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

    1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By: /s/ Shawn M. Guertin


Shawn M. Guertin
Executive Vice President, Chief Financial Officer and Treasurer
Date: November 9, 2007

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Coventry Health Care, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)  

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 9, 2007

By: /s/ Dale B. Wolf


Dale B. Wolf
Chief Executive Officer and Director
 
 

By: /s/ Shawn M. Guertin


Shawn M. Guertin
Executive Vice President, Chief Financial Officer and Treasurer