WellPoint Shareholders Benefit From Its Health Reform Strategy

NEW YORK (TheStreet) -- Like all large health insurers Wellpoint (WLP) , which is in the process of changing its name to Anthem, is executing on a five-year plan it doesn't want to talk about.

That's because the genesis of that plan, Obamacare, is politically unpopular, at least under that name. But call it the Affordable Care Act (ACA), or use a state exchange name like Kentucky's Kynect to describe it, and the answer may be different.

Wellpoint publicly opposed the law while it was being debated, but in the end both its power and profit are being enhanced by it. For the quarter ending in September, the company reported earnings of $630.9 million, $2.22 per share, on revenues of $18.4 billion. Adjusted net income was up 12% from a year earlier, and the customer base grew by 259,000 during the quarter, to 37.5 million. It renewed its dividend of 43.75 cents per common share.

Wellpoint operates the Blue Cross Blue Shield plans in many states, and under that name it dominates health insurance markets in 82 of 388 metropolitan markets according to the American Medical Association.

Soon after the ACA was passed in 2010 Wellpoint made acquisitions aimed at controlling its costs, buying Caremore and then Amerigroup, which serve many patients under both Medicare and Medicaid. But when new CEO Joe Swedish came on board last year he publicly disavowed that strategy and has so far kept to that promise.

Swedish came to Wellpoint from the hospital industry, having run Trinity Health in Michigan and, before that, Centura Health in Colorado. He predicted early this year that further consolidation is coming to health care delivery and has put Wellpoint in a position to take advantage of that without putting its own capital into making it happen.

Instead, the company is focused on narrowing consumer choices through agreements like a deal signed in 2012 with Aurora Health Care of Wisconsin, in which patients are given narrow networks under the control of a single hospital group in exchange for lower rates.

This approach, similar to plans Health Maintenance Organizations (HMOs) pioneered in the 1990s, have made Wellpoint among the best performing health insurers over the last year. Since last October WellPoint shares advanced 44% against a 37% gain at United Healthcare (UNH) and a 30% gain at Aetna (AET) .

HMOs failed because patients were able to go outside networks and had little financial incentive to use wellness services. The ACA provides both the narrow networks and the incentives -- in the form of higher service charges for patients using hospitals and direct savings for insurers who keep patients healthy -- needed to make the strategy work.

Narrow networks and wellness programs are allowing Swedish to predict rising profits in 2015 even with rates that should rise just 6% on state exchanges next year. Some states are showing decreases on exchange rates, not just those with their own exchanges like Kentucky but even states on the federal exchange like Georgia and Oklahoma.

By managing to do under the federal law at what many insurers tried and failed to do in the 1990s, limit networks and add wellness services that limit the networks' use, Wellpoint is showing both solid profits and a solid profit outlook, without making new acquisitions.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates WELLPOINT INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WELLPOINT INC (WLP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: WLP Ratings Report 

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