WellPoint, Inc. — FY 2010 Form 10-K
Entity and period: The supplied filing is WellPoint, Inc.’s annual report for the year ended December 31, 2010, filed February 17, 2011. The filing does not identify the registrant as Elevance Health, Inc.; the company name in the filing is WellPoint, Inc. Figures below are for FY 2010 unless otherwise noted.
Business context
WellPoint operated a U.S. health benefits business through Commercial, Consumer, and Other segments, with 33.3 million medical members and 69.2 million individuals served across subsidiaries at year-end. About 93% of 2010 operating revenue came from premiums and 7% from administrative fees and other revenue. In December 2009, the company sold its pharmacy benefit management business to Express Scripts and entered a 10-year services agreement.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Operating revenue | $57.84 billion | $60.83 billion |
| Total revenue | $58.80 billion | $65.03 billion |
| Net income | $2.89 billion | $4.75 billion |
| Diluted EPS | $6.94 | $9.88 |
| Operating cash flow | $1.42 billion | $3.04 billion |
| Benefit expense ratio | 83.2% | 83.6% |
| SG&A expense ratio | 15.3% | 15.0% |
| Net income / total revenue | 4.9% | 7.3% |
- Operating revenue fell 5%; total revenue fell 10%; net income fell 39% and diluted EPS fell 30%. The primary comparability factor was the $3.79 billion pretax gain ($2.36 billion after tax) on the PBM sale recorded in 2009.
- On the company’s non-GAAP basis, adjusted net income was $2.80 billion, down 4%, while adjusted diluted EPS was $6.74, up 11%, reflecting the 13% decline in average diluted shares to 415.8 million. Adjusted measures exclude specified items and are not GAAP measures.
- Cash and investments, including long-term investments, totaled $20.2 billion at year-end, down $2.4 billion. Cash and cash equivalents were $1.79 billion. Operating cash flow was reduced in part by a $1.2 billion tax payment related to the PBM sale and higher incentive compensation payments.
- Total debt was approximately $8.9 billion; the debt-to-total-capital ratio was 27.3%, versus 25.3% in 2009. The company reported $2.0 billion available under its revolving credit facility and $336 million of commercial paper outstanding. It repaid $700 million of notes at maturity in January 2011.
- Shareholders’ equity was $23.8 billion and total assets were $50.2 billion. The company repurchased 76.7 million shares for $4.4 billion during 2010; it had not paid cash dividends through year-end.
Changes, segments, and operating drivers
- Medical membership declined 1% to 33.3 million. Fully insured membership fell 11% to 13.7 million, while self-funded membership rose 7% to 19.6 million. Conversions of large accounts to self-funded status, economic conditions, and UniCare member transitions to HCSC contributed to the shift and lower premium revenue.
- Commercial operating revenue declined 7% to $34.7 billion, while operating gain increased 27% to $3.09 billion and operating margin rose to 8.9%, reflecting stronger Local Group margins, disciplined pricing, lower utilization and flu-related costs, and favorable reserve development.
- Consumer operating revenue was nearly flat at $16.1 billion, but operating gain declined 22% to $1.00 billion and margin fell to 6.2%, primarily due to lower Medicare Advantage reimbursement and higher administrative costs.
- Other segment revenue declined 3% to $7.09 billion and moved from $469 million operating gain to an $8.8 million operating loss, largely reflecting the PBM sale and higher unallocated expenses.
- Management estimated 2010 cost-of-care trend of 6.0%–6.5% for Local Group fully insured business. It described inpatient and outpatient costs as areas of pressure, driven mainly by unit costs.
- Benefit expense included $247 million of higher-than-expected favorable reserve releases in 2010. A reduction in the targeted adverse-deviation margin for medical claims reserves lowered 2010 pretax expense by a further $67.7 million, or $0.11 per diluted share.
Outlook, risks, and unusual items
- No quantified full-year 2011 revenue or EPS guidance is provided in the supplied filing text. Management expected unemployment to remain high during 2011, potentially weighing on membership, and expected continued growth in the self-funded share of group membership.
- Management said 2011 California Individual rate increases were intended to cover expected cost trends, but timing, approval, membership mix, renewal levels, and adequacy of premiums remained uncertain. The company reported a $112 million operating loss in that market in 2010 following delayed and lower rate increases.
- Health reform legislation (PPACA and HCERA) creates material uncertainty around minimum medical loss ratios and rebates, rate review, coverage and pricing rules, exchanges, industry fees, Medicaid expansion, and lower Medicare Advantage reimbursement. Management said impacts were still being evaluated as regulations developed.
- Other key risks include medical-cost forecasting and pricing, membership and product mix, government-program funding and compliance, investment valuation and interest-rate exposure, regulatory limits on subsidiary dividends, substantial debt, and potential impairment of goodwill and intangible assets. Goodwill and other intangible assets totaled $21.3 billion, about 42% of assets.
- Pending matters include out-of-network reimbursement class actions and demutualization litigation. The company could not determine ultimate outcomes. Potential assessments arising from Penn Treaty’s rehabilitation/liquidation proceedings were not estimable and could be material.
- Unusual items include the 2009 PBM sale gain, a $1.2 billion related IRS payment in 2010, $21.1 million of 2010 intangible-asset impairment, and $140.9 million of 2010 restructuring costs. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Reconcile GAAP results with adjusted net income and EPS, including the effect of the 2009 PBM-sale gain and the 2010 share repurchases.
- Track whether California Individual rate filings were approved and whether premium levels covered subsequent medical costs.
- Assess claims-reserve development: the $247 million favorable reserve releases and $67.7 million reserve-estimate change, alongside the sensitivity of claims liabilities to assumptions.
- Monitor membership trends, especially fully insured declines, self-funded conversions, and Medicare Advantage and Part D enrollment and reimbursement.
- Review cash generation, debt maturities, revolving-facility availability, regulatory limits on subsidiary dividends, and capital returned through repurchases.
- Follow implementation and financial effects of health reform, unresolved litigation, and possible Penn Treaty guaranty-fund assessments.