'Wellpoint would be a primary beneficiary' if health insurance reform fails, investment firm says

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"Of course, healthcare reform is a double-edged sword for Wellpoint shares. Should reform fail, Wellpoint would be a primary beneficiary."

That comes from the first page of the Cowen and Co.'s assessment of Wellpoint stock in 2010 and beyond. The argument is simple: Wellpoint's business model is uncommonly concentrated in the individual and small-group markets. Those are the exact markets that health-care reform will drastically change. Those are the markets where people get rejected for preexisting conditions, where insurers spend 30 cents of every premium dollar on administration and where rate hikes are volatile and constant. Health-care reform wants to change all of that, and if it does, Wellpoint's business model will be changed, too.

Wellpoint's "2.2 million individual members do leave it somewhat exposed to the 80% individual [Medical Loss Ration] floor contemplated in the Senate bill and Federal oversight of rating action proposed by the President," continues the analysis. In English, that means the bill will force Wellpoint to spend at least 80 cents of every premium dollar on medical care for its customers, and it means that regulators aren't likely to let Wellpoint jack prices up by 25 percent with no warning or reason. It also means that Wellpoint is not spending that much of premiums on medical care and is not keeping its rates under control now.

There are other insurers (Aetna, for instance) that have less to fear from reform because they aren't so highly concentrated in the marginal markets where the worst practices flourish. But in recent weeks, Wellpoint has become to health-care reform what Sen. Jim Bunning is to Senate reform. Day after day, they're proving why we need reform, even if they stand the most to lose from these changes. This isn't because they're dumb. It's because their appalling practices are absolutely central to how they do their job. Threats and scrutiny aren't nearly enough to get them to stop, because they are bound to the incentives of their system. Only actual reform will change their behavior, because only reform can change the system, and thus their incentives.

http://voices.washingtonpost.com/ezra-klei..._firm_says.html

[I AM NOT THAT GUY 5,715]

Of course, healthcare reform is a double-edged sword for WLP

shares. Should reform fail, WLP would be a primary beneficiary. However, its 2.2

million individual members do leave it somewhat exposed to the 80% individual

MLR floor contemplated in the Senate bill and Federal oversight of rating action

proposed by the President.

http://voices.washingtonpost.com/ezra-klei...WLP03042010.pdf

What the hell does that mean? Who writes these prospectuses anyways? Former Fed Chairmen?

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What the hell does that mean? Who writes these prospectuses anyways? Former Fed Chairmen?

MLR is medical loss ratio. A mandated minimum MLR of 80% means 80% of all money received as premium must be paid out in claims. This limits administrative costs, payroll, profit, etc. to 20% of premium received. In addition, premium increases will be subject to aggressive regulatory oversight.

Complicated? Only if you have no desire to understand.

[I AM NOT THAT GUY 5,715]

MLR is medical loss ratio. A mandated minimum MLR of 80% means 80% of all money received as premium must be paid out in claims. This limits administrative costs, payroll, profit, etc. to 20% of premium received. In addition, premium increases will be subject to aggressive regulatory oversight.

Complicated? Only if you have no desire to understand.

Sounds easy when you explain it. Have you thought of writing prospecti?

[I AM NOT THAT GUY 5,715]

■ By our estimates, each 2-month delay in WLP realizing targeted mid-20s

rate hikes for its 800,000 individual members in California will likely

shave $0.10 off 2010 projected EPS. The rate increases are scheduled for

May. Unfortunately, the magnitude of its requested premium increases have

become a bit of a political lightning rod. We look for a sense of the magnitude

and timing of requested individual rate action.

■ Modeling WLPs PBM sale is no easy feat. Contrary to the Consensus view, we

believe that the sale of the PBM will RAISE WLPs aggregate MLR (by 60 bp

not including the impact of lower drug costs on operating MLRs) owing to

a rise in the companys specialty MLR. We estimate that WLPs at-risk

specialty MLR will rise from a baseline of 67% in 2009 (before the 4Q/09

divestiture of the PBM) to 79.7% in 2010. Merely extracting Other Revenue, Cost

of Drugs Sold Through Mail Order and some SG&A does not fully adjust for the

PBM sale (and in fact, implies that the PBM operated in the red the spread on

drugs must also be extracted). We look for more clarity on how to model the

PBM sale.

■ Net reserve releases of $262 million in 2009 represent a headwind of

$0.36 per share in 2010 and a 50 bp headwind to its MLR (albeit one we expect

to be more than offset through share repurchase enabled by the sale of the

companys PBM).

■ We conservatively anticipate that WLPs Medicare Advantage MLR will

deteriorate by 610 bp. By our estimates, the book achieved a spectacular 77%

MLR in 2009, thanks in part to $168 million in prior period favorable

development (excluding PPPD, the Medicare MLR was 80.8% in 2009, projected to

rise to 83.1% in 2010).

■ The magnitude of SG&A improvement in 2010 is a critical element of our

2010 EPS projection, albeit one that remains somewhat of a mystery.

According to ESRX filings, WLPs PBM carried quarterly SG&A of roughly $100

million, implying a sequential step down of about $70 million in 1Q10. We have

modeled a decline of about $100 million (relative to normal seasonality from

4Q/09 to 1Q/10). It is unclear how much the sale of the PBM, loss of at-risk

commercial membership and operational improvement initiatives will improve

the SG&A load. We anticipate some offsetting investments.

■ We see WLPs commercial MLR improving 60 bp (excluding specialty) as the

conversion of 870,000 municipal members from insured to ASO (at a presumed

90% MLR) and the exit of commercial enrollment in Illinois and Texas should

improve the commercial MLR by 90 bp in 2010 versus 2009. While the

commercial MLR benefited from about $81 million in prior period favorable

development (helped 2009 commercial MLR by 20 bp), rate action coupled with

mix shift should more than secure our MLR improvement projection. COBRA

should remain a drag (paying brokers for COBRA members was not a prudent

strategy, in our view), although H1N1 should partially offset the drag.

■ While WLP will be reclassifying some medical costs (MLR) to SG&A in

2010, our model does not contemplate this shift.

Clear as mud!