(Reuters) - WellPoint Inc WLP.N, the nation’s second largest health insurer, sees President Barack Obama’s healthcare reform giving a $20 billion boost to its revenue by 2016, led by an expansion of the Medicaid program for the poor and the introduction of subsidized coverage for the uninsured.
WellPoint will be one of the largest players on health insurance exchanges created by the Affordable Care Act that will allow consumers to choose subsidized health plans beginning on October 1. It plans to compete on the exchanges in the 14 states where it operates Blue Cross Blue Shield licenses.
In addition, about half of the states where it operates have elected to expand the government’s Medicaid program, increasing eligibility to millions more people. These two central provisions of “Obamacare” are expected to expand insurance to 25 million more Americans by 2016.
Wellpoint gave the upbeat forecast alongside higher than expected quarterly results, but its shares were held back by a cautious outlook for 2014.
“Over the next few years, enrollment growth in Medicaid, exchange and other products could drive our annual run rate operating revenue to around $90 billion by 2016,” Chief Executive Officer Joseph Swedish said during a conference call with analysts to announce quarterly earnings.
U.S. health insurers have been reluctant to embrace Obama’s healthcare law, a focus of opposition from Republican lawmakers and the business community, which includes requirements that will raise costs, and new taxes, for the industry
At the same time, insurers are expected to benefit in the longer-term from healthcare reform, as the market for individual insurance plans grows by the millions. UnitedHealth Group (UNH.N), WellPoint’s larger rival, said last week that it expects long-term growth in the future.
WellPoint Chief Financial Officer Wayne DeVeydt said in an interview that much of the $20 billion in growth - an unprecedented advance for the company - is driven by Medicaid and exchanges alone. “The general components of that are primarily driven by the government business with the expansion of the Affordable Care Act,” he said.
It is difficult for a company as large as WellPoint to grow that substantially, Wedbush Securities analyst Sarah James said.
“That’s $30 billion in gross revenues from today, so that is pretty bullish,” she said.
At the same time, the company took a more conservative tone about its performance in 2014, when it expects its small business division to lose members as employers stop providing coverage for staff who will seek subsidized coverage on the state insurance exchanges.
WellPoint, said it will make up for some small business losses on the exchanges but is not sure how that will unfold.
“Until the exchanges are up and running, it’s a challenge for us to be overly optimistic, but we are optimistic about our future,” DeVeydt said.
Another unknown for 2014 is the level of pressure on government payments for privately-run Medicare plans for the elderly, which have already seen funding cuts. The company still plans to invest $100 million in that business this year, but said it would shift an additional $50 million it had earmarked to it over to the exchanges, its employer-based business and Medicaid.
WellPoint also reported a much higher-than-expected quarterly profit on Wednesday, helped by low medical costs in its employer-based insurance business and improvements in Medicaid operations after the purchase of Amerigroup in December.
Second-quarter net income rose to $800.1 million, or $2.64 per share, from $643.6 million, or $1.94 per share, a year earlier. Revenue was $17.6 billion, up from $15.2 billion a year ago.
Excluding investment gains and acquisition-related costs, WellPoint said earnings were $2.60 per share. That compares with analysts’ expectations of $2.11, according to Thomson Reuters I/B/E/S.
This was WellPoint’s first full quarter under new CEO, Swedish. He took over the top spot at the company from Angela Braly, who left after coming under investor pressure one year ago over disappointing financial results.
WellPoint said that while it expected medical costs to rise in 2013, it has continued to see low utilization of medical services by consumers. That trend has helped all insurers during the past few years as their claim costs fell.
The company said it had 35.7 million members at the end of June, a slight drop from the end of March as declines in the employer-based and Medicare businesses outpaced increases in Medicaid from the Amerigroup acquisition.
The company said it spent 83.9 percent of the premiums it took in on medical claims, down from 85.4 percent a year earlier. The Affordable Care Act sets levels for how much of an insurer’s premiums must go towards claims.
WellPoint raised its full-year earnings forecast to at least $8 per share, up from the $7.75 it had affirmed in June.
WellPoint said its improved 2013 outlook was based on the better first-half results and that it remained “prudent” about the second half of the year.
Company shares were up 0.1 percent to $87.60 midday.
Reporting by Caroline Humer; Editing by Michele Gershberg, Lisa Von Ahn and Andrew Hay