WellPoint Health Networks (WLP)

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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]

[edit] Overview

[edit] 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]

[edit] 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]

[edit] Trends & Forces

[edit] 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.^[28]

[edit] 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.^[29] 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.^[30] As a result, the company's Medicare Advantage Part D membership had grown 15 percent over the year ended June 30, 2008.^[31] 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.^[32] 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.^[33]

[edit] 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.^[34][35]

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.^[36] 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.

[edit] 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^[37]

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.^[38]

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^[39][40]

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^[41]

Top 10 U.S. Health Plans by Total Enrollment^[42]

 WellPoint Health Networks

	Select All  |  Select None Metrics Revenue by Geography - International Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Africa Revenue by Geography - South America Gross Profit Net Income Operating Income Total Premiums Health Care Premiums Total Customers Medicare Customers Medicaid Customers Risk-based Customers Fee-based Customers Medical Loss Ratio Administrative Cost Ratio Premiums from Commercial Customers Revenue Revenue by Geography - United States Net Investment Income Net Income Margin Premiums from Medicare Premiums from Medicaid Cancel

	Select All  |  Select None Companies Aetna (AET) AMERIGROUP (AGP) Centene (CNC) Coventry Health Care (CVH) I-TRAX (DMX) Health Net (HNT) Healthspring (HS) Metropolitan Health Networks (MDF) Magellan Health Services (MGLN) MOLINA HEALTHCARE (MOH) Sierra Health Services (SIE) Wellcare Group (WCG) UnitedHealth Group (UNH) WellPoint Health Networks (WLP) Humana (HUM) CIGNA Corporation (CI) UNIVERSAL AMERICAN CORP (UAM) Cancel

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Company	Data From	Premiums from Medicare	Net Investment Income	Revenue	Premiums from Medicaid	Revenue by Geography - United States	Net Income Margin
Aetna (AET)	2007	$2.6B[43]	$1.15B[44]	$27.6B[45]	$245M[43]	$27.6B[45]	7%[45]
CIGNA Corporation (CI)	2007	$675M[46]	$1.11B[47]	$17.6B[47]	Add	$17.6B[47]	6%[47]
Humana (HUM)	2007	$14.8B[48]	$314M[49]	$25.3B[49]	$556M[48]	$25.3B[49]	3%[49]
UnitedHealth Group (UNH)	2007	$26B[50]	$1.14B[51]	$75.4B[52]	$6.58B[50]	Add	6%[52]
WellPoint Health Networks (WLP)	2007	$13.7B[53]	$1M[54]	$61.1B[55]	Add	$61.1B[55]	5%[55]

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[edit] 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. ↑ [27] WLP 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 131
28. ↑ [28] Wellpoint Reports First Quarter 2008 Results. April 23, 2008
29. ↑ [29] About.com Health Insurance: Medicare Advantage. July 8, 2007
30. ↑ [30] SeekingAlpha | Wellpoint Q1 2008 Earnings Call Transcript. April 23, 2008
31. ↑ [31] WLP 2008 2Q 10-Q Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Pg 20
32. ↑ [32] SeekingAlpha | Wellpoint Says Price Hikes Will Fix Its Bottom Line; Analysts are Skeptical. April 24, 2008
33. ↑ [33] SeekingAlpha | Wellpoint Q1 2008 Earnings Call Transcript. April 23, 2008
34. ↑ [34] WLP 2007 10-Q
35. ↑ [35] WLP Reports Second Quarter 2008 Results
36. ↑ [36] Managed Care Magazine | As Premium Hikes Slow, Some Brace for Famine
37. ↑ [37] WLP 2007 10-K Item 1. Business, Pg 7
38. ↑ [38] SeekingAlpha | Wellpoint Inc. Q1 2008 Conference Call Transcript. April 23, 2008
39. ↑ [39] UNH 2007 10-K Item 8. Financial Statements and Supplementary Data, Pg 51
40. ↑ [40] SeekingAlpha | What's Going On with Managed Care? July 21, 2008
41. ↑ [41] Mark Farrah Associates | Top Health Plans Post ASO Membership Growth of 5.28% in 2007. May 30, 2008
42. ↑ [42] AIS Market Data | Top 25 U.S. Health Plans, Ranked by Total Enrollment (as of December 2007)
43. ↑ ^{43.0 43.1} AET,2007,EXBT-13,Item-na,Page-5
44. ↑ AET,2007,EXBT-13,Item-na,Page-41
45. ↑ ^{45.0 45.1 45.2} AET,2007,EXBT-13,Item-na,Page-40
46. ↑ CI,2007,10-K,Item-7,Page-48
47. ↑ ^{47.0 47.1 47.2 47.3} CI,2007,10-K,Item-6,Page-38
48. ↑ ^{48.0 48.1} HUM,2007,10-K,Item-7,Page-35
49. ↑ ^{49.0 49.1 49.2 49.3} HUM,2007,10-K,Item-6,Page-30
50. ↑ ^{50.0 50.1} UNH,2007,10-K,Item-7,Page-20
51. ↑ UNH,2007,10-K,Item-8,Page-51
52. ↑ ^{52.0 52.1} UNH,2007,10-K,Item-6,Page-19
53. ↑ WLP,2007,10-K,Item-7,Page-57
54. ↑ WLP,2007,10-K,Item-8,Page-86
55. ↑ ^{55.0 55.1 55.2} WLP,2007,10-K,Item-6,Page-39