Healthcare stocks dropped Friday as Wall Street feared more bad news ahead for the nation's large insurance companies after giant insurer WellPoint Inc. abruptly canceled a massive rate increase in California.
Investors worried that Indianapolis-based WellPoint's decision to abandon plans for rate hikes as high as 39% amid pressure from state officials could be a sign of things to come elsewhere.
"People are thinking, if this is happening in California, it might start happening in other states," said Steven Shubitz, a healthcare analyst with Edward Jones in St. Louis. "If that happens, profit growth could be seriously impacted."
WellPoint unit Anthem Blue Cross withdrew rate increases for many of its 800,000 California customers with individual policies Thursday after a state consultant found it had overstated future medical costs used to justify the higher premiums.
State officials said Anthem's rate application was filled with methodological errors that pushed up rates.
On Friday, shares of WellPoint, the nation's largest health insurer as measured by membership, tumbled nearly 9% to $53.80. The losses came two days after the company reported a 51% increase in first-quarter earnings.
WellPoint's poor performance on the final day of April followed a pullback on Wall Street as the Dow Jones industrial average fell 158 points. All major indexes dropped more than 1%.
UnitedHealth Group, the nation's largest insurance company by revenue, and insurer Humana each dropped 3%. Insurers Aetna and Cigna were both down 5%.
Analysts said uncertainty over the effect of the nation's new healthcare law has left investors jittery.
The new law will impose billions of dollars of new taxes on insurance companies. It will guarantee insurance for millions of uncovered Americans and bar insurers from rejecting anyone because of medical conditions.
Insurers will have spend at least 80% of their premium revenues on healthcare for plans that cover individuals and small business, and 85% for policies with large employers.
The effect of the new law remains uncertain because federal officials have yet to determine which expenses will factor into the formulas. Insurers say they can't project potential costs until the details are nailed down.
"It's unclear how much more they are going to have to spend because we don't know the definition of medical spending," said Sarah James, a health services analyst with Wedbush Securities in Los Angeles. "Uncertainty around the reform issue is weighing on stock prices."
In its earnings report Wednesday, WellPoint said that it spends 82% of its revenue on medical claims. The company's subsidiaries have more than 33 million customers in 14 states.
In California, insurers now are required to devote only 70% of revenue to claims. Anthem said that all of the insurance plans submitted in its rate-hike application met the threshold. But the state's outside actuarial consultant said, however, that one of the Anthem plans was at 67% after correcting errors in the insurer's flawed methodology.
Anthem said it would file new rates this month that would satisfy the federal spending requirements. An Anthem spokeswoman said Friday the company could not assess the effect of the new regulations on its bottom line.
"It is premature to estimate the impact new medical loss ratios will have on premiums, having only yesterday announced plans to refile our individual rates," said Peggy Hinz.