Healthcare reform worries dog WellPoint and Aetna

NEW YORK Wed Jul 28, 2010 1:55pm EDT

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NEW YORK (Reuters) - WellPoint Inc WLP.N and Aetna Inc (AET.N), two of the largest U.S. health insurers, failed to provide investors with a clear view on profits in 2011 as they wait for details on the country's healthcare reform.

Shares of the two companies slid on Wednesday and weighed on industry peers despite the fact that both posted strong quarterly earnings and raised their 2010 forecasts.

"This goes back to the concern everyone has about 2011," said David Heupel, a portfolio manager with Thrivent Investment Management. "If it hasn't been painfully obvious in the last quarter or so that nobody cares about 2010 earnings, it's just another example."

A main reason for the industry's uncertainty about the impact of the U.S. healthcare overhaul is that rules determining how much the health insurers must spend on medical costs have yet to be determined. Those details are expected to be ironed out in the next couple of months.

Neither Aetna nor WellPoint could provide a 2011 profit forecast during their conference calls to discuss earnings on Wednesday. They did touch on some of the challenges and marketplace dynamics they face for next year.

"The reality is we can't give them that 100 percent certainty because we don't have final rules written," WellPoint Chief Financial Officer Wayne DeVeydt said in an interview. WellPoint is the top U.S. health insurer by membership.

Once the rules are finalized, DeVeydt said, "investors will then be able to start sizing what they think the impacts will be and I think you'll see them starting to come back in."

WellPoint shares fell 3.2 percent while Aetna dropped more than 2 percent. The Morgan Stanley Healthcare Payor index .HMO was down 2 percent.

THUMBS DOWN FOR AETNA'S CVS DEAL?

Aetna may have also disappointed some investors with an announcement on Tuesday that it would contract its pharmacy benefit services to CVS Caremark Corp (CVS.N), as opposed to selling its drug-benefit business outright. WellPoint sold its drug benefit business last year for $4.68 billion to Express Scripts Inc (ESRX.O).

"It feels to us like WellPoint got the better deal on its PBM transaction." Citigroup analyst Carl McDonald wrote in a research note.

Aetna, the No. 3 U.S. health insurer, said on Wednesday the CVS deal would be neutral to earnings next year and add about 30 cents per share to earnings when the contract is fully implemented in 2012. That amounts to an increase of nearly 9 percent in Aetna's expected earnings of $3.49 per share for 2012, according to Thomson Reuters I/B/E/S.

After Aetna's pharmacy benefit decision, the focus will likely switch to Cigna Corp (CI.N) as the only remaining major health insurer with a "pure" pharmacy benefit unit, according to Goldman Sachs analyst Matthew Borsch.

Shares of CVS rose 4.2 percent after the company outlined its profits from the Aetna deal and cited progress overall in its pharmacy benefit business.

CALIFORNIA CHALLENGES

WellPoint's net income for the second quarter rose 4.2 percent to $722.4 million, or $1.71 per share. Excluding items, it earned $1.67 per share and topped analysts' average estimate by 12 cents, according to Thomson Reuters I/B/E/S.

Revenue slipped nearly 7 percent to $14.22 billion. Analysts looked for $14.61 billion.

Profit in WellPoint's commercial business jumped 28 percent to $745.7 million, helped by its plans serving small businesses.

Profit in its consumer business fell 21 percent to $300.9 million, as WellPoint cited a delay in implementing rate increases for its individual plans in California and weaker performance by its Medicare Advantage plans.

WellPoint had pulled its initial request for an average 25 percent increase in California, which drew heavy criticism from Democrats earlier this year, when errors were found.

The insurer has said it expects to lose money this year on its individual business in California, where it is now seeking to raise rates by 14 percent on average.

Chief Executive Angela Braly said the company was likely to see profit margins squeezed for its individual plans in some states next year, although the company believes appropriate rates will be granted over time in the individual market.

For the year, WellPoint forecast earnings of "at least" $6.30 per share, up from its prior outlook of at least $6.00. Analysts had been looking for $6.26.

Last week, UnitedHealth Group Inc (UNH.N), the largest health insurer by market value, raised its profit forecast after posting a far higher-than-expected quarterly profit.

(Reporting by Lewis Krauskopf, additional reporting by Phil Wahba; Editing by Michele Gershberg, Derek Caney, Matthew Lewis and Steve Orlofsky)

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