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The Third Circuit Court of Appeals in Louisiana has approved its final settlement of $150.5 million against First Health Group Corp. Inc., a wholly owned subsidiary of Coventry Health Care Inc. (CVH), for providing lower medical reimbursements to the injured workers.
As per the initial judgment in July 2010, Coventry was accused of paying $262 million along with additional accruals for legal fees and interest related to this settlement. Later in February 2011, First Health planned to pay $150.5 million from its escrow fund.
Consequently, Coventry will record a favorable non-recurring pre-tax adjustment to earnings of $159.3 million, or 68 cents per share after tax, in the second quarter of 2011.
The legal action was initiated in April 2004, which involved allegations by certain health providers including Southwest Louisiana Hospital Association against First Health for violating the notice provisions of Louisiana’s Any Willing Provider Act for the treatment of injured workers with compensation claims.
According to the health providers, First Health kept the workers uninformed and reimbursed them for the damages at the lower preferred provider organization contracted rates, instead of the mandated workers’ compensation rates, which are higher.
First Health denied the claims and filed a motion citing that all the workers were paid as per the guidelines issued by the US District Court for the Western District of Louisiana. However, the motion was rejected.
Nevertheless, Coventry maintains a solid fundamental business and has continued to grow with all seven core businesses performing at or above internal expectations. Coventry’s lawsuit did not impact the profitability of the company. Recently, it posted strong first-quarter adjusted earnings of 66 cents per share, exceeding the Zacks Consensus Estimate of 53 cents.
The improved result was attributable to solid performance across all lines of its businesses. Besides, continued emphasis on cost containment throughout the organization and excellent liquidity position resulted in positive results.
Following the impressive first-quarter earnings results and improved 2011 earnings outlook of Coventry, the rating agency Moody's Investors Service has kept its debt ratings under review. Moody’s will seek Coventry's ability to sustain and grow its profit margins and membership to upgrade its rating.
Currently, Coventry's senior unsecured debt, senior unsecured credit facility and corporate family debt, which are rated "Ba1," including approximately $1.6 billion in debt, are under review. In addition, Moody's is reviewing ratings on Coventry health care plans including HealthAssurance Pennsylvania Inc., HealthAmerica Pennsylvania Inc. and Group Health Plan Inc., which are currently rated as "Baa1."
Besides, Moody’s, the rating agency A.M. Best Co. had also revised its outlook to stable from negative. It is same for all debt ratings and the majority of the health care subsidiaries of Coventry as of March 2011, while reiterating the financial strength and issuer credit ratings of Coventry's subsidiaries and also debt ratings.
Further, we believe that Coventry is also growing on the acquisition front, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.
Additionally, Coventry’s acquisition of Mercy Health Plans and its subsidiaries is expected to be slightly accretive to its 2011 earnings and will serve more than 1.2 million members in its six-state Midwest region.
We believe that Coventry’s acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale. Major competitors of Coventry are Unitedhealth Group Inc. (UNH - Analyst Report), Aetna Inc. (AET - Analyst Report) and WellPoint Inc. (WLP - Analyst Report).
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