Bloomberg News

WellPoint Spends More on Care as Medicare Membership Grows

July 27, 2011

(Updates with closing stock price in fifth paragraph.)

July 27 (Bloomberg) -- WellPoint Inc., the largest health insurer by enrollment, said its costs to provide medical care jumped in the second quarter as the number of Medicare patients it serves grew. The shares fell the most in almost a year.

WellPoint raised its annual forecast for the second time this year after sales and enrollment increased, according to a statement today by the Indianapolis-based company. At the same time, an influx of sicker members aged 65 and older pushed the percent of income spent on care to 85.7 percent from 82.9 percent a year earlier, the company said.

Enrollment rose 2.1 percent to 34.2 million, and most of the new customers were beneficiaries of Medicare, the U.S. health plan for the elderly and disabled. Three-quarters of this group had previously been with rival plans that exited the northern California market, Chief Financial Officer Wayne DeVeydt said. The enrollees were sicker than the company had expected or priced for, he said.

“We’re not seeing this problem across the rest of” the senior population WellPoint insures, DeVeydt said in a telephone interview. “We’re confident it can be fixed next year.”

The shares fell $4.86, or 6.6 percent, to $68.70 at 4:15 p.m. in New York Stock Exchange composite trading. It was the biggest intraday decline since Aug. 11, 2010, when Democrats in Congress called for new rules requiring that plans spend more of their premiums on medical care. The stock increased 21 percent since the beginning of the year.

Raising Prices

WellPoint is reviewing its quarterly data on spending with the Centers for Medicare and Medicaid Services in Baltimore, DeVeydt said, so that “we can resolve” the pricing for next year. The company will continue to pay out a higher portion of its income to care for these patients through the rest of the year, he said.

“Even with that hit, we exceeded earnings estimates” because the industry is benefitting from lower demand for health services, DeVeydt said. Americans have been unnerved by rising unemployment and continue to defer medical treatment, a trend that has plagued hospital operators like HCA Corp., which reported lower earnings July 25.

Typically this pullback in spending lasts about 18 months into a recession, DeVeydt said. “We really are at the end of that 18-month period. We’ve taken the view that it will spike back up and if it doesn’t we’ll do better than out projected guidance.”

Beat Estimates

WellPoint reported earnings before one-time items of $1.83 a share, beating by 3 cents the estimates of 22 analysts surveyed by Bloomberg. The insurer said it expected to earn $6.90 to $7.10 a share in 2011, up from a June forecast of at least $6.70.

“The problem in Medicare Advantage is a surprise, but it is likely to be company-specific, product-specific,” said Matthew Borsch, an analyst at Goldman Sachs Group Inc. in New York, in a note to clients.

While Medicare enrollment rose for the company, commercial plans saw their membership fall as the economy faltered in the first half of the year, Chief Executive Officer Angela Fray Braly said in a conference call. WellPoint expects “modest attrition” in enrollment in the second half of the year and may end the year with 33.9 million members, she said.

Aetna Inc., the third-largest U.S. health insurer, raised its annual forecast today and announced earnings that beat analyst estimates.

Profit at Minnetonka, Minnesota-based UnitedHealth Group Inc., the largest insurer by sales, also beat estimates. The two plans said they gained from a decline in use of medical services tied to consumer economic concerns.

--Editors: Chris Staiti, Reg Gale.

To contact the reporter on this story: Pat Wechsler in New York at pwechsler@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.


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