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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001

OR

¨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 0-19147

Coventry logo

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)

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

     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 þ NO¨

    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, 2001
Common Stock $.01 Par Value 65,562,957

COVENTRY HEALTH CARE, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION  
   
     ITEM 1:    Financial Statements 3
       
                        Consolidated Balance Sheets     3
                        at September 30, 2001 and December 31, 2000      
   
                        Consolidated Statements of Operations     4
                        for the three months and nine months ended September 30, 2001 and 2000      
   
                        Condensed Consolidated Statements of Cash Flows     5
                        for the nine months ended September 30, 2001 and 2000    
   
                        Notes to the Condensed Consolidated Financial Statements     6
       
     ITEM 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
         
     ITEM 3:    Quantitative and Qualitative Disclosures of Market Risk 19
         
PART II. OTHER INFORMATION  
   
     ITEM 1:    Legal Proceedings 20
         
     ITEMS 2, 3, 4 and 5:  Not Applicable 20
         
     ITEM 6:   Exhibits and Reports on Form 8-K 20
         
     SIGNATURES 21
   

2


PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

September 30, December 31,
2001 2000


  (unaudited)  
ASSETS    
Current Assets:    
Cash and cash equivalents $      236,319 $      256,229
Short-term investments 113,438 84,659
Accounts receivable, net 74,362 59,654
Other receivables, net 54,668 59,226
Deferred income taxes 41,111 41,111
Other current assets 7,598 5,621


   Total current assets 527,496 506,500
   
Long-term investments 542,475 411,562
Property and equipment, net 32,480 38,066
Goodwill and intangible assets, net 265,403 261,840
Other long-term assets 25,740 21,068


   Total assets $   1,393,594 $   1,239,036


LIABILITIES AND STOCKHOLDERS’ EQUITY    
Current Liabilities:    
Medical claim liabilites $      443,367 $      388,051
Other medical liabilities 60,393 56,836
Accounts payable and other accrued liabilities 159,273 146,304
Deferred revenue 50,362 40,972


   Total current liabilities 713,395 632,163
   
Long-term liabilities 11,454 6,443


   Total liabilities 724,849 638,606
   
Stockholders’ equity:    
   Common stock, $.01 par value; 200,000,000 shares authorized;    
      66,731,318 shares issued and 65,548,138 outstanding in 2001;    
     and 66,306,880 shares issued and 65,102,006 outstanding 2000 667 663
   Treasury stock, at cost, 1,183,180 and 1,204,874 shares    
     in 2001 and 2000, respectively (12,828) (10,810)
   Additional paid-in capital 539,607 538,804
   Accumulated other comprehensive income 11,265 3,276
   Retained earnings 130,034 68,497


   Total stockholders’ equity 668,745 600,430


   Total liabilities and stockholders’ equity $   1,393,594 $   1,239,036


SEE 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)

Three Months Ended Nine Months Ended
September 30, September 30,


2001 2000 2001 2000




Operating revenues:          
    Managed care premiums $778,562 $635,361   $2,285,646 $1,851,800
    Management services 16,120 12,256   47,146 34,421




      Total operating revenues 794,682 647,617   2,332,792 1,886,221




Operating expenses:      
    Medical costs 668,844 544,019   1,967,390 1,584,245
    Selling, general and administrative 95,048 81,819   281,892 242,850
    Depreciation and amortization 6,574 6,852   19,409 20,276




      Total operating expenses 770,466 632,690   2,268,691 1,847,371




Operating earnings 24,216 14,927   64,101 38,850
   
Other income, net 10,703 10,742   33,988 29,078




Earnings before income taxes 34,919 25,669   98,089 67,928
Provision for income taxes 13,269 10,263   37,430 27,525




Cummulative effect of change in accounting          
     principle - SFAS No. 133, net of tax -- --   878 --




Net earnings $      21,650 $      15,406   $      61,537 $      40,403




Net earnings per share:
    Basic before cumulative effect - SFAS No. 133 $         0.33 $         0.26   $         0.93 $         0.69
    Cumulative effect - SFAS No. 133           -                -                 0.02           -     




      Basic EPS $         0.33 $         0.26   $         0.95 $         0.69




       
    Diluted before cumulative effect - SFAS No. 133 $         0.32 $         0.23   $         0.89 $         0.62
    Cumulative effect - SFAS No. 133           -                -                 0.02           -     




      Diluted EPS $         0.32 $         0.23   $         0.91 $         0.62




SEE 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,

2001 2000


Net cash provided by operating activities $   107,097  $   19,401 


Cash flows from investing activites:    
    Capital expenditures, net (5,520) (13,766)
    Sales of investments 271,464  318,379 
    Purchases of investments (415,048) (388,586)
    Payments for acquisitions, net of cash acquired 28,965 440


Net cash used in investing acitivies (120,139) (83,533)


Cash flows from financing activities:    
    Net payments for repurchase and issuance of stock (6,868) (2,622)


Net cash used in financing activities (6,868) (2,622)


Net decrease in cash and cash equivalents (19,910) (66,754)
Cash and cash equivalents at beginning of period 256,229  240,076 


Cash and cash equivalents at end of period $ 236,319  $ 173,322 


Supplemental disclosure of cash flow information:    
     Cash paid for interest $         --    $         --   
     Income taxes paid, net $   22,884  $     8,500 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


5


COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.   BASIS OF PRESENTATION

     The condensed consolidated financial statements of Coventry Health Care, Inc. and 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 generally accepted accounting principles in the United States have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”). 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, 2000, filed with the SEC on March 29, 2001.

2.   SIGNIFICANT ACCOUNTING POLICIES

        In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 144 – “Accounting for the Impairment for Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not believe this statement will have a material impact on its results of operations.

        In June 2001, the FASB issued SFAS No. 143 – “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe this statement will have a material impact on its results of operations.

        In June 2001, the FASB issued two SFAS related to business combinations. The first statement, SFAS No. 141 – “Business Combinations,” requires all business combinations, initiated after June 30, 2001, to be accounted for using the purchase method and prohibits the pooling-of-interest method of accounting. The Company currently uses the purchase method of accounting for all business combinations, and, therefore, management believes the Company will not be significantly affected by the implementation of this statement.

        The second statement, SFAS No. 142 – “Goodwill and Other Intangible Assets,” requires companies to cease amortization of goodwill. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. SFAS No. 142 also states that acquired intangible assets should be separately recognized upon meeting certain criteria. Such intangible assets include, but are not limited to, trade and service marks, noncompete agreements, and customer lists. Intangible assets that have indefinite lives will not be amortized, but instead will be subject to an impairment test. The Company will be required to adopt SFAS No. 142 for the fiscal year beginning January 1, 2002 with the exception that goodwill and intangible assets acquired after June 30, 2001 will not be subject to amortization. Impairment reviews may result in future periodic write-downs in the period in which the impairment took place.

         In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Effective January 1, 2001, the Company adopted SFAS No. 133 (as amended by SFAS No. 137 and SFAS No. 138). Accordingly, a transition gain of $0.9 million, net of tax, was recorded in the first quarter of 2001 related to one financial instrument classified as derivative in nature. The adjustment was shown separately as a cumulative effect of a change in accounting principle.

6


3.  ACQUISITIONS AND DISPOSITIONS

        On January 1, 2001, the Company’s subsidiary, Group Health Plan (“GHP”), completed its acquisition of Health Partners of the Midwest’s commercial membership for a total purchase price, including transaction costs, of approximately $4.8 million. This acquisition brings the Company’s total risk membership in the St. Louis area to approximately 388,000.

        On April 2, 2001, the Company’s subsidiary, Coventry Health Care of Kansas, Inc., acquired Kaiser Foundation Health Plan of Kansas City, Inc.’s commercial and Medicare+Choice membership located in Kansas City. Although the Company has paid a $1 million deposit, the final purchase price will be determined based upon members that ultimately transfer to the Company. The acquisition brings Coventry’s total membership in the Kansas City area to more than 142,000.

        On May 17, 2001, GHP reached an agreement with Aetna Inc. whereby GHP will act as the replacement carrier for Aetna’s St. Louis area commercial health maintenance organization (“HMO”) customers. Aetna’s St. Louis area HMO members will be directly marketed to by GHP as Aetna winds down its St. Louis area operations. The final purchase price will be determined based upon members that ultimately transfer to the Company. The agreement with Aetna is exclusive to GHP.

        On June 11, 2001, the Company’s subsidiary, Coventry Health Care of Louisiana (“CHCLA”), reached an agreement with Aetna Inc. whereby CHCLA will act as a replacement carrier for Aetna’s Louisiana commercial HMO customers. Aetna’s Louisiana HMO customers will be directly marketed to by CHCLA as Aetna winds down its Louisiana HMO operations. A nominal deposit has been paid, and the final purchase price will be determined based upon members that ultimately transfer to the Company. The agreement with Aetna is exclusive to CHCLA.

        On September 4, 2001, the Company announced the completed acquisition of Blue Ridge Health Alliance, Inc. and its HMO subsidiary, QualChoice of Virginia Health Plan, Inc., for a total purchase price, including transaction costs, of approximately $14.9 million, effective September 1, 2001. The acquisition brings Coventry’s total membership in southwest and central Virginia to more than 165,000.

4.  COMPREHENSIVE INCOME

        Comprehensive income for the three months and nine months ended September 30, 2001 and 2000 is as follows (in thousands):

Three Months Ended   Nine Months Ended
September 30,   September 30,


2001 2000 2001 2000




Net earnings $  21,650  $  15,406    $  61,537  $  40,403 
Other comprehensive gain:          
     Holding gain, net   10,492 1,533          13,337   2,858
     Reclassification adjustment (204) (135)    1,199 (256)
     Cumulative effect - SFAS No. 133 --     --       (1,439) --    




         Sub-Total 10,288 1,398    13,097  2,602 
     Tax Provision (4,012)  (545)   (5,108) (1,015)




Comprehensive income $  27,926  $  16,259    $  69,526  $  41,990 




7


5.   RESTRICTED STOCK AWARDS

        Under the Coventry 1998 Stock Incentive Plan (the “Plan”), as amended and restated, the Company may grant stock options, restricted stock and other stock-based awards to key employees, consultants and directors as a form of compensation. As part of the Plan, no more than nine million shares of the Company’s stock may be issued for such rewards. In addition, no more than three percent (3%) of the total number of shares of the Company’s common stock outstanding may be issued as shares of restricted stock under this Plan.

        In the third quarter of 2001, the Company awarded 483,500 shares of restricted stock with varying vesting periods through July 2005. The fair value of the restricted shares, at the date of grant, is amortized over the vesting period. The restricted stock shares were granted at a weighted-average fair value of $18.80 per share.

6.   EARNINGS PER SHARE

        Basic earnings per share (“EPS”) are based on the weighted average number of common shares outstanding during the year. Diluted EPS assumes the exercise of all options, warrants, restricted stock and redeemable convertible preferred stock using the treasury stock method.

        The following table summarizes the earnings and the average number of common shares used in the calculation of basic and diluted EPS (in thousands, except per share amounts):

Three Months Ended September 30, 2001

Earnings Shares Per Share
(Numerator) (Denominator) Amount



Basic EPS $  21,650   64,969 $  0.33
Effect of dilutive securities:
   Options and warrants 3,117


Diluted EPS $  21,650   68,086 $  0.32


Three Months Ended September 30, 2000

Earnings Shares Per Share
(Numerator) (Denominator) Amount



Basic EPS $  15,406   59,223 $  0.26
Effect of dilutive securities:
   Options and warrants 3,257
   Redeemable convertible preferred stock 4,236


Diluted EPS $  15,406   66,716 $  0.23



8


Nine Months Ended September 30, 2001

Earnings Shares Per Share
Basic EPS (Numerator) (Denominator) Amount



Earnings before cumulative effect - SFAS No. 133 $  60,659   64,951 $  0.93
Cumulative effect - SFAS No. 133 878 0.02


Basic EPS $  61,537   $  0.95


Diluted EPS      
Earnings before Cumulative effect - SFAS No. 133 $  60,659   64,951  
Effect of dilutive securities:
   Options and warrants 2,844


  $  60,659   67,795 $  0.89
Cumulative effect - SFAS No. 133 878 0.02


Diluted EPS $  61,537   $  0.91


   
Nine Months Ended September 30, 2000

Earnings Shares Per Share
(Numerator) (Denominator) Amount



Basic EPS $  40,403   58,889 $  0.69
Effect of dilutive securities:
   Options and warrants 1,470
   Redeemable convertible preferred stock 4,550


Diluted EPS $  40,403   64,909 $  0.62


7.   SEGMENT INFORMATION

        The Company has three reportable segments: Commercial, Medicare and Medicaid products. The products are provided to a cross section of employer groups and individuals throughout the Company’s health plans. Commercial products include health maintenance organization (“HMO”), preferred provider organization (“PPO”), and point-of-service (“POS”) products. HMO products provide comprehensive health care benefits to members 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. The Company provides comprehensive health benefits to members participating in Medicare and Medicaid programs and receives premium payments from federal and state governments.

        The Company evaluates the performance of its operating segments and allocates resources based on gross margin. Assets are not allocated to specific products and, accordingly, cannot be reported by segment. The following tables summarize the Company’s reportable segments through gross margin (in thousands):

Three Months Ended September 30, 2001

Commercial Medicare Medicaid Total




Revenues $   592,111 $   89,751 $   96,700 $   778,562
Gross Margin 88,156 8,646 12,916 109,718
       
Three Months Ended September 30, 2000

Commercial Medicare Medicaid Total




Revenues $   459,724 $   102,205 $   73,432 $   635,361
Gross Margin 64,198 12,957 14,187 91,342
       

9


Nine Months Ended September 30, 2001

Commercial Medicare Medicaid Total




Revenues $   1,746,372 $   262,624 $   276,650 $   2,285,646
Gross Margin 241,910 32,216 44,130 318,256
       
Nine Months Ended September 30, 2000

Commercial Medicare Medicaid Total




Revenues $   1,340,237 $   296,840 $   214,723 $   1,851,800
Gross Margin 200,579 30,056 36,920 267,555
       

Following are reconciliations of total reportable segment information to financial statement amounts (in thousands):

Three Months Ended Nine Months Ended
September 30, September 30,


2001 2000 2001 2000




Earnings before income taxes:
   Gross margin from reportable segments $     109,718  $      91,342  $     318,256  $      267,555 
         
   Management services 16,120  12,256  47,146  34,421 
         
   Selling, general, and administrative (95,048) (81,819) (281,892) (242,850)
         
   Depreciation and amortization (6,574) (6,852) (19,409) (20,276)
         
   Other income, net 10,703  10,742  33,988  29,078 




   Earnings before income taxes $      34,919  $      25,669  $      98,089  $      67,928 




8.   LEGAL PROCEEDINGS

        In the normal course of business, the Company has been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through September 30, 2001 may result in the assertion of additional claims. With respect to medical malpractice, the Company carries professional malpractice and general liability insurance for each of its operations on a claims-made basis with varying deductibles for which the Company maintains reserves. In the opinion of management, the outcome of these actions should not have a material adverse effect on the financial position or results of operations of the Company.

        On April 16, 2001, the Company was served with an Amended Complaint filed in the United States District Court for the Southern District of Florida, Miami Division, MDL No. 1334, styled In Re: Humana, Inc., Managed Care Litigation, Charles B. Shane, M.D., et al. vs. Humana, Inc., et al. This matter is a purported class action lawsuit filed by a group of health care providers against the Company and 11 other defendants in the managed care field. The lawsuit alleges multiple violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), violations of the “prompt pay” statutes in certain states, and breaches of contract for failure to pay claims. The lawsuit seeks declaratory, injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. Although we can not predict the outcome, we believe this suit is without merit and intend to defend our position vigorously.

        It is possible that the Company may be the target of other similar lawsuits involving RICO, and the Employee Retirement Income Security Act of 1974, generally claiming that managed care companies overcharge consumers and misrepresent that they deliver quality health care. Although it is possible that the Company may be the target of other similar lawsuits, the Company believes there is no valid basis for such lawsuits.

10


        The Company’s industry is heavily regulated and the laws and rules governing the industry and interpretations of those laws and rules are subject to frequent change. Existing or future laws could have significant effect on the Company’s operations.

9.   SUBSEQUENT EVENTS

         At the time of this filing, no such events have occurred.

11


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

        The statements contained in this Form 10-Q that are not historical are forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. These forward-looking statements may be affected by a number of factors, including the “Risk Factors” contained in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. Actual operations and results may differ materially from those expressed in this Form 10-Q. Among the factors that may materially affect the Company’s business are potential increases in medical costs, difficulties in increasing premiums due to competitive pressures, price restrictions under Medicaid and Medicare, marketing of products or accreditation or certification of the products by private or governmental bodies and imposition of regulatory restrictions, costs, or penalties. Other factors that may materially affect the Company’s business include issues relating to difficulties in obtaining or maintaining favorable contracts with health care providers, credit risks on global capitation arrangements, financing costs and contingencies and litigation risk.

        The following discussion and analysis relates to the financial condition and results of operations of the Company for the three and nine months ended September 30, 2001 and 2000. This discussion and analysis should be read in conjunction with the condensed financial statements and other data presented herein as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

GENERAL

     Overview

        Coventry Health Care, Inc. (together with its subsidiaries, the “Company”, “Coventry”, “we”, “our”, or “us”) is a managed health care company operating health plans under the names Coventry Health Care, Coventry Health and Life, HealthAmerica, HealthAssurance, HealthCare USA, Group Health Plan, SouthCare, Southern Health, Carelink Health Plans, and WellPath. The Company provides a full range of managed care products and services including health maintenance organization (“HMO”), point-of-service (“POS”), preferred provider organization (“PPO”), Medicare, and Medicaid products. The Company also administers self-insured plans for large employer groups. Coventry was incorporated under the laws of the State of Delaware on December 17, 1997 and is the successor to Coventry Corporation, which was incorporated on November 21, 1986.

        On May 16, 2001, the Company began trading on the New York Stock Exchange® under the new ticker symbol “CVH”. Previously, the Company had been trading on Nasdaq® under the ticker symbol “CVTY”.

12


        As of September 30, 2001, in continuing operations, Coventry had 1,532,568 members for whom it assumes underwriting risk (“risk members”) and 319,242 members of self-insured employers for whom it provides management services, but does not assume underwriting risk (“non-risk members”). The following tables show the total number of members as of September 30, 2001 and 2000 and the percentage change in membership between those dates:

September 30, Percent
2001 2000 Change



Membership in continuing operations:
   Carolinas 134,790 37,170 262.6% 
   Delaware 154,139 140,685 9.6% 
   Georgia 54,218 44,249 22.5% 
   Iowa 90,526 83,703 8.2% 
   Kansas City 142,474 83,019 71.6% 
   Louisiana 60,298 56,943 5.9% 
   Nebraska 44,507 35,340 25.9% 
   Pennsylvania 485,798 493,905 (1.6%) 
   St. Louis 387,518 371,064 4.4% 
   Virginia 165,146 54,409 203.5%
   West Virginia 89,158 107,233 (16.9%) 
   Wichita 43,238 42,864 0.9% 



Total membership in continuing operations 1,851,810 1,550,584 19.4% 
Total membership in non-continuing operations:      
   Indiana --     511 (100.0%)



      Total membership 1,851,810 1,551,095 19.4% 



September 30, Percent
2001 2000 Change



Risk membership in continuing operations:
   Commercial 1,260,942 1,059,795 19.0% 
   Medicare 52,017 70,267 (26.0%)
   Medicaid 219,609 184,215 19.2% 



      Total risk membership in continuing operations 1,532,568 1,314,277 16.6% 
      Total non-risk membership 319,242 236,307 35.1% 



   Total membership in continuing operations 1,851,810 1,550,584 19.4% 
Total membership in non-continuing operations:
   Indiana --     511 (100.0%)



      Total membership 1,851,810 1,551,095 19.4% 





Coventry Map

13


        Acquisitions and Dispositions

        On January 1, 2001, the Company’s subsidiary, Group Health Plan (“GHP”), completed its acquisition of Health Partners of the Midwest’s commercial membership for a total purchase price, including transaction costs, of approximately $4.8 million. This acquisition brings the Company’s total risk membership in the St. Louis area to approximately 388,000.

        On April 2, 2001, the Company’s subsidiary, Coventry Health Care of Kansas, Inc., acquired Kaiser Foundation Health Plan of Kansas City, Inc.’s (“Kaiser – KC”) commercial and Medicare+Choice membership located in Kansas City. Although the Company has paid a $1 million deposit, the final purchase price will be determined based upon members that ultimately transfer to the Company. The acquisition brings Coventry’s total membership in the Kansas City area to more than 142,000.

        On May 17, 2001, GHP reached an agreement with Aetna Inc. whereby GHP will act as the replacement carrier for Aetna’s St. Louis area HMO customers. Aetna’s St. Louis area HMO members will be directly marketed to by GHP as Aetna winds down its St. Louis area operations. The final purchase price will be determined based upon members that ultimately transfer to the Company. The agreement with Aetna is exclusive to GHP.

        On June 11, 2001, the Company’s subsidiary, Coventry Health Care of Louisiana (“CHCLA”), reached an agreement with Aetna Inc. whereby CHCLA will act as a replacement carrier for Aetna’s Louisiana commercial HMO customers. Aetna’s Louisiana HMO customers will be directly marketed to by CHCLA as Aetna winds down its Louisiana HMO operations. A nominal deposit has been paid, and the final purchase price will be determined based upon members that ultimately transfer to the Company. The agreement with Aetna is exclusive to CHCLA.

        On September 4, 2001, the Company announced the completed acquisition of Blue Ridge Health Alliance, Inc. (“Blue Ridge”) and its HMO subsidiary, QualChoice of Virginia Health Plan, Inc., for a total purchase price, including transaction costs, of approximately $14.9 million, effective September 1, 2001. The acquisition brings Coventry’s total membership in southwest and central Virginia to more than 165,000.

        Legal Proceedings

        In the normal course of business, the Company has been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through September 30, 2001 may result in the assertion of additional claims. With respect to medical malpractice, the Company carries professional malpractice and general liability insurance for each of its operations on a claims-made basis with varying deductibles for which the Company maintains reserves. In the opinion of management, the outcome of these actions should not have a material adverse effect on the financial position or results of operations of the Company.

         On April 16, 2001, the Company was served with an Amended Complaint filed in the United States District Court for the Southern District of Florida, Miami Division, MDL No. 1334, styled In Re: Humana, Inc., Managed Care Litigation, Charles B. Shane, M.D., et al. vs. Humana, Inc., et al. This matter is a purported class action lawsuit filed by a group of health care providers against the Company and 11 other defendants in the managed care field. The lawsuit alleges multiple violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), violations of the “prompt pay” statutes in certain states, and breaches of contract for failure to pay claims. The lawsuit seeks declaratory, injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. Although we can not predict the outcome, we believe this suit is without merit and intend to defend our position vigorously.

        It is possible that the Company may be the target of other similar lawsuits involving RICO, and the Employee Retirement Income Security Act of 1974, generally claiming that managed care companies overcharge consumers and misrepresent that they deliver quality health care. Although it is possible that the Company may be the target of other similar lawsuits, the Company believes there is no valid basis for such lawsuits.

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        The Company’s industry is heavily regulated and the laws and rules governing the industry and interpretations of those laws and rules are subject to frequent change. Existing or future laws could have significant effect on the Company’s operations.

RESULTS OF OPERATIONS

        The Company’s operating expenses are primarily medical costs, including medical claims under contractual relationships with a wide variety of providers, and capitation payments. Medical claims expense also includes an estimate of claims incurred but not reported (“IBNR”). The Company currently believes that the estimates for IBNR liabilities are adequate in order to satisfy its ultimate medical claims liability with respect thereto. In determining the Company’s medical claims liabilities, the Company employs plan by plan standard actuarial reserve methods (specific to the plans’ membership, product characteristics, geographic territories and provider network) that consider utilization frequency and unit costs of inpatient, outpatient, pharmacy and other medical costs, as well as claim payment backlogs and the timing of provider reimbursements. Reserve estimates are reviewed by underwriting, finance, accounting, and other appropriate plan and corporate personnel and judgments are then made as to the necessity for reserves in addition to the estimated amounts. Changes in assumptions for medical costs caused by changes in actual experience, changes in the delivery system, changes in pricing due to ancillary capitation and fluctuations in the claims backlog could cause these estimates to change in the near term. The Company continually monitors and reviews its IBNR reserves, and, as actual settlements are made or accruals adjusted, reflects these differences in current operations.

        Medical claim liability accruals are continually monitored and reviewed, with differences for actual settlements from reserves reflected in current operations. In addition to the procedures for determining reserves as discussed above, the Company reviews the actual payout of claims relating to prior period accruals, which may take more than six months to develop fully. Medical costs are affected by a variety of factors, including the severity and frequency of claims that are difficult to predict and may not be entirely within the Company’s control. The Company continually refines its actuarial practices to incorporate new cost events and trends.

        Coventry continues to focus on ways to control its medical costs, including implementation of best practices to reduce inpatient days and improvement of the overall quality and level of care. Coventry is also continuously monitoring and renegotiating with its provider networks to improve reimbursement rates and improve member access to providers.

        Quarters Ended September 30, 2001 and 2000

        Total membership increased by 19.4% from the prior year’s third quarter, almost all of which was attributable to the acquisitions of WellPath, Health Partners, Kaiser – KC and Blue Ridge. On a same store basis, the Company experienced a slight decline in both Commercial and Medicare membership. The decline in Commercial membership was a result of the loss of a large group in each of the St. Louis and West Virginia markets. The majority of the Medicare decline was a result of exiting certain markets and changes being made to the rate and benefit structures, effective January 1, 2001. Offsetting this decline was an increase in the Medicaid membership, primarily in Missouri, due to an expansion into additional counties and the withdrawal of a competitor.

        Managed care premium revenue increased from the prior year’s third quarter by 22.5%, primarily as a result of the acquisitions previously mentioned, and also as a result of rate increases that occurred throughout all markets. Commercial yields increased by an average of 11.3% over third quarter 2000 on a per member per month (“PMPM”) basis, to $163.77 PMPM. Coventry will continue to be diligent in attempting to obtain adequate premium increases, and expects Commercial rate increases to exceed 14% for the entire year. Medicare yields increased by an average of 17.0% over third quarter 2000 on a PMPM basis as a result of changes being made to rate and benefit structures as mentioned above, as well as changes in demographics.

        Management services revenue increased from the prior year’s third quarter almost entirely due to the increase in non-risk membership as a result of the acquisitions of WellPath, Health Partners and Blue Ridge.

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        Medical costs increased from the prior year’s third quarter due primarily to the additional expenses associated with acquisitions, and also due to medical trend. The increase in medical costs of $124.8 million included $84.5 million from acquisitions. The increase associated with the acquisitions had a negative impact on the Company’s medical loss ratio (“MLR”) causing a 0.3% increase from the prior year’s third quarter, to 85.9%. Excluding the four most recent acquisitions, the MLR would have been 84.8% for the quarter, a 0.8% improvement over the prior year’s third quarter.

        Selling, general and administrative (“SG&A”) expense increased from the prior year’s third quarter primarily due to the acquisitions mentioned above. Although these acquisitions resulted in additional SG&A expense, there was a decrease in SG&A as a percentage of revenue due to an increased revenue base and efficiencies gained through our streamlined administrative functions.

         Nine Months Ended September 30, 2001 and 2000

         Managed care premium revenue increased by 23.4% from the nine months ended September 30, 2000. Approximately half of the increase was attributable to acquisitions and the rest was attributable to rate increases on renewals. Commercial premium yields for the nine months ended September 30, 2001 increased by an average of $16.24 PMPM, or 11.2%, from the corresponding period of 2000 to $161.66 PMPM. Total premium yields for the nine months ended September 30, 2001 increased by an average of $11.65 PMPM, or 7.2%, from the corresponding period of 2000 to $173.67 PMPM. The total premium yields did not increase as much as commercial yields due to the decline in the high yield Medicare membership noted earlier.

         Management services revenue increased from the nine months ended September 30, 2000 primarily due to the increase in non-risk membership as a result of the acquisitions of WellPath and Health Partners.

         Medical costs increased from the nine months ended September 30, 2000 primarily due to the acquisitions previously mentioned and due to medical trend. The increase in medical costs associated with the acquisitions had a negative impact on the Company's MLR causing a 0.5% increase from the prior year, to 86.1%. Excluding the four most recent acquisitions, the MLR would have been 84.8% for the year, a 0.8% improvement over the prior year.

         SG&A expense increased for the nine months ended September 30, 2001 from the corresponding period in 2000 primarily due to acquisitions. SG&A expense as a percent of revenue decreased to 12.1%, from 12.9% in the corresponding period in 2000. The decrease in SG&A expense as a percent of revenue was primarily attributable to the premium rate increases mentioned above and to acquisitions, which required minimal incremental SG&A expense.

         Other income, net of interest expense, increased from the nine months ended September 30, 2000. The increase in other income was primarily due to the increase in investment income, as a result of an increase in the Company's short-term and long-term investments compared to the nine months ended September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

        The Company’s total cash and investments, excluding deposits of $22.4 million restricted under state regulations, increased $139.8 million to $869.9 million at September 30, 2001 from $730.1 million at December 31, 2000. The increase was primarily attributable to the cash inflow from operating activities and cash and investments acquired through acquisitions reduced by net payments for the repurchase and issuance of stock, payments for acquisitions, and payments for capital expenditures.

        The Company’s investment guidelines emphasize investment grade fixed income instruments in order to provide short-term liquidity and minimize the risk to principal. The Company believes that since its long-term investments are available-for-sale, the amount of such investments should be added to current assets when assessing the Company’s working capital and liquidity. On such basis, current assets plus long-term investments available-for-sale less current liabilities improved to $356.6 million at September 30, 2001 from $285.9 million at December 31, 2000.

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        The Company’s HMOs and its insurance company subsidiary, Coventry Health and Life Insurance Company (“CH&L”), are required by state regulatory agencies to maintain minimum surplus balances, thereby limiting the dividends the parent may receive from its HMOs and CH&L. The majority of states in which the Company operates 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 equal to 200% of their RBC. Although not all states in which the Company operates have adopted the RBC policy, the total surplus in excess of 200% of RBC for all of the Company’s HMO subsidiaries was approximately $76.2 million at September 30, 2001, up from $41.1 million at December 31, 2000. The increase is primarily due to income from the current year and from capital contributions made by the parent company to HMO subsidiaries in order to comply with the newly adopted RBC policies or to prevent the impairment of the subsidiaries’ net worth, and offset by dividends paid to the parent company.

        CH&L had excess surplus of approximately $18.1 million and $7.9 million at September 30, 2001 and December 31, 2000, respectively. The improvement is primarily due to CH&L’s net income for the year of 2001.

        Excluding funds held by entities subject to regulation, the Company had cash and investments of approximately $96.2 million and $79.1 million at September 30, 2001 and December 31, 2000, respectively, which are available to pay intercompany balances to regulated subsidiaries and for general corporate purposes. The Company has entered into agreements with certain of its regulated subsidiaries to provide additional capital, if necessary, to prevent the subsidiary’s impairment of net worth requirements.

        Projected capital investments in 2001 of approximately $10.0 million consist primarily of computer hardware, software and related equipment costs associated with the development and implementation of improved operational and communications systems. As of September 30, 2001, approximately $5.5 million has been spent.

        The Company believes that cash flows generated from operations, cash and investments, and excess funds in certain of its regulated subsidiaries will be sufficient to fund continuing operations through December 31, 2002.

E-COMMERCE INITIATIVES

        The Company has launched several e-commerce initiatives. Each initiative is intended to reach a segment of our core business customers: providers, brokers, employers and members. The Company’s e-commerce initiatives are extending the Company’s core business functions directly to the customers in an effort to deliver increased customer value.

        Company e-Services. Earlier this year the Company replaced all of its legacy web sites with professionally designed web sites. Coventry has a new on-line formulary, which is being used internally by the Company’s customer support services, as well as externally by the Company’s customers. Soon, a tool will be installed that will allow physicians to download the Company’s formulary to pocket PC devices. The Company continues to add tools to enhance its on-line services. The Company also provides on-line health care directory services, which makes information about its health plan providers available to all customers.

        Provider Channel. The Company continues to work to roll out a full suite of services to health care providers in the Company’s multiple markets. Coventry is currently implementing Internet services to manage the electronic submission and processing of eligibility determination, authorization submission and status, claims submission and status, and reporting. We expect to gain some administrative savings from expanded real-time transaction processing, as well as enhanced provider connectivity and increased provider satisfaction. The Company currently has Provider Channel services in five of its largest markets and will provide these to its remaining health plans in 2001 and 2002.

        Broker/Employer Channel. The Company continues to automate the entire sales and enrollment process for our small group insurance market by implementing a web-based application. This application streamlines the process of quoting, enrollment, underwriting, case installation and renewal for employee benefits providers, their sales representatives, agents and customers. We currently provide this product in three of our largest markets. It will be made available to our remaining health plans in 2001 and 2002.

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        Member/Employer Channel. Coventry has completed the rollout to the majority of its plans for secure web transaction functionality for the Company’s health plan members. This initiative provides automated services with web-based password-protected functionality. The initial transaction types available to members include: status transactions (claim, authorization, eligibility, benefits); change information (address, phone, primary care physician); request items (ID card, ID card image, brochures); and notify us (other insurance, life event). These services are available seven days a week, 24 hours a day using a secure ID and password. Additionally, we provide connections to health care and medical information on the Internet.

        The Company recently launched employer web transaction functionality in the St. Louis market that will allow employers to view roster, billing and eligibility information on-line. This functionality will enable employers to reconcile billing statements and verify eligibility without a phone call. Employer functionality will be deployed to our remaining health plans in 2001 and 2002.

LEGISLATION AND REGULATION

        Numerous proposals have been introduced in the United States Congress and various state legislatures relating to health care reform. Some proposals, if enacted, could among other things, restrict the Company’s ability to raise prices and to contract independently with employers and providers. Certain reform proposals favor the growth of managed health care, while others would adversely affect managed care. Although the provisions of any legislation adopted at the state or federal level cannot be accurately predicted at this time, management of the Company believes that the ultimate outcome of currently proposed legislation would not have a material adverse effect on the Company or its results of operations in the short-term.

        Pursuant to a Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandate, the Department of Health and Human Services (“HHS”) released a final rule regarding standards for privacy of individually identifiable health information on December 20, 2000, effective April 14, 2003. The Company has established a HIPAA Project Team, with representation from Senior Management, Information Systems and our Customer Service Organization, and is expected to institute all necessary modifications to systems and business processes by the compliance date.

        HHS also released its final rule for electronic data standards on August 17, 2000, effective October 17, 2000. The Company’s HIPAA Project Team expects to institute all necessary modifications to systems and business processes by the compliance date, October 17, 2002.

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ITEM 3: Quantitative and Qualitative Disclosures of Market Risk

        The Company’s only material risk in investments in financial instruments is in its debt securities portfolio. The Company invests primarily in marketable state and municipal, U.S. Government and agencies, corporate, and mortgage-backed debt securities. Effective January 1, 2001, the Company adopted SFAS No. 133 (as amended by SFAS No. 137 and SFAS No. 138). Accordingly, a transition gain of $0.9 million, net of tax, based on the valuation at December 31, 2000, was recorded in the first quarter of 2001 related to one financial instrument classified as derivative in nature.

        The Company has established policies and procedures to manage its exposure to changes in the fair value of its investments. These policies include an emphasis on credit quality, management of portfolio duration, maintaining or increasing investment income through high coupon rates and actively managing profile and security mix depending upon market conditions. The Company has classified all of its investments as available-for-sale. The fair value of the Company’s investments at September 30, 2001 was $655.9 million. Investments at September 30, 2001 mature according to their contractual terms, as follows, in thousands (actual maturities may differ because of call or prepayment rights):

Amortized Fair
Cost Value
 

Maturities:
   Within 1 year $     150,257 $     151,062
   1 to 5 years 230,822 240,895
   6 to 10 years 77,935 80,652
   Over 10 years 178,378 183,304


Total short-term and long-term securities $     637,392 $     655,913


        The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by the issuer of the debt securities we hold. The mortgage-backed securities are insured by several associations, including Government National Mortgage Administration and Federal National Mortgage Administration.

        The Company’s projections of hypothetical net losses in fair value of the Company’s market rate sensitive instruments, should potential changes in market rates occur, are presented below. While the Company believes that the potential market rate change is reasonably possible, actual results may differ.

        Based on the Company’s investment portfolio and interest rates at September 30, 2001, using a weighted average of investment duration, a 100 basis point increase in interest rates would result in a decrease of $16.0 million or 2.4%, in the fair value of the portfolio. Changes in interest rates may affect the fair value of the debt securities portfolio and may result in unrealized gains or losses. Gains or losses would be realized upon the sale of the investments.

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PART II. OTHER INFORMATION

ITEM 1: Legal Proceedings

        In the normal course of business, the Company has been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through September 30, 2001 may result in the assertion of additional claims. With respect to medical malpractice, the Company carries professional malpractice and general liability insurance for each of its operations on a claims-made basis with varying deductibles for which the Company maintains reserves. In the opinion of management, the outcome of these actions should not have a material adverse effect on the financial position or results of operations of the Company.

        On April 16, 2001, the Company was served with an Amended Complaint filed in the United States District Court for the Southern District of Florida, Miami Division, MDL No. 1334, styled In Re: Humana, Inc., Managed Care Litigation, Charles B. Shane, M.D., et al. vs. Humana, Inc., et al. This matter is a purported class action lawsuit filed by a group of health care providers against the Company and 11 other defendants in the managed care field. The lawsuit alleges multiple violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), violations of the “prompt pay” statutes in certain states, and breaches of contract for failure to pay claims. The lawsuit seeks declaratory, injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. Although we can not predict the outcome, we believe this suit is without merit and intend to defend our position vigorously.

        It is possible that the Company may be the target of other similar lawsuits involving RICO, and the Employee Retirement Income Security Act of 1974, generally claiming that managed care companies overcharge consumers and misrepresent that they deliver quality health care. Although it is possible that the Company may be the target of other similar lawsuits, the Company believes there is no valid basis for such lawsuits.

        The Company’s industry is heavily regulated and the laws and rules governing the industry and interpretations of those laws and rules are subject to frequent change. Existing or future laws could have significant effect on the Company’s operations.

ITEMS 2, 3, 4 and 5: Not Applicable

ITEM 6: Exhibits and Reports on Form 8-K

     (a) Exhibit Listing

Exhibit No. Description of Exhibit


10.1 Employment Agreement effective as of September 1, 2001 between Harvey C. DeMovick, Jr. and the Company
10.2 Employment Agreement effective as of September 1, 2001 between Thomas Zielinski and the Company


     (b) Reports on Form 8-K


        No reports on Form 8-K were filed during the quarter ended September 30, 2001.

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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: November 9, 2001 By: /s/ Allen F. Wise

Allen F. Wise
President, Chief Executive Officer and Director
   
Date: November 9, 2001 By: /s/ Dale B. Wolf

Dale B. Wolf
Executive Vice President, Chief Financial Officer and Treasurer
   
Date: November 9, 2001 By: /s/ John J. Ruhlmann

John J. Ruhlmann
Vice President and Controller

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Links

PART I: FINANCIAL INFORMATION
PART II: OTHER INFORMATION






EMPLOYMENT AGREEMENT

        This Agreement is made the 23rd of August, 2001, effective as of September 1, 2001, by and between Coventry Health Care, Inc., a Delaware corporation (the “Company”), and Harvey C. DeMovick, Jr. (the “Executive”).

        WHEREAS, Executive desires to enter into an employment relationship with the Company and the Company desires to employ Executive; and

        WHEREAS, Executive and the Company desire to set forth in a written agreement the terms and conditions of such employment.

        NOW, THEREFORE, in consideration of the mutual covenants contained in this Employment Agreement, the parties hereby agree as follows:

1.  TERM AND DUTIES

        1.1 The term of this Agreement shall commence as of September 1, 2001, and shall continue through December 31, 2003 and will continue on a year-to-year basis thereafter in the absence of notice of either party given no later than the September 30th prior to the expiration, or unless otherwise extended (the “Term”).

        1.2 Executive shall serve as Senior Vice President, Customer Service Organization (CSO) and Chief Information Officer (CIO), shall report to the President and Chief Executive Officer and shall be responsible for broad executive responsibilities in the Customer Service Operations and Information Systems management area, including, but not limited to, the establishment and implementation of policies and procedures, formulation of long range plans, goals and objectives, effective management of employees, and such other powers and duties normally associated with such position or as may be delegated or assigned to the Executive by the Company’s President and Chief Executive Officer. During the term of the Agreement, the Executive shall also serve without additional compensation in such other offices of the Company or its subsidiaries or affiliates to which he may be elected or appointed by the Board of Directors of the Company or its subsidiaries or affiliates, respectively.

2.  COMPENSATION AND BENEFITS

        2.1 The Company shall pay the Executive a base salary (“Base Salary”) of not less than Three Hundred Forty Thousand Dollars ($340,000) per annum, subject to applicable withholdings. The Base Salary shall be payable according to the customary payroll practices of the Company. The Base Salary shall be reviewed annually and shall be subject to increase from time to time.

        2.2 The Executive shall be eligible for an annual bonus (“Bonus”) in accordance with the Company’s annual bonus plan in effect on the date of this Agreement.

        2.3 The terms and conditions of all stock options and restricted share awards previously granted to Executive shall remain in full force and effect.

        2.4 The Executive will be entitled to participate in all employee benefit plans or programs and receive all benefits and perquisites to which any salaried employee is eligible under any existing or future plan or program for salaried employees, including, without limitation, all plans developed for executive officers of the Company. These plans or programs may include group hospitalization, health care, dental care, life or other insurance, tax qualified pension, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans, including capital accumulation programs, restricted stock programs, stock purchase programs and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any of the plans or programs applicable to salaried employees or executive officers. The Executive will be entitled to four (4) weeks of annual paid vacation.

        2.5 The Company will reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in connection with the performance of his duties upon proper documentation in accordance with Company policies. To the degree that the Executive is accountable for any income taxes arising from this Section, he will have sole responsibility for calculating and paying such taxes.

        2.6 Executive will be eligible to participate in the Company Deferred Compensation Plan (the “Plan”) in accordance with and under the terms of the Plan document.

3.  DEATH AND DISABILITY COMPENSATION

        3.1 In the event of the death of the Executive during the Term, payments under this Employment Agreement shall cease as of the date of death, except for the following benefits to be paid to the Executive's beneficiaries:

          (a) any earned but unpaid base salary and a lump sum payment equal to the annual bonus compensation for the two (2) calendar years immediately preceding the death of Executive, pro-rated for the year death occurs;

          (b) for twenty-four (24) months following the date of the Executive’s death, the Company shall reimburse the Executive’s designated beneficiary for the cost of the designated beneficiary’s medical and dental insurance as in effect at the date of the Executive’s death;

          (c) the exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and the terms of the respective stock option plans; and

          (d) the Executive’s designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided or referred to in this Employment Agreement.

        3.2 Notwithstanding the disability of the Executive, the Company will continue to pay the Executive pursuant to Section 2 hereof during the Term, unless the Executive’s employment is earlier terminated in accordance with this Agreement. In the event the disability continues for a period of three (3) months, the Company may thereafter terminate this Agreement and the Executive’s employment. Following such termination, the Company will pay the Executive amounts equal to the following:

          (a) his regular installments of Base Salary, as of the time of termination, for a period not to exceed the commencement of payments under any Company provided long-term disability plan;

          (b) a lump sum payment equal to the average annual bonus compensation for the two (2) calendar years immediately preceding the year of termination due to disability, prorated for the year the disability occurs;

          (c) for twenty-four (24) months following the date of the Executive’s termination due to disability, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of the Executive’s termination; and

          (d) if the Executive is receiving disability benefits under the Company’s qualified long-term disability program, the Executive will receive a monthly payment equal to 60% multiplied by pre-disability earnings (as defined by the qualified long-term disability plan) less any monthly benefit paid under the qualified long-term disability program. Such payments shall continue to cessation of payments under the Company’s qualified long-term disability program.

          (e) the exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and the terms of the respective stock option plans.

        3.3 During the period the Executive is receiving payments following his disability and as long as he is physically and mentally able to do so, the Executive will furnish information and assistance to the Company and from time to time will make himself available to the Company to undertake assignments consistent with his position or prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of this Employment Agreement, the Executive’s obligation to provide information and assistance will cease.

        3.4 For purposes of this Agreement, the term “disability” will have the same meaning as is attributed to such term, or any substantially similar term, in the Company’s long-term disability income plan as in effect from time to time. The Company’s group long-term disability policy in existence at the time of disability shall be considered to be a part of this Agreement.

4.  TERMINATION OF EMPLOYMENT

        4.1 Except in the case of the two (2) year period following a Change in Control (as hereinafter defined), if the Executive suffers a Termination Without Cause (hereinafter defined) or a Constructive Termination (as hereinafter defined), the Company will continue to pay the Executive the following:

          (a) for a period of twelve (12) months after Termination Without Cause or Constructive Termination, a monthly amount equal to the sum of the Executive’s combined (i) Base Salary in effect at the time of the termination and (ii) the average Bonus for the two (2) calendar years immediately preceding the year of termination, divided by twelve (12); and

          (b) for twelve (12) months following such Termination Without Cause or Constructive Termination, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of termination or will maintain coverage in the Company’s medical and dental plans for such period. However, if Executive obtains employment with another employer during such twelve (12) month period, such coverage or reimbursement will cease as of the date Executive, his spouse and family can be covered under the plans of the new employer without exclusion for preexisting conditions, if earlier than the end of the 12-month period. In addition, the Executive will receive twelve (12) months additional vesting credit for all stock options and restricted stock awards, if applicable.

        4.2 If the Executive suffers a Termination Without Cause or Constructive Termination within two (2) years following a Change in Control, the Company will pay to the Executive the following:

          (a) in a lump sum upon such termination an amount equal to the sum of (i) 100% of the Executive’s combined (A) Base Salary as in effect at the time of the termination and (B) average Incentive Bonus for the two (2) calendar years immediately preceding the year of termination, and (ii) to the extent that such foregoing amount or any other payment in the nature of compensation (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (“Section 280G”)) to or for the benefit to the Executive (or any part of such amount or other payment) constitutes an “excess parachute payment” within the meaning of Section 280G, the amount, if any, of (A) such “excess parachute payment” multiplied by a fraction, the numerator of which is the number one (1.00) and the denominator of which is (I) the number (1.00) minus (II) the effective tax rate under Section 280G applicable to the Executive expressed as decimal, minus (B) the amount of such “excess parachute payment”;

          (b) for twelve (12) months following such Termination Without Cause or Constructive Termination following a Change of Control, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of termination; and

          (c) all stock options and all restricted stock granted to the Executive shall vest in full upon a Change of Control.

        4.3 If the Executive suffers a Termination with Cause or the Executive terminates his employment with the Company not due to a Constructive Termination, death or disability (as defined in Section 3.4) (a “Voluntary Termination”), then the Company will not be obligated to pay the Executive any amounts of compensation or benefits following the date of termination, except earned but unpaid Base Salary through the date of termination, which will be paid in a lump sum. The exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and plans.

        4.4 For purposes of this Employment Agreement, the following terms have the following meanings:

          (a) A “Change in Control” shall occur if at any time, substantially all of the assets of the Company are sold or transferred by sale, merger or otherwise, to an entity which is not a direct or indirect subsidiary of the Company, or if any “person” (as such term is used in Sections 13(d) or 14 (d) of the Securities Exchange Act of 1934, as amended) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the then existing outstanding securities of the Company.

          (b) “Constructive Termination” means termination by the Executive which follows (a) a reassignment of duties, responsibilities, title, or reporting relationships that are not at least the equivalent of his then current position as set forth in Section 1.2 or the compensation and benefits provided herein, (b) the intentional or material breach by the Company of this Agreement, or (c) a reassignment, after a Change of Control, to a geographic location more than fifty miles from Bethesda, Maryland. The Executive shall have a period of ninety (90) days after termination of his employment to assert against the Company that he suffered a Constructive Termination, and after the expiration of such ninety (90) day period, the Executive shall be deemed to have irrevocably waived the right to such assertion.

          (c) “Termination With Cause” means termination by the Company, acting in good faith, by written notice to the Executive specifying the event relied upon for such termination, due to the Executive’s conviction for a felony, the Executive’s intentional perpetration of a fraud, embezzlement or other act of dishonesty or the Executive’s intentional breach of a trust or fiduciary duty which materially adversely affects the Company or its shareholders.

          (d) “Termination Without Cause” means termination by the Company other than due to the Executive’s death or disability or Termination With Cause.

5.  OTHER DUTIES OF THE EXECUTIVE

        5.1 The Executive shall devote substantially all of his working time to the business of the Company and during the Term shall not take, directly or indirectly, an active role in any other business without the prior written consent of the Company; but except as provided in Section 5.3, this Section shall not prevent the Executive from serving as a director of other entities not affiliated with the Company, from making real estate or other investments of a passive nature or from participating in the activities of a charitable organization where such participation does not adversely affect the Executive’s ability to perform his duties under this Agreement.

        5.2 The Executive will, upon reasonable notice, during or after the Term of this Employment Agreement, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. The Executive shall receive reasonable compensation for the time expended by him pursuant to this Section 5.2 after the Term.

        5.3 The Executive acknowledges that certain information pertaining to the business and operations of the Company such as strategic plans, product development, financial costs, pricing terms, sales data or new or developing business opportunities (“Confidential Information”), is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this Confidential Information are essential to the performance of the Executive’s duties under this Agreement. The Executive will not during the term of this Agreement or following termination of his employment except to the extent reasonably necessary in the performance of his duties under this Agreement, give to any person, firm, association, corporation or governmental agency any Confidential Information except as required by law. The Executive will not make use of this Confidential Information for his own purposes or for the benefit of any person or organization other than the Company. The Executive will also use his best efforts to prevent the disclosure of this Confidential Information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Executive or otherwise coming into his possession will remain the property of the Company.

        5.4 The Executive will not Compete with the Company (as hereinafter defined) at any time while he is employed by the Company. Except after a Change in Control or after non-renewal under Section 1.1, in the event of Termination Without Cause or Constructive Termination pursuant to Section 4.1, the Executive will not Compete with the Company for a period of one (1) year from the date of such termination. In the event of a termination after a Change in Control that gives rise to payments to Executive under Section 4.2, the Executive will not Compete with the Company for one (1) year from the date of termination. In the event of a Voluntary Termination in which the Executive only receives payment as defined under Section 4.3, or which follows a Company non-extension notice under Section 1.1, there will be no restriction on the Executive’s right to Compete with the Company after the date his employment terminates. For the purposes of this Section 5.4, the term “Compete with the Company” means action by the Executive, direct or indirect, either as an officer, director, stockholder, owner, partner, employee or in any other capacity, resulting in the Executive having any legal or equitable ownership or other financial or non-financial interest in or employment with, any HMO, managed care or health insurance business within a fifty mile radius of any location where the Company or any subsidiary or affiliate of the Company conducts such business at the date of a termination of the Executive’s employment; provided, however, that the term “Compete with the Company” shall not include ownership (without any more extensive relationship) of a less than a five percent (5%) interest in any publicly-held corporation or other business entity. The Executive acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. The Executive acknowledges that his breach or threatened or attempted breach of any provision of Section 5.4 may cause irreparable harm to the Company not compensable in monetary damages and that the Company may be entitled, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of Section 5.4.

6.  INDEMNIFICATION OF EXECUTIVE

        6.1 The Company shall indemnify the Executive and shall reimburse the Executive’s expenses under the circumstances described, and to the maximum extent provided under the mandatory and the permissive indemnification and expense reimbursement provisions of Delaware law. The provisions of this Section 6.1 shall continue in full force and effect after Executive ceases to serve as an officer, director, employee or in any other capacity with the Company or any of its affiliates, and shall inure to the benefit of his heirs, executors or administrators.

7.  MISCELLANEOUS

        7.1 This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates, and the Executive.

        7.2 This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Employment Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.

        7.3 Should any part of this Agreement be declared invalid for any reason, such invalidity shall not affect the validity of any remaining portion hereof and such remaining portion shall continue in full force and effect as if this Employment Agreement had been originally executed without including the invalid part. Should any covenant of this Employment Agreement be unenforceable because of its geographic scope or term, its geographic scope or tem shall be modified to such extent as may be necessary to render such covenant enforceable.

        7.4 Titles and captions in no way define, limit, extend or describe the scope of this Agreement nor the intent of any provision thereof.

        7.5 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

        7.6 This Employment Agreement has been executed and delivered in the State of Maryland and its validity, interpretation, performance and enforcement shall be governed by the laws of that state. Any dispute among the parties hereto shall be settled by arbitration in Bethesda, Maryland, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof. All provision hereof are for the protection and are intended to be for the benefit of the parties hereto and enforceable directly by the binding upon each party. Each party hereto agrees that the remedy at law of the other for any actual or threatened breach of this Employment Agreement would be inadequate and that the other party shall be entitled to specific performance hereof or injunctive relief or both, by temporary or permanent injunction or such other appropriate judicial remedy, writ or orders as may be decided by a court of competent jurisdiction in addition to any damages which the complaining party may be legally entitled to recover.

        7.7 All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or when delivered if by hand, overnight delivery service or confirmed facsimile transmission to the following:

          (i) If to the Company, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817, Attention: Chairman of the Compensation Committee, or at such other address as may have been furnished to the Executive by the Company in writing; or

           (ii) If to the Executive, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817 or 70 Noyes Neck Road, Westerly, Rhode Island, 02891, or such other address as may have been furnished to the Company by the Executive in writing.

        7.8 This Employment Agreement shall be binding on the parties’ successors, heirs and assigns.

        IN WITNESS WHEREOF, the undersigned have executed this Employment Agreement as of the date first above written.

COVENTRY HEALTH CARE, INC. EXECUTIVE:
By: /s/ Allen F. Wise By: /s/ Harvey C. DeMovick, Jr.


Allen F. Wise Harvey C. DeMovick, Jr.
President & CEO









EMPLOYMENT AGREEMENT

        This Agreement is made the 10th of July, 2001, effective as of September 1, 2001, by and between Coventry Health Care, Inc., a Delaware corporation (the “Company”), and Thomas Zielinski (the “Executive”).

        WHEREAS, Executive desires to enter into an employment relationship with the Company and the Company desires to employ Executive; and

        WHEREAS, Executive and the Company desire to set forth in a written agreement the terms and conditions of such employment.

        NOW, THEREFORE, in consideration of the mutual covenants contained in this Employment Agreement, the parties hereby agree as follows:

1.  TERM AND DUTIES

        1.1 The term of this Agreement shall commence as of September 1, 2001, and shall continue through December 31, 2002 and will continue on a year-to-year basis thereafter in the absence of notice of either party given no later than the September 30th prior to the expiration, or unless otherwise extended (the “Term”).

        1.2 Executive shall serve as Senior Vice President and General Counsel, shall report to the President and Chief Executive Officer and shall be responsible for broad executive responsibilities in the legal and general counsel management area, including, but not limited to, the establishment and implementation of policies and procedures, formulation of long range plans, goals and objectives, effective management of employees, and such other powers and duties normally associated with such position or as may be delegated or assigned to the Executive by the Company’s President and Chief Executive Officer. Executive’s principal office will be in the Coventry Health Care of Delaware health plan in Wilmington, DE, but Executive agrees to travel to the Corporate office in Bethesda, MD, on a once a week basis. During the term of the Agreement, the Executive shall also serve without additional compensation in such other offices of the Company or its subsidiaries or affiliates to which he may be elected or appointed by the Board of Directors of the Company or its subsidiaries or affiliates, respectively.

2.  COMPENSATION AND BENEFITS

        2.1 The Company shall pay the Executive a base salary (“Base Salary”) of not less than Three Hundred Fifty Thousand Dollars ($350,000) per annum, subject to applicable withholdings. The Base Salary shall be payable according to the customary payroll practices of the Company. The Base Salary shall be reviewed annually and shall be subject to increase from time to time.

        2.2 The Executive shall be eligible for an annual bonus (“Bonus”) with a target bonus equal to 50% of base compensation in accordance with the Company’s annual bonus plan in effect on the date of this Agreement.

        2.3 The Executive will be entitled to participate in all employee benefit plans or programs and receive all benefits and perquisites to which any salaried employee is eligible under any existing or future plan or program for salaried employees, including, without limitation, all plans developed for executive officers of the Company. These plans or programs may include group hospitalization, health care, dental care, life or other insurance, tax qualified pension, car allowance, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans, including capital accumulation programs, restricted stock programs, stock purchase programs and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any of the plans or programs applicable to salaried employees or executive officers. The Executive will be entitled to four (4) weeks of annual paid vacation.

        2.4 The Company will reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in connection with the performance of his duties upon proper documentation in accordance with Company policies. In addition, Executive shall be entitled to a discretionary car allowance of $900 per month. To the degree that the Executive is accountable for any income taxes arising from this Section, he will have sole responsibility for calculating and paying such taxes.

        2.5 Executive will be granted a nonqualified stock option to purchase 100,000 shares of Common Stock of the Company. The terms and conditions of the grant will be under and in accordance with an agreement between Executive and the Company and the terms and provisions of the Company’s 1998 Stock Incentive Plan. The option will vest at a rate of one-fourth of the shares per year over a four-year vesting period beginning on the date of grant, or in the event of a Change of Control (as defined in the 1998 Stock Incentive Plan), the option will become fully vested in accordance with the terms of the Company’s 1998 Stock Incentive Plan. The option will expire on the tenth anniversary of the Date of Employment unless sooner terminated by the Executive terminating his employment hereunder.

        2.6 Executive will be eligible to participate in the Company Deferred Compensation Plan (the “Plan”) in accordance with and under the terms of the Plan document.

3.  DEATH AND DISABILITY COMPENSATION

        3.1 In the event of the death of the Executive during the Term, payments under this Employment Agreement shall cease as of the date of death, except for the following benefits to be paid to the Executive’s beneficiaries:

          (a) any earned but unpaid base salary and a lump sum payment equal to the annual bonus compensation for the one (1) calendar year immediately preceding the death of Executive, pro-rated for the year death occurs;

          (b) for twelve (12) months following the date of the Executive’s death, the Company shall reimburse the Executive’s designated beneficiary for the cost of the designated beneficiary’s medical and dental insurance as in effect at the date of the Executive’s death;

          (c) the exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and the terms of the respective stock option plans; and

          (d) the Executive’s designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided or referred to in this Employment Agreement.

        3.2 Notwithstanding the disability of the Executive, the Company will continue to pay the Executive pursuant to Section 2 hereof during the Term, unless the Executive’s employment is earlier terminated in accordance with this Agreement. In the event the disability continues for a period of three (3) months, the Company may thereafter terminate this Agreement and the Executive’s employment. Following such termination, the Company will pay the Executive amounts equal to the following:

          (a) his regular installments of Base Salary, as of the time of termination, for a period not to exceed the commencement of payments under any Company provided long-term disability plan;

          (b) a lump sum payment equal to the annual bonus compensation for the one (1) calendar year immediately preceding the year of termination due to disability, prorated for the year the disability occurs;

          (c) for twelve (12) months following the date of the Executive's termination due to disability, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of the Executive’s termination; and

          (d) if the Executive is receiving disability benefits under the Company’s qualified long-term disability program, the Executive will receive a monthly payment equal to 60% multiplied by pre-disability earnings (as defined by the qualified long-term disability plan) less any monthly benefit paid under the qualified long-term disability program. Such payments shall continue to cessation of payments under the Company’s qualified long-term disability program.

          (e) the exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and the terms of the respective stock option plans.

        3.3 During the period the Executive is receiving payments following his disability and as long as he is physically and mentally able to do so, the Executive will furnish information and assistance to the Company and from time to time will make himself available to the Company to undertake assignments consistent with his position or prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of this Employment Agreement, the Executive’s obligation to provide information and assistance will cease.

        3.4 For purposes of this Agreement, the term “disability” will have the same meaning as is attributed to such term, or any substantially similar term, in the Company’s long-term disability income plan as in effect from time to time. The Company’s group long-term disability policy in existence at the time of disability shall be considered to be a part of this Agreement.

4.  TERMINATION OF EMPLOYMENT

        4.1 Except in the case of the one year period following a Change in Control (as hereinafter defined), if the Executive suffers a Termination Without Cause (hereinafter defined) or a Constructive Termination (as hereinafter defined), the Company will continue to pay the Executive the following:

          (a) for a period of twelve (12) months after Termination Without Cause or Constructive Termination, a monthly amount equal to the sum of the Executive’s combined (i) Base Salary in effect at the time of the termination and (ii) the average Bonus for the two (2) calendar years immediately preceding the year of termination, divided by twelve (12); and

          (b) for twelve (12) months following such Termination Without Cause or Constructive Termination, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of termination or will maintain coverage in the Company’s medical and dental plans for such period. However, if Executive obtains employment with another employer during such twelve (12) month period, such coverage or reimbursement will cease as of the date Executive, his spouse and family can be covered under the plans of the new employer without exclusion for preexisting conditions, if earlier than the end of the 12-month period. In addition, the Executive will receive twelve (12) months additional vesting credit for all stock options and restricted stock awards, if applicable.

        4.2 If the Executive suffers a Termination Without Cause or Constructive Termination within one (1) year following a Change in Control, the Company will pay to the Executive the following:

          (a) in a lump sum upon such termination an amount equal to the sum of (i) the Executive’s combined (A) Base Salary as in effect at the time of the termination and (B) average Incentive Bonus for the two (2) calendar years immediately preceding the year of termination, and (ii) to the extent that such foregoing amount or any other payment in the nature of compensation (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (“Section 280G”)) to or for the benefit to the Executive (or any part of such amount or other payment) constitutes an “excess parachute payment” within the meaning of Section 280G, the amount, if any, of (A) such “excess parachute payment” multiplied by a fraction, the numerator of which is the number one (1.00) and the denominator of which is (I) the number (1.00) minus (II) the effective tax rate under Section 280G applicable to the Executive expressed as decimal, minus (B) the amount of such “excess parachute payment”;

          (b) for twelve (12) months following such Termination Without Cause or Constructive Termination following a Change of Control, the Company shall reimburse the Executive for the cost of the Executive’s medical and dental insurance as in effect at the date of termination; and

          (c) all stock options and all restricted stock granted to the Executive shall vest in full upon a Change of Control.

        4.3 If the Executive suffers a Termination with Cause or the Executive terminates his employment with the Company not due to a Constructive Termination, death or disability (as defined in Section 3.4) (a “Voluntary Termination”), then the Company will not be obligated to pay the Executive any amounts of compensation or benefits following the date of termination, except earned but unpaid Base Salary through the date of termination, which will be paid in a lump sum. The exercisability of stock options granted to the Executive shall be governed by any applicable stock option agreements and plans.

        4.4 For purposes of this Employment Agreement, the following terms have the following meanings:

          (a) A “Change in Control” shall occur if at any time, substantially all of the assets of the Company are sold or transferred by sale, merger or otherwise, to an entity which is not a direct or indirect subsidiary of the Company, or if any “person” (as such term is used in Sections 13(d) or 14 (d) of the Securities Exchange Act of 1934, as amended) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the then existing outstanding securities of the Company.

          (b) “Constructive Termination” means termination by the Executive which follows (a) a reassignment of duties, responsibilities, title, or reporting relationships that are not at least the equivalent of his then current position as set forth in Section 1.2 or the compensation and benefits provided herein, (b) the intentional or material breach by the Company of this Agreement, or (c) a reassignment, after a Change of Control, to a geographic location more than fifty miles from Wilmington, Delaware. The Executive shall have a period of ninety (90) days after termination of his employment to assert against the Company that he suffered a Constructive Termination, and after the expiration of such ninety (90) day period, the Executive shall be deemed to have irrevocably waived the right to such assertion.

          (c) “Termination With Cause”: means termination by the Company, acting in good faith, by written notice to the Executive specifying the event relied upon for such termination, due to the Executive’s conviction for a felony, the Executive’s intentional perpetration of a fraud, embezzlement or other act of dishonesty or the Executive’s intentional breach of a trust or fiduciary duty which materially adversely affects the Company or its shareholders.

          (d) “Termination Without Cause” means termination by the Company other than due to the Executive's death or disability or Termination With Cause.

5.  OTHER DUTIES OF THE EXECUTIVE

        5.1 The Executive shall devote substantially all of his working time to the business of the Company and during the Term shall not take, directly or indirectly, an active role in any other business without the prior written consent of the Company; but except as provided in Section 5.3, this Section shall not prevent the Executive from serving as a director of other entities not affiliated with the Company, from making real estate or other investments of a passive nature or from participating in the activities of a charitable organization where such participation does not adversely affect the Executive’s ability to perform his duties under this Agreement.

        5.2 The Executive will, upon reasonable notice, during or after the Term of this Employment Agreement, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. The Executive shall receive reasonable compensation for the time expended by him pursuant to this Section 5.2 after the Term.

        5.3 The Executive acknowledges that certain information pertaining to the business and operations of the Company such as strategic plans, product development, financial costs, pricing terms, sales data or new or developing business opportunities (“Confidential Information”), is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this Confidential Information are essential to the performance of the Executive’s duties under this Agreement. The Executive will not during the term of this Agreement or following termination of his employment except to the extent reasonably necessary in the performance of his duties under this Agreement, give to any person, firm, association, corporation or governmental agency any Confidential Information except as required by law. The Executive will not make use of this Confidential Information for his own purposes or for the benefit of any person or organization other than the Company. The Executive will also use his best efforts to prevent the disclosure of this Confidential Information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Executive or otherwise coming into his possession will remain the property of the Company.

        5.4 The Executive will not Compete with the Company (as hereinafter defined) at any time while he is employed by the Company. Except after a Change in Control or after non-renewal under Section 1.1, in the event of Termination Without Cause or Constructive Termination pursuant to Section 4.1, the Executive will not Compete with the Company for a period of one (1) year from the date of such termination. In the event of a termination after a Change in Control that gives rise to payments to Executive under Section 4.2, the Executive will not Compete with the Company for one (1) year from the date of termination. In the event of a Voluntary Termination in which the Executive only receives payment as defined under Section 4.3, or which follows a Company non-extension notice under Section 1.1, there will be no restriction on the Executive’s right to Compete with the Company after the date his employment terminates. For the purposes of this Section 5.4, the term “Compete with the Company” means action by the Executive, direct or indirect, either as an officer, director, stockholder, owner, partner, employee or in any other capacity, resulting in the Executive having any legal or equitable ownership or other financial or non-financial interest in or employment with, any HMO, managed care or health insurance business within a fifty mile radius of any location where the Company or any subsidiary or affiliate of the Company conducts such business at the date of a termination of the Executive’s employment; provided, however, that the term “Compete with the Company” shall not preclude the Executive, in the event of Termination under Section 4.1 or 4.2, from providing legal services or advice to an HMO, managed care or health insurance business in connection with engaging in the private practice of law and shall not include ownership (without any more extensive relationship) of a less than a five percent (5%) interest in any publicly-held corporation or other business entity. The Executive acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. The Executive acknowledges that his breach or threatened or attempted breach of any provision of Section 5.4 may cause irreparable harm to the Company not compensable in monetary damages and that the Company may be entitled, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of Section 5.4.

6.  INDEMNIFICATION OF EXECUTIVE

        6.1 The Company shall indemnify the Executive and shall reimburse the Executive’s expenses under the circumstances described, and to the maximum extent provided under the mandatory and the permissive indemnification and expense reimbursement provisions of Delaware law. The provisions of this Section 6.1 shall continue in full force and effect after Executive ceases to serve as an officer, director, employee or in any other capacity with the Company or any of its affiliates, and shall inure to the benefit of his heirs, executors or administrators.

7.  MISCELLANEOUS

        7.1 This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates, and the Executive.

        7.2 This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Employment Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.

        7.3 Should any part of this Agreement be declared invalid for any reason, such invalidity shall not affect the validity of any remaining portion hereof and such remaining portion shall continue in full force and effect as if this Employment Agreement had been originally executed without including the invalid part. Should any covenant of this Employment Agreement be unenforceable because of its geographic scope or term, its geographic scope or tem shall be modified to such extent as may be necessary to render such covenant enforceable.

        7.4 Titles and captions in no way define, limit, extend or describe the scope of this Agreement nor the intent of any provision thereof.

        7.5 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

        7.6 This Employment Agreement has been executed and delivered in the State of Maryland and its validity, interpretation, performance and enforcement shall be governed by the laws of that state. Any dispute among the parties hereto shall be settled by arbitration in Bethesda, Maryland, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof. All provision hereof are for the protection and are intended to be for the benefit of the parties hereto and enforceable directly by the binding upon each party. Each party hereto agrees that the remedy at law of the other for any actual or threatened breach of this Employment Agreement would be inadequate and that the other party shall be entitled to specific performance hereof or injunctive relief or both, by temporary or permanent injunction or such other appropriate judicial remedy, writ or orders as may be decided by a court of competent jurisdiction in addition to any damages which the complaining party may be legally entitled to recover.

        7.7 All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or when delivered if by hand, overnight delivery service or confirmed facsimile transmission to the following:

          (i) If to the Company, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817, Attention: Chairman of the Compensation Committee, or at such other address as may have been furnished to the Executive by the Company in writing; or

          (ii) If to the Executive, at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817 or 621 Cornerstone Lane, Bryn Mawr, PA, 19010, or such other address as may have been furnished to the Company by the Executive in writing.

        7.8 This Employment Agreement shall be binding on the parties’ successors, heirs and assigns.

     IN WITNESS WHEREOF, the undersigned have executed this Employment Agreement as of the date first above written.

COVENTRY HEALTH CARE, INC. EXECUTIVE:
By: /s/ Allen F. Wise By: /s/ Thomas C. Zielinski


Allen F. Wise Thomas C. Zielinski
President & CEO