WellPoint (NYSE:ANTM) wins if Obamacare wins -- and loses if it doesn't.
While the large health insurer reported its third-quarter financial results on Wednesday, the more important news impacting the company's future could very well be the meeting that WellPoint's CEO planned to attend shortly after that announcement with Health and Human Services Secretary Kathleen Sebelius and Humana's (NYSE:HUM) CEO. You don't have to be a fly on the wall to know that the discussion focused largely on the significant problems experienced so far with the health insurance exchanges established by the Affordable Care Act.
WellPoint has a lot riding on the success of Obamacare. The company is participating in exchanges in every state where it operates. It's also a major player in the Medicaid market, which is expanding in several states due to the health reform legislation. With WellPoint now joined at the hip with Obamacare, should investors rejoice or be nervous? Perhaps a little of both are in order.
The third-quarter earnings results announced by WellPoint beat what Wall Street had expected. The insurer reported adjusted net income of $2.10 per share, while analysts expected around $1.82 per share. Revenue was up 17.2% year-over-year to $17.7 billion.
WellPoint raised its full-year 2013 adjusted earnings guidance from at least $8.00 per share to at least $8.40 per share. CEO Joe Swedish attributed the rosier outlook in part to "coming market changes under the Affordable Care Act."
The company's government business segment grew sales by 47.6% year over year in the third quarter, thanks primarily to the purchase of Amerigroup in late 2012. Much of this sales growth stemmed from the Medicaid enrollment gains of more than 2.4 million members obtained through the acquisition.
While many states don't plan to expand Medicaid as pushed for in the Affordable Care Act, most of the 14 states where WellPoint operates are doing so -- including two of the biggest prizes, California and New York. The Obamacare Medicaid expansion could be the gift that keeps on giving for this insurance company. WellPoint also hopes to benefit from previously uninsured individuals buying health insurance as a result of the health law's carrot of federal subsidies and stick of financial penalties.
Everything looks great -- thanks, Obamacare? Not necessarily.
First, despite the earnings beat, WellPoint actually saw its profit drop by 5% compared to last year. One reason behind this decline was higher sales, general, and administrative expenses of more than $500 million. This large increase stemmed from "preparation for coming growth opportunities" (i.e., Obamacare). WellPoint managed to squeak by with higher earnings per share than last year primarily through stock buybacks.
Second, Medicare cuts from both Obamacare and the federal budget sequestration deal will likely continue to be a factor. WellPoint has nearly 1.48 million Medicare members. It could be worse. Humana, for example, receives almost 75% of its premiums and services revenue from Medicare.
The biggest risks, though, relate to enrollment in the Obamacare exchanges. If the numerous technical problems that have plagued the websites persist much longer, WellPoint, Humana, and other insurers hoping to enroll lots of new customers could be sorely disappointed.
And there's an even more serious potential problem. Relatively healthy individuals could choose not to buy insurance rather than deal with the headaches. Without enough healthy members, insurance companies lose money.
Unlike WellPoint, Aetna (NYSE:AET) and UnitedHealth Group (NYSE:UNH) intentionally took cautious stances on the exchanges because of this very concern, with both companies are participating in exchanges in a minority of the states where they operate. UnitedHealth CEO Stephen Hemsley expressed concerns about an initial wave of enrollees with pent-up demand for medical services. Hemsley's fears came months before the exchanges launched with major problems.
Aetna CEO Mark Bertolini didn't hold back about the challenges for the Obamacare exchanges. In an interview with CNBC, Bertolini said that his company got more nervous as development of the exchanges progressed. He thought the launch of the exchanges should have been delayed. Bertolini also expressed serious concerns that enough younger Americans will enroll.
Joe Swedish was undoubtedly eager to meet with HHS Secretary Sebelius. Problems with the Obamacare exchanges translate to problems for WellPoint.
Of course, the Medicaid expansion won't be affected by the bug-riddled health insurance exchanges. But even though Medicaid is an important growth driver for WellPoint, the program only makes up 12% of the insurer's total membership.
For WellPoint to succeed, Obamacare must succeed. Bumping up earnings guidance and anticipating sunny days ahead is fine. But I suspect there's more anxiety than joy in the executive offices of WellPoint right now.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.