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Investors fear insurers' rosy outlook will boost regulators' scrutiny

July 29, 2010

Indianapolis-based WellPoint Inc. became the third U.S. health insurer this month to increase its 2010 profit forecast, stirring investor concern that state and federal regulators may increase scrutiny of industry pricing.

WellPoint’s earnings may be at least $6.30 a share this year, more than a prior forecast of at least $6, the Indianapolis-based insurer said Wednesday when it reported second-quarter financial results. Shares in WellPoint, the biggest U.S. health plan by enrollment, fell 3.7 percent after Chief Financial Officer Wayne DeVeydt said the outlook was tempered by uncertainty over how the health-care law passed in March will affect results.

WellPoint, UnitedHealth Group Inc. and Aetna Inc. all cited lower medical costs in raising forecasts, saying fewer people visited doctors and hospitals because of the recession. With profits growing, insurers can’t justify any rate increases or benefit cuts next year, said U.S. Representative Pete Stark, a California Democrat.

“WellPoint and Aetna are on track for great years with multibillion-dollar profits,” Stark said in an e-mailed statement. “Now it’s time for them to return those windfalls to their enrollees in the form of reduced premiums.”

With regulators crafting rules to limit insurer expenses and expand reviews of their premiums, the enhanced forecasts may be bad news for investors, said Carl McDonald, a Citigroup analyst in New York. WellPoint already has canceled a rate increase in California this year under pressure from state and federal officials.

“None of the publicly traded plans have been directly impacted more by the increased regulatory oversight than WellPoint,” McDonald said in a note to clients. “The company’s strong financial results probably won’t help the situation.”

WellPoint fell $1.97, to $50.83, in New York Stock Exchange composite trading. UnitedHealth, based in Minnetonka, Minn., declined 45 cents, to $30.33. Hartford, Conn.-based Aetna fell 81 cents, or 2.9 percent, to $27.55.

“The uncertainty is what’s causing the panic,” CFO DeVeydt said in a telephone interview. Investors “didn’t get the clarity they want, and it’s very challenging for us to provide that clarity or even a direction until we get the rules written.”

The company is losing money on the California market, where rising medical costs make the situation “not sustainable,” Chief Executive Officer Angela Braly said on a conference call with analysts. “We expect that over time appropriate rates will be granted” in most states, as officials see WellPoint’s requests are justified, she said.

Enrollment in WellPoint’s health plans fell 2.1 percent to 33.5 million, dragged down by unemployment that the company expects to stay near 10 percent in the U.S. this year, the company said. The insurer raised its forecast on the strength of medical savings earlier this year, as well as share repurchases and investment gains, DeVeydt said.

The outlook for profit in 2011 and beyond depends on how the health-care law is implemented, especially a rule that requires insurers to spend at least 80 percent of member premiums on medical care, the CFO said.

“The core operations look very solid at this point,” he said. “We are taking a cautious and conservative view for the second half of the year as we wait to see some of the impacts of health reform.”

Even as it works to lower expense, the company expects its medical bills to rise about 8 percent this year as the cost of procedures rises and hospitals demand higher reimbursements, DeVeydt said.

UnitedHealth raised its forecast to $3.40 to $3.60 a share, citing the lower medical costs, and said second- quarter profit rose 30 percent. Aetna said its quarterly profit rose 42 percent and projected yearly earnings of $3.05 to $3.15 a share, up from $2.75 to $2.85.

“Medical costs continued to moderate in the quarter, increasing margins and generating outperformance,” said Dave Shove, a BMO Capital Markets analyst in New York, in a note to clients. “Earnings momentum is on the upswing.”

Aetna shares fell after the insurer said a pharmacy-benefits contract with CVS Caremark Corp. of Woonsocket, R.I., announced Wednesday, wouldn’t add to earnings before 2012. CEO Ronald Williams also said the company’s lower expenses earlier this year depended partly on one-time events, including a mild flu season and snowstorms that kept people from visiting doctors.

“We believe that the sector does have an overhang,” Williams told Margaret Brennan in an interview on Bloomberg Television’s “InBusiness.” “Companies aren’t trading on their fundamental performance and until the uncertainty disappears, we believe that’s going to be the fact.”

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