Large managed care provider WellPoint (NYSE: ANTM ) is proof positive that when you stop shooting yourself in the foot you will often have an easier time of walking. WellPoint's operational turnaround is still a work in progress, but there has definitely been progress and the Street has taken note – pushing the shares up almost 36% over the past year and making it one of the better-performing companies in the sector. With management now running a strong Medicaid business and turning its attention to Medicare Advantage while projecting profits from its public exchange business, things are looking up for the company.
Scale in Medicaid, work to do in Medicare
With the Amerigroup transaction fully integrated, WellPoint stands as the largest player in Medicaid – with an estimated 18% share in participating states. That's close to double UnitedHealth's (NYSE: UNH ) share, and well ahead of Centene, Molina, and Aetna (NYSE: AET ) . It's also profitable business, contributing a low-to-mid teens percentage of the company's earnings. Between Medicaid expansion and ABD products, management believes it could still grow membership at a double-digit rate. It's also noteworthy that adopting Amerigroup's hub-and-spoke model (versus WellPoint's former centralized approach) has improved both proposal success rates and operational efficiency. On a more negative note, the head of this group (Dick Zoretic) is retiring, meaning that all of Amerigroup's top leadership has now left WellPoint.
Medicare Advantage, on the other hand, needs work. WellPoint has never prioritized this business the way UnitedHealth or Humana (NYSE: HUM ) have and it shows. WellPoint has only about 4% share of the market (against 20% for UnitedHealth, 17% for Humana, and 7% for Aetna) and its STAR rating is frankly pathetic at 3.29 versus an industry average of 3.8 and Aetna's market-leading 4.05. Any turnaround is going to take time and management is prioritizing achieving 4-star quality ratings and improving its provider relationships.
Public exchanges still a sizable unknown
Due in part to a desire to maintain its Blue Cross Blue Shield brand value, WellPoint has been among the most active in public exchanges under the Affordable Care Act – participating in 14 exchanges and on the way to enrolling 700,000 lives. That's well ahead of Aetna's 450,000 estimate and due in part to the markets involved – Aetna is active in more exchanges (17), but WellPoint has a large presence in California (about one-third of enrollees), Virginia, and Georgia. By way of comparison, UnitedHealth, Cigna, and Health Net have only token presences in public exchanges, though UnitedHealth has commented on possibly getting more active for 2015 (and early filings indicate they will be substantially increasing their footprint).
While WellPoint has taken a big leap, management seems to have a better grasp on risk and costs. While most exchange participants are expecting breakeven to slightly negative margins for 2014, WellPoint has been consistent in projecting 3% to 5% margins. I would venture to speculate that a meaningful part of this could be coming from WellPoint's advantaged cost position (more in a moment).
WellPoint also ruffled some feathers months ago when it projected a double-digit increase in premiums for 2015 while the CBO was projecting low to mid single-digit increases. Management has since revised its guidance to a mid-to-high single-digit increase, but the fact remains that these companies are still in the dark as to how utilization and cost trends will evolve with these newly enrolled members.
Pushing cost advantages
A while back, during the company's investor day, management laid out a strong case for its cost management initiatives. Management believes it has a 5% unit cost advantage, a 10% overall cost of care advantage versus the industry, and cost leadership in over 70% of its markets. While UnitedHealth et al may quibble with the numbers, WellPoint has focused on building strong market share in core markets (an average of 30% share in its commercial business); by holding such strong local share, WellPoint can negotiate fiercely with providers on costs.
WellPoint has also been an active participant in accountable care organizations (ACOs), with 2.7 million members in 74 ACOs at the end of 2013. Management is looking to increase the number of members in ACOs by 50% by the end of 2014. Comparisons are complicated by different models, but Cigna has about 100 similar arrangements, Aetna is targeting 60 by year end, Humana has over 300 in-house clinics, and UnitedHealth has arrangements with over 600 hospitals and 1,200 medical groups.
The bottom line
Given UnitedHealth's recent operating stumbles, and the Street's overreaction to them, UnitedHealth looks cheaper on a going-forward basis but the level of expectations are different. Should WellPoint get its return on equity into the mid-teens (possibly harder to do as it lacks the high-margin technology and service offerings of UnitedHealth's Optum business), the potential returns would be significant. As is, WellPoint is back on track and still offers some moderate upside from today's level.
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