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WellPoint Profit Jumps 51% as Medical Costs Moderate

Updated on
WellPoint Inc.'s headquarters
A sign hangs on the exterior of WellPoint Inc.'s headquarters in Indianapolis, Indiana. Photographer: D. Kevin Elliott/Bloomberg

WellPoint Inc., the top U.S. health insurer by enrollment, said profit climbed 51 percent as a less-severe flu season helped slow the growth in medical costs.

First-quarter net income rose to $876.8 million, or $1.96 a share, from $580.4 million, or $1.16, a year earlier, when the company reported $228.4 million in investment losses, Indianapolis-based WellPoint said in a statement today. Excluding some items, adjusted profit of $1.95 a share beat the $1.67 average estimate of 17 analysts surveyed by Bloomberg. Revenue was little changed at $15.1 billion.

WellPoint spent 81.8 percent of the premiums it collected in the quarter on customers’ medical care, down from 82.5 percent a year earlier. About 12,000 Americans died in the past flu season, two-thirds fewer than usual. The milder season kept costs lower by about $35 million to $50 million during the quarter, Chief Financial Officer Wayne DeVeydt said today.

“The upside came from weaker flu and seasonality in its local and individual plan products,” Collins Stewart analyst Brian Wright wrote in a research note today. He said the insurer’s medical-care spending was 1 percentage point less than what he expected, and recommends holding WellPoint shares.

WellPoint Shares

WellPoint gained $1.53, or 2.7 percent, to $57.45 at 4 p.m. in New York Stock Exchange composite trading. Before today, the shares had fallen 14 percent since March 21, the day the U.S. House of Representatives passed legislation that expanded coverage of the uninsured while imposing more taxes and regulations on health plans.

WellPoint reiterated its March 17 forecast of “at least” $6 a share in earnings this year. DeVeydt, on a conference call that day, said net income would drop about 11 percent to $2.6 billion and enrollment would fall 400,000, as WellPoint exits its Unicare franchises in Texas and Illinois.

The company today lowered its operating revenue forecast to about $58.5 billion from its March projection of $59 billion. WellPoint said it would spend 84.3 percent of premiums for the year to provide medical benefits, reconfirming its prior estimate. The insurer now expects medical enrollment at year-end of 33.1 million, down from 33.3 million in projected in March.

California Rate Increases

The percentage of premiums WellPoint will spend on its business for individuals buying insurance will increase because of delayed rate increases in California, the company said.

Like many other insurers, WellPoint has seen its expenses drop in the first half of the year as more people shift to low- premium, high-deductible plans, said Sarah James, a Wedbush Securities analyst in Los Angeles.

Share buybacks were “the big driver” of earnings, James said in a telephone interview. WellPoint’s board authorized as much as $3.5 billion in share repurchases in January, after buying back $2.6 billion in stock in 2009.

Enrollment in WellPoint’s medical plans dropped 2.1 percent to 33.8 million, from 34.6 million a year earlier.

WellPoint in January reclassified call centers staffed by nurses, disease management and wellness programs used by its customers as health benefits, instead of administrative expenses, in anticipation of language in the health-care law requiring health plans to spend at least 80 percent of their premiums on medical care.

The legislation leaves it to the federal Health and Human Services Department to develop a standard definition for what should count as a medical expense. Investor fears that the rule will limit profits have helped drive insurer shares down since the bill passed, said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York.

The insurer, led by Chief Executive Officer Angela Braly, cut 1,500 jobs last year and promised to upgrade computer systems that it blamed for setting premiums too low to cover rising costs. It also sold its drug-benefits unit to St. Louis-based Express Scripts Inc. for $4.68 billion.

UnitedHealth Group Inc. of Minnetonka, Minnesota, the second-biggest health plan, raised its 2010 earnings forecast April 20 after announcing better-than-projected enrollment. Aetna Inc., the No. 3 insurer, is due to report tomorrow.

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