Managed Care - June 2008 - (Page 29)

But even giant WellPoint experienced the worst this heated race. Add these events to a health care stock selloff of any health plan in more than a earnings season, and volatility is sure to follow. To decade — a drop of 47 percent in value in April — protect us from this volatility, what we should be after warning investors that rising medical costs, looking for is a company in this sector that has miscalculations in pricing health-plan premiums, good earnings, is valued cheaply at current prices, and the troubled national economy meant lowerand has a bit of momentum to take them forward.” than-expected profits in 2008. MacEachern declared WellPoint a favorite with an In a March conference call with analysts, Angela EPS of $5.40 compared to an industry average of Braly, WellPoint’s president and chief executive of$2.41 at the end of May. ficer, said that the company had underestimated the rate of increased medical costs. “We just know that Diversification we had it understated and that was reflected in the Analysts say the sector turnaround, which repricing to date,” she said. “We know now mains in too low a gear to be called a recovthat we are assuming a higher trend, and ery, can be attributed to several factors. In we’re going to stick with disciplined pricing his blog, John D. Frankola of Vista Investin our products going forward. And because ment Management in Pittsburgh lists reawe have the opportunity to price our prodsons why the sector is resilient: ucts throughout the year, we’re going to do that with discipline and with the higher • The annuity aspect of the business. The claims projected than we had in 2007.” vast majority of customers renew their covThat meant that at the end of the first erage from year-to-year. quarter, WellPoint reduced its earnings • Market consolidation. Most geographic guidance for 2008 from 4 percent to 8 per- “Plans get their inmarkets are now dominated by just two or come by providing cent growth compared with 2007 — a sharp three major competitors. “This reduction service,” says the drop from the 15.3 percent net income Urban Institute’s in competition should keep pricing somegrowth it had projected at the end of 2007. John Holahan, what rational,” said Frankola. The stock prices of other managed health author of a study of • Negotiating power. Increased market share care companies have also fallen precipi- the current market. gives managed care companies clout when tously. Aetna, for example, fell by 8.3 percent “The way plans pernegotiating fees for products and services. — although it fared better than most. Aetna ceive service has to • High price of entry. The size and scale of adjust to market destated that its 2008 medical cost increase mands.” the remaining companies presents a barrier was projected at 7.5 percent. to entry of new competitors. But in a March conference call that gave investors • Historical performance. Despite the current confidence, it did not lower its 2008 EPS projection concern, companies in this sector have his— it remains at about 15 percent, says Laberge. torically demonstrated a high level of earnings “We feel confident that we can meet expectations,” and cash flow stability. he says. Toward the end of May that optimism was “With concern over rapidly rising health care spreading. Stock prices were inching higher, creatcosts, the managed care companies have strategiing a sense of upward market momentum. Health cally positioned themselves to be part of the health care stocks were beginning to be perceived as uncare cost solution,” he said. “These companies redervalued. In late May, analysts were describing alize their future success will depend on helping to the investor sentiment toward the entire sector as control costs by forcing health care providers to be bullish. more efficient, providing products that give their That sentiment was reflected in the health care members market incentives to control costs, and by blogs that play a significant role in today’s market. making better use of information.” According to Ayton MacEachern, an analyst with WellPoint, for example, is well positioned for Investopedia.com, the volatility of the health care long-term growth, according to analysts. Size alone sector “isn’t surprising, considering it is an election is a factor: It is the largest Blue Cross Blue Shield liyear, and health care has been a hot topic during censee, with 35 million members. JUNE 2008 / MANAGED CARE 29

Table of Contents Feed for the Digital Edition of Managed Care - June 2008

Managed Care - June 2008 Editor’s Memo Contents Viewpoint Letters News and Commentary Legislation & Regulation Medication Management Compensation Monitor Plans Chart Course in Rough Waters A Conversation With Barbara Starfield, MD Smoke Signals from Payers Slow Going for Clinical Decision Support Back Pain and Physical Therapy Formulary Files PlanWatch Outlook

Managed Care - June 2008

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