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WellPoint Holds the Line... For Now

Although coverage of WellPoint's third-quarter earnings were dominated by a $562.6 million in investment losses -- largely related to its investments in Fannie Mae, Freddie Mac and Lehman Brothers -- and a relatively minor 5.4 percent drop in net income, the more important news for the nation's largest health-insurance firm resided in the details of its earnings announcement last week. WellPoint continued to see its more profitable business shrink, as membership in its fully insured plans dropped 3.2 percent compared to a year earlier. Self-funded plans, which WellPoint manages for a fee without actually shouldering the (usually quite profitable) insurance risk, jumped 6.2 percent.

WellPoint holds the line... for nowBut the percentages really don't tell the whole story. Think of it this way: Of WellPoint's 35.3 million members, 18.7 million -- or roughly 53 percent -- are in self-insured plans. Just a year ago, WellPoint's membership was split almost 50-50 between fully insured and self-insured plans.

The company's medical costs also continued to rise to 82.5 percent of its premium-based income, up from 81.8 percent a year earlier. CEO Angela Braly noted that the cost of inpatient hospital stays rose between seven and nine percent, as did the cost of outpatient procedures. That's despite across-the-board premium increases, which WellPoint suggested will just keep going up.

The trends weren't all bad. Unlike many insurers, WellPoint has managed to keep expanding its membership without acquiring smaller health plans; more to the point, its growth isn't largely restricted to Medicare and other state-funded plans. Overall, WellPoint's membership rose 1.5 percent in the quarter (against both the previous and year-earlier periods), with the largest growth in the insurer's national accounts -- presumably health plans for large national and international employers.

By contrast, the company dropped more than 200,000 members in both the individual-insurance and state-sponsored (think Medicare and Medicaid) markets. In last week's conference call, Braly was straightforward about WellPoint's willingness to abandon government health plans in order to preserve profitability:

As we have previously announced in January of 2009, we will be exiting from the Nevada State Sponsored business program. This will impact approximately 49,000 members. In addition, we currently provide administrative services to 203,000 Medicaid members in Connecticut, and we expect these members to transition to other carriers by January 1, 2009.

As we noted earlier this year, our senior business profitability in 2008 has been constrained by a poorly designed benefit plan in certain Medicare Advantage private fee-for-service offerings that resulted in adverse collections.... However, we are addressing this problem by eliminating this product design and through our pricing filed for 2009. There are approximately 64,000 members in this planned design.

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