The big question for WellPoint Inc. is how much profit it will lose when the full impact of President Obama’s 2010 health reform law hits next year.
According to one estimate, the Indianapolis-based health insurer will shed $100 million in pre-tax profits in each of the next four years, due to small employers sending their workers to buy health insurance in new government-run exchanges that will begin on Jan. 1.
The exchanges, which are the centerpiece of Obama’s health law, will be online marketplaces operated by state governments and by the federal government. They will allow individuals to choose coverage from different insurers and receive a taxpayer-funded subsidy. Subsidies will be paid to households with incomes less than 400 percent of the federal poverty line, or about $92,000 for a family of four.
WellPoint executives have said they expect the company's profit margins from small employers to be cut in half in the exchanges, due to competition and restrictions on their plans imposed by the health reform law. The profit margins would be reduced to a “low- to mid-single-digit” range.
That reduction would total $400 million by 2017, or about 11 percent of WellPoint’s annual pre-tax profits, according to Chris Rigg, a health insurance analyst at Susquehanna Financial Group Inc., in an April 24 note to investors.
WellPoint executives have affirmed the estimated $400 million hit to its pre-tax profits, but they have not issued a prediction on how fast its small-employer clients will shift to the exchanges.
Rigg’s estimate predicted that 25 percent of WellPoint’s small-business customers will start buying WellPoint coverage through Obamacare’s exchanges in each of the next four years.
Rigg also assumed that WellPoint will keep all of its small-business health plan members, which now total 2 million people. That group of customers represents a huge chunk of WellPoint’s annual profits.
Of course, WellPoint could end up losing those customers to competing insurers when they switch to buy coverage in the exchanges. The 2010 Patient Protection and Affordable Care Act establishes four standard categories of insurance coverage so customers can easily compare different insurers' prices.
But WellPoint has spent $150 million trying to make sure the exchanges actually become an opportunity for growth. WellPoint has conducted exchange simulations with 55,000 people in eight states to figure out what features will make them most likely to buy an insurance policy on the exchanges.
“So we think with this research, we are very well positioned in our product design, in our marketing strategies and more importantly, in our pricing,” said Wayne DeVeydt, WellPoint’s chief financial officer, during a March 12 presentation at the Barclays Healthcare Conference.
Indeed, price was the No. 1 factor that could sway consumers' decisions in the exchanges, according to DeVeydt.
“Price mattered most and people are willing to do trade-offs for price. What we found second was brand mattered a lot,” DeVeydt said. He added, “And then we found everything else was a very distant third place of what mattered.”
With Obamacare’s expansion of the low-margin Medicaid business and Congress’ continued crimping of profit margins in Medicare Advantage plans, WellPoint’s future looks to feature higher volumes at lower profits.