Coventry to Buy Preferred Health

Bethesda Firm Seeking to Improve Midwest Presence

Coventry Health Care said Monday that it has agreed to acquire health plan Preferred Health Systems of Wichita, a move that would boost the Bethesda managed-care provider's presence in the Midwest.

Under the deal, Coventry would add Preferred Health's roughly 100,000 members to its rolls, giving it more than 1 million members in six Midwestern states, Coventry chief executive Allen F. Wise said in a statement. The deal also establishes a long-term business relationship between Coventry and Preferred Health's current owner, Via Christi Health System, the largest provider of health-care services in Kansas.

The transaction is scheduled to close in 90 to 120 days, Coventry said in its statement. Financial terms, including the purchase price, were not disclosed. Coventry executives did not return calls Monday seeking comment.

Health-insurance providers have struggled during the recession, with companies such as Kaiser Permanente laying off hundreds of workers as rising unemployment rates reduce the number of people who subscribe to employer-provided plans.

Coventry's profits have been sinking in recent years even as its revenue has been on the rise. The company, a small player in the health-care market compared to competitors such as Aetna, saw its profit shrink nearly 40 percent in 2008, despite revenue growth of 20 percent. This year hasn't been much different; for the first half of 2009, the company's revenue grew from $5.3 billion to $6.4 billion. Profit, meanwhile, fell from $208 million to less than $63 million.

Analysts say the company has suffered from a number of missteps in recent years, such as pricing its services too low. Some think that Coventry Health Care has tried too hard to expand beyond its core competencies.

This year, the company has indicated that it will focus on its core businesses in an effort to return to greater profitability. Wise, who had served as chairman and chief executive from 1996 to 2004, took the company's reins again in January.

That move, and deals like the Preferred Health acquisition, indicate that the company is returning to its roots, said Dave Shove, an analyst at BMO Capital Markets who follows the company.

"This is an indication that they are returning to something that they were good at," he said. Coventry originally built its fortune by aggressively trying to be an influential player in areas of the United States that other health-care providers took for granted, he said.

Though the deal is not a "market mover" and "doesn't move the needle in a significant way for Coventry," Shove deemed the deal as a positive one for both parties. For the Wichita hospital, getting out of the insurance business will probably free up capital to buy, for example, medical equipment. For Coventry, on the other hand, the opportunity to increase its membership numbers was surely appealing, considering today's economic climate. Upon completion of the Preferred Health purchase, Coventry is expected to have a total of 5.3 million members.

Coventry's stock gained 34 cents, or 1.8 percent, to close at $19.34.