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Coventry Hit by Lawsuit, Alters EPS

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On Friday, the Third Circuit Court of Appeals in Louisiana approved the prior trial court’s decision against First Health Group Corp. Inc., a wholly owned subsidiary of Coventry Health Care Inc. , to settle a class action lawsuit for $262 million. The legal action was initiated in 2004 for providing lower medical reimbursements to injured workers.
The April 2004 case involves 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.
Moreover, Coventry states that the court does not possess any supportive facts regarding this decision. Hence, it intends to demand a rehearing and explore other avenues of appeal. Coventry is believed to have sufficient resources to pay any final judgment in the litigation should the appeals prove unsuccessful.
The class action lawsuit will result in a one-time pre-tax charge of $278 million in the second quarter of 2010, which will reduce the quarter’s earnings by about $1.18 per share.
The 2010 EPS outlook was also revised to $1.57−$1.72 in view of the impact of the charge, down from the prior range of $2.35−$2.50 per share. Excluding the charge, Coventry anticipates the EPS outlook to increase by 40 cents per share to range between $2.75 and $2.90. This forecast includes the earnings of 28 cents per share from Medicare Advantage Private-Fee-for-Service through May 31, 2010.
Coventry’s lawsuit did not affect the ratings given by Fitch. The rating agency believes that these charges will not influence the credit metrics of the company. Fitch has an issuer debt rating of ‘BBB’ on Coventry, with a negative outlook, reflecting risks associated with health care reform proposals.
Coventry has a solid fundamental business and has continued to grow with all seven core businesses performing at or above internal expectations during the first quarter of 2010.
Coventry intends to expand its footprint in the Midwest and has thus, agreed to acquire Mercy Health Plans , consisting of MHP Inc. and its subsidiaries from the Sisters of Mercy Health System, on June 30, 2010. In February, the company completed the acquisition of Preferred Health Systems Inc. based in Kansas, and the wholly owned health insurance subsidiary of Via Christi Health System Inc.
We believe that Coventry’s acquisitive growth strategy will expand its presence in the Midwest, where it can leverage its regional service centers and improve operating efficiencies, largely through economies of scale. However, we remain concerned that the shares would plummet if the company is found guilty and has to pay damages to settle the case.

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