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 ended June 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 Second Quarter 2009 Performance

• Revenue increased 18.8% over the prior year quarter.
• Continued growth in all Medicare products. Medicare Coordinated Care Product ("CCP") membership growth of 39% from the prior year quarter.
• Continued growth in Individual risk membership. Announced the pending divesture of a non-core business, First Health
• Services Corporation ("FHSC") for $110 million in cash, subject to certain working capital adjustments. Recognized a gross goodwill impairment charge of $72.4 million related to
• the pending FHSC divestiture.
• Debt reduction of $95.7 million during the quarter.
• Cash flow from operations of $120.3 million.

New Accounting Standards

For this information, refer to Note C., New Accounting Standards, in the Notes to the Condensed Consolidated Financial Statements, herein.

Membership

The following table presents our membership as of June 30, 2009 and 2008 (in
thousands):

                                                  June 30,
                     Membership by Product       2009  2008
                     Health Plan Commercial Risk 1,477 1,584
                     Health Plan Commercial ASO    697   765
                     Medicare Advantage CCP        182   131
                     Medicaid Risk                 385   493
                     Health Plan Total           2,741 2,973

                     Medicare Advantage PFFS       329   241
                     Other National Risk            15    29
                     Other National ASO            571   645
                     Total Medical Membership    3,656 3,888

                     Medicare Part D             1,555   874

                     Total Membership            5,211 4,762

Total Health Plan membership decreased 232,000 primarily due to membership losses in Commercial Risk and Medicaid 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 membership declined as a result of premium pricing increases related to the higher medical cost experienced in 2008. The decrease in Medicaid Risk membership was primarily due to the termination of our Pennsylvania Medicaid behavioral health contract representing approximately 107,000 members, effective July 1, 2008. 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. The increase in Medicare Advantage CCP was primarily the result of our successful annual election period and open enrollment period for 2009.

The increases in Medicare Part D membership of 681,000 and Medicare Advantage Private Fee-for-Service ("PFFS") of 88,000 were primarily the result of our successful annual election period and open enrollment period for 2009.

Results of Operations

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

                         Quarters Ended June 30,     Increase    Six Months Ended June 30,     Increase
                            2009          2008      (Decrease)       2009           2008      (Decrease)
Total operating
revenues               $  3,536,950   $ 2,977,904        18.8% $    7,110,539   $ 5,918,513        20.1%
Operating earnings     $     36,954   $   126,320      (70.7%) $      109,868   $   320,643      (65.7%)
Operating earnings as
a percentage of
revenues                       1.0%          4.2%       (3.2%)           1.5%          5.4%       (3.9%)
Net earnings           $     18,425   $    83,151      (77.8%) $       62,592   $   208,180      (69.9%)
Diluted earnings per
share                  $       0.12   $      0.55      (78.2%) $         0.42   $      1.36      (69.1%)
Selling, general and
administrative as a
percentage of revenue         16.0%         16.7%       (0.7%)          16.0%         17.0%       (1.0%)

Comparison of Quarters Ended June 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. The revenue increases were also a result of increased Individual membership. Partially offsetting this increase was lower revenue for our Commercial Risk and Medicaid businesses due to membership declines.

Management services revenue for the current quarter was consistent with the revenue level in the prior year quarter. We experienced an increase in our Worker's Compensation Division due to higher pharmacy benefit management program revenue partially offset by a decrease in revenue from our Public Sector line of business.

Medical costs increased primarily as a result of 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 improved MLR on our Medicare Advantage and Commercial lines of business. Medical costs were unusually high in 2008 due to unfavorable IBNR reserve development on our PFFS business as well as increased Commercial medical cost trend experienced during 2008.

Selling, general and administrative expense increased due to higher wage expense including staff increases associated with the additional Medicare membership, annual incentive compensation accruals in the current year quarter but not in the prior year quarter and severance expense related to terminated employees in 2009. Additionally, during the current year quarter 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 decreased primarily as a result of developed software and computer equipment becoming fully depreciated.

We considered the pending sale of FHSC to be a potential indicator of the impairment of goodwill. As a result we performed an interim goodwill impairment analysis, which resulted in us recording a gross impairment charge of $72.4 million during the quarter ended June 30, 2009.

Interest expense decreased due to lower interest rates on the Company's revolving credit facility during the current quarter.

Other income, net for the current quarter was consistent with the prior year quarter. During the current quarter we recognized an $8.3 million gain on the repurchase of outstanding debt. This was offset by $8.1 million lower interest income earned during the current quarter due to lower interest rates.

The effective tax rate increased to 60.9%, as compared to 38.0% for the prior year quarter, primarily as a result of the FHSC goodwill impairment charge.

Comparison of Six Months Ended June 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.

Management services revenue increased primarily due to the growth of our pharmacy benefit management program in the Workers' Compensation Division, partially offset by lower revenue in the Public Sector and National Account businesses.

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

Medical costs for the six months ended June 30, 2009 included approximately $140.9 million of favorable medical cost development related to prior calendar years. On a full year basis we expect favorable development related to prior calendar years to be slightly higher than that recorded for the first half of 2009. Comparatively, medical costs for the six months ended June 30, 2008, included approximately $34.2 million of favorable medical cost development related to prior calendar years. For the full year of 2008 we experienced favorable medical cost development of $48.1 million. The increase in favorable development during the 2009 six month period was primarily a result of favorable development on the Medicare PFFS line, as compared to unfavorable development for that line in the 2008 period.

Selling, general and administrative expense increased due to higher wage expense including staff increases associated with the additional Medicare membership, annual incentive compensation accruals in the current year six month period but not in the prior year six month period and severance expense related to terminated employees in 2009. Additionally, during the current year quarter 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 decreased primarily as a result of developed software and computer equipment becoming fully depreciated.

Impairment of goodwill represents the write down of goodwill in the current quarter related to the pending divestiture of FHSC.

Interest expense decreased due to lower interest rates on the Company's revolving credit facility during the current year six month period.

Other income, net decreased for the current six month period due to $19.4 million in lower interest income resulting from lower interest rates. This decrease was partially offset as we recognized an $8.3 million gain on the repurchase of outstanding debt during the current period.

The effective tax rate increased to 46.8%, as compared to 37.9% for the prior year six months, primarily as a result of the FHSC goodwill impairment charge.

Segment Results

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. As a result, 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 presentation. For additional information regarding our segments, refer to Note B., Segment Information, in the Notes to the Condensed Consolidated Financial Statements, herein.

                                  Quarters Ended June 30,            Increase        Six Months Ended June 30,       Increase
                                 2009               2008            (Decrease)            2009            2008      (Decrease)
Operating Revenues (in
thousands)

Commercial risk            $    1,310,645     $    1,353,101     $      (42,456)   $      2,637,866   $ 2,694,796 $   (56,930)
Commercial Management
Services                           83,675             82,446               1,229            167,485       168,589      (1,104)
Medicare Advantage              1,224,011            795,495             428,516          2,385,601     1,504,509      881,092
Medicaid Risk                     263,039            285,024            (21,985)            523,877       567,203     (43,326)
Health Plan and Medical
Services                        2,881,370          2,516,066             365,304          5,714,829     4,935,097      779,732
Medicare Part D                   397,090            201,911             195,179            881,213       485,319      395,894
Other Premiums                     23,746             15,193               8,553             47,703        22,930       24,773
Public Sector                      38,576             43,164             (4,588)             79,270        86,748      (7,478)
Other Management Services          23,408             23,315                  93             46,667        44,104        2,563
Specialized Managed Care          482,820            283,583             199,237          1,054,853       639,101      415,752
Workers' Compensation             192,060            187,043               5,017            379,694       358,014       21,680
Other/Eliminations               (19,300)            (8,788)            (10,512)           (38,837)      (13,699)     (25,138)
Total Operating Revenues   $    3,536,950     $    2,977,904     $       559,046   $      7,110,539   $ 5,918,513 $  1,192,026


Gross Margin (in
thousands)

Health Plan and Medical
Services                   $      478,190     $      423,213     $        54,977   $        969,826   $   974,510 $    (4,684)
Specialized Managed Care          102,437            101,019               1,418            166,401       159,534        6,867
Workers' Compensation             134,040            139,637             (5,597)            263,798       273,265      (9,467)
Other/Eliminations                (2,711)            (2,190)               (521)            (5,353)       (4,090)      (1,263)
Total                      $      711,956     $      661,679     $        50,277   $      1,394,672   $ 1,403,219 $    (8,547)

Revenue and Medical Cost
Statistics

Managed Care Premium Yields (per member per month):
Health plan commercial
risk                       $       299.79     $       285.32                5.1%   $         298.05   $    284.41         4.8%
Medicare Advantage risk
(1)                        $       857.05     $       879.79              (2.6%)   $         858.71   $    865.68       (0.8%)
Medicare Part D (2)        $        85.27     $        89.92              (5.2%)   $          84.82   $     89.29       (5.0%)
Medicaid risk              $       230.27     $       193.59               18.9%   $         231.09   $    193.87        19.2%
Medical Loss Ratios:
Health plan commercial
risk                                81.7%              82.7%              (1.0%)              81.3%         80.7%         0.6%
Medicare Advantage risk             90.4%              93.2%              (2.8%)              90.5%         88.3%         2.2%
Medicare Part D                     89.9%              86.0%                3.9%              96.4%         96.1%         0.3%
Medicaid risk                       90.2%              86.4%                3.8%              89.3%         85.4%         3.9%
Total                               86.4%              85.8%                0.6%              86.9%         84.2%         2.7%

Health Plan and Medical Services Division

Quarters and Six Months Ended June 30, 2009 and 2008

Health Plan and Medical Services revenue increased over the prior year quarter and six months ended 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 six month period ending June 30 increased to $795.58 in 2009 from $747.36 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. Medicaid premium yields increased as a result of rate increases in Missouri, our largest Medicaid market, effective July 1, 2008. 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 six months ended as the prior year included unfavorable IBNR reserve development on our PFFS business. We also experienced improvement during 2009 in the Commercial risk MLR. We experienced higher than expected medical cost trends in 2008 which appear to have peaked in the second quarter of 2008. As a result of this increase in medical costs during 2008, premium rates were increased upon renewal during the second half of 2008 and the first half of 2009.

Specialized Managed Care Division

Quarters and Six Months Ended June 30, 2009 and 2008

Specialized Managed Care revenue experienced a significant increase over the prior year quarter and six months ended June 30, 2009, due to the large increase in membership for the Medicare Part D product. Medicare Part D premium yields for the period ending June 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 $96.45 for the 2009 six month period compared to $92.60 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 six months ended June 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.

Workers' Compensation Division

Quarters and Six Months Ended June 30, 2009 and 2008

Revenue in the Workers' Compensation Division increased over the prior year quarter and six months ended periods 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 six months ended periods due to the decline in claim volume, partially offset by the growth in the pharmacy benefit management program.

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 3.18 years as of June 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 Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and FSP 115-2. 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 $72.6 million at June 30, 2009, and $66.5 million at December 31, 2008 that are restricted under state regulations, increased $408 million to $3.5 billion at June 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 G., Investments and Fair Value Measurements, in the Notes to the Condensed Consolidated Financial Statements, herein.

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 from operating activities for the six months ended June 30, 2009 was a result of net earnings plus non-cash adjustments to earnings, as well as increases in medical liabilities, accounts payable and other accrued liabilities, and deferred revenue. The increase in medical liabilities during the 2009 period primarily resulted from a growth in membership across the Medicare business. The nature of our business is such that premium revenues are generally received up to two months prior to expected cash payment for the related medical costs. This results in strong cash inflows upon the implementation or growth of a benefit program. Accounts payable and other accrued liabilities increased primarily due to accruals for annual incentive compensation programs. Deferred revenue increased mainly due to strong collections in the current year.

Our net cash from operating activities for the six months ended June 30, 2009 was $259 million higher than the corresponding 2008 period. Contributing to the increase was the larger increase in medical liabilities of $91 million during the 2009 period as a result of membership increases. Also during the current period Medicare accruals resulted in a $138 million lower change in other receivables when compared to the prior year period. Additionally, accounts payable and other accrued liabilities cash flows changed by $148 million. The 2008 six month period was an outflow of $130 million primarily due to tax payments exceeding tax accruals as well as changes to incentive compensation accruals. Partially offsetting the changes was lower earnings during the current year period and a lower increase in deferred revenue, also during the current year period.

Net cash from investing activities for the six months ended June 30, 2009 was an inflow primarily due to proceeds received from the sales and maturities of investments. Additionally, escrow payments totaling $10 million were received during the period from previous acquisitions.

Projected capital expenditures for fiscal 2009 are estimated at $65 to $75 million and consist primarily of computer hardware, software and other equipment.

The smaller outflow in net cash from financing activities during the six months ended June 30, 2009 was a result of no share repurchases under our share repurchase program and less debt repayment during the current period. During the prior year six months we paid $220 million for share repurchases and $220 million in debt repayment, compared to $87 million for debt repayment in the current period. The prior year period also included $30 million of proceeds from debt issuances.

Health Plans

Our regulated Health Maintenance Organization ("HMO") and insurance company . . .