Rules mostly falling WellPoint's way

September 29, 2010

Health insurers such as WellPoint Inc. and UnitedHealth Group got a little bit of regulatory Meatloaf last week: Two Out of Three Ain’t Bad.

The insurers won fairly broad leeway under key rules suggested by state insurance commissioners that will govern what kinds of expenses count toward meeting a new federal threshold to spend at least 80 percent of premium dollars on medical care.

The proposal by the National Association of Insurance Commissioners said wellness efforts aimed at improving an individual customer’s health can be counted as medical expenses, but wellness and other efforts "should not be designed primarily to control or contain cost."

Also, insurers will be able to subtract from their total premium revenue most of what they pay in state and federal taxes. That would have the effect of increasing the companies' medical-loss ratios, which must exceed 80 percent for small companies and 85 percent for large ones.

"It's written the way insurers wanted it to be written, and so that is good for the insurers," Amy Thornton, an analyst at Concept Capital's Washington Research Group, told Reuters.

The proposal still must be approved by the U.S. Department of Health and Human Services. However the rules are finally written will have a big impact on insurers, because the new health law requires them to refund any premiums that should have been spent on medical care.

One thing that didn’t go the way Indianapolis-based WellPoint and others would like: Under the proposed rules, insurers would have to meet the 80-percent threshold for each of the numerous health plans they operate. Insurers wanted to be able to aggregate the ratios from all their plans.

The hit would have been equally significant, either way, for WellPoint in 2009. The company would have had to refund about $800 million, according to an IBJ analysis of data collected by the U.S. Senate's Commerce Committee and the California Department of Managed Care.

That’s roughly 2.5 percent of the $33 billion in medical premiums that WellPoint’s state-regulated subsidiaries collected last year. It also represents about 40 percent of WellPoint's 2009 adjusted pre-tax profit margin.

But being able to count its wellness efforts as medical expenses should help chip $300 million or more off that hit. And WellPoint is working to reduce its administrative costs also to help comply with the new rule.

WellPoint, which insures more Americans than any other company, sees itself in better position to absorb the hits than any of its competitors, especially smaller companies. Some analysts agree that size will matter more than ever in the new environment.

"We also believe that these rules favor the larger managed-care organizations over smaller groups, as the larger companies have better actuarial systems and larger pools of patients over which to spread the risk,” Les Funtleyder, a health care analyst and investor at Miller Tabak & Co., wrote in a note to clients.

WellPoint expects those advantages to lead many smaller companies to put themselves up for sale. And WellPoint intends to capitalize. It holds a $20 billion war chest (in cash and investments) that it intends to use to buy other companies in the next two years.

“It’s going to be very important we maintain enough capital at the parent, or enough liquidity and ability to lever up, to be able to do transactions, because I really do think they’re going to present themselves over the next couple of years,” WellPoint Chief Financial Officer Wayne DeVeydt said at a recent investor conference. “And I think you’ll see further consolidation in the industry, significantly more than what we have seen over the last four, five years.”


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