Updated from 9:21 a.m. EST

OKLAHOMA CITY -- WellPoint ( WLP) has failed to cure the problem that worries investors the most.

The giant health insurer once again suffered a painful rise in its medical cost ratio, or MCR, relying on savings elsewhere to hit its fourth-quarter targets.

Revenue for the quarter climbed 6.8% to $15.3 billion, meeting analysts' expectation, as the company's customer base continued to expand. Net income increased 7% to $859 million, with earnings per share of $1.51 matching Wall Street projections exactly.

But the company's MCR -- the most closely watched metric of all -- continued to grow worse. That ratio, representing the percentage of revenue spent on actual health benefits, jumped nearly 2% to 82.9% in the latest period. More than half of that increase stemmed from a negative "prior period development," as the company shored up reserves to cover escalating costs in its crucial commercial segment.

Despite repeated failures in this arena, WellPoint expects some improvement in the metric going forward. Specifically, the company has predicted that its MCR -- which reached 82.4% in 2007 -- will fall to 81.6% this year.

If that happens, the company believes that it can deliver double-digit profit growth, with earnings per share of $6.41 this year.

Analysts have been banking on earnings of $6.43 per share.

WellPoint's stock, already hit by lackluster results from rival UnitedHealth ( UNH) a day earlier, were sliding 4.8% to $75 Wednesday.

Just two weeks ago, the stock fetched a record $90, boosted by hopes for another stellar year.

WellPoint's fourth-quarter report exposed plenty of weak spots instead. While the company managed to increase its overall customer base by 2% to 34.8 million members in the latest period, it lost more than 200,000 accounts in its local group and individual segment. Meanwhile, profits declined for some of its government-funded businesses.

WellPoint actually lost money on its Medicaid businesses in Ohio and Connecticut. The company has decided to terminate its main Medicaid contract in Ohio, costing it 145,000 customers, as a result. Meanwhile, the company's contract with Connecticut, which has shifted toward less lucrative coverage, is set to expire next month unless both parties decide to extend it.

WellPoint faces challenges in other arenas as well. Fourth-quarter profits from the company's core commercial business inched up just 2%, hurt by rising medical costs, despite revenue growth and cost-cutting gains. Earnings from the company's government-related businesses grew at a slightly faster clip, rising 3.3% in the quarter, but only with help from drug sales to seniors, thanks to the new Medicare Part D program, and lower performance-based pay.

Thus, WellPoint wound up relying on its "other" operating division for an extra boost. That business swung to a fourth-quarter profit, due in part to the absence of merger-related bonuses paid out a year ago.

Aggressive share repurchases padded results as well. The company shelled out $1.8 billion for 22.5 million shares of its stock in the latest quarter, exceeding the 18.1 million shares it had been buying, on average, in prior periods of the year.

Still, WellPoint sounded satisfied with its results overall.

"We are pleased that WellPoint achieved its earnings-per-share expectations during 2007 and continued its strong organic membership growth," CEO Angela Braly stated on Wednesday. "We view this as an excellent indication that customers continue to find great value in the products and services we are providing to the marketplace."

High Hopes

Wall Street clearly expected more.

Even Goldman Sachs analyst Matthew Borsch, who views WellPoint as a rare bargain in the managed-care space, called the results "disappointing." Although WellPoint managed to beat Borsch's EPS target by a penny, the company fell short in a number of other areas.

For starters, Borsch had anticipated slightly better enrollment gains and somewhat higher earnings before interest, taxes, depreciation and amortization. Moreover, he assumed that the company could at least meet his recent MCR projection.

"As with UNH yesterday, we expect investor reaction will not be favorable in light of the pressure on commercial margins even though expectations have been negative ahead of this quarter and though (like UNH) the company backed its 2008 MCR guidance," Borsch wrote on Wednesday morning. "However, we would buy the stock on weakness today, as we expect investor sentiment will gradually improve."

Borsch had a $96 price target on WellPoint's stock ahead of the company's fourth-quarter report. However, he has now placed that target under review.

Despite his bullish view on WellPoint, Borsch has long been cautious on the managed care group overall. He remains especially concerned about UnitedHealth following this week's developments.

Notably, UnitedHealth posted higher medical costs, as well as weak enrollment. The company blamed its own MCR woes on increased reserves for a surprising regulatory dispute. But the company struggled to explain the recent loss of half-a-million commercially insured customers.

Borsch, for one, sees ongoing challenges for UnitedHealth. He says the company must find a way to improve both margins and mix in its crucial commercial division. Moreover, he says, the company needs to maintain the already high margins on its Medicare book of business.

UnitedHealth also must improve customer perceptions ahead of the 2009 selling season, Borsch says, as well as finish its merger-related integrations without disrupting its execution or service levels.

"UnitedHealth faces a daunting task list to meet its 2008 goals," Borsch stressed on Tuesday. "We remain neutral-rated on the stock in light of the tough year ahead."

Borsch's firm has investment-banking ties to WellPoint and UnitedHealth.

Some experts had anticipated a milder earnings season for the group. Early this week, in fact, Wachovia analyst Matt Perry predicted an in-line quarter with relatively few surprises. He figured that history would repeat itself, with managed care companies quietly meeting their year-end goals and causing little stock volatility in the process.

Perry entered this earnings season with a favorable outlook on the managed care sector as a whole. He viewed the industry's challenges as somewhat distant, yet manageable, in nature.

He portrayed the group as "slightly undervalued" in the meantime.

"We think the group's multiple reflects awareness of and concern over the 2008 Presidential election," said Perry, whose firm seeks to do business with the companies it covers. "We share this concern but think it's already priced into the stocks."

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