NEW YORK (Reuters) - WellPoint Inc WLP.N posted a far better-than-expected quarterly profit on improvements for the health insurer’s Medicaid plans for low-income Americans and lower spending of premium revenue on medical costs.
Shares in the largest U.S. health insurer by membership rose 3.4 percent as the company said it also benefited from a milder-than-anticipated flu season and backed a 2010 financial forecast that some analysts deem conservative.
“There is probably a huge amount of upside to that guidance range,” Morningstar analyst Matthew Coffina said. “It’s going to be a really strong year, there’s no doubt about that. The question on everybody’s mind is: Is that sustainable going forward?”
WellPoint’s net income was $876.8 million, or $1.96 per share, compared with $580.4 million, or $1.16 per share, a year earlier, when results were hurt by net investment losses.
Excluding items, earnings of $1.95 per share were 28 cents ahead of the consensus estimate of analysts, according to Thomson Reuters I/B/E/S.
WellPoint followed UnitedHealth Group Inc (UNH.N) and Humana Inc (HUM.N) in reporting strong quarterly performance. But concern over implementation of the new U.S. healthcare reform law has undercut investor enthusiasm for the sector.
WellPoint has been a focus of criticism in the debate, including political ire over a plan to raise rates as much as 39 percent in California.
On Tuesday, the company said it would expedite a reform measure and stop dropping coverage for customers after they get sick except in cases of fraud and other similar cases. UnitedHealth made a similar announcement on Wednesday.
The moves followed pressure from Democrats and the Obama administration, who cited a Reuters report that WellPoint targeted breast cancer patients for such rescission investigations.
WellPoint Chief Executive Officer Angela Braly has called the report inaccurate and told analysts on Wednesday that “there have been many misrepresentations ... in recent days that have caused confusion among our members and among the public generally about our policies in this area.”
Reuters stands by its story, it has said.
WellPoint expects full-year net income of at least $6 per share. Analysts are looking for $6.14.
“The guidance was conservative going into this and it remains conservative,” Edward Jones analyst Steve Shubitz said.
In the first quarter, WellPoint’s operating revenue slipped 3 percent to $14.87 billion.
The company spent 81.8 percent of premium revenue on medical costs, down from 82.5 percent a year ago.
While such medical cost ratio improvements have been hailed by investors in the past, they have been less warmly received this quarter because the new law will more tightly regulate such spending. Details around those regulations have yet to be determined.
“It’s clearly a solid quarter,” Collins Stewart analyst Brian Wright said. “We need some of these other issues to be resolved before we get a more sustained rally in the group.”
The company said it expects the ratio to rise over the rest of the year, as more members fulfill their deductibles.
It also expects the ratio for its individual business to rise because of the delayed premium rate increases in California. WellPoint, which has defended the increases as reflecting higher medical costs, said on Wednesday its individual business in California was performing below expectations this year and lost money in March.
The Indianapolis-based insurer reported 33.8 million members at the end of March, down 2.1 percent from a year ago. It projected year-end membership of about 33.1 million, after saying in March it expected 33.3 million at year’s end.
Operating profit in the commercial segment, which includes plans serving employers, rose 8 percent to $978.4 million, as the company cited improvement in its local group business.
Profit rose 49 percent to $326 million in its consumer segment. WellPoint pointed to improvement in its state-sponsored business, which includes its Medicaid plans, due to operational changes, higher reimbursement levels for some programs and a less severe flu season.
WellPoint shares rose $1.88 to $57.80 on the New York Stock Exchange.
Reporting by Lewis Krauskopf; Editing by Derek Caney, Maureen Bavdek and Robert MacMillan