ELV

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, filed by WellPoint, Inc. (now Elevance Health). WellPoint is the largest health benefits company in the United States by medical membership, serving 34.6 million members as of the reporting date. The company operates through three reportable segments: Commercial, Consumer, and Other. It is an independent licensee of the Blue Cross and Blue Shield Association (BCBSA) and operates under brands including Anthem Blue Cross, Anthem Blue Cross Blue Shield, Empire Blue Cross Blue Shield, and UniCare.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total operating revenue decreased slightly by $67.9 million (less than 1%) due to membership declines in Local Group and UniCare businesses and the exit from Ohio Medicaid programs, partially offset by premium rate increases.
• Net Income: Net income decreased by $7.7 million (1%). The decline was driven by net realized investment losses and increased administrative expenses, offset by improvements in benefit expense.
• Investment Performance: Net realized losses on investments increased significantly to $352.5 million in Q1 2009 from $45.6 million in Q1 2008. This was primarily due to other-than-temporary impairments (OTTI) of $305.0 million related to equity market deterioration and credit-related fixed maturity securities.
• Membership: Total medical membership decreased by 814,000 (2%). Fully-insured membership dropped by 1.1 million (6%), while self-funded membership increased by 292,000 (2%).
• Cost of Care: Benefit expense decreased by $528.3 million (4%), improving the benefit expense ratio by 350 basis points to 81.6%.

Guidance, Outlook, and Risks

• Strategic Transactions: On April 13, 2009, the company announced an agreement to sell its NextRx pharmacy benefit management (PBM) subsidiaries to Express Scripts, Inc. for $4.675 billion. The transaction is expected to close in the second half of 2009.
• Regulatory Actions: The Centers for Medicare and Medicaid Services (CMS) suspended the company from marketing and enrolling new patients in Medicare Advantage and Part D plans in January 2009 due to compliance issues. The company is working to remediate these findings.
• Capital Allocation: The company repurchased approximately 17.7 million shares of common stock for $681.2 million during the quarter. The Board authorized an additional $1.5 billion for repurchases, leaving $1.8 billion available as of March 31, 2009.
• Tax Outlook: The effective tax rate for Q1 2009 was 35.0%, up from 33.1% in 2008. The full-year 2009 effective tax rate is projected at 35.2%, reflecting new New York state legislation.
• Risks: Key risks include the uncertainty of the Express Scripts transaction closing, potential further investment impairments due to market volatility, and the impact of CMS sanctions on Medicare business growth.

Investor Verification Checklist

• Investment Portfolio Health: Verify the extent of unrealized losses ($933.6 million) and the potential for future other-than-temporary impairment charges given market conditions.
• Express Scripts Transaction: Monitor the regulatory approval process and closing timeline for the $4.675 billion PBM divestiture.
• CMS Compliance: Track the resolution of the CMS suspension regarding Medicare Advantage and Part D enrollment to assess impact on the Consumer segment.
• Membership Trends: Analyze the shift from fully-insured to self-funded membership and the impact of the Ohio Medicaid exit on future revenue stability.
• Legal Contingencies: Review ongoing litigation regarding out-of-network reimbursement and rescission practices, particularly in California and New York.