Flush with cash from a strong finish to 2010, WellPoint Inc. has become the latest health insurer to announce it will reward shareholders with a sizeable payout.
The Indianapolis insurer on Wednesday unveiled a plan to spend about $400 million this year on its first cash dividend, even as managed care companies warn that the massive health care overhaul passed last year by Congress will squeeze their businesses in the coming years.
Big health insurers used to offer token annual dividends amounting to only a few cents. But that started to change when UnitedHealth Group Inc. _ the largest health insurer based on revenue _ said last spring it would spend about $560 million over 12 months as it started paying quarterly dividend payments of 12.5 cents per share.
Earlier this month, Aetna said it will start paying a 15 cent quarterly dividend. Then on Wednesday, WellPoint's board declared a quarterly cash dividend of 25 cents per share, payable March 25 to shareholders of record as of March 10.
The steady cash flow from larger dividends can make a company's stock more attractive to investors. This is especially true in the managed care sector, where investors have worried about how companies will be affected by the overhaul.
"If you're providing dividends, it says maybe things are not as bad as you thought they were in terms of the new health care law," said Robert Laszewski, a former insurance executive who's now a consultant.
Insurers haven't taken a huge hit yet from the still-unfolding overhaul, but that is expected to change.
WellPoint, which runs Blue Cross Blue Shield plans in several states, has forecast a $300 million hit this year from a new provision that requires insurers to spend minimum percentages of their premiums on medical care or offer rebates. Companies also will face new coverage provisions in 2013 and 2014 and more taxes, balanced by millions of new policyholders entering the market.
Despite these looming costs, the dividend payments are likely here to stay. Companies only offer dividends if they're certain they can continue that for many quarters, said Howard Silverblatt, senior index analyst for Standard & Poor's.
"Dividends are the check the mail, you can't play with that," he said. "You send me a check and I cash it guaranteed, and I expect another one in three months."
The insurers are part of a larger movement by companies to raise dividends. Silverblatt said 80 companies have either increased their dividends or started new ones this year alone. But the yields for insurer dividends fall below the 2.3 percent average for S&P 500 companies that make the payments to their shareholders.
Health insurance stocks bounced up and down in recent years as the industry struggled with falling enrollment and a bad economy. The overhaul also made investors jittery about the sector as it became a focus in the 2008 presidential campaign, and as Congress debated the bill.
But the shares of major companies have climbed steadily since last summer, and a slowdown in health care use has helped their bottom lines.
WellPoint's fourth-quarter profit easily topped Wall Street expectations, and analysts have said they expected the insurer to announce a dividend on Wednesday, when the company meets with investors in Indianapolis.
Stronger financial performances have given insurers a growing supply of cash to spend after stocking the reserves they need to keep for claims. Dividends are an option for that money, especially when there are few prospective acquisitions out there for big companies to make, said Laszewski, president of Health Policy and Strategy Associates.
Another option is share buybacks. WellPoint also said Wednesday its board boosted the company's repurchase authorization to $1.6 billion in 2011.
One option companies probably won't take is using that excess cash to reduce premiums, even though shareholder dividend payments may invite fresh criticism of the industry. Some insurers, including WellPoint, took heat last year for jacking premiums in individual insurance markets while reporting rich profits.
Using cash to lower premiums would only be a temporary solution that does nothing to solve the underlying problem of spiraling care costs, which are still climbing higher than inflation. Laszewski said it would only delay rate increases for a year because cost increases aren't going away. The premium increase would compound and create an even bigger headache.
"Subsidizing these rates for one year would really be a stupid thing to do because you only create a much bigger problem for consumers and regulators in two years and therefore (insurers)," he said.
Health insurers also can't simply sit on the money, Dan Mendelson, CEO of research firm Avalere Health, said. Low interest rates make that a poor use of capital, and if the companies don't use the money, shareholders will want it back. He thinks any criticism of the industry over dividend payments would be unwarranted.
"This is really between (insurers) and their shareholders," he said. "They're giving back money to teachers and firefighters and all sorts of people, so I don't think they need to take a PR hit from this."