Bloomberg News

WellPoint Reduces Forecast as Medical Costs Increase

July 25, 2012

WellPoint Inc. (WLP:US), the second-biggest U.S. health plan, cut its full-year forecast after quarterly profit missed analyst estimates because of higher medical costs and falling membership. The shares fell the most since 2008.

Net income will be $7.30 to $7.40 a share, hurt by costs from this month’s $4.9 billion purchase of Amerigroup Corp., Indianapolis-based WellPoint said in a statement. Second-quarter earnings (WLP:US) excluding one-time items of $2.04 a share were 4 cents below the average of 19 analyst estimates (WLP:US) compiled by Bloomberg.

Medical costs have stabilized this year as Americans seek care after putting it off previously amid high unemployment. WellPoint said there had been “an uptick” in costs, as well as a decline in enrollment as the company pulled out of less- profitable markets. UnitedHealth Group Inc., (UNH:US) the biggest health plan, last week raised its forecast after increasing its rolls.

The results “put an exclamation point on the differences between United and WellPoint,” said Carl McDonald, a Citigroup analyst in New York, in a note to clients. “United is seeing medical costs increase this year too, but the uptick is already incorporated in United’s guidance, something WellPoint’s management team failed to adequately do.”

The missteps mean “time may be running out for WellPoint’s management team,” especially when investors compare them with UnitedHealth’s leadership, McDonald said. “Several large holders were already frustrated.”

Shares Fall

WellPoint fell 12 percent to $54 at 1:54 p.m. New York time, after declining to $53.56 in the biggest intraday drop since October 2008. UnitedHealth, based in Minnetonka, Minnesota, declined 4.4 percent to $52.51 and the No. 3 insurer, Hartford, Connecticut-based Aetna Inc. (AET:US), dropped 4.7 percent.

The lower forecast hurts “a stock that investors already dislike,” said Thomas A. Carroll, a Stifel Nicolaus & Co. analyst in Baltimore, in an e-mail. “There was lots of talk of medical trends rising and higher utilization. That will have sector-wide implications.”

Chief Executive Officer Angela Braly has tried to add business ahead of the 2014 implementation of President Barack Obama’s health-care law, which is also expected to squeeze profits. The company on July 9 announced its deal for Amerigroup, which specializes in government-backed Medicaid plans for the poor, and agreed last month to pay $900 million for eyewear retailer 1-800 Contacts.

‘Right Action’

“We’re disappointed with the need to lower our guidance, but believe it’s the right action to take, given the challenging marketplace we see” and WellPoint’s need to invest, Braly said on a conference call with analysts today.

WellPoint also missed analyst estimates in last year’s fourth quarter, after finding costs in some California plans for Medicare patients were higher than the company had anticipated. The insurer pulled out of those markets this year.

Membership in its medical plans fell 2.3 percent to 33.5 million, driven down by what Chief Financial Officer Wayne DeVeydt called “the competitive nature of certain markets.”

At the same time, the insurer expanded its Medicare and Medicaid enrollment, gained an account covering motion-picture industry employees that will add 100,000 members and has signed on other private employers for next year, DeVeydt said in a telephone interview.

‘Selective’ Approach

“It’s not that we’re not winning in the market,” he said. “It’s that we’re being selective in the markets and cautious about not cutting our investments in the future.”

WellPoint said it saw faster growth in its medical bills for members in the second quarter and now expects costs to grow “toward the upper half” of its previous projections of 6.5 percent to 7.5 percent this year.

Second-quarter net income (WLP:US) fell 8.3 percent to $643.6 million, or $1.94, from $701.6 million, or $1.89, a year earlier, WellPoint said. Revenue increased to $15.4 billion from $15.1 billion.

The insurer on June 15 said full-year profit was forecast to be at least $7.57 a share. The company also said that day that it would pay $90 million this year to settle a lawsuit over its decision to become a publicly traded company in 2001. That charge, along with costs from the 1-800 Contacts deal, are being taken this year, the company said in statements last month. The Amerigroup (AGP:US) purchase is set to close next year.

UnitedHealth last week also announced second-quarter earnings that beat analyst estimates as the company increased membership in its Medicare and Medicaid plans.

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net

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


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Companies Mentioned

  • WLP
    (WellPoint Inc)
    • $111.12 USD
    • 0.25
    • 0.22%
  • UNH
    (UnitedHealth Group Inc)
    • $82.42 USD
    • -0.32
    • -0.39%
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