WellPoint shares drop as it revises California rates

U.S. Secretary of Health and Human Services Kathleen Sebelius at the White House in Washington, March 4, 2010.

NEW YORK (Reuters) - WellPoint Inc (WLP.N) shares fell nearly 9 percent on Friday after the U.S. health insurer said it would revise a controversial request for rate increases for individual plans in California.

Other major U.S. health insurer stocks also closed as much as 5 percent lower on concerns that such a revision would signal a tougher operating environment under recently passed healthcare legislation intended to reform the industry.

The news overshadowed better-than-expected first-quarter profit from Coventry Health Care Inc (CVH.N).

WellPoint's Anthem Blue Cross said late on Thursday it would revise its rate requests previously filed with the California Department of Insurance and California Department of Managed Health Care, probably sometime in May.

The insurer said it would "address inadvertent miscalculations related to the way in which we estimated our future medical costs in our initial filings."

An independent actuarial analysis found "numerous and substantial errors" in Anthem's rate filing, said Steve Poizner, California's insurance commissioner, who had called for the outside review.

"We notified Anthem of these errors and they admitted to the mistakes," Poizner said in a statement on Thursday.

WellPoint's plan to raise rates by as much as 39 percent for some individuals in California was strongly criticized as Democrats rallied support to pass the health reform law earlier this year.

"The California news, coming on the heels of similar decisions in Maine and Massachusetts, highlights the difficult political environment that plans still face," Oppenheimer & Co analyst Carl McDonald said in a research note on Friday.

STATES TAKE LEAD

State insurance commissioners are advising the U.S. government on part of the new law that sets how much health insurance companies spend on medical costs, also known as medical loss ratios (MLR). Wall Street watches MLRs because they will affect profitability.

Investors are interpreting WellPoint's announcement as a sign that states will seek tough regulations, Tim Nelson, a healthcare analyst with First American Funds. said.

"The biggest lever they have is the MLR regulations," Nelson said. "That's the biggest way they can put the screws to the industry and not have to fight every year plan by plan, state by state on these kind of rate increases."

WellPoint's Chief Executive Officer Angela Braly told a congressional committee in February that the rate hikes reflected higher medical costs.

U.S. Health Secretary Kathleen Sebelius hailed WellPoint's announcement as "good news for the more than 800,000 Californians who could have been hit with massive rate increases and gives them some much-needed temporary relief."

In reporting first-quarter results earlier this week, WellPoint said its individual business in California was performing below expectations this year and that it lost money in March.

WellPoint shares closed down $5.28, or 8.9 percent, at $53.80 on Friday on the New York Stock Exchange.

(Reporting by Lewis Krauskopf; additional reporting by Susan Heavey; Editing by Lisa Von Ahn, Leslie Gevirtz)