Small employers dumping plans faster than expected, WellPoint says

A year ago, investors worried that WellPoint Inc. would lose more of its small business customers than it could offset by signing up individuals in the Obamacare exchanges.

The first half of those concerns were justified—and then some. Indianapolis-based WellPoint is seeing its small business customers dump their group health plans and move their workers to the Obamacare exchanges at a faster clip this year than it expected.

Already in 2014, WellPoint has watched 218,000 members of its health plans disappear because their employers have ended their group health plans. That’s a 12-percent drop in WellPoint’s overall small group membership.

As I have reported before, the Obamacare tax credits for individuals have proven quite attractive for many employers with fewer than 30 workers. That's not to say all are taking this route. Most other health insurers have reported that small employers are ending their health plans more slowly than expected.

But WellPoint expects the trend of its small business customers ending their group health plans to play out in just two years, with roughly $400 million in annual profit disappearing.

“We think [that] will be in a more accelerated timeframe over a shorter window of time, meaning this year and next, than over a longer period of time,” said WellPoint Chief Financial Officer Wayne DeVeydt during a July 30 conference call with investors.

But the second half of investors’ concerns has proved wrong—and then some.

WellPoint has signed up 769,000 customers on the Obamacare exchanges—far more than the “more than 600,000” it said it expected back in April. That number has even been reduced for members who signed up and then failed to pay their premiums.

That healthy enrollment has more than made up for the fact that WellPoint’s profits on the Obamacare exchanges are only half as large as in the small employer market.

Exchange profits are running in the range of 3 percent to 5 percent, according to WellPoint officials. The company does not disclose its small employer profits, but it has said they are roughly double the exchange profits.

Given those numbers, I figure the Obamacare transition is bringing WellPoint about $1.75 in new profits for every $1 it loses. Here’s how I came up with those figures:

Assume WellPoint receives $5,000 in premiums for every health plan member it signs up. Also assume that WellPoint makes an 8 percent profit on each member it signs up at small employers and 4 percent profit for each exchange enrollee.

That’s $400 in profits for each person it enrolls among small employers and $200 per person in the exchange market.

So if WellPoint has lost 218,000 small employer health plan members, at $400 in profits per person, it has lost $87 million in profits.

But if it has gained 769,000 in exchange plan members, at $200 in profits per person, it has gained a total of nearly $154 million in profits.

Those new profits of $154 million are 76 percent higher than the profits WellPoint lost from small employers.

That’s a rough calculation. But it helps explain—along with WellPoint’s sky-high stock price—why WellPoint executives are so upbeat lately.

“I think we’ve modeled this very effectively, executed very effectively, and we’re expecting a good path to year-end,” said WellPoint CEO Joe Swedish on July 30.

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