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WellPoint plans for exchange wait effect

WellPoint Inc. (NYSE:WLP) produced a big increase in net income for the fourth quarter of 2012 and is hoping to do well in 2013, but company executives spent much of today's earnings call talking about 2014.

WellPoint is reporting $464 million in net income for the latest quarter on $16 billion in revenue, up from $335 million in net income on $15 billion in revenue for the fourth quarter of 2011.

The company ended the quarter providing or administering health coverage for 36 million people, 5.5 percent more than it was covering a year earlier.

Enrollment in self-insured plans that WellPoint is administering fell 1.6 percent, to 20 million, and commercial group enrollment fell 3.3 percent, to 27 million. But enrollment in insured plans rose 16 percent, to 16 million, and enrollment in individual and government health insurance arrangements rose 54 percent, to about 8 million.

Wayne DeVeydt, WellPoint's chief financial officer, said the company believes it is entering 2013 on a strong note.

"Fourth quarter results were better than we expected and give us reason for optimism about business performance in 2013," DeVeydt said.

But uncertainty around federal budget actions, overall medical utilization trends, the severity of the 2012-2013 flu season, and implementation of the Patient Protection and Affordable Care Act of 2010 (PPACA) are good reasons for WellPoint to be cautious when predicting what might happen to earnings this year, DeVeydt said.

Although WellPoint did well in the fourth quarter, the flu reduced net income by about 2 cents per share, or about 1.3 percent, DeVeydt said.

WellPoint is not sure how much flu will affect earnings for the quarter that is now under way, DeVeydt said.

The company is expecting the underlying local group medical cost trend, or rate of increase in the underlying cost of care, to be between 6.5 percent and 7.5 percent.

That compares with a cost trend estimate of 5 percent to 6 percent issued last week by a major WellPoint competitor, UnitedHealth Group Inc. (NYSE:UNH).

DeVeydt noted that WellPoint expects to see enrollment in the self-insured group plans it administers to continue to fall in 2013 because of price increases it pushed through in 2012.

The company intends to "maintain pricing disciple" on insured plans, especially in the small group market, this year, DeVeydt said.

WellPoint executives also talked about efforts to get ready for the PPACA individual and small group exchange programs, or government-supervised health insurance supermarkets, to start up in 2014.

Stephen Hemsley, the president of UnitedHealth, made a point during his company's call of emphasizing that UnitedHealth would participate in state exchange programs only in states in which doing so seemed to be likely to produce a reasonable return on capital.

Executives at WellPoint, the holder of Blue Cross or Blue Shield licenses in 14 states, expressed similar sentiments with different wording.

Kenneth Goulet, president of WellPoint's commercial and individual business, said WellPoint is working with the exchange regulators in the company's 14 core market states.

"While we feel that, really, the underlying economic constructs and the structure in each state will drive our decision about whether we participate there or not, we're going in with a very positive attitude," Goulet said. "We're going in with the assumption that we'll participate anywhere where that economically makes sense."

DeVeydt said WellPoint is thinking that the changes coming as a result of PPACA in 2014 could have an effect on individual policy enrollment decisions this year.

"We ... anticipate some membership loss in the individual market during the second half of the year as some people may choose to withhold buying coverage until the exchange is open," DeVeydt said.

The level of individual sales in the second half of the year could be "minimal," DeVeydt said.

WellPoint believes pricing insured business to reflect the effects the PPACA exchange system might have is the prudent thing to do, DeVeydt said.

The individual business that does go to the exchanges likely would be relatively low-margin business, and the migration of that business to the exchanges would probably not hurt earnings, DeVeydt said.

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