(Reuters) - WellPoint Inc WLP.N reported a higher-than-expected fourth-quarter profit on Wednesday as it kept medical costs down, but the second-largest U.S. health insurer said it was taking a “prudent” view of 2013 in the face of industry reform.
WellPoint, which sells private health insurance to businesses and individuals and also provides government insurance for the elderly and the poor, is preparing for a round of changes resulting from the U.S. Affordable Care Act.
Later this year, states and the federal government will begin selling health insurance on exchanges for 2014, and new insurance taxes are on the way. Pressure on prices for medical services is also a concern for insurers.
WellPoint Chief Financial Officer Wayne DeVeydt said the company intends to sell insurance on the exchanges in the 14 states where it sells Blue Cross Blue Shield insurance plans, whether the exchanges are run by the state or the Federal government.
“We expect this to be a growth opportunity,” DeVeydt said during an interview. “If you look at who is eligible for a full or partial subsidy on the exchanges, that represents almost 66 percent of the U.S. population.”
Amerigroup, which WellPoint bought in December because of its marketshare in Medicaid insurance, is ready to tap into the growing Medicaid market. That is expected to expand as a result of the Affordable Care Act.
WellPoint said that given the “fluid and dynamic” market over the next 18 to 24 months, it expected a 2013 net profit of at least $7.60 per share, including the costs of integrating its recent acquisition of smaller competitor Amerigroup.
Analysts on average have been expecting $7.98 a share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the two numbers are comparable.
“It’s lighter than we thought, but it’s also including Amerigroup’s integration costs,” Leerink Swann analyst Jason Gurda said, so it was not clear that investors would be disappointed by the outlook.
Shares of WellPoint were up 1.2 percent, or 79 cents, at $64.59 in midday trading.
Management changes might be behind the conservative forecast, Gurda said. WellPoint is being run by an interim chief executive officer, John Cannon, who took over following the abrupt resignation of Angela Braly in August.
DeVeydt told analysts on a conference call on Wednesday that the company still expected to name a new CEO this quarter.
He said the 2013 outlook included 20 cents to 25 cents a share in Amerigroup-related costs and $300 million in additional investments. About half of that, or $150 million, will be spent on technology links to the exchanges, he said.
Besides healthcare reform and broad-based cuts in government medical payments, areas of uncertainty for this year include the costs of the flu as more members visit the doctor and overall use of medical services, DeVeydt said.
The company said that fourth-quarter net profit had risen to $464.2 million, or $1.51 per share, helped by an income tax settlement and investment gains.
WellPoint, which included Amerigroup figures in its earnings report for the first time, said it had 36.1 million members as of December 31, up 5.5 percent from a year earlier.
It said it expected membership to drop in 2013 to a range of 35.3 million to 35.5 million. About half of that drop is due to fewer employees in large-company, self-insured plans. The other half is from expectations some individuals and small groups will delay receiving insurance until January 1, 2014 when the government subsidies go into effect.
Ken Goulet, president of WellPoint’s commercial business unit, said during the conference call that he does not expect employers to “dump” their workers onto the exchanges.
“We don’t think it will be an avalanche early on, but it will be moderate changes,” Goulet said. He expects some small business insurance customers will be the first to move their business to the exchanges in order to take advantage of government subsidies for their low-income workers who qualify. Later, some large-company customers may also move, he said.
Excluding the tax settlement, investment gains and other special items, the company said earnings had increased to $1.03 per share from 99 cents a year earlier.
On that basis, analysts on average had been expecting a profit of 95 cents per share, according to Thomson Reuters I/B/E/S.
WellPoint said that lower-than-anticipated medical costs in its private insurance business, stable membership numbers and strong operating cash flow helped earnings during the quarter. It said its fourth-quarter tax rate had been abnormally low because of the settlement with the Internal Revenue Service.
Revenue for the quarter rose to $15.27 billion from $15.18 billion a year earlier.
WellPoint’s results followed those of the larger rival UnitedHealth Group Inc (UNH.N), which last week reported a slight drop in net income and said the next two years had the potential for growth and opportunity.
Reporting by Caroline Humer; Editing by Lisa Von Ahn and Andrew Hay