WellPoint Is Not Well

Business was good for WellPoint (NYSE: WLP). The company met its guidance for 2007 and had projected more than 15% growth in earnings per share in 2008.

But this year's earnings party just got quite a bit smaller for WellPoint, which is now looking for EPS growth of just 4% to 8%.

WellPoint blames the lowered earnings on the increase in medical costs that it has seen in the first two months of the year. It should have seen this trend coming, but at least WellPoint announced it now and didn't wait until it released first-quarter results to give investors the bad news.

Not only are medical costs up, but not as many people are paying for WellPoint's more lucrative insurance offerings. The company added 410,000 members since the beginning of the year, but the subset that took on full insurance was lower than what it was looking for. Specifically, declines in the small group and individual plans lead WellPoint to think that it'll be harder to gain members during the rest of 2008.

Lower membership growth and higher costs are not good news for WellPoint. The big question: Is this an industrywide trend? Aetna (NYSE: AET) tried to reassure investors that it has guessed right on pricing and membership numbers by reaffirming its forecast, but WellPoint's news brought it and the rest of the sector down today.

WellPoint's incorrect guess on health-care costs might be specific to the company, but its prediction that members will be fewer in a recession is likely to be an industrywide issue. My guess is that the large insurers, such as UnitedHealth Group (NYSE: UNH), will have an easier time negotiating costs and wooing new members than the small companies. They're also the ones that are spewing off the free cash flow that might be used to gobble up some of the small insurers while the industry is down.

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