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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-16477

COVENTRY HEALTH CARE, INC.
(Exact name of registrant as specified in its charter)

6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (301)581-0600

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock purchase rights

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

        Indicate by check mark whether the registrant is an accelerated filer (as defined in the Securities Exchange Act of 1934 Rule 12b-2) Yes þ No ¨

        The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant as of June 30, 2003 (computed by reference to the closing sales price of such stock on the NYSE® stock market on such date) was $2,765,263,930.

        As of February 29, 2004, there were 88,622,550 shares of the registrant’s voting Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Parts of the registrant’s Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A subsequent to the filing of this Form 10-K Report are incorporated by reference in Items 10 through 14 of Part III hereof.

COVENTRY HEALTH CARE, INC.

FORM 10–K

TABLE OF CONTENTS

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PART I

Cautionary Statement Regarding Forward–Looking Statements

        This Form 10-K 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. For example, discussions regarding our operating and growth strategy, projections of revenue, income or loss and future operations. Unless this Form 10–K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “our Company,” “the Company” or “us” as used in this Form 10–K 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10–K. Actual operations and results may differ materially from those expressed in this Form 10–K. Among the factors that may materially affect our business are increases in medical costs, difficulties in increasing premiums due to competitive pressures, price restrictions under Medicaid and Medicare, issues relating to marketing of products or accreditation or certification of our products by private or governmental bodies and imposition of regulatory restrictions, costs, or penalties. Other factors that may materially affect the Company’s business include issues related to difficulties in obtaining or maintaining favorable contracts with health care providers, credit risks on global capitation arrangements, financing costs and contingencies, the ability to increase membership and premium rates, issues relating to continued growth through acquisitions, and litigation risk.

Item 1: Business

General

        We are a leading publicly traded managed health care company with 2.4 million members, excluding network rental members, as of December 31, 2003. We operate a diversified portfolio of local market health plans serving 14 markets, primarily in the Mid–Atlantic, Midwest and Southeast United States. Our health plans are operated under the names Altius Health Plans, Carelink Health Plans, Coventry Health Care, Coventry Health and Life, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, PersonalCare, SouthCare, Southern Health and WellPath. Our health plans generally are located in small to mid–sized metropolitan areas. Coventry was incorporated under the laws of the State of Delaware on December 17, 1997 and is the successor to Coventry Corporation, which was incorporated on November 21, 1986. Our Annual Report on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K and amendments to these reports, and recent press releases can be found, within one week of being filed with or furnished to the Securities and Exchange Commission and free of charge, on the Internet at www.coventryhealth.com.

        We offer employer groups a broad range of commercial managed care products that vary with respect to the level of benefits provided, the costs paid by employers and members and our members’ access to providers without referral or preauthorization requirements. We offer underwritten or “risk” products, including health maintenance organizations (“HMO”s), preferred provider organizations (“PPO”s) and point of service (“POS”) plans. In addition, we offer defined contribution health plans. Our risk products also include state–sponsored managed Medicaid programs and Medicare+Choice programs in selected markets where we believe we can achieve profitable growth based upon favorable reimbursement levels, provider costs and regulatory climates. For our risk products, we receive premiums in exchange for assuming underwriting risks and performing sales, marketing and administrative functions. We also offer “non–risk” products to employer groups that self–insure employee health benefits.

Operating and Growth Strategy

        Maintaining Leading Positions in Our Markets

        We operate health plans with strong competitive positions in all of our markets. We believe our local focus enables us to compete effectively with large national competitors that operate in the markets we serve, and our management expertise, resources and economies of scale give us a competitive advantage over small, local market health plans. We believe the combination of our local strengths and our resources as a large company makes our health plans attractive to employers and members, and thereby enhances our competitive positions in the markets in which we operate. We believe our strong market positions enable us to negotiate competitive contracts with providers and realize operating efficiencies.

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      Pursuing Strategic Acquisitions

        The managed care industry continues to be highly fragmented, with many health plans in operation in the United States. A part of our acquisition strategy is to acquire entities that we believe will benefit from our management expertise and provide opportunities for improved operations and cost savings through our management practices and economies of scale. The acquisitions have been at attractive valuations as a result of our ability to provide opportunities for improved operations and cost savings. We believe that there will be additional acquisition opportunities in the future as a result of the continued consolidation of the managed care industry and the increasing difficulties that some of the small, local plans will face in competing with larger companies that have greater access to capital, superior information systems, lower administrative costs, more innovative product portfolios and more effective medical management techniques and management practices. We intend to continue to pursue acquisitions in both our existing markets and in new markets as attractive opportunities arise.

        Throughout the entire acquisition process, beginning with due diligence and thereafter, we undertake an extensive review of the premium rates, medical and administrative cost structures, provider arrangements and medical management practices of the acquired entity. Generally, we have been able to improve the operating margins of our acquired entities within six to twenty–four months after we have completed the acquisition. This is primarily due to strict pricing discipline, improved provider arrangements, more effective medical management protocols and/or reductions in administrative costs resulting from operating efficiencies and our economies of scale. We believe that we can continue to achieve improved operating margins at acquired entities through these means.

Products

      Commercial Risk and Governmental Programs

        Our health plans and insurance companies offer employer groups a full range of commercial risk products, including HMO, PPO and POS products. We design our products to meet the needs and objectives of a wide range of employers and members and to comply with the regulatory requirements in the markets in which we operate. We had 1.5 million commercial risk members as of December 31, 2003 that accounted for $3.4 billion of revenue in 2003.

        Our products vary with respect to the level of benefits provided, the costs to be paid by employers and members, including deductibles and co–payments, and our members’ access to providers without referral or preauthorization requirements.

Health Maintenance Organizations

        Our HMO products provide comprehensive health care benefits to members, including ambulatory and inpatient physician services, hospitalization, pharmacy, mental health and ancillary diagnostic and therapeutic services. In general, a fixed monthly membership fee covers all HMO services although some benefit plans require co–payments or deductibles in addition to the basic membership fee. A primary care physician assumes overall responsibility for the care of a member, including preventive and routine medical care and referrals to specialists and consulting physicians. While an HMO member’s choice of providers is limited to those within the health plan’s HMO network, the HMO member is typically entitled to coverage of a broader range of health care services than is covered by typical reimbursement or indemnity policies. Furthermore, many of our HMO plans have added features to more easily allow “direct access” to providers.

Preferred Provider Organizations and Point of Service

        Our PPO and POS products also provide comprehensive managed health care benefits to members, but allow members to choose their health care providers at the time medical services are required and allow members to use providers that do not participate in our managed care networks. If a member chooses a non–participating provider, deductibles, co–payments and other out–of–pocket costs to the member generally are higher than if the member chooses a participating provider. Premiums for our PPO and POS products typically are lower than HMO premiums due to the increased out–of–pocket costs borne by the members.

Medicare

        As of December 31, 2003, we operated five Medicare+Choice HMOs in six states covering 64,000 members. We also operated three Medicare+Choice demonstration PPOs in as many states covering 1,000 members. In addition, we managed one Medicare+Choice alternative payment demonstration HMO, for which we assume no underwriting risk, in two states covering 3,000 members. The Medicare+Choice line of business accounted for $480.3 million of revenue in 2003.

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        Under the Medicare+Choice contracts, we receive a county–specific fixed premium per member per month from the Centers for Medicare and Medicaid Services (“CMS”). This premium reflects certain demographic adjusters of the Medicare population. Ten percent of the CMS premium was based on individually determined health risk adjusters in 2003. Thirty percent of the CMS premium will be based on individually determined health risk adjusters in 2004. Fifty, seventy–five and one hundred percent of the CMS premium will be based on individually determined health risk adjusters in 2005, 2006 and 2007, respectively. The average increase of the CMS rates in 2003 was 2%. In the HMO alternative payment demonstration, we provide only administrative services to an employer retiree account for a fixed administrative fee with 10% of that fee at risk as part of an agreement among CMS, the employer and us. PPO products in all markets benefit from a risk sharing arrangement with CMS.

        As of December 31, 2003, we withdrew from the individual Medicare+Choice market in one county in West Virginia and one county in Ohio due to inadequate rates. This affected only a few members, some of whom switched to our PPO product. In the first quarter of 2004, we introduced two products in the Kansas market and one in the Pennsylvania market.

Medicaid

        We offer health care coverage to Medicaid recipients in seven states which, as of December 31, 2003, covered 324,000 members and accounted for $523.8 million of revenue in 2003. The Medicaid Management Care agreement is a contract with each individual state. Under a Medicaid contract, the participating state pays a monthly premium per member based on the age, sex, eligibility category and in some states, county or region of the Medicaid member enrolled. In some states, these premiums are adjusted according to the health risk associated with the individual member.

        During 2003, our total Medicaid membership grew by 17.8% and revenue increased by 14.5% related to an auto–assignment of additional members by the State of Missouri due to the withdrawal of a competitor in the Missouri market. The majority of the Medicaid members are in the Missouri and Pennsylvania markets, representing 84.6% of our total Medicaid membership.

Financial Information

        Required financial information related to our business segments is set forth in Note O of our consolidated financial statements.

      Management Services

        We offer management services and access to our provider networks to employers that self–insure their employee health benefits. The management services we provide typically include network management, claims processing, utilization review and quality assurance. For our management services, we receive a fixed fee for the access to our provider networks and the management services we provide and assume no underwriting risk. As of December 31, 2003, we had approximately 484,000 non–risk members.

        We offer a product to third–party payors under which we provide access to our provider networks for members of self–insured employers, as well as the benefits of our provider pricing arrangements, claims repricing and utilization review services. We do not assume underwriting risk for these services. As of December 31, 2003, we had approximately 678,000 network rental members.

        These management services accounted for $92.7 million of revenue for the year ended December 31, 2003.

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Markets

        The markets in which we operate are described as follows:

• Delaware – commercial products in Delaware and eastern Maryland; Medicaid products in the Baltimore metropolitan area and northeast counties.
• Georgia – commercial products in the Atlanta metropolitan area.
• Illinois – commercial products, primarily in the Central and Southern areas.
• Iowa – commercial products to members primarily in the Des Moines metropolitan area with additional networks in Sioux City, Waterloo and rural Iowa; and Medicaid products in the Waterloo area.
• Kansas – commercial and Medicare+Choice products in the Kansas City and Wichita metropolitan areas, including portions of Western Missouri.
• Louisiana – commercial products, primarily in the New Orleans and Baton Rouge metropolitan areas.
• Missouri – commercial and Medicare+Choice products to members in the St. Louis metropolitan area, including portions of Southern Illinois; Medicaid products also in the St. Louis metropolitan area and Central and Western Missouri.
• Nebraska – commercial products primarily in the Omaha metropolitan area with additional networks in Lincoln and rural Nebraska.
• North Carolina – commercial and Medicaid products primarily in the Charlotte and Raleigh–Durham metropolitan areas.
• Pennsylvania – commercial products primarily in Harrisburg and the State College metropolitan areas comprising the eastern Pennsylvania market; commercial products in Pittsburgh, Erie and portions of Eastern Ohio comprising the western Pennsylvania market; Medicaid products in the Harrisburg metropolitan area; and Medicare+Choice in the Pittsburgh and State College metropolitan areas.
• Utah – commercial products primarily in the Ogden, Salt Lake City and Provo metropolitan areas.
• Virginia – commercial and Medicaid products primarily in the Richmond, Roanoke and Charlottesville metropolitan areas and the Shenandoah Valley.
• West Virginia – commercial, Medicaid and Medicare+Choice products to a service area covering a majority of the state’s population.

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Membership

        The following tables show the total number of members as of December 31, 2003 and 2002 (rounded to the nearest thousand) and the percentage change in membership between these dates.

* Membership by market excludes network rental membership

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Provider Networks

        Our health plans maintain provider networks that furnish health care services through contractual arrangements with physicians, hospitals and other health care providers. All of our health plans currently offer an open panel delivery system. In an open panel structure, individual physicians or physician groups contract with the health plans to provide services to members but also maintain independent practices in which they provide services to individuals who are not members of our health plans.

        A small percentage of our membership is covered by global capitation arrangements. Under the typical arrangement, the provider receives a fixed percentage of premium to cover all the medical costs provided to the globally capitated members. Under some capitated arrangements, physicians may also receive additional compensation from risk sharing and other incentive arrangements. Global capitation arrangements limit our exposure to the risk of increasing medical costs, but expose us to risk as to the adequacy of the financial and medical care resources of the provider organization. In addition to global capitation arrangements, we have capitation arrangements for ancillary services, such as mental health care. We are ultimately responsible for the coverage of our members pursuant to the customer agreements. To the extent that the respective provider organization faces financial difficulties or otherwise is unable to perform its obligations under the capitation arrangements, we will be required to perform such obligations. Consequently, we may have to incur costs in excess of the amounts we would otherwise have to pay under the original global or ancillary capitation arrangements. Medical costs associated with capitation arrangements made up approximately 9.9%, 8.9%, and 8.8% of our total medical costs for the years ended December 31, 2003, 2002 and 2001, respectively. Membership associated with global capitation arrangements was approximately 145,000, 116,000 and 84,000 as of December 31, 2003, 2002 and 2001, respectively. We consider the risk associated with these arrangements to be immaterial.

        Most contracted primary care and specialist physicians are compensated under a discounted fee–for–service arrangement. The majority of our contracts with hospitals provide for inpatient per diem or per case hospital rates. Outpatient services are contracted on a discounted fee–for–service, a per case basis or in some instances a discount from charges basis. We pay ancillary providers on a fixed fee schedule or a capitation basis. Prescription drug benefits are provided through a formulary comprised of an extensive list of drugs. Drug prices are negotiated through a national network of pharmacies at discounted rates.

Medical Management

        We have established systems to monitor the availability, appropriateness and effectiveness of the patient care we provide. We collect utilization data in each of our markets that we use to analyze over–utilization or under–utilization of services and assist our health plans in providing appropriate care for their members and improving patient outcomes in a cost efficient manner. Our corporate office monitors the medical management policies of our health plans and assists our health plans in implementing disease management programs, quality assurance programs and other medical management tools. In addition, our health plans have internal quality assurance review committees made up of practicing physicians and staff members whose responsibilities include periodic review of medical records, development and implementation of standards of care based on current medical literature and the collection of data relating to results of treatment. We review new medical technologies in advance to ensure that only safe and effective new medical procedures are used. We regularly conduct studies to discover possible adverse medical outcomes for both quality and risk management purposes.

        We have developed a comprehensive disease management program that identifies those members having certain chronic diseases, such as asthma and diabetes. Our case managers proactively work with members and their physicians to facilitate appropriate treatment, help to ensure compliance with recommended therapies and educate members on lifestyle modifications to manage the disease. We believe that our disease management program promotes the delivery of efficient care and helps to improve the quality of health care delivered.

        Each of our health plans either employs or contracts with physicians as medical directors who monitor the quality and appropriateness of the medical services provided to our members. The medical directors supervise medical managers who review and approve requests by physicians to perform certain diagnostic and therapeutic procedures, using nationally recognized clinical guidelines developed based on nationwide benchmarks that maximize efficiency in health care delivery and InterQual, a nationally recognized evidence–based set of criteria developed through peer review medical literature. Medical managers also continually review the status of hospitalized patients and compare their medical progress with established clinical criteria, make hospital rounds to review patients’ medical progress and perform quality assurance and utilization functions.

        Medical directors also monitor the utilization of diagnostic services and encourage the use of outpatient surgery and testing where appropriate. Data showing each physician’s utilization profile for diagnostic tests, specialty referrals and hospitalization are collected by each health plan and presented to the health plan’s physicians. The medical directors monitor these results in an attempt to ensure the use of cost–effective, medically appropriate services.

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        We also focus on the satisfaction of our members. We monitor appointment availability, member–waiting times, provider environments and overall member satisfaction. Our health plans continually conduct membership surveys of existing employer groups concerning the quality of services furnished and suggestions for improvement.

Information Technology

        We believe that integrated and reliable information technology systems are critical to our success. We have implemented advanced information systems to improve the operating efficiency of our health plans, support medical management, underwriting and quality assurance decisions and effectively service our employer customers, members and providers. Each of our health plans operates on a single financial reporting system along with a common, fully integrated application which encompasses all aspects of our commercial, government and non–risk business, including enrollment, provider referrals, claims processing and premium billing.

        We have dedicated in–house teams providing infrastructure and application support services to our members. Our data warehouse collects information from all of our health plans and uses it in medical management to support our underwriting, product pricing, quality assurance, rates, marketing and contracting functions. Our centralized data center processes approximately 19 million claims annually. We have dedicated in–house teams that convert acquired health plans to our information systems as soon as possible following the closing of the acquisition.

        Approximately 60% of all claim transactions are processed via electronic data interface which supports our ability to auto adjudicate 75% of all claims.

        Over the last four years, we have continued to invest and expand our e–commerce capability. We are committed to delivering fully functional, secure, e–commerce transactions, services and content across our member, employer groups, broker and provider channels. In 2003, we experienced significant growth in all of our e–commerce channels, supported by focused growth programs. Transaction growth for 2003 includes:

• a 57% increase in the number of visitors to our public web sites;
• a 281% increase in provider transactions;
• a 46% increase in our password protected member self–service transactions; and
• a significant growth of our password protected self–service transactions.

        The Health Insurance Portability and Accountability Act (“HIPAA”) of 1996 imposed new requirements relating to the standardization of electronic healthcare transactions, privacy and security. Dedicated HIPAA project teams, along with a senior management steering committee, have been created to ensure that we have satisfied all applicable requirements. The HIPAA projects for privacy and for transaction and code sets were delivered on schedule by the mandatory compliance dates. We are continuing to work on HIPAA security and expect to complete all security required enhancements to our systems and business processes by the mandatory compliance date.

Marketing

        Our health plans market commercial HMO, POS and PPO products to employer group purchasers on both a fully insured and self–funded basis. Among small and medium size employers, our commercial products are most commonly offered on an exclusive basis. In the large group segment, our products may be made available to employees as one option among multiple carriers. In all size segments, employers generally pay a large part of their employees’ health care premiums, although we have witnessed a trend toward a growing portion of that cost being assumed by employees. Typically our employer group contracts are renewed annually.

        To respond to market demand in all size segments, our health plans have expanded the number of lower cost product options made available to employee group purchasers. These products also serve as the foundation for our consumer-driven strategy, Coventry FlexChoice. We believe interest in this product type will continue to grow as increasing premiums encourage employers to seek out more cost effective alternatives. We also intend to expand Coventry FlexChoice to take advantage of the new Internal Revenue Service guidelines recently promulgated concerning Health Savings Accounts.

        We market our managed care products and services through our own sales staff and a network of several thousand independent brokers and agents. Our local direct sales staff and independent brokers and agents market our health plans, seeking to attract new employer customers and members and retain our existing employer customers and members. We compensate our direct sales staff through a combination of base salary and incentive arrangements. We compensate our independent brokers and agents on a commission basis.

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        Our direct sales staff and independent brokers and agents typically market our managed care products and services to employers in a two–step process in which presentations are made first to employers to secure contracts to provide health benefits. In most instances, our sales are made on a complete replacement basis. If we are co–existing in an account with another carrier, our direct sales staff will then be involved in the solicitation of members from the employee base during periodic open enrollments during which employees are permitted to change health care programs. In some markets, we use workplace presentations, direct mail and radio and television advertisements to market to prospective members.

        Our Medicaid products are marketed to Medicaid recipients by state Medicaid authorities. We market our Medicare+Choice products to both individuals and retirees of employer groups that provide benefits to retirees through television, radio, newspaper and billboard advertising and direct mail. Our Medicaid and Medicare+Choice contracts are renewable annually. Medicare enrollees may disenroll monthly. Medicaid enrollees may disenroll monthly or annually, depending on the jurisdiction.

Significant Customers

        Our commercial business is diversified across a large customer base and there are no commercial groups that make up 10% or more of our managed care premiums. For the years ended 2003, 2002 and 2001, we received 10.8%, 12.3% and 11.4%, respectively, of our managed care premiums from the Federal Medicare+Choice program throughout our various markets. We also received 11.8%, 13.1% and 12.4% of our managed care premiums in 2003, 2002 and 2001, respectively, from our state-sponsored Medicaid programs throughout our various markets. In 2003, the State of Missouri accounted for over half of our Medicaid premiums.

Competition

        The managed care industry is highly competitive, both nationally and in the individual markets we serve. Generally, in each market, we compete against local Blue Cross Blue Shield affiliated health plans, locally–owned plans and provider sponsored plans. In certain markets, we also compete with national health plans. We compete for employer groups and members primarily on the basis of the price of the benefit plans offered, locations of the health care providers, reputation for quality care, financial stability, comprehensiveness of coverage, diversity of product offerings and access to care. We also compete with other managed care organizations and indemnity insurance carriers in obtaining and retaining favorable contracts for health care services and supplies. We maintain an active presence in the communities served by our health plans through participation in health fairs, special children’s programs and other community activities, which we believe enhances our visibility and reputation in the communities we serve.

Corporate Governance

        Our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to the members of our Board of Directors and our officers, including our Chief Executive Officer and Chief Financial Officer and our employees. In addition, the Board of Directors has adopted Corporate Governance Guidelines and committee charters for our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. Our Code of Business Conduct and Ethics, Corporate Governance Guidelines and current committee charters can be accessed on our website at www.coventryhealth.com or may be requested by writing to the following address: Coventry Health Care, Inc., Attn: Corporate Secretary, 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817.

Government Regulation

        As a managed health care company, we are subject to extensive government regulation of our products and services. The laws and regulations affecting our industry generally give state and federal regulatory authorities broad discretion in their exercise of supervisory, regulatory and administrative powers. These laws and regulations are intended primarily for the benefit of the members of the health plans. Managed care laws and regulations vary significantly from jurisdiction to jurisdiction and changes are frequently considered and implemented.

      State Regulation

        The states served by our health plans provide the principal legal and regulatory framework for the commercial risk products offered by our insurance companies and HMO subsidiaries. One of our insurance company subsidiaries, Coventry Health and Life Insurance Company (“CH&L”), offers managed care products, primarily PPO and POS products, in conjunction with our HMO subsidiaries in states where HMOs are not permitted to offer these types of health care benefits. CH&L does not offer traditional indemnity insurance.

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        Our regulated subsidiaries are required by state law to file periodic reports and to meet certain minimum capital and deposit and/or reserve requirements and may be restricted from paying dividends to the parent or making other distributions or payments under certain circumstances. They also are required to provide their members with certain mandated benefits. Our HMO subsidiaries are required to have quality assurance and educational programs for their professionals and enrollees. Certain states’ laws further require that representatives of the HMOs’ members have a voice in policy making. Several states impose requirements with respect to the prompt payment of claims and permitting “any willing provider” to join our network. Compliance with “any willing provider” laws could increase our costs of assembling and administering provider networks.

        We also are subject to the insurance holding company regulations in the states in which our regulated subsidiaries operate. These laws and associated regulations generally require registration with the state department of insurance and the filing of reports describing capital structure, ownership, financial condition, certain inter–company transactions and business operations. Most state insurance holding company laws and regulations require prior regulatory approval or, in some states, prior notice, of acquisitions or similar transactions involving regulated companies, and of certain transactions between regulated companies and their parents. In connection with obtaining regulatory approvals of acquisitions, we may be required to agree to maintain capital of regulated subsidiaries at specified levels, to guarantee the solvency of such subsidiaries or to other conditions.

        Most states now impose risk–based or other net worth-based capital requirements on our regulated entities. These requirements assess the capital adequacy of the regulated subsidiary based upon the investment asset risks, insurance risks, interest rate risks and other risks associated with the subsidiary’s business. If a subsidiary’s capital level falls below certain required capital levels, it may be required to submit a capital corrective plan to regulatory authorities, and at certain levels may be subjected to regulatory orders, including regulatory control through rehabilitation or liquidation proceedings. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information.

      Federal Regulation

Sarbanes–Oxley Act of 2002

        On July 31, 2002, President George W. Bush signed into law the Sarbanes–Oxley Act of 2002 (the “Act”). The Act is a comprehensive piece of legislation that will increase the cost of doing business. The Act’s principal reforms include:

• the creation of an independent public company accounting oversight board;
• auditor independence provisions that restrict the non-audit services that accountants may provide to their audit clients;
• a range of corporate governance and responsibility measures;
• expanded disclosure requirements, including accelerated Section 16(a) reporting by insiders;
• mandatory disclosure by analysts of potential conflicts of interest;
• a range of new penalties for fraud and other violations; and
• mandatory disclosure of management’s assessment of internal controls.

        Other provisions in the Act increase the Securities and Exchange Commission’s funding and enforcement powers, and require various studies and reports. We are compliant with the Act.

Health Insurance Portability and Accountability Act of 1996

        The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) imposes new requirements relating to a variety of issues that affect the Company’s business, including the privacy and security of medical information, limits on exclusions based on preexisting conditions for certain plans, guaranteed renewability of health care coverage for most employers and individuals and administrative simplification procedures involving the standardization of transactions and the establishment of uniform health care provider, payor and employer identifiers. Various agencies of the federal government have issued regulations to implement certain sections of HIPAA. This law is far reaching and complex, and proper interpretation and practice under the law continues to evolve. Because the rules implementing this law are still evolving, we can not assure you that the costs of compliance with this law will not adversely affect our results of operations or cause us to significantly change the way we operate our business.

        The Department of Health and Human Services also released its final rule for electronic data standards under the HIPAA on August 17, 2000, effective October 17, 2000. This rule establishes the standard data content and format for the electronic submission of claims and other administrative health transactions. We are compliant with the electronic data standards established by the final rule.

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        On December 20, 2000, the Department of Health and Human Services released a final rule regarding standards for privacy of individually identifiable health information and the Department of Health and Human Services published revisions to the final rule in August 2002. The primary purposes of the privacy rule are to protect and enhance the rights of consumers by providing them access to their health information and controlling the inappropriate use of that information, and to improve the efficiency and effectiveness of health care delivery by creating a national framework for health privacy protection that builds on efforts by states, health systems, individual organizations and individuals. We are compliant with the final rule.

        On January 5, 2001, the U.S. Department of Labor’s Pension and Welfare Benefits Administration, the Internal Revenue Service and the Department of Health and Human Services issued two regulations that provide guidance on the nondiscrimination provisions under the HIPAA as they relate to health factors and wellness programs. These nondiscrimination provisions prohibit a group health plan or group health insurance issuer from denying an individual eligibility for benefits or charging an individual a higher premium based on a health factor. We currently do not believe that these regulations will have a material adverse effect on our business.

        On February 20, 2003, the Department of Health and Human Services issued its final rule for security standards under the HIPAA. This rule establishes minimum standards for the security of electronic health information while being held by an entity and while the information is in transit between entities. The compliance date for the security standards rule is April 21, 2005. We have implemented a plan of action to achieve compliance with the final security standards rule by the compliance date.

Employee Retirement Income Security Act of 1974

        The provision of services to certain employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third party claims administration services for benefit plans. We provide a variety of products and services to employee benefit plans that are covered by ERISA.

        The U.S. Department of Labor adopted federal regulations that establish claims procedures for employee benefit plans under ERISA (insured and self–insured). The regulations shorten the time allowed for health and disability plans to respond to claims and appeals, establishes new requirements for plan responses to appeals and expands required disclosures to participants and beneficiaries. The regulations apply to claims filed under a group health plan on or after the first day of the first plan year beginning on or after July 1, 2002 and not later than January 1, 2003. These regulations have not had a material adverse effect on our business.

      Medicare+Choice and Medicaid

        Some of our HMOs contract with the Centers for Medicare and Medicaid Services to provide services to Medicare beneficiaries pursuant to the Medicare+Choice program. Some of our HMOs also contract with states to provide health benefits to Medicaid recipients. As a result, we are subject to extensive federal and state regulation. The Centers for Medicare and Medicaid Services may audit any health plan operating under a Medicare+Choice contract to determine the plan’s compliance with federal regulations and contractual obligations. In addition, we must file cost reimbursement reports for the Medicare cost contracts, which are subject to audit and revision.

        The Centers for Medicare and Medicaid Services and the appropriate state regulatory agency have the right to audit any health plan operating under a Medicaid managed care contract to determine the plan’s compliance with state and federal law. In some instances, states engage peer review organizations to perform quality assurance and utilization review oversight of Medicaid managed care plans. Our HMOs are required to abide by the peer review organizations standards.

        The Centers for Medicare and Medicaid Services issued a final Medicaid managed care rule on January 19, 2001. The final rule includes strengthened beneficiary protections and new provisions designed to protect the rights of participants in the Medicaid program. Specifically, the final rule requires states to assure continuous access to care for beneficiaries with ongoing health care needs who transfer from one health plan to another. The new rule also requires states and plans to identify enrollees with special health care needs and to assess the quality and appropriateness of their care. This rule has not had a material adverse effect on our business.

        The Social Security Act imposes criminal and civil penalties for paying or receiving remuneration (which is deemed to include a kickback, bribe or rebate) in connection with any federal health care program, including the Medicare, Medicaid and Federal Employees Health Benefits Programs. The law and related regulations have been interpreted to prohibit the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal health care program patients or any item or service that is reimbursed, in whole or in part, by any federal health care program. Similar anti-kickback provisions have been adopted by many states, which apply regardless of the source of reimbursement.

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        The Centers for Medicare and Medicaid Services have promulgated regulations that prohibit HMOs with Medicare contracts from including any direct or indirect payment to physicians or other providers as an inducement to reduce or limit medically necessary services to a Medicare beneficiary. These regulations impose disclosure and other requirements relating to physician incentive plans such as bonuses or withholds that could result in a physician being at “substantial financial risk” as defined in Medicare regulations. Our ability to maintain compliance with such regulations depends, in part, on our receipt of timely and accurate information from our providers. Although we believe we are in compliance with all such Medicare regulations, we are subject to future audit and review.

        In 1996, as part of the HIPAA, Congress adopted a statutory exception for certain risk-sharing arrangements. The Office of the Inspector General has published two safe harbors addressing these risk–sharing arrangements. A safe harbor is a regulation that describes relationships and activities that are deemed not to violate the federal anti–kickback statute. However, failure to satisfy each criterion of an applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that our risk agreements satisfy the requirements of these safe harbors. In addition, the Office of the Inspector General has adopted other safe harbor regulations that relate to managed care arrangements. We believe that the incentives offered by our HMOs to Medicare and Medicaid beneficiaries and the discounts our plans receive from contracting health care providers satisfy the requirements of these safe harbor regulations. We believe that our arrangements do not violate the federal or similar state anti-kickback laws.

      Federal Employees Health Benefits Program

        We contract with the Office of Personnel Management (“OPM”) to provide managed health care services under the Federal Employee Health Benefits Program (“FEHBP”). These contracts with the OPM and applicable government regulations establish premium rating arrangements for this program. The OPM conducts periodic audits of its contractors to, among other things, verify that the premiums established under its contracts are in compliance with the community rating and other requirements under FEHBP. The OPM may seek premium refunds or institute other sanctions against health plans that participate in the program.

        HealthAmerica Pennsylvania, Inc. (“HealthAmerica”), our Pennsylvania HMO subsidiary, received audit reports from the OPM that questioned approximately $31.1 million of subscription charges that were paid to HealthAmerica under the FEHBP for contract years 1993 – 1999. In the fourth quarter of 2003, HealthAmerica settled this dispute with the OPM and the U.S. Department of Justice. The final settlement payment of $29.0 million was fully reserved by HealthAmerica and therefore had no impact on 2003 earnings, the regulated capital of HealthAmerica, or our consolidated stockholders’ equity.

      Recent Federal Managed Care Legislative Proposals

        While both Houses of Congress passed some form of Patients’ Bill of Rights legislation in 2001, no such federal legislation currently exists. Despite Congress’ failure to reconcile and pass a final Patients’ Bill of Rights, the current administration has indicated a willingness to pass some form of patient protection legislation. Such patient protection legislation could adversely affect the managed care industry.

        In February 2003, Rep. Charlie Norwood re-introduced Patients’ Bill of Rights legislation that closely tracks the House version that died in the 107th Congress. Among other provisions, the proposed legislation includes the following:

• would require insurers to have approved utilization review programs, claims procedures and appeal procedures concerning claim denials;
• would restrict interference by insurers with the doctor-patient relationship;
• would prohibit insurers from discriminating against licensed healthcare professionals with respect to participation in their networks;
• would provide opportunity for individuals battling life threatening, deadly diseases to participate in a federally approved or funded clinical trial; and
• would permit every member who is denied care to have a fair, speedy and impartial appeal to a review organization not selected by the insurer;

        The bill was referred to House Subcommittee on Employer-Employee Relations on March 3, 2003. The bill’s status is unchanged.

        We can not predict whether the provisions of the Patients’ Bill of Rights legislation introduced by Rep. Norwood will ultimately be enacted into law. The House may pass a different version or no version at all, and any passed legislation must be passed by the Senate and signed by the President. We also can not predict what impact any Patients’ Bill of Rights or other federal legislation would have on our business and operations.

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        Numerous other proposals have been introduced in the United States Congress and various state legislatures relating to managed health care reform. The provisions of legislation that may be adopted at the state level can not be accurately and completely predicted at this time, and we therefore can not predict the effect of proposed legislation on our operations. On the federal level, it is possible that some form of managed health care reform may be enacted. At this time, it is unclear as to when any legislation might be enacted or the content of any new legislation, and we can not predict the effect on our operations of the proposed legislation or any other legislation that may be adopted.

      The Medicare Prescription Drug, Improvement and Modernization Act of 2003

        On December 8, 2003, President George W. Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This act makes changes to the existing Medicare law, including the creation of a new outpatient drug benefit beginning in 2006 and an immediate drug discount card for the interim period until January 1, 2006. The act makes managed care organizations eligible to be sponsors of both the drug card and drug benefit plan programs. In addition, the Medicare+Choice program, renamed Medicare Advantage, is expanded in a number of ways and payments are increased. At this time, we can not predict what impacts this new law will have on our business and operations.

        This act increased base rate payments to Medicare+Choice plans. The total increase in 2004 for all of our markets averaged 10.7%. The increase in revenue is required to be spent as follows: to increase benefits to members; to decrease cost sharing of members through reduced co–payments and coinsurance; to stabilize provider networks; to decrease member premiums; and to stabilize benefits. Title I of this same law created a prescription drug discount card and provides for a future prescription drug benefit. We are planning to ensure our members have access to a CMS endorsed prescription drug discount card throughout 2004 and 2005. The prescription drug benefit will be effective on January 1, 2006. This benefit will become part of the Medicare+Choice funding at that time. The Company is currently monitoring the implementation of the law to determine how it will impact our offerings in 2006 and will continue to monitor this issue as new regulations are released.

Risk Management

        In the normal course of business, we have been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, employment related claims and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 2003 may result in the assertion of additional claims. We maintain general liability, professional liability and employment practices liability insurances in amounts that we believe are appropriate, with varying deductibles for which we maintain reserves. The professional liability and employment practices liability insurances are carried through our captive subsidiary.

        Our captive subsidiary provides up to $5 million in professional liability coverage for each single claim and up to $10 million in coverage for each class action claim. The captive professional liability policy has an aggregate limit of $20 million per year. The captive is also co–insured with a commercial carrier for an additional $10 million for professional liability claims. Additionally, the captive employment practices liability policy provides up to $250,000 per single claim, $10 million per class action claim, and an aggregate policy limit of $10 million. Each year we will re–evaluate the most cost effective method for insuring these types of claims.

Employees

        At February 27, 2004, we employed 4,203 persons, none of whom are covered by a collective bargaining agreement.

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Acquisition Growth

        We began operations in 1987 with the acquisition of the American Service Companies entities, including Coventry Health and Life Insurance Company. We have grown substantially through acquisitions. The table below summarizes all of our significant acquisitions. See Note B to the consolidated financial statements for additional information on the most recent acquisitions.

Service Marks and Trademarks

        We have the following federally registered service marks: “Advantra,” “Carelink,” “Carelink Health Plans” logo, “Coventry,” “Coventry Healthy Choices Program,” “Coventry USA,” cross design, “Delawarecare,” Doc Bear character, “GHP,” “GHP” logo, “GHP Network Connection,” “HealthAmerica,” “HealthAssurance,” “HealthAssurance Flex,” “It’s That Simple,” “Mid-America Health Network,” “Sensicare,” “SouthCare,” “SouthCare Medical Alliance” logo, sun design logo, “Strong Starts,” “WellPath Select,” “WellPath 65,” “WellPath Community Health Plans,” “Senior Life Management,” “The Good Life Times” and our torch logo design. We have the right in perpetuity to use the federally registered name “HealthCare USA” in Missouri, Illinois, Kansas and Florida.

        We have pending applications for federal registration of the following service marks: “Coventry Healthy Decisions Program,” “Coventry FlexChoice,” “With You When It Matters,” “The Answer To Your Health Care Needs,” “Mid America Health Access,” “Mid America Health Access Plus,” “Mid America Health Access +,” “Mid America Health Administrators,” “Mid America Health Care,” “Mid America Health Reinsurance, Ltd.,” “Mid America Health” logo and “The Health Conscious Health Plan.”

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Executive Officers of Our Company

        The following table sets forth information with respect to the current executive officers:

        Allen F. Wise has been a director and President and Chief Executive Officer of our Company since October 1996. From October 1994 to October 1995, he was Executive Vice President of MetraHealth Companies, Inc., a managed health care company that was acquired by UnitedHealth Group, Incorporated, a diversified health and well being company, in October 1995. From October 1995 to October 1996, he was Executive Vice President of UnitedHealth Group, Incorporated. From January 1994 to October 1994, he was President and Chief Executive Officer of Wise Health System, a health care investment company. From 1991 to 1994, Mr. Wise was President and Chief Executive Officer of Keystone Health Plan, a managed health care company, and also Chief Operating Officer of Independence Blue Cross, a health care insurance company. He is a director and a member of the audit committee of NCO Group, Inc., a provider of accounts receivable management and other outsourced services.

        Thomas P. McDonough was elected Executive Vice President of our Company in April 1998 and Chief Operating Officer in July 1998. He was Chief Executive Officer of Uniprise, a subsidiary of UnitedHealth Group, Incorporated, a diversified health and well being company, from November 1997 until April 1998; Executive Vice President, Customer Services Group from February 1997 to November 1997; and Senior Vice President, Claim Services from August 1995 through February 1997. Prior to 1995, he was the President of Harrington Service Corporation, an insurance services company, and the Chief Operating Officer of Jardine Group Services Corporation, an insurance brokerage company and third party administrator.

        Dale B. Wolf was elected Executive Vice President, Chief Financial Officer and Treasurer of our Company in April 1998. From December 1996 to April 1998, he was Senior Vice President, Chief Financial Officer and Treasurer of our Company. From August 1995 to December 1996, he was Executive Vice President of SpectraScan Health Services, Inc., a women’s health care services company. From January 1995 to August 1995, Mr. Wolf was Senior Vice President, Business Development of MetraHealth Companies, Inc., a managed health care company. From August 1988 to December 1994, Mr. Wolf was Vice President, Specialty Operations of the Managed Care and Employee Benefits Operations of The Travelers, an insurance company. He is a director and a member of the audit committee of HealthExtras, Inc., a provider of pharmacy benefit management services and supplemental benefits. Mr. Wolf is a Fellow of the Society of Actuaries.

        Nancy G. Cocozza was elected Senior Vice President, Government Programs, of our Company in May 2001, and has served as head of Medicare Operations since August 2003. Prior to that time, she held the following positions with former Aetna US HealthCare Inc. (now Aetna Inc.), a national employee benefits carrier: from October 1999 to February 2001, she was Vice President, e-Health PMO; from March 1998 to January 2000, she was Vice President, Y2K Readiness; and from August 1996 to March 1998, she was Vice President, Mid Atlantic Region Customer Service. Prior to that time, she was head of Self-Insured Operations of US HealthCare (now Aetna Inc.).

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        Thomas A. Davis was elected Senior Vice President of our Company in April 1998 and President and Chief Executive Officer of Coventry Health Care of Georgia, Inc., our Georgia health plan, in May 1998. Prior to that time from 1996 to 1998, he was the Chief Executive Officer of the Utah operations of UnitedHealth Group, a diversified health and well being company. From 1995 to 1996, Mr. Davis was Vice President, Operations, of MetraHealth Companies, Inc., a managed health care company. From 1992 to 1994, he was Director, HMO Operations, of Prudential Health Care System. Prior to 1992, Mr. Davis held various positions in health care venture capital and management consulting firms.

        Harvey C. DeMovick, Jr. was elected Senior Vice President of our Company in April 1998. He has served as our Chief Information Officer since April 2001 and as our Senior Vice President, Customer Service Operations since September 2001. From April 2001 to September 2001, he served as our Senior Vice President, Organizational Development, Human Resources and Compliance. From April 1998 to April 2001, he was Senior Vice President, Government Programs, Compliance, Information Systems and Human Resources of our Company. He was Senior Vice President, Medical and Government Programs of Coventry Corporation from July 1997 to April 1998. From October 1995 to July 1997, Mr. DeMovick was Senior Vice President, Customer Administrative Services, of UnitedHealth Group, Incorporated, a diversified health and well being company, and from October 1994 through October 1995 he was Vice President, Managed Care Operations, of MetraHealth Companies, Inc., a managed health care company.

        Richard J. Gilfillan, M.D. was elected Senior Vice President of our Company in August 2001. Prior to that time, from October 2000 to August 2001, he was an independent health care consultant. From June 1989 to October 2000, he held various positions with Independence Blue Cross, a health care insurance company in southeastern Pennsylvania, including most recently Senior Vice President and General Manager of AmeriHealth New Jersey, a managed health care plan and subsidiary of Independence Blue Cross. Prior to that, he was Senior Vice President and Chief Medical Officer of Independence Blue Cross. Prior to that time, from 1985 to 1989, he served as Medical Director for Medigroup Central Health Plan, a managed health care plan, and from 1980 to 1985, he served as Medical Director and practicing physician with The Winchendon Community Health Center, a health care clinic.

        Shawn M. Guertin was elected Senior Vice President of our Company in February 2003. He has served as President of Coventry Health and Life Insurance Company since February 2002. From April 1998 to February 2003, he was Vice President of Finance of our Company. Prior to that date, he was Vice President of Finance of Coventry Corporation from January 1998. From October 1995 to January 1998, he was a Vice President of UnitedHealth Group, Incorporated, a diversified health and well being company. Prior to that time, from 1993 to 1995, he served as a Vice President for The MetraHealth Companies, Inc., a Connecticut managed health care company, and for The Travelers, a Connecticut insurance company.

    J. Stewart Lavelle was elected Senior Vice President, Sales and Marketing, of our Company in April 1998. He was the Chief Executive Officer of Southern Health Services, our Virginia health plan, from January 1998 to December 1999. From 1996 to November 1997, Mr. Lavelle was President of Riscorp Health Plans, a managed health care company. He joined U.S. Healthcare, Inc. in 1987 and served as Senior Vice President, General Manager of its New Jersey, Delaware, Maryland, Washington D.C. and Virginia operations from 1991 to 1996.

        Bernard J. Mansheim, M.D. was elected Senior Vice President and Chief Medical Officer of our Company in April 1998. From August 1997 to April 1998, he was the Chief Operating Officer of United HealthCare of the Mid-Atlantic, a managed health care company, and, from August 1996 to July 1997, was its Chief Medical Officer. In April 1995, he became President and Chief Executive Officer of HealthSpring, Inc., a pre-paid, primary care group medical practice and subsidiary of MetraHealth Companies, Inc. Following the acquisition of MetraHealth Companies, Inc. by UnitedHealth Group, Incorporated, a diversified health and well being company, in October 1995. Dr. Mansheim continued as the President and Chief Executive Officer of HealthSpring, Inc. until its divestiture in August 1996 and also served as National Medical Director of UnitedHealth Group, Incorporated. From August 1994 to April 1995, he was President and Chief Executive Officer of Triangle HealthCare Group, a primary care group medical practice, and Medical Director of Prudential Health Care System of the Triangle in Raleigh-Durham-Chapel Hill, North Carolina, a managed health care company.

        James E. McGarry was elected Senior Vice President of our Company in July 1998. From November 1997 to July 1998, he was the Chief Operating Officer of Uniprise of UnitedHealth Group, Incorporated. From January 1995 to October 1997, he was Senior Vice President, Consumer Services Administration, of UnitedHealth Group, Incorporated. Prior to 1995, he was Vice President of Field Operations of MetraHealth Companies, Inc. and Vice President of Field Operations for The Travelers, an insurance company.

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        Timothy E. Nolan was elected Senior Vice President of our Company in December 2003. From September 2000 to December 2003, he was an independent consultant for various healthcare companies, including the Company. From September 2000 to January 2004, he served as a director of Andrx Corporation, a generic pharmaceutical company. From late March 2000 through November 2001, Mr. Nolan served as President and Chief Operating Officer of Cybear, Inc., an information technology company and a wholly owned subsidiary of Andrx Corporation. From June 1999 to September 2000, he served as a director of Cybear, Inc. From 1985 through March 2000, Mr. Nolan was employed by Aetna Inc., last serving as Senior Vice President of former AetnaUSHealthcare Inc. (now Aetna Inc.) in charge of the field organization. On May 6, 2003, Mr. Nolan entered into an administrative consent Order with the SEC pursuant to which, without admitting or denying the SEC’s findings, he agreed to cease and desist from committing or causing any future violations of certain of the reporting provisions of the Securities Exchange Act of 1934. The Order related to the SEC’s finding that Cybear had improperly recognized approximately $1.3 million in revenue (representing approximately $27,000 in gross profit) pursuant to a joint venture between Andrx and Cybear. The SEC’s Order found that these amounts were improperly recognized in Cybear’s March 31, 2000 and June 30, 2000 Forms 10-Q, and in the July 31, 2000 joint proxy statement/prospectus with respect to a reorganization completed in September 2000 under which Cybear became a wholly owned subsidiary of Andrx Corporation.

        John J. Ruhlmann was elected Vice President and Corporate Controller of our Company in November 1999. From December 1993 to September 1999, Mr. Ruhlmann was Vice President of Accounting of Integrated Health Services, Inc., a national provider of health services that owned and managed hospitals, nursing homes and clinics.

        Francis S. Soistman, Jr. was elected Senior Vice President of our Company in April 1998. He was named President and Chief Executive Officer of HealthAmerica Pennsylvania, Inc. and HealthAssurance Pennsylvania, Inc., our Pennsylvania subsidiaries, in May 1998 and July 2001, respectively. He was Regional Vice President of Principal Health Care, Inc., from December 1994 to March 1998. From April 1994 to December 1994, he was Executive Director of Principal Health Care of the Mid-Atlantic, Inc., a wholly owned managed health care subsidiary of one of Principal’s subsidiaries. From January 1983 until March 1994, Mr. Soistman held various positions with Blue Cross Blue Shield of Maryland and its subsidiary companies.

        Janet M. Stallmeyer was elected Senior Vice President of our Company in March 1999. She has been the President and Chief Executive Officer of Coventry Health Care of Kansas, Inc., our Kansas health plan, since October 1998, and its Executive Director from January 1995 to October 1998. From October 1992 to December 1994, she was the Executive Director of our Louisiana health plan, Coventry Health Care of Louisiana, Inc.

        Charles R. Stark was elected Senior Vice President of our Company in August 2001 and was named President and Chief Executive Officer of Group Health Plan, Inc., one of our Missouri health plans, in October 2001. He was President and Chief Executive Officer of HealthCare USA of Missouri, LLC, one of our Missouri health plans, from January 2001 to October 2001. From December 1996 to September 1999, he was the President and Chief Executive Officer of Antero Health Plans, a Colorado managed care company. From June 1992 to December 1996, he was President and Chief Executive Officer of Health Direct, an Illinois health care company.

        Thomas C. Zielinski was elected Senior Vice President and General Counsel of our Company in August 2001. Prior to that time, Mr. Zielinski worked for 19 years in various capacities for the law firm of Cozen and O’Connor, P.C., including as a senior member, shareholder and Chair of the firm’s Commercial Litigation Department.

Item 2: Properties

        As of December 31, 2003, we leased 60,000 square feet of space for our corporate office in Bethesda, Maryland. We also leased 848,000 aggregate square feet for office space, subsidiary operations and customer service centers for the various markets where our health plans operate, of which 10% is subleased. Our leases expire at various dates from 2004 through 2013. We also own a building in Richmond, Virginia with 45,000 square feet, which is used for administrative services related to our health plan in that state, of which 46% is subleased. We believe that our facilities are adequate for our operations.

Item 3: Legal Proceedings

        See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Legal Proceedings” for more information.

Item 4: Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year 2003.

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PART II

Item 5: Market for the Registrant’s Common Equity and Related Stockholder Matters

Price Range of Common Stock

        Our common stock is traded on the New York Stock Exchange® (NYSE®) stock market under the ticker symbol “CVH.” On December 23, 2003, our Board of Directors approved a three–for–two stock split of our common stock. The stock split, in the form of a stock dividend, was effective January 30, 2004 for stockholders of record on January 9, 2004. The stock split is reflected retroactively in our price per share for all periods presented. The following table sets forth the quarterly range of the high and low closing sales prices of the common stock on the NYSE® stock markets during the calendar period indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions: