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Conversion Settlement Hits WellPoint Earnings

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A $90 million lawsuit settlement contributed to a drop in second-quarter net income at WellPoint Inc. (NYSE:WLP), but the company says accelerating increases in medical costs and uneven demand for group health coverage also affected results.

WellPoint, Indianapolis, is reporting $644 million in net income for the latest quarter on $15 billion in revenue, compared with $702 million in net income on $15 billion in revenue for the second quarter of 2011.

WellPoint ended the quarter providing or administering medical coverage for about 34 million people, down 1.9% from the total it reported a year earlier.

Because of the drop in enrollment and rising medical cost trends, WellPoint expects to report slightly lower earnings for the full year than it had originally predicted, according to WellPoint President Angela Braly.

The results include $34 million in costs related to a lawsuit settlement.

Lawyers brought the class-action suit on behalf of 700,000 former members of a company that’s now part of WellPoint, Anthem Insurance Companies Inc. Members of the class say Anthem paid them less cash than it should have when it converted from being a member-owned mutual insurer to a stock company in 2001.

WellPoint executives say they also see some challenges in day-to-day operations.

Originally, for example, the company was predicting that the medical cost trend for 2012 could range  from 6.5% to 7.5%. The company now believes the full-year trend will be “towards the upper half of the range,” according to Wayne DeVeydt, the company’s chief financial officer.

The cost of the services being used is up, and use of services also increased, the company says.

WellPoint also is seeing softness in demand for commercial group health coverage.

Some insurers have reported that demand for benefits products has improved in recent quarters.

WellPoint is finding “economy-related in-group membership attrition and competitive situations in certain local group markets,” the company says.

The company will continue to invest in expanding its senior business and push ahead with the $4.5 billion acquisition of Amerigroup Inc., Virginia Beach, Va. (NYSE:AGP), Braly said in a statement.

Those moves should help WellPoint compete as the Centers for Medicare & Medicaid Services (CMS) expands programs for managing care for people who are eligible for both Medicaid and Medicare, and they also should help the company compete on the exchanges that the Patient Protection and Affordable Care Act of 2010 (PPACA) calls for states to create, Braly said.

During a call with analysts, one analyst asked about the possible effects of the recent U.S. Supreme Court ruling on the constitutionality of PPACA. The court ruled that Congress has the constitutional authority to impose a tax on individuals who fail to buy a minimum level of health coverage but no authority to cut existing Medicaid funding for states that refuse to expand Medicaid eligibility.

The analyst asked whether the ruling might hurt WellPoint Medicaid program growth.

Braly said she thinks WellPoint will continue to get more Medicaid plan administration business.

“When you look at the penetration of managed care into Medicaid, it’s woefully low compared to the commercial market,” Braly said.

State efforts to manage and control Medicaid costs should continue to create opportunities for companies like WellPoint, Braly said.

Even if Medicaid expansions is slower than expected, the PPACA exchanges should still lead to an increase in Medicaid enrollment, Braly said.


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