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WellPoint fails to profit on consumer pullback

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With recession-weary Americans going to the doctor less, health insurer WellPoint Inc. should be enjoying higher profits. But it isn’t working out that way.

Indianapolis-based WellPoint spent nearly 86 percent of insurance premiums collected on paying medical bills during its second quarter, substantially higher than the 83 percent it paid in the same quarter last year. And the company expects medical bills to remain elevated the rest of the year.

Those higher costs helped push WellPoint’s profit down 3 percent in the second quarter, to $702 million.

The blame for this was cast on WellPoint’s Medicare Advantage customers in northern California, who are racking up medical bills that exceed the premiums they’re paying. Many of these customers switched over to WellPoint this year after Philadelphia-based Cigna Corp. left the market. WellPoint officials said they did not set their prices high enough for the level of care these customers need.

But Citigroup analyst Carl McDonald said the Medicare issues were not enough to account for all of WellPoint’s woes during the quarter. He estimated that expenses for medical bills in the rest of WellPoint’s business rose nearly as much—with the problems most likely coming in its employer-sponsored, or commercial, health plans.

“That the commercial loss ratio deteriorated isn’t surprising,” McDonald wrote in a July 28 report, noting declines at other health insurers, UnitedHealthcare and Aetna. “However, the magnitude of the change is, particularly considering how favorable industry utilization has been.”

McDonald estimated the medical bills for employer-sponsored plans rose 4 percentage points in the second quarter—a huge increase. He titled his report, “What Do You Think Of Your Team’s Execution? Right Now, I’m In Favor Of It.”

WellPoint officials attributed its commercial business’s higher medical expenses—also known as a benefit-expense ratio—to the fact that it socked away more in reserves, about $300 million in the second quarter. That spending offset lower spending on health care by consumers.

WellPoint reported that the cost of medical care has been rising about 7.5 percent this year for its fully insured customers, down from historical norms of about 8.5 percent. Other health insurers have reported similar trends.

“Our commercial benefit-expense ratio was stable on a year-to-date basis as the impact of lower prior period reserve development was offset by lower than expected, underlying medical cost trends during the first six months of 2011,” WellPoint CEO Angela Braly told investors and analysts during a July 27 conference call. She called the performance in WellPoint’s commercial business “strong.”

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