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A Bright Spot in Health Insurance

Earnings: WellPoint reports a 46% rise in profit. Managed-care firms post gains on rising premiums.


In this season of many dreary corporate earnings reports, the nation's health insurance industry is emerging as an island of lush profits as leading managed-care companies reap the benefits of hefty premium increases.

The latest example came Wednesday from WellPoint Health Networks Inc. of Thousand Oaks, which beat analysts' expectations by posting a 46% increase in its first-quarter profit from a year earlier. WellPoint, the parent of Blue Cross of California, said revenue for the quarter jumped 51% to $3.9 billion.

Analysts attributed the surge in earnings to strong enrollment gains, which were bolstered by acquisitions, price increases and lower-than-expected costs for medical expenses and administration.

"That's fabulous earnings growth," said William McKeever, a health-care analyst at UBS Warburg in New York.

The upbeat earnings from WellPoint, which follows a similarly rosy report last week from UnitedHealth Group Inc., the nation's largest managed-care firm, reflects skyrocketing prices for medical care, especially at hospitals. Health insurance companies have been able to pass these costs on to employers and consumers, and as a result premiums have risen by double-digit rates in the last two years. Early signs suggest that pattern will continue next year.

With the exception of Aetna Inc.--which some analysts say could show a return to profitability when it announces its first-quarter results today--most of the other major managed-care firms are expected to post robust earnings growth for the first quarter and the full year.

Investors have been anticipating the gains. Standard & Poor's managed-care index, which contains WellPoint and four other big companies, has climbed 21% since the start of the year, in contrast to a year-to-date drop of 4.8% in the S&P 500 index.

Analysts say the long-term outlook for the managed-care industry remains bright, despite greater resistance from employers to paying big premium increases. During the economic expansion and tight labor market of recent years, employers accepted the steadily rising premiums as the price of doing business. But lately they have been shifting more of the burden of higher medical costs to employees.

The huge profits now being reported by health insurance firms are likely to push more employers to take a tougher stance in negotiating premiums. "Most employers we talk to are wrestling with the degree of radicalism in which they want to approach this year," said Kirby Bosley, who heads the health-care practice at Mercer Human Resource Consulting in Los Angeles. Mercer's survey showed that large employers nationwide last year paid, on average, $5,162 per employee for medical, dental and prescription drug costs. That was about 11% higher than in 2000.

Another study, released Wednesday by PricewaterhouseCoopers, indicated that prescription drugs, medical devices and other medical advances accounted for the biggest share of the nearly 14% increase in health-care costs last year.

But the report also said these factors could produce savings in the future by reducing hospitalizations and other health-care services.

For now, though, there are few signs that health-care costs will slow down from this year's rapid pace--and that doesn't bode well for employers, which clearly have lost the bargaining clout they once had in the mid-1990s. That was evident last week when the California Public Employees' Retirement System, the state's biggest single purchaser of insurance, approved a record 25% increase in HMO premiums for next year.

Clifford A. Hewitt, a health analyst at the Baltimore brokerage firm of Legg Mason, said it used to be that the performance of health insurers followed a cyclical pattern in which they went up for several years, then down for a period.

But he said the managed-care industry, after a wrenching period of restructuring and consumer backlash that has reduced HMO companies and enrollment, now have a wider variety of health plans, better efficiencies and a more sophisticated ability to predict and control costs. All of these are likely to cushion the industry from the vicissitudes of the insurance business.

As an example, he said, WellPoint's latest quarterly report showed that the company's premiums went up in the January-to-March period as fast as their costs. WellPoint's medical loss ratio--or its cost of providing health-care services divided by the premiums it collected--held steady from a year earlier, at just under 81%, one of the best ratios among the major managed-care companies.

"You've had a shakeout in the industry; the peripheral players are gone," he said of managed-care companies. "There's pricing discipline. So managed-care organizations are not as likely today to lower prices to win a piece of the business."

Companies such as WellPoint also have the ability to drive future revenue and earnings through acquisitions.

Purchases of existing health plans were a big factor in WellPoint's strong membership gains in the last quarter, as it expanded further beyond the California market into the Midwest.

For the first quarter, WellPoint said it earned $141.1 million, or 97 cents a share, compared with $96.5 million, or 74 cents, a year earlier.

Management raised its earnings forecast for this year to $4 a share from $3.85 a share. The average analyst estimate was $3.89 a share.

WellPoint released its earnings report after the markets closed Wednesday. Its shares closed up 78 cents, or 1.1%, at $71.48 on the New York Stock Exchange, near its all-time high.

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