Health Insurer Posts Sickening Drop in Profits
The country's largest health insurer, WellPoint Inc., posted a 25 percent decline in first-quarter net income amid a rising medical-loss ratio as the insurer once again lowered its full-year earnings projections.
Angela Braly, WellPoint president and CEO, said the new forecast is based on "higher medical costs and a lower level of favorable prior-year reserve development."
WellPoint earned net income of $588.1 million in the period, down from $783.1 million a year earlier. Total revenue climbed 3.1% to $15.55 billion. The health insurer’s medical-loss ratio, the percentage of premium revenue used to pay patient bills, climbed to 85.1 percent, up from 83.1 percent on higher claims in the senior business as a result of benefit-design changes in some product categories. Health-plan membership increased 1.4% from a year earlier to 35.4 million, driven by national business, which added 468,000 members.
Looking forward, WellPoint cut its 2008 earnings forecast another 34 cents to $5.42 to $5.67 a share, though it raised its view for operating revenue by $300 million to $62.3 billion. The latest mean estimates were for earnings of $5.73 on $62.33 billion in revenue.
“While the first quarter was challenging for WellPoint, since our March announcement we have further reduced claims inventories and achieved greater visibility into medical costs," said Braly. "Consequently, we have refined our earnings forecast to reflect higher medical costs and a lower level of favorable prior-year reserve development."
After WellPoint gave its first sharp profit warning in March, citing higher medical costs, lower enrollment and the changing economic environment, doubts arose about the entire health-insurance sector's ability to sustain healthy profit margins amid rising medical expenses and a shrinking commercial managed-care market.
Managed health care companies across the board find themselves buffeted from all sides, facing major pressures on earnings per share this year in the face of a severe flu season, Federal Reserve actions that are lowering interest rates and investment income, and planned cuts in California's Medicaid program.
Last month WellPoint kick-started the sector's worst selloff in the past 10 years after warning that rising medical costs, miscalculations in pricing health-plan premiums and broader economic woes would lead to lower-than-expected profits this year. Both WellPoint and UnitedHealth Group Inc., the second-largest insurer, have seen recent declines in the number of people they insure.
Braly said part of the reason is that small businesses in the grip of tough financial straits are dropping or cutting back coverage.
Published on April 23, 2008
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