WellPoint Inc's WLP.N quarterly profit came in far above Wall Street expectations, helped by expansion of individual health insurance plans and Medicaid membership, as well as lower medical costs from plans sold to small businesses.
Shares of WellPoint, the second-largest U.S. health insurer, were up 5 percent on Wednesday afternoon, leading increases for the sector. The Morgan Stanley Healthcare Payor Index .HMO was up 1.2 percent.
WellPoint and its rivals are bracing for a transformation of the U.S. healthcare system under President Barack Obama's reform law that takes full effect in January.
It will participate in the expansion of insurance coverage to more than 30 million additional Americans, through broader government Medicaid coverage for the poor and private health insurance exchanges to be sold in individual U.S. states.
The company said it is still planning to sell products on health exchanges in the 14 states where it operates now, but that it is waiting for details of how they will be set up in the next few months. State exchanges will have to be ready to enroll new members on October 1 to provide benefits as of January 1, 2014.
"We are planning and assuming in our guidance that it rolls out on October 1," Chief Financial Officer Wayne DeVeydt said in an interview.
While insurers stand to gain more members under the new health law, they also face regulations that may restrict profit margins, tighter controls on reimbursement for government-sponsored insurance plans and requirements to cover more health services fully.
WellPoint, which provides insurance under Blue Cross and Blue Shield licenses, raised its 2013 earnings outlook because of the better-than-expected operating results.
However, WellPoint is "still being prudent as many of the uncertainties inherent in our original guidance still exist," Chief Executive Officer Joseph Swedish said in a statement, such as the effects of government budget cuts, or sequestration, on Medicare funding.
Swedish, a former hospital executive, took over as CEO in the first quarter, replacing longtime chief Angela Braly who had come under investor pressure over WellPoint's repeatedly disappointing financial results.
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WellPoint reported a profit of $885.2 million, or $2.89 per share, up from $856.5 million, or $2.53 per share, a year earlier.
Excluding items such as investment losses, the company earned $2.94 per share. On that basis, analysts were expecting $2.39, up from $2.34 a year earlier, according to Thomson Reuters I/B/E/S.
Revenue rose 16 percent to $17.5 billion, helped by the company's December acquisition of Amerigroup and the addition of its individual and Medicaid memberships.
WellPoint said the Amerigroup business had higher average benefit costs than the company as a whole. It was partly offset by lower-than-expected medical costs in its plans for small businesses that typically have between two and 50 employees.
WellPoint forecast 2013 net income of at least $7.75 per share or $7.80 excluding items, compared with a prior forecast of $7.60 per share.
"When I looked at the numbers I saw the beat as primarily being driven by lower taxes and a larger share repurchase, which has always been a big part of their story," said Wedbush Securities analyst Sarah James.
Looking ahead, WellPoint faces lower reimbursement rates next year from the government for its management of Medicare health plans for the elderly, Swedish said. As a result, the company is re-evaluating where it will invest the $150 million it has designated for the sector, he told analysts on a conference call.
While the entire industry will be affected by reimbursement changes to these privately administered Medicare Advantage plans, WellPoint's Medicare business in California, CareMore, is expected to take an even greater hit because it has many patients with multiple diseases for which it will receive lower reimbursements under the changes. CareMore accounts for about 10 percent of WellPoint's Medicare Advantage portfolio.
WellPoint shares were up 4.9 percent at $72.70 on the New York Stock Exchange on Wednesday afternoon, off an earlier high at $74.43.
(Reporting by Caroline Humer in New York; editing by Michele Gershberg, Lisa Von Ahn and Matthew Lewis)