WellPoint Hits the Trifecta

WellPoint (NYSE: WLP) hit the trifecta yesterday, but it wasn't the one that makes you leave the track happy. This triple combination -- investment losses, lower enrollment, and higher medical costs -- caused earnings per share to sink 57%.

Fortunately, investors saw it coming. The stock actually ended up 4% on the day.

The $350.5 million after-tax investment loss hurt, but the damage is done, and the company is still above its required level of capitalization. Aetna (NYSE: AET) and Humana (NYSE: HUM) also reported impairments last year, but none of them are close to needing a bailout like AIG (NYSE: AIG).

WellPoint's membership dropped 1% in the quarter as people lost jobs and couldn't pay for COBRA. Completing the trifecta, medical care ratio -- medical costs divided by premiums -- was up to 83.4% from 82.9% a year earlier. Those higher costs are cutting directly into the bottom line.

Fortunately, premiums reset eventually, and the company should be able to get the cost issue under control this year. Investors will have to wait until the end of next month at the company's investor day to get the full details, but management did say they expect to see earnings in the "low single digits." Not great, but at least it's headed in the right direction.

WellPoint and the rest of the health insurance industry -- UnitedHealth Group (NYSE: UNH), Cigna (NYSE: CI), and the like -- will have two opposing forces working on their stocks this year. On one hand, they should be at the front edge of the recovery -- increased employment means increased revenue -- but the unknowns that surround Washington's plans for universal health care (or some derivation thereof) will continue to drag on their stocks.

The only thing WellPoint can do is hope that the economy recovers, hope Washington doesn't dilly-daddle, and keep costs under control while it rides this out.