A drastic earnings warning from managed-care concern Coventry Health Care Inc. (NYSE:CVH) (CVH) represents the latest shoe to drop from a U.S. health insurance industry that's been tossing plenty in recent months.

The group may not be done delivering disappointing financial news this year, either, although two key players, Aetna Inc. (NYSE:AET) (AET) and Humana Inc. (NYSE:HUM) (HUM), rushed Thursday to reaffirm their earnings outlooks and medical-cost expectations. Some other insurers recently reaffirmed their 2008 outlooks in conjunction with analyst meetings.

The news renewed concerns over insurers' ability to price their health plans high enough to keep pace with rising medical costs, and appeared to bolster the view among some on Wall Street that the companies now have little room to absorb missteps or outside pressures that might have done little harm in years past.

"Five of the seven largest companies in the group have reduced guidance materially in the past three months, making it tough to argue that there isn't an industry issue," Oppenheimer analyst Carl McDonald wrote, although he said data do not support fears of cut-rate pricing to boost enrollment or of accelerating cost increases.

Oppenheimer believes that for the first time in many years, the group is not benefiting from slowing increases in medical costs, meaning that "there is no longer any cushion in the spread between pricing and cost trends, so whenever something goes against the group, like a worse than expected flu season or falling interest rates, it shows up on the bottom line."

Coventry, of Bethesda, Md., late Wednesday slashed its second-quarter per- share earnings forecast by more than 45% and its full-year outlook by 17%, prompting a big slide in its shares Thursday morning and a significant sell-off in other managed-care stocks.

Shares of Coventry recently traded down 23% to $30.77.

The company cited unexpectedly high costs, including surprisingly high claims from previous periods in its Medicare Advantage private-fee-for-service business and heavy outpatient utilization in its commercial plans.

Revenue was lower than expected, the company said, citing a now anticipated 4% decline this year in membership from a key business, commercial risk, which is comprised of corporate and similar accounts for which the company assumes the insurance risk.

Coventry said it is raising pricing on premiums to adjust to higher-than- planned medical costs.

Goldman Sachs analyst Matthew Borsch sees Coventry's problems "in the industry context of cyclical pressure on top- and bottom-line targets," which has led to unrealistic pricing and cost assumptions.

Goldman considers industry giant UnitedHealth Group Inc. (NYSE:UNH) (UNH) and Health Net Inc. (NYSE:HNT) (HNT) at risk for further cuts to their earnings outlooks, and sees " further industry-wide margin pressure in 2009-2010 with continuation of the health insurance down cycle."

At the same time, the firm sees near-term trading investment opportunities in other managed-care companies, given curremt valuations, and believes most companies will see in-line second-quarter results.

Lehman Brothers analyst Josh Raskin said the Coventry move "bodes poorly for the managed-care group," as its executives comprise "one of the most respected management teams in the sector, with a strong record of results." Coventry has been one of the best operators in the sector, and cut its forecast well more than the average seen at other companies, the firm said.

"Half of the shortfall is being blamed on commercial (medical) cost trend acceleration. This has not been seen or admitted to at other companies and clearly impacts all of the large health insurance companies," Raskin wrote.

JPMorgan cited industry implications in Coventry's "sharply higher" 2008 forecast for commercial medical cost growth, from the previous 7.5% to 9%. Nonetheless, while the firm maintains its neutral view of the sector, it said the magnitude of Coventry's warning "does not seem plausible as a reliable sector indicator," so that damage to other stocks today has the potential for being overdone.

Aetna (NYSE:AET) , which stands out among peers as having not lowered either earnings or membership forecasts this year, on Thursday maintained its guidance for medical- cost growth of roughly 7.5%. It also reaffirmed its operating per-share earnings guidance of 93 cents in the second quarter and $4 for the full year.

Humana, which earlier this year sharply lowered its earnings forecast, maintained its most recent outlook Thursday and said it's not seeing adverse prior-period claims development as Coventry did. It also said its medical cost projections remain on track.

JPMorgan noted that Coventry had only slightly lowered its first-quarter view in advance of that report earlier this year, and now joins many of its peers in having made a substantial cut.

Wachovia downgraded Coventry to market perform from outperform, saying further negative events for the company, including another potential earnings warning, and the sector could pressure valuation.

Wachovia analyst Matt Perry doesn't see broader implications in Coventry's Medicare Advantange private fee-for-service claims problems while considering its spike in commercial costs more troubling for the inudstry. Other than Health Net, he wrote, "this is the first indication we've seen of a spike in costs in commercial plans. With a handful of companies retierating their 2008 outlook recently, the Q2 outlook is mixed, in our view."

The managed-care industry has rattled investors this year, with the two largest players, WellPoint Inc. (NYSE:WLP) (WLP) and UnitedHealth Group (NYSE:UNH) , turning in tepid first-quarter results and, at the same time, lowering full-year forecasts. Several managed-care companies had issued profit warnings before first-quarter results were announced, setting investors on edge.

Investor concerns over rising medical costs for health plans and a weak economy have pressured shares, as have worries about insurers' potential willingness to restrain pricing as they compete fiercely for business in a shrinking market for corporate accounts.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@ dowjones.com

    (END) Dow Jones Newswires   06-19-08 1229   Copyright (c) 2008 Dow Jones & Company, Inc.