Analyst: WellPoint will lose money on Obamacare in 2014

WellPoint Inc. is on track to record a net loss of $236 million from the major provisions of Obamacare next year, according to a recent analysis by UBS.

Analyst A.J. Rice predicts that WellPoint will lose far more of its current individual customers than it will regain next year in the Obamacare exchanges. Rice also expects a decent chunk of small businesses to end their group health plans and send employees to the exchanges, where WellPoint will “recapture” only a fraction of the people it had.

“WellPoint’s compelling competitive profile leaves the company as a likely market share winner post healthcare reform,” Rice wrote in a Nov. 25 report to investors. “However, the company's above-average exposure to the individual and small group markets remains a key risk.”

Indeed, investors—and even WellPoint executives—have been worried since the Affordable Care Act passed in 2010 that the company’s extensive business in the individual and small group segments might take a hit.

Earlier this year, Susquehanna Financial Group estimated that exchanges could take a $400 million bite out of WellPoint's profit over the next four years, just because the profit margins in that marketplace will be smaller than those WellPoint enjoyed before Obamacare.

Starting in July, WellPoint CEO Joe Swedish tried to sell investors on the tremendous long-term opportunity that Obamacare gives WellPoint. And he’s still making that case, even as he acknowledges that 2014 will be rough.

“I recognize the uncertainty around 2014 and the valid questions many of you have on the timing and impact of exchanges and the resulting impact on our 2014 earnings outlook,” Swedish told investors Nov. 12 during a health care conference hosted by Credit Suisse in Arizona. “Stepping back, however, I believe we can position this company in a way that leverages our brand, local density, and national scale to drive earnings growth over the next five years.”

WellPoint Chief Financial Officer Wayne DeVeydt, when speaking about the Obamacare exchanges, was even blunter.

“The exchanges for us is not a 2014 play; it's a long-term play,” he told investors at the conference. “And it's a play that we think goes along with 2015, 2016 and beyond.”

WellPoint is hardly at risk of recording an actual loss in 2014. The company has predicted earnings per share this year of at least $8.40 and at least $8.00 per share in 2014.

Rice predicts the provisions of Obamacare will cost WellPoint 80 cents per share in profit next year. He expects WellPoint’s share repurchases and some positive trends in other parts of its business to narrow WellPoint’s overall profit hit to 20 cents per share next year. WellPoint has yet to issue its own profit forecast for 2014.

Here is how Rice’s predictions break down:

He expects WellPoint to lose $59 million as small businesses dump their group plans and send their employees to the exchanges. He expects WellPoint to recapture only about one of 20 of those small business plan members, which would reduce its losses by $3 million.

Therefore, small group dumping will yield a net loss for WellPoint of $56 million, or 19 cents per share, according to Rice’s analysis.

WellPoint is the nation’s largest seller of individual health insurance policies, with 1.8 million individual members. Having those customers move to the Obamacare exchanges will cost WellPoint $142 million next year, Rice estimates.

Of course, WellPoint is competing vigorously to win those customers back, and it also will attract new customers, as Obamacare’s subsidies for purchasing insurance —and taxes for those who don’t—push more customers into the individual market. Rice expects those factors to bring WellPoint $57 million in new profit.

Still, the exchanges will cost WellPoint about $85 million next year, or 29 cents per share, according to Rice’s analysis.

To help pay for its expansion of health insurance coverage, Obamacare cuts payments to health insurers that operate Medicare Advantage plans for seniors. Rice estimates those cuts will cost WellPoint $44 million next year, or 15 cents per share.

Also to help pay for the expansion of insurance coverage, Obamacare taxes health insurers based on their market share. WellPoint has priced those taxes in to its customers. But when it comes to the Medicaid patients it handles for state governments, not all states are allowing health insurers to pass on those taxes. Even among states that have agreed to pay for those taxes, not all have agreed to compensate health insurers for the fact that the compensation itself will be liable to corporate income tax.

These tax issues on Medicaid contracts will cost WellPoint nearly $74 million next year, Rice estimates, or 25 cents per share.

However, Obamacare will also expand WellPoint’s Medicaid business. Many states have raised eligibility for the program for all adults making up to 138 percent of the federal poverty limit. In addition, many states have put out new contracts for health insurers to manage their expanding “dual-eligible” populations—low-income seniors who qualify for both Medicare and Medicaid coverage.

Rice expects those developments to bring WellPoint more than $23 million in new profit next year, or about 8 cents per share.

All told, those provisions will cost WellPoint $236 million in profit next year. In 2015, Rice expects WellPoint’s profits to remain the same as in 2014, although he expects share repurchases to boost WellPoint’s earnings per share.

Rice expects WellPoint’s revenue at the end of 2015 to equal $80 billion. Swedish’s bullish predictions claim that that Obamacare will zoom WellPoint’s revenue to $90 billion by the end of 2016.