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WellPoint: Consumers will control health insurance

June 4, 2012

The future of health insurance is lower profit margins and greater consumer control. WellPoint Inc. just bet $900 million on it.

The Indianapolis-based health insurer on Monday said it would acquire Utah-based 1-800-Contacts Inc., a contact lens and eyeglass retailer, from Fenway Partners, a private equity firm based in New York.

WellPoint did not disclose financial terms of the deal, but several news outlets, citing unnamed sources, reported a price tag of $900 million.

WellPoint’s profit margins are being squeezed by the 2010 Patient Protection & Affordable Care Act, which mandated additional requirements for health insurance coverage while also insisting that insurers take no more than 20 percent of customer premiums for overhead or profits.

Last year, WellPoint’s profits amounted to 4.4 percent of total revenue, and Wall Street analysts expect that number to shrink going forward, leading to consolidation among health insurers.

1-800-Contacts, meanwhile, sports double-digit profit margins, according to WellPoint officials. The retailer's revenue is about $400 million, according to Wall Street analysts, and has been growing about 10 percent each year.

“Most specialty businesses, especially direct-to-consumer segments, generate unregulated earnings for WellPoint,” Barclays Capital analyst Joshua Raskin wrote in a research note Monday. “This is very attractive in light of the restrictions on cash generated at WellPoint’s regulated subsidiaries.”

Perhaps even more important to WellPoint is that financially strapped employers plan to shift more costs—as well as decision-making—to their workers. That threatens to disrupt WellPoint’s well-established advantages selling to corporate purchasers.

A year ago, WellPoint indicated that its future growth would hinge on individual and senior health coverage.

In a survey released last week by PricewaterhouseCoopers, more than 40 percent of employers said they are “somewhat likely” to shift their health plans to a defined contribution arrangement. That means employers would give their employees a certain amount of money to go out and buy health insurance—and possibly vision and dental insurance, as well.

About the same percentage of employers said they were likely to cover their employees through government-run insurance exchanges, called for by the 2010 health reform law. Consultants expect employers to give their employees a few thousand dollars to help cover the cost of insurance in those exchanges.

Even more employers—nearly 50 percent—say they are somewhat likely to cover their employees through private exchanges, such as those run by California-based eHealthInsurance or Minnesota-based Bloom Health.

WellPoint and two other health insurers acquired a controlling stake in Bloom Health last fall.

“Over time, the consumer will become the primary purchaser,” Wayne DeVeydt, WellPoint’s chief financial officer, told Bloomberg News.

Under the 2010 health reform law, the number of Americans covered by individual health insurance is expected to grow by 22 million. Enrollment in private exchanges would be on top of that.

WellPoint is already the largest seller of health plans to individuals, covering 1.9 million Americans. But Bloomberg noted that other insurers are pursuing similar strategies, with Aetna Inc. announcing it will sell coverage this year through Costco Wholesale Corp.’s stores.

“Health reform really accelerated the movement to the consumer-purchasing environment, but we still see it occurring no matter what,” DeVeydt said.

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