WellPoint Feels Some Malaise

The health insurance industry is beginning to wheeze a little.

The latest example came from WellPoint Health Networks Inc., the Thousand Oaks parent of Blue Cross of California, which Tuesday reported double-digit profit growth in the second quarter but said its membership declined slightly from the previous three-month period.

It was the first quarter-to-quarter drop in enrollment in recent memory, the company said, as the sluggish economy and steep insurance premium hikes appeared to be finally catching up with WellPoint and the rest of the managed-care industry.

This month UnitedHealth Group Inc., the big Minneapolis-based insurer, reported a similarly hefty increase in second-quarter earnings and said enrollment dropped by about 100,000 compared with the first quarter.

Membership declines worry analysts and investors, who wonder whether persistent cutbacks by employers and rising numbers of uninsured could stifle membership gains and end a string of sizable profit gains for health insurers.

“You won’t have extraordinary earnings growth” at managed-care companies, predicted Matthew Borsch, an analyst at Goldman, Sachs & Co. in New York, which last week downgraded WellPoint from “outperform” to “in line” with expectations.

WellPoint has been among the strongest performers in the industry and is widely expected to continue to grow at a healthy rate. In the latest quarter, it boosted earnings by cutting expenses and spending a slightly smaller part of its premium revenue for medical care.

The company’s second-quarter profit exceeded analysts’ expectations: Net income jumped 31% to $224.5 million, or $1.49 a share, from $170.7 million, or $1.12, in the year-earlier period. Quarterly revenue rose 15% to $4.94 billion.

“Our ability to offer a broad array of innovative products that are priced right is key to our outstanding performance,” said Leonard D. Schaeffer, WellPoint’s chairman and chief executive. “We are also effectively using technology to ... reduce administrative expenses.”

Still, analysts said, the days of such lush profits for WellPoint and similar medical insurers may be coming to an end if membership rolls continue to fall -- which many believe they will.

In the second quarter, WellPoint’s enrollment declined by 73,000 from the previous quarter. Though that was a fraction of its membership of more than 13 million nationwide, it marked the first drop in at least the last 10 quarters, according to company reports.

WellPoint attributed the decline partly to its withdrawal from the Medi-Cal program for lower-income families in Orange County. But the drop-off was also because of layoffs at employers that buy insurance from WellPoint and companies’ reducing the number of plans they offer to workers. Analysts said smaller companies, in particular, are changing carriers and sometimes dropping health benefits altogether. Others are boosting employee contributions for insurance so much that some employees elect not to take up coverage.

“We are seeing small companies switch carriers due to rising rates or cut health-care plans altogether, given that the whole economy is not that great,” said Susan Au, a health-care consultant in Westlake Village who sells insurance to small and medium-sized businesses.

Kirby Bosley, who heads the health-care practice at Mercer Human Resource Consulting in Los Angeles, said much the same thing is happening at some bigger companies.

“What I am seeing on a national basis is large employers moving employees into a single plan to consolidate risk,” she said. “And in many parts of the country, they’re simply terminating HMOs because they aren’t cost-effective.”

Health insurers could build membership through consolidations and acquisitions, as WellPoint has in recent years by expanding into Missouri, Georgia and other states.

In June, WellPoint made a bid for Milwaukee-based Cobalt Corp., with 800,000 members. If approved by regulators, the $906-million deal would give the company a major presence in the Midwest and a huge new membership base.

Some say WellPoint could face more challenges in its core California market, where government budget cuts and an increase in business costs will give employers more reason to reduce health benefits.

WellPoint shares closed down 96 cents, or 1.2%, to $80.73 on the New York Stock Exchange before the financial results were announced.