WellPoint Inc.'s second-quarter net income fell 3 percent as Medicare Advantage expenses climbed, and Wall Street punished the health insurer's stock in Wednesday trading even though the company raised its 2011 earnings forecast for the second time this year.
The Indianapolis insurer said medical claims _ its largest expense _ rose 8.5 percent to $11.92 billion in the quarter, as costs for its Senior business have come in "significantly higher" than it expected this year. This was due mainly to its Medicare Advantage enrollment in California.
Medicare Advantage plans are privately run versions of the government's Medicare program. WellPoint said some of its plans were hurt by adverse selection, which involves healthy members dropping coverage and leaving a greater concentration of people who generate more in claims than they contribute in premiums.
Chairwoman and CEO Angela Braly said WellPoint was hurt, in particular, in Northern California, where one of its plans attracted more customers with a higher risk profile than they expected because a competitor left the market.
Overall, though, WellPoint said health care use continues to be lower than expected so far this year, a trend that has helped insurers turn in strong performances in recent quarters.
The largest publicly traded health insurer based on enrollment earned $701.6 million in the three months that ended June 30, down from $722.4 million in the same quarter last year. Earnings per share rose nearly 11 percent to $1.89 from $1.71, however, because the company had fewer shares outstanding.
Adjusted net income, which excludes investment gains, was $1.83 per share.
The Indianapolis company's operating revenue, which also excludes investment gains or losses, climbed nearly 5 percent to $14.88 billion.
The performance beat Wall Street expectations. Analysts polled by FactSet forecast, on average, a profit of $1.79 per share on $14.87 billion in revenue.
"That the company was able to beat consensus and raise guidance (albeit modestly) is a testament to a much lower tax rate and how favorable the underlying cost trend environment is," Citi analyst Carl McDonald said in research note.
Company shares fell 4.7 percent, or $3.48 to $70.08 in late morning trading, while broader trading indexes were down around 1 percent.
WellPoint operates Blue Cross Blue Shield plans in 14 states, including California and New York. It said total medical membership climbed 2 percent to 34.2 million compared to last year's quarter, mainly due to gains in its national accounts, which involve health plans the insurer administers for big employers.
The company also benefited from a drop in some key expenses. Selling, general and administrative expenses fell nearly 7 percent to $2.01 billion, which the company attributed mainly to its efforts to become more efficient. WellPoint's income tax expense also dropped 25 percent to $305.8 million mainly due to the settlement of prior-year tax liabilities.
The insurer also spent $91.1 million in the quarter on a dividend payment of 25 cents per share. WellPoint and other health insurers have started quarterly dividend payments recently after piling up cash thanks to strong performances in recent quarters.
In June, WellPoint said it will buy CareMore, a privately held Cerritos, Calif., company that provides coverage and coordinated care for Medicare Advantage patients. The companies didn't release the cost of the acquisition, which they expect to close by the end of the year.
That deal will help "smooth out" the company's Medicare results, McDonald said.
WellPoint now expects 2011 earnings between $6.75 and $6.95 per share, not counting investment gains of 15 cents per share. That's up from a forecast it made in April of $6.60 per share.
Analysts expect, on average, earnings of $7.10 per share.