Medicare weighs on WellPoint; other insurers down

A pharmacy employee fills a prescription in New York, December 23, 2009.

NEW YORK (Reuters) - Health insurer WellPoint Inc (WLP.N) said surprisingly high medical claims from a Medicare plan serving the elderly in California would hurt its profits this year, and its shares fell 5.1 percent on Wednesday.

Shares of other insurers with significant Medicare business were also down as analysts said investors were additionally concerned the budget deficit talks could lead to legislation that hurts Medicare reimbursement.

WellPoint's setback, which it said would be isolated to 2011, comes as the No. 2 health insurer by market value charges into Medicare and challenges more established companies in the field, UnitedHealth Group Inc (UNH.N) and Humana Inc (HUM.N).

WellPoint wants to capitalize on the post-war "baby-boom" population becoming eligible for the Medicare program.

Administrative cost cuts and a lower-than-expected tax rate still allowed WellPoint to post second-quarter profit 2 percent ahead of analyst estimates. It also raised its full-year earnings forecast, but to a level below Wall Street's target.

"We're obviously disappointed with our performance in senior," WellPoint Chief Executive Angela Braly said on a conference call with analysts.

By contrast, Aetna Inc (AET.N), the No. 3 U.S. health insurer, reported quarterly profit on Wednesday that topped analysts' expectations by 25 percent and raised its forecast above analysts' average estimate. Aetna shares slipped 1.2 percent.

Humana and UnitedHealth were off 4 percent and 1.5 percent, respectively, while smaller Healthspring Inc HS.N, which also specializes in Medicare, fell 3.8 percent.

(For a graphic on health insurer P/E ratios, see: r.reuters.com/xej82s)

WellPoint said it encountered problems specifically in northern California, where the insurer expanded its Medicare plan into this year after previously operating in the southern part of the most populous U.S. state.

As WellPoint was pushing north, doubling its Medicare members in the state to about 110,000, its rivals were exiting that market, and the company "essentially got a much larger book of unhealthier lives than we had anticipated," Chief Financial Officer Wayne DeVeydt told Reuters in an interview.

"We were expanding in a market that others were leaving, and we ended up basically holding the bag for these members that were coming in," DeVeydt said.

A 30-CENT HIT

In the second quarter, profit in WellPoint's business that includes Medicare plans tumbled 41.3 percent.

For the year, the high Medicare costs will hurt WellPoint's earnings by 30 cents per share, according to the company. It projected a full-year profit of $6.90 to $7.10 per share, or $6.75 to $6.95 per share excluding net investment gains. It previously projected full-year profit of "at least" $6.60 per share excluding investment gains.

Analysts have been looking for $7.12 for the year.

Wells Fargo analyst Peter Costa said in a research note that "the timing may trigger concerns that WellPoint discovered its Medicare problem too late to sufficiently improve its bids for 2012."

But DeVeydt said the company had caught the issue in time for its bids for next year, which were due in early June.

"We think through the bidding process we have this fixed and resolved, and you'll see us recover that 30 cents that is impacting us this year," he said in the interview.

Sarah James, an analyst with Wedbush Securities, said "It seems like something that can be fixed for next year, but not something that they can really address this year."

Citigroup analyst Carl McDonald said the issue was "probably more a function of WellPoint's relative inexperience in Medicare than anything else."

But DeVeydt said the setback would not stall WellPoint's Medicare push.

He pointed to WellPoint's recently announced acquisition of privately held Medicare specialist CareMore, which serves seniors through Medicare Advantage plans and operates clinics. And he said the company was performing well in other markets such as Ohio and New York.

"This won't change our strategy," DeVeydt said. "It's one location, it's easy to fix in our opinion and we're going to continue to expand."

STILL A STRONG YEAR

WellPoint's report undercut some momentum for health insurer shares, which have been on a roll in 2011.

Health insurers have benefited this year from Americans postponing doctor visits and medical procedures in the weak economy. Weak use of health services has cut medical claims, leading to stronger-than-expected financial performances.

The results, combined with greater investor comfort in the fallout of the U.S. healthcare overhaul, has spurred strong stock price gains this year. Through Tuesday, Aetna shares had risen about 40 percent and WellPoint had climbed nearly 30 percent, while the S&P 500 index .SPX was up only 6 percent.

WellPoint's second-quarter net income was $701.6 million, or $1.89 per share, compared with $722.4 million, or $1.71 per share, a year earlier, when it had more shares outstanding.

Excluding items, earnings of $1.83 per share were 3 cents ahead of the analysts' average estimate, according to Thomson Reuters I/B/E/S.

Revenue rose 4.8 percent to $14.88 billion.

Aetna's second-quarter net income rose to $536.7 million, or $1.39 per share, from $491 million, or $1.14 per share, a year earlier.

Excluding items, earnings of $1.35 per share topped the average estimate of analysts by 27 cents.

Revenue slipped 2 percent to $8.32 billion.

Aetna raised its full-year forecast to a range of $4.60 to $4.70 per share, up from $4.20 to $4.30 previously. Analysts are looking for $4.39.

Aetna's results "were solid and mirrored the favorable utilization trends reported by its peers," Oppenheimer & Co analyst Michael Wiederhorn said in a research note.

Last week, UnitedHealth Group Inc (UNH.N), the industry's largest company by market value, reported better-than-expected second-quarter results although it raised its forecast only to a level in line with analyst estimates.

(Reporting by Lewis Krauskopf; Editing by Maureen Bavdek, John Wallace, Dave Zimmerman)