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WLP AT A GLANCE

P/E ► 9.18 AVG EV/EBITDA ► 7.40 AVG ROA ► 5.6% AVG ROE ► 10.5% AVG Debt to Equity ► 1.16 AVG Current Ratio ► 0   Interest Coverage Ratio ► 8.77 AVG

 

 

 

 

 

 

Wellpoint Inc. is the largest managed care company in the United States in terms of enrollment, with 35.3 million members as of June 30, 2008.^[1] The company’s primary sources of revenue are premiums and administrative fees charged to businesses and governments for the management of employee health plans. Benefit costs, which are payments made to health care providers such as physicians and hospitals and spending on drugs prescribed to members, represented approximately 82 percent of Wellpoint's total expenses in 2007.^[2] With its exclusive license to the Blue Cross Blue Shield brand in its most significant markets and the nation's largest provider network, Wellpoint can compete with other managed care companies by offering nationwide access to care at lower costs than smaller companies. Wellpoint has members in all 50 states, and approximately one in nine Americans receives health plan coverage through one of the company's plans.^[3] Wellpoint's large size also helps it negotiate more favorable reimbursement terms with health care providers like hospitals and physicians, which reduces costs and provides a competitive advantage.^[4]

Wellpoint's profitability depends on its ability to accurately predict and manage health care costs for its members through underwriting criteria and negotiating favorable contracts with providers. Upward trends in medical costs and an aging population adversely affect the company's profits by increasing its expenses.^[5] The managed care industry is characterized by consolidation, and increasing price sensitivity among consumers. Notable managed care mergers include Aetna's July 2007 acquisition of Schaller Anderson, a provider of management services for Medicaid plans, for $535 million,^[6] Coventry's September 2007 acquisition of Florida Health Plan Administrators for $708 million,^[7] Humana's October 2007 purchase of CompBenefits Corp., a provider of dental and vision insurance benefits, for $369 million,^[8] and Wellpoint's December 2005 purchase of Wellchoice, a managed care company with nationwide operations, for $6.5 billion.^[9] During the company's Q1 2008 earnings conference call, management responded to analyst concerns that consumer price sensitivity would force the company to cut premiums in an effort to attract and retain customers by stating that Wellpoint would not take part in a premium pricing war.^[10]

Overview

Business & Financial Analysis

Wellpoint’s revenue and operating income for the fiscal year ended December 31, 2007 were $60.1 billion and $5.3 billion, respectively. Over the five year period ending December 31, 2007, revenue grew at a compound annual rate of 35.7 percent while operating income grew at a compound annual rate of 44.5 percent. However, management blamed rising medical costs and intense competition in the managed care industry as the company reported net income of $1.34 billion for for first six months of 2008, down 17 percent from $1.62 billion for the first six months of 2007^[11][12]. Several managed care companies, notably Humana,^[13] were forced to cut premiums in an effort to attract new members which, coupled with unexpected increases in medical costs for members, resulted in thinner profit margins for the industry. At Wellpoint, increased costs, blamed in part on an unexpectedly large number of the company's elderly Medicare Advantage beneficiaries catching the flu^[14], raised the company’s benefits expense ratio, which expresses the company’s spending on health care for its members as a percentage of the revenues it collects from premiums, to 83.3 percent in the 2nd quarter of 2008, up from 81.8 percent a year earlier.^[15] The benefits expense ratio can also be referred to as the benefit cost ratio, medical loss ratio, medical cost ratio, or medical care ratio. Wellpoint reports premiums revenue as Premiums Earned, which states the amount of revenue earned for the risk covered by an insurer in that period. For example, if Wellpoint writes an insurance policy for coverage spanning an entire year with an annual premium of $1,000. the company reports $250 of premiums earned revenue on its Income Statement for the first quarter of the year. The remaining $750 is reported on the balance sheet as unearned income.^[16]

Much of the company's growth has been fueled by acquisitions of other managed care companies, including Anthem (2004), Lumenos (2005) and Wellchoice (2005). Wellpoint also acquired Imaging Management Holdings, a radiology benefit management and technology company, in 2007^[17].

Wellpoint is the exclusive licensee of the Blue Cross and Blue Shield brands in 11 states, including New York, and is the exclusive licensee of the Blue Shield brand in California. Wellpoint's broad product offering includes traditional health insurance offerings (such as HMO, PPO, POS and Indemnity plans), targeting individuals, small and large employer groups, national accounts and government-funded beneficiaries. In addition, WLP has several specialty products marketed to all customers such as group life and disability insurance, pharmacy benefits management, plus dental, vision and behavioral health services. Local groups with less than 1,000 employees accounted for the largest share of the company's customer base, representing 48% of enrolled members as of December 31, 2007.^[18]

Breakdown of WLP Medical Enrollment by Customer Type, As of December 31, 2007^[19]

Business Segments

• Consumer and Commercial Business (70% of sales, 80% of net income in 2007)^[20] serves individual and commercial customers with a diversified mix of managed care products, including Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), traditional indemnity benefits and Point of Service (POS) plans. CCB also offers a variety of hybrid benefit plans, including Consumer Driven Health Plans (CDHPs) intended to help businesses control health care costs. CDHPs combine a high-deductible PPO plan with an employer and/or employee-funded personal care account. Additionally, CCB provides a broad array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management and other administrative services. Self-funded customers, typically large group employers, pay a fee to Wellpoint for managing employee health benefits and reimburse the company for most or all of the health care costs.^[21]

• Specialty, Senior, and State Sponsored (20% of sales, 20% of net income)^[22] provides Medicare Part D, Medicare Advantage, Medicare Supplement, Medicaid, life and disability insurance benefits, pharmacy benefits, dental, vision, behavioral health benefit services and long-term care insurance, and workers compensation services.^[23]

• Other (10% of sales, <0.2% of net income)^[24] includes results from the company’s Federal Government Solutions, or FGS, business, which provides health benefits to federal employees. ^[25]

WLP 2007 Revenue by Segment^[26]

Quarterly Earnings

WellPoint achieved operating revenue of $15.3 billion in Q2 (ending 6-30-09), down 1.4% from $15.5 billion in 2008. Operating income fell from $751 million in 2008 to $694 million, a decrease of 7.6%. The loss in revenue was due in part to a decrease in member enrollment to 34.2 million, a decrease of 1.1 million. WellPoint attributes this decrease to losses of in-group enrollment due to increased unemployment. This decrease was also the result of increased premiums charged for the medical plans, which WellPoint imposed to offset increases in healthcare costs.^[27]

Trends & Forces

Healthcare reform will impact many aspects WellPoint's business

Potential healthcare reforms vetted by the Obama Administration and currently under review in Congress would remake the structure of the American health-care system. WellPoint stands to both benefit and be hurt by the new healthcare reform proposals. One one hand, expansion of Medicaid to tens of millions of currently uninsured Americans would drive revenue growth for WellPoint. On the other hand, increased taxes and publicly-driven competition in the health insurance market would hurt WellPoint's bottom line. It is important to note, however, that nothing has been set in stone with regard to a final healthcare reform bill, and there can only be speculation of what form healthcare reform will eventually take.

One feature of the healthcare reform proposal is a government-run insurance program. Such a program would grab market share from private insurance companies, thus hurting the bottom line of companies such as WellPoint. However, this facet of the healthcare reform bill is a point of controversy that received criticism from Republicans and some moderate Democrats. In the face of this opposition, President Obama has stated that he would be willing to accept a proposal that included non-profit health insurance cooperatives instead of a government-run program.^[28] While cooperatives, in which consumers band together to form insurance groups (somewhat like a credit union),^[29] would introduce competition into the health insurance market, their fragmented nature in relation to a government-run program would make them a much less formidable competitive force against private health insurers. Another hot-topic issue involves the question of whether the government will tax health care benefits provided by employers.^[30] Such a tax would likely adversely affect health insurance companies, as the added consumer costs would eat away at margins.

WellPoint would benefit, however, from the expansion of Medicaid to the tens of millions uninsured Americans. WellPoint’s Medicaid services program serves more than two million members in 14 states.^[31] Expanding the pool of citizens who qualify for Medicaid coverage would benefit WellPoint’s Medicaid program.

On September 8, details emerged regarding a healthcare reform proposal from Sen. Max Baucus that included $6 billion in annual fees to health insurance providers and a tax on high-end "luxury" health plans.^[32] In addition to substantially impacting the bottom line of WellPoint, these fees would force higher premiums on health insurers, which could adversely affect market share in the face of public competition. WellPoint shares fell 4.3% after announcement of the plan.

Rising Medical Costs and Falling Enrollment Cause Wellpoint to Lower 2008 Earnings Outlook

In a March 10, 2008 press release, Wellpoint blamed higher than expected medical costs coupled with lower than expected enrollment as it cut its forecast for 2008 net income to $5.76 to $6.01 per share, down from a previous forecast of $6.41 per share. Shares fell more than 25% following the announcement. Increased medical cost forecasts prompted the company to further lower its 2008 earnings outlook as it reported results for the 1st quarter of 2008. The revised guidance calls for earnings in the range of $5.42 to $5.67 per share and a benefits expense ratio between 83.3 and 83.6 percent.^[33]

Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.^[34] These competing pressures are having the overall effect of lowering WellPoint's revenues and margins. WellPoint's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.

Benefit Changes Attract Sicker Members to Wellpoint's Medicare Advantage Plans; Cause Unexpected Cost Increases

Under the Medicare Advantage program, Medicare beneficiaries sign up for health (Medicare Advantage Part A & B) and drug (Medicare Advantage Part D) coverage with private insurers, and Medicare pays the private insurer a set amount of money each month for each member's care, whether or not the member uses any health care services.^[35] In 2007, Wellpoint altered the benefits structure of its Medicare Advantage Part D plan so that members would have no copay for prescription drugs received under the plan.^[36] As a result, the company's Medicare Advantage Part D membership had grown 15 percent over the year ended June 30, 2008.^[37] However, the company was struck by unexpectedly high medication costs as sick members requiring many prescriptions signed up for the revamped plan. When reporting results for the 1st quarter of 2008, the company blamed these unexpected costs in its Senior division for 160 basis points of the 200 basis point year-over-year increase in its benefit expense ratio.^[38] As changes to pricing and benefits do not go into effect until 2009, the company expects to be hurt by higher costs in its Senior division through the end of 2008.^[39]

Wellpoint Uses Excess Capital to Buy Back Shares

During the six months ended June 30, 2008, Wellpoint repurchased 46.5 million shares for approximately $2.9 billion, or approximately 10% of the company's market capitalization on June 30, 2008. At the end of June 2008, the remaining board-approved allocation for share repurchasing was approximately $1.4 billion.^[40][41]

Wellpoint's share repurchasing program is typical typical of the managed care sector. As the industry is not particularly capital intensive, managed care organizations tend to redistribute excess revenues to shareholders through buybacks and dividends and to employees through the granting of options rather than reinvesting in the business.^[42] Share buybacks allow companies to dispose of excess capital in a way that reward investors and also increases earnings per share by lowering the number of shares outstanding.

Competition

As the nation's largest managed care organization by medical enrollment, Wellpoint is able to use its size and nationwide presence to negotiate more favorable contracts with health care providers like physicians and hospitals, thereby reducing the amount it spends on health care benefits for members.

Consumers have favored health insurance plans offering larger networks and greater member choice relating to coverage and physicians. The BlueCard program, in which each of the 39 independent Blue Cross Blue Shield licensed companies participates, lets any BCBS licensed company take advantage of any other BCBS licensed company's provider networks and discounts when a member works or travels outside of the state in which the policy is written. The program provides Wellpoint and other BCBS licensed companies with a competitive advantage, especially when competing for the business of employers with offices around the country^[43]

Wellpoint enjoys the number one market share in almost all of the 14 states in which it operates using the Blue Cross Blue Shield License. Among these Blue states, the company has a 30 percent or greater share of the market in four of them and another four states in which it has greater than 40 percent market share.^[44]

A key metric used to evaluate the profitability of managed care organizations is the benefits expense ratio, which is essentially a ratio of (cost of goods sold / sales revenue) with cost of goods sold being expenses on health care services for members and sales revenue being premiums collected from members. Considering the nation's largest managed care organizations take in billions of dollars in annual premiums revenue, small movements in the benefits expense ratio have a significant impact on net income. For instance, Wellpoint collected $55.9 billion in premiums during 2007. Had the company managed to reduce its benefits expense ratio by one additional percentage point (100 Basis point (bps)), to 81.4 percent from the 82.4 percent it reported, net income would have increased by $559 million, a 17% increase on reported 2007 net income of $3.35B. Benefit expense ratios are primarily impacted by medical cost trends and rates of denial for payment of claims submitted to managed care organizations by health care providers.

Benefits Expense Ratio for Wellpoint and Major Competitors, 2005 - 2007^[45][46]

Medical Membership Growth from 2006 to 2007 Among Leading Managed Care Organizations. Note: Fully Insured customers are those whom the managed care organization indemnifies against health care expenses while Administrative Services Only members are those for whom the member's employer pays for health care expenses and the managed care organization receives a fee for administration and management of the employee's health plan^[47]

Top 10 U.S. Health Plans by Total Enrollment^[48]

References

1. ↑ [1] AP | WellPoint 2Q profit drops but beats forecast. July 23, 2008
2. ↑ [2] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 86
3. ↑ [3] Wellpoint.com | About Wellpoint
4. ↑ [4] WLP 2007 10-K Item 1. Business, Pg 7
5. ↑ [5] WLP 2007 10-K Item 1A. Risk Factors, Pg 23
6. ↑ [6] AET 2007 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Pg 33
7. ↑ [7] CVH 2007 10-K Item 1. Business, Pg 16
8. ↑ [8] HUM 2007 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Pg 33
9. ↑ [9] WLP 2007 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Pg 43
10. ↑ [10] SeekingAlpha | Wellpoint Says Price Hikes Will Fix Its Bottom Line; Analysts are Skeptical. April 24, 2008
11. ↑ [11] WLP 2008 2Q 10-Q Item 1. Financial Statements, Pg 2
12. ↑ [12] SeekingAlpha | WellPoint, Inc. F2Q08 (Qtr End 06/30/08) Earnings Call Transcript. July 23, 2008
13. ↑ [13] Bloomberg | Humana, Following Wellpoint, Cuts Earnings Forecast. March 12, 2008
14. ↑ [14] Bloomberg | Wellpoint Plummets, Pulling Down Health Insurers. March 11, 2008
15. ↑ [15] Fox Business | WellPoint Reports Second Quarter 2008 Results. July 23, 2008
16. ↑ [16] WLP 2007 10-K Item 8. Financial Statements and Supplmentary Data, Pg 95
17. ↑ [17] WLP 2007 10-K Item 1. Business, Pg 5
18. ↑ [18] WLP 2007 10-K Item 1. Business, Pg 3
19. ↑ [19] WLP 2007 10-K Item 1. Business, Pg 13
20. ↑ [20] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 131
21. ↑ [21] WLP 2007 10-K Item 1. Business, Pg 9
22. ↑ [22] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 131
23. ↑ [23] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 131
24. ↑ [24] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 131
25. ↑ [25] WLP 2007 10-K Item 1. Business, Pg 9
26. ↑ [26] WLP 2007 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
27. ↑ WellPoint Reports Second Quarter 2009 Results
28. ↑ Obama may drop U.S.-run health plan
29. ↑ What are Nonprofit Health Insurance Cooperatives?
30. ↑ Raising taxes at center of health care reform debate
31. ↑ WellPoint Names Head For Its Medicaid Business
32. ↑ Health insurers, others hit as reform ramps up
33. ↑ [27] Wellpoint Reports First Quarter 2008 Results. April 23, 2008
34. ↑ http://www.reuters.com/article/healthNews/idUSTRE55H68320090618 Healthcare costs for U.S. companies seen rising 9 percent: survey]
35. ↑ [28] About.com Health Insurance: Medicare Advantage. July 8, 2007
36. ↑ [29] SeekingAlpha | Wellpoint Q1 2008 Earnings Call Transcript. April 23, 2008
37. ↑ [30] WLP 2008 2Q 10-Q Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Pg 20
38. ↑ [31] SeekingAlpha | Wellpoint Says Price Hikes Will Fix Its Bottom Line; Analysts are Skeptical. April 24, 2008
39. ↑ [32] SeekingAlpha | Wellpoint Q1 2008 Earnings Call Transcript. April 23, 2008
40. ↑ [33] WLP 2007 10-Q
41. ↑ [34] WLP Reports Second Quarter 2008 Results
42. ↑ [35] Managed Care Magazine | As Premium Hikes Slow, Some Brace for Famine
43. ↑ [36] WLP 2007 10-K Item 1. Business, Pg 7
44. ↑ [37] SeekingAlpha | Wellpoint Inc. Q1 2008 Conference Call Transcript. April 23, 2008
45. ↑ [38] UNH 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 51
46. ↑ [39] SeekingAlpha | What's Going On with Managed Care? July 21, 2008
47. ↑ [40] Mark Farrah Associates | Top Health Plans Post ASO Membership Growth of 5.28% in 2007. May 30, 2008
48. ↑ [41] AIS Market Data | Top 25 U.S. Health Plans, Ranked by Total Enrollment (as of December 2007)