General Information

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

These forward-looking statements may be affected by a number of factors, including, but not limited to, the "Risk Factors" contained in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008. Actual operations and results may differ materially from those forward-looking statements expressed in this Form 10-Q.

The following discussion and analysis relates to our financial condition and results of operations for the quarters and nine months ended September 30, 2009 and 2008. This discussion should be read in conjunction with our condensed consolidated financial statements and other information presented herein as well as the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2008, including the critical accounting policies discussed therein.

Summary of Third Quarter 2009 Performance

Revenues from continuing operations increased 17.7% from the prior year
• quarter
• Continued growth in Medicare products
- Medicare Coordinated Care Product membership growth of 38% from the prior year quarter
- Medicare Part D membership growth of 81,000 from the prior quarter
• Health plan commercial group risk medical loss ratio of 82.1%
• GAAP cash flows from operations were $314.3 million
• Excellent liquidity position
- Debt repayment of $98 million during the quarter
• Share buyback of 1.5 million shares at the end of the quarter
• Investment portfolio in a net unrealized gain position at quarter-end

New Accounting Standards

For this information, refer to Note E, New Accounting Standards, to the condensed consolidated financial statements.

Membership

The following table presents our membership (in thousands):

                                             As of September 30,
                Membership by Product          2009       2008
                Health Plan Commercial Risk      1,431      1,587
                Health Plan Commercial ASO         689        720
                Medicare Advantage CCP             185        134
                Medicaid Risk                      391        386
                Health Plan Total                2,696      2,827

                Medicare Advantage PFFS            336        243
                Other National Risk                  5         27
                Other National ASO                 567        641
                Total Medical Membership         3,604      3,738

                Medicare Part D                  1,636        910

                Total Membership                 5,240      4,648

Total Health Plan membership decreased 131,000 primarily due to membership losses in Commercial Risk. During the current quarter, the growth in national unemployment resulted in an acceleration of "in group" Health Plan Commercial Risk membership attrition compared to the same period in 2008. Additionally, the Commercial Risk membership declined as a result of premium pricing increases related to the higher medical cost experienced in 2008. The increase in Medicare Advantage CCP membership is primarily due to the result of our successful annual election period and open enrollment period for 2009 and also due to age-ins. Other National ASO membership decreased by 74,000 primarily due to the attrition of membership associated with our mail handlers benefit plan client and losses of National Accounts business compared to 2008.

The increases in Medicare Part D membership of 726,000 and Medicare Advantage Private Fee-for-Service ("PFFS") of 93,000 were primarily the result of our successful annual election period and open enrollment period for 2009.

Results of Continuing Operations

As discussed in Note C, Discontinued Operations, to the condensed consolidated financial statements, on July 31, 2009 the Company sold its Medicaid/Public entity business First Health Services Corporation ("FHSC") and therefore its operations are classified as "discontinued" on the Company's consolidated statements of operations and excluded from the information below. Accordingly, the information and discussion below relates to the Company's results from continuing operations.

The following table is provided to facilitate a discussion regarding the comparison of our consolidated results of continuing operations for the quarters and nine months ended September 30, 2009 and 2008 (dollars in thousands, except diluted earnings per share amounts):

                          Quarters Ended September 30,       Increase        Nine Months Ended September 30,       Increase
                            2009                2008        (Decrease)          2009                  2008        (Decrease)

Total operating
revenues              $     3,444,110     $     2,925,721        17.7%   $      10,475,379     $      8,757,486        19.6%
Operating earnings    $       152,762     $       156,437        (2.3% ) $         318,546     $        466,934       (31.8% )
Operating earnings as
a percentage of
revenues                         4.4%                5.3%        (0.9% )              3.0%                 5.3%        (2.3% )
Income from
continuing operations $       100,439     $        78,978        27.2%   $         206,254     $        280,654       (26.5% )
Selling, general and
administrative as a
percentage of revenue           15.3%               16.4%        (1.1% )             15.3%                16.1%        (0.8% )

Comparison of Quarters Ended September 30, 2009 and 2008

Managed care premium revenue increased primarily as a result of higher membership in our Medicare lines of business in Part D, PFFS, and CCP as a result of successful enrollment for 2009. Medicaid premium revenue has also increased due to higher rates and higher membership as a result of changes in eligibility due to current economic conditions. Partially offsetting this increase was lower revenue for our Commercial business due to membership declines.

Management services revenue for the current quarter was consistent with the revenue level in the prior year quarter.

Medical costs increased primarily as a result of the increase in Medicare membership, as discussed above. Total medical costs as a percentage of premium revenue, "medical loss ratio," or "MLR" increased over the prior year quarter as a result of a change in our mix of business due to the increase in membership for the Medicare products which have a higher MLR. The increased medical costs were partially offset by an improved MLR on our PFFS and Commercial lines of business.

Selling, general and administrative expense increased due to higher wage expense primarily due to the growth in the Medicare business as well as annual incentive compensation accruals made in the current year quarter but not made in the prior year quarter. Additionally, during the current year there was an increase in broker commissions and other member related costs due to the higher Medicare membership. Selling, general and administrative expense as a percentage of revenue declined slightly as a result of the large increase in operating revenues in the current quarter, while expenses were controlled at a rate lower than the increase in revenue.

Depreciation and amortization expense increased in the current year quarter as a result of a write down in value of $5.3 million for certain long-lived assets.

Interest expense decreased due to the repurchase of senior notes during 2009 as well as lower interest rates on the Company's revolving credit facility during the current quarter.

Other income, net for the current quarter increased compared with the prior year quarter due to a charge in the prior year quarter of $36.2 million, consisting primarily of $33.5 million for the other-than-temporary impairment of investment securities and $2.7 million in realized losses on the sale of securities.

The effective tax rate on continuing operations decreased to 33.1% as compared to 36.3% for the prior year quarter, due to resolution of various tax uncertainties.

Comparison of Nine Months Ended September 30, 2009 and 2008

Managed care premium revenue increased primarily as a result of higher membership in our Medicare business in Part D, PFFS, and CCP as a result of successful enrollment for 2009. The revenue increases were also a result of increased Individual membership. Partially offsetting this increase was lower revenue for our Commercial Risk and Medicaid business due to membership declines. Effective July 1, 2008, our Medicaid risk membership decreased due to the termination of our Pennsylvania Medicaid behavioral health contract representing approximately 107,000 members. This was a capitated pass-through arrangement we had with a local provider group. Given the nature of this globally capitated contract, we earned a low single digit operating margin.

Management services revenue increased primarily due to the growth of our pharmacy benefit management program in the Workers' Compensation Division.

Medical costs increased primarily as a result of the increase in Medicare membership, as discussed above. MLR increased over the prior year nine months as a result of a change in our mix of business primarily related to Medicare Advantage, Part D, and Commercial Risk.

Cost of sales increased due to the growth of the pharmacy benefit management program revenues in the Workers' Compensation Division as noted above.

Selling, general and administrative expense increased due to higher wage expense related to the growth in the Medicare business, new executive hires as well as severance expense related to terminated employees in 2009, and annual incentive compensation accruals in the current year nine month period but not in the prior year nine month period. Additionally, during the current year there was an increase in broker commissions and other member related costs due to the higher Medicare membership. Selling, general and administrative expense as a percentage of revenue declined as a result of the large increase in operating revenues in the current quarter while expenses were controlled at a rate lower than the increase in revenue.

Depreciation and amortization expense were consistent between the current and prior year nine month periods.

Interest expense decreased due to the repurchase of senior notes during 2009 as well as lower interest rates on the Company's revolving credit facility during the current year nine month period.

Other income, net increased for the current nine month period due to a charge of $36.2 million in the third quarter of 2008, consisting primarily of $33.5 million for the other-than-temporary impairment of investment securities and $2.7 million in realized losses on the sale of securities. Additionally, other income, net increased due to gains of $8.4 million on the repayment of outstanding debt during the period. Partially offsetting the increases was a $28 million current year-to-date interest income decrease as a result of lower interest rates.

The effective tax rate on continuing operations decreased to 36.3% as compared to 37.5% for the prior nine months, due to resolution of various tax uncertainties.

Segment Results from Continuing Operations

As a result of the change in our executive leadership, we realigned our organizational structure during the first quarter of 2009. The new organizational structure brings enhanced focus to areas of growth opportunities. Accordingly, our reportable segments have changed to the following three reportable segments: Health Plan and Medical Services, Specialized Managed Care, and Workers' Compensation. The Company's segment results for the 2008 periods have been reclassified to conform to the 2009 segment presentation.

                                                                               Nine Months Ended September
Continuing Operations        Quarters Ended September 30,         Increase                 30,                  Increase
                               2009                2008          (Decrease)      2009              2008        (Decrease)
Operating Revenues (in thousands)

                                                                                       $
Commercial risk          $     1,279,571     $     1,362,956   $    (83,385 )  3,917,436     $     4,057,752 $   (140,316 )
Commercial Management             81,661
Services                                              86,672         (5,011 )    249,146             255,261       (6,115 )
Medicare Advantage             1,268,592             825,504        443,088    3,654,193           2,330,013    1,324,180
Medicaid Risk                    281,146             260,060         21,086      805,024             827,263      (22,239 )
Health Plan and Medical        2,910,970
Services                                           2,535,192        375,778    8,625,799           7,470,289    1,155,510
Medicare Part D                  316,654             170,483        146,171    1,197,867             655,802      542,065
Other Premiums                    23,568              18,937          4,631       71,271              41,866       29,405
Other Management                  21,617
Services                                              23,253         (1,636 )     68,283              67,360          923
Specialized Managed Care         361,839             212,673        149,166    1,337,421             765,028      572,393
Workers' Compensation            190,152             190,546           (394 )    569,846             548,559       21,287
Other/Eliminations               (18,851 )           (12,690 )       (6,161 )    (57,687 )           (26,390 )    (31,297 )
Total Operating Revenues                                                               $
                         $     3,444,110     $     2,925,721   $    518,389   10,475,379     $     8,757,486 $  1,717,893


Gross Margin (in
thousands)

Health Plan and Medical
Services                 $       496,060     $       469,602   $     26,458 $  1,465,885     $     1,444,113 $     21,772
Specialized Managed Care          99,181              67,657         31,524      186,313             140,444       45,869
Workers' Compensation            127,768             136,257         (8,489 )    391,566             409,521      (17,955 )
Other/Eliminations                (2,414 )            (2,489 )           75       (7,767 )            (6,580 )     (1,187 )

Revenue and Medical Cost Statistics

Managed Care Premium Yields (per member per month):
Health plan
commercial risk       $        304.13       $       286.73                6.1%     $    300.01    $    285.18     5.2%
Medicare Advantage
risk (1)              $        853.90       $       856.90               (0.4% )   $    857.04    $    862.53    (0.6% )
Medicare Part D (2)   $         84.63       $        85.64               (1.2% )   $     84.76    $     88.05    (3.7% )
Medicaid risk         $        239.22       $       226.08                5.8%     $    233.87    $    202.96    15.2%

Medical Loss Ratios:
Health plan
commercial risk                 82.1%                82.3%               (0.2% )         81.6%          81.3%     0.3%
Medicare Advantage
risk                            89.4%                88.4%                1.0%           90.1%          88.4%     1.7%
Medicare Part D                 79.4%                78.5%                0.9%           91.9%          91.5%     0.4%
Medicaid risk                   86.1%                84.2%                1.9%           88.2%          85.0%     3.2%
Total                           84.4%                83.8%                0.6%           86.1%          84.0%     2.1%

Health Plan and Medical Services Division

Quarters and Nine Months Ended September 30, 2009 and 2008

Health Plan and Medical Services revenue increased over the prior year quarter and nine months ended September 30, 2009 primarily due to membership growth in the Medicare PFFS products. The increase was also a result of an increase in the average realized premium yield per member per month for the Medicare PFFS product. With the effect of the ceded revenue being included in the Medicare Advantage risk premium yield, the premium yield per member per month for the nine month period ending September 30 increased to $796.92 in 2009 from $741.62 in 2008. The increase is a result of a smaller portion of our Medicare PFFS business in 2009 being ceded to external parties through quota share arrangements. When reviewing the premium yield for Medicare Advantage business, we believe that adjusting for the ceded revenue is useful for comparisons to competitors that may not have similar ceding arrangements. Additionally, the Medicare Advantage risk premium yields have increased as a result of risk score improvement. The improvement in risk scores were partially offset by reserves recorded associated with potential CMS risk adjustment data validation audits.

CMS uses a risk adjustment model that incorporates the use of hierarchical condition category ("HCC") codes to determine premium payments to health plans. We estimate risk adjustment revenues based on the HCC data submitted to CMS. Changes in revenue from CMS resulting from the periodic changes in risk adjustments scores for our membership are recognized when the amounts become determinable and the collectability is reasonably assured.

CMS periodically performs risk adjustment data validation audits and may seek return of payments made to the company if risk adjustment factors are not properly supported by medical record data. We estimate and record reserves for CMS audits based on information available at the time the estimates are made. The judgments and uncertainties affecting the application of these policies include significant estimates related to the amount of HCC revenue subject to audit and anticipated error rates. Although we feel the Company is appropriately reserved for its exposure to the risk adjustment data validation audits, actual results could differ materially from those estimates. Reserves for CMS audits will be adjusted as new information becomes available.

Medicaid premium yields increased as a result of rate increases in Missouri, our largest Medicaid market, effective July 1, 2008 and July 1, 2009 as well as rate increases in Virginia and West Virginia effective July 1, 2009. The yields also increased due to the termination of our Pennsylvania Medicaid behavioral health contract, which had a lower premium yield. These increases in revenue were offset by declines in the membership of the Medicaid Risk and Commercial Risk products.

Gross margin increased primarily due to the growth in the Medicare Advantage business as well as the improved medical loss ratios for the Medicare PFFS product. The Medicare PFFS medical loss ratios decreased over the prior year quarter and nine months ended as the prior year included unfavorable IBNR reserve development on our PFFS business. The Commercial risk MLR for the nine months ended September 30, 2009 is slightly higher. The current period includes estimates for the effects of increased COBRA membership and increased flu related costs. The Medicaid MLR for the nine months ended September 30, 2009 is higher than the corresponding period in 2008 as a result of higher medical cost trends, higher inpatient utilization, and increasing estimates for the effects of increased flu related costs.

Specialized Managed Care Division

Quarters and Nine Months Ended September 30, 2009 and 2008

Specialized Managed Care revenue experienced a significant increase over the prior year quarter and nine months ended September 30, 2009, due to the large increase in membership for the Medicare Part D product. Medicare Part D premium yields for the period ending September 30, 2009, excluding the effect of CMS risk sharing premium adjustments and revenue ceded to external parties, decreased in 2009 compared to 2008, primarily due to the mix of products sold in 2009. The majority of the Medicare Part D growth was in the lower cost, leaner benefit plans, which have a lower premium. Including the effect of the CMS risk sharing premium adjustments as well as the ceded revenue, the premium yields were $85.25 for the 2009 nine month period compared to $82.48 in 2008. The increase is a result of a smaller portion of our Medicare Part D business in 2009 being ceded to external parties through quota share arrangements.

When reviewing the premium yield for Medicare Part D business, we believe that adjusting for the ceded revenue is useful for comparisons to competitors that may not have similar ceding arrangements. When reviewing the Medicare Part D business, adjusting for the risk share amounts is useful to understand the results of the Part D business because of our expectation that the risk sharing revenue will eventually be insignificant on a full year basis.

The gross margin for the Specialized Managed Care Division improved for the quarter and nine months ended September 30, 2009, compared to the same period in 2008. This increase in gross margin is primarily the result of increased Part D membership during the current periods while maintaining a relatively consistent medical loss ratio.

Workers' Compensation Division

Quarters and Nine Months Ended September 30, 2009 and 2008

Revenue in the Workers' Compensation Division increased over the nine months ended September 30, 2009 primarily due to the growth of our pharmacy benefit management program. The increase was partially offset by lower revenue in the other business lines as a result of lower claim volume.

Workers' Compensation gross margin decreased over the prior year quarter and nine months ended periods due to the decline in claims volume which is a higher margin product, partially offset by the growth in the pharmacy benefit management program which operates at a lower margin.

Liquidity and Capital Resources

Liquidity

Our investment guidelines require our fixed income securities to be investment grade in order to provide liquidity to meet future payment obligations and minimize the risk to the principal. The fixed income portfolio includes government and corporate securities with an average quality rating of "AA+" and a modified duration of 3.00 years as of September 30, 2009. Typically, the amount and duration of our short-term assets are more than sufficient to pay for our short-term liabilities, and we do not anticipate that sales of our long-term investment portfolio will be necessary to fund our claims liabilities.

We account for investments in accordance with ASC Topic 320, "Investments - Debt and Equity Securities." We invest primarily in fixed income securities and classify all of our investments as available-for-sale. Investments are evaluated on an individual security basis at least quarterly to determine if declines in value are other-than-temporary. In making that determination, we consider all available evidence relating to the realizable value of a security. This evidence includes, but is not limited to, the following:

• the length of time and the extent to which the fair value has been less than the amortized cost basis;
• adverse conditions specifically related to the security, an industry, or geographic area;
• the historical and implied volatility of the fair value of the security;
• the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
• failure of the issuer of the security to make scheduled interest or principal payments;
• any changes to the rating of the security by a rating agency; and
• recoveries or additional declines in fair value subsequent to the balance sheet date.

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

Our cash and investments, consisting of cash and cash equivalents and short-term and long-term investments, but excluding deposits of $75.5 million at September 30, 2009 and $66.5 million at December 31, 2008 that are restricted under state regulations, increased $756 million to $3.9 billion at September 30, 2009, from $3.1 billion at December 31, 2008.

We have classified all of our investments as available-for-sale. Maturities (in thousands) based upon their contractual terms are as disclosed in Note I, Investments and Fair Value Measurements, to the condensed consolidated financial statements.

The demand for our products and services is subject to many economic fluctuations, risks and uncertainties that could materially affect the way we do business. Please refer to Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008, for more information. Management believes that the combination of our ability to generate cash flows from operations, our cash and investments on hand and the excess funds held in certain of our regulated subsidiaries will be sufficient to fund continuing operations, capital expenditures, debt interest costs, debt principal repayments and other reasonably likely future cash requirements.

Cash Flows

Net cash flows from operating activities for the nine months ended September 30, 2009 was a result of net earnings plus non-cash adjustments to earnings, including the impairment of FHSC goodwill, as well as increases in medical liabilities and accounts payable and other accrued liabilities. The increase in medical liabilities during the nine months ended September 30, 2009 can be attributed to the growth in membership across the Medicare business. The accounts payable and other accrued liabilities increase is largely due to accruals for annual incentive compensation programs and Medicare payables.

Our net cash from operating activities for the nine months ended September 30, 2009 was $207 million higher than the corresponding 2008 period. Contributing to the increase was the strong cash inflow from accounts payable and other accrued liabilities of $213 million during the 2009 period due to annual incentive compensation accruals in the current year nine month period but not in the prior year nine month period, audit reserves included in Medicare payables, and the tax provision in the 2009 period exceeding the tax payments. Other receivables were also a cash inflow when comparing the same periods due to the receipt of cash related to the pharmacy rebate and Medicare receivables. Offsetting this . . .