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WellPoint shares top $100 on bullish 5-year forecast

March 24, 2014

Increased government spending in health care is turning out to be a business boom for WellPoint Inc.

The Indianapolis-based health insurer predicted growth in government-funded health insurance programs would push revenue above $100 billion by 2018. That prompted investors to push WellPoint stock above $100 per share—an all-time high for the company. And Wall Street analysts starting set price targets at $120 and even $130.

The stock closed Monday at $100.97 per share, up $1.20 on the day.

WellPoint expects to add $30 billion in annual revenue over the next five years, with essentially all of it coming from government sources.

The biggest chunk, $16 billion in annual revenue, is expected to come via the Obamacare exchanges, where most individuals have been receiving taxpayer-funded subsidies to buy private insurance.

"We believe the market is poised for unprecedented growth in covered lives," WellPoint CEO Joe Swedish said during the company’s Investor Day in New York City.

Even though the roll out of the federal marketplaces was botched, WellPoint has managed to sign up more than 500,000 customers. But WellPoint expects its exchange enrollment to reach 3 million by 2018. Other individual customers would add to that number, marking a significant increase over the 2 million individual customers WellPoint had before the launch of the exchanges.

WellPoint said a higher percentage of sick customers would boost exchange premiums 10 percent over the next three years. Those increases will be held at that somewhat modest level by about $600 million it expects to receive from Obamacare’s reinsurance and risk-adjustment funds.

The next-biggest chunk of revenue will come from expansions in Medicare and, especially, Medicaid. WellPoint’s Amerigroup subsidiary won eight out of eight of the state Medicaid contracts it bid for in 2013.

Obamacare’s expansion of Medicaid coverage will bring WellPoint an extra $6 billion in annual revenue by 2018, the company predicts. On top of that, it expects to win $6.5 billion in new state contracts to handle “dual eligible” customers—low-income seniors who qualify for both Medicare and Medicaid.

Medicare Advantage plans, an area in which WellPoint has always lagged far behind its peers, will also grow, bringing WellPoint an extra $2.5 billion per year by 2018.

What won’t grow, or at least won’t grow much, is WellPoint’s existing commercial business. The company expects to lose 1.5 million customers by 2018, mostly from smaller employers' sending their employees to the Obamacare exchanges. That will cost WellPoint $7.5 billion in revenue per year.

The company thinks it could derive an additional $6 billion to $11 billion from existing customers, which would offset most of those commercial losses.

All in all, investors liked what they heard. WellPoint raised its 2014 profit forecast to $8.20 per share and said that by 2018 it would be earning profits of $14 per share.

“Our primary takeaway from WLP’s Investor Day is that the company now has the right management team on the field,” wrote Chris Rigg, an analyst at Susquehanna Financial Group, referring to WellPoint by its ticker symbol. “The management team coupled with the brand-recognition benefits derived from WLP’s [Blue Cross and Blue Shield] affiliation, in our opinion, should allow for accelerating top- and bottom-line growth over the near-to-intermediate term.”

But WellPoint also has a lot of catching up to do. Its stock price has risen 60 percent in the four years since Obamacare—formally known as the Patient Protection and Affordable Care—became law.

That’s in line with the Standard & Poor’s 500 during that time, but well behind WellPoint’s main competitors.

During the same four-year stretch, Minnesota-based UnitedHealth Group Inc. and Louisville-based Humana Inc. saw their stock prices rise 149 percent and 148 percent, respectively. Philadelphia-based Cigna Corp., Hartford, Conn.-based Aetna Inc. both saw their stock prices rise 120 percent or more.

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