It seems as though investors have made their peace with health insurance reform to some extent, as WellPoint (NYSE:WLP) shares have more than doubled off of their bottom in late 2008/early 2009. That said, major health insurance names like WellPoint, Unitedhealth (NYSE:UNH), Aetna (NYSE:AET) and Coventry (NYSE:CVH) still seem to be trading below their inherent earning power as investors try to digest the impact of upcoming regulation on their medical costs and membership expansion potential.

Tutorial: Intro To Insurance: Health Insurance

A Surprisingly Strong First Quarter
WellPoint's first quarter once again highlights the difference between absolute and relative performance. On an absolute basis, it would seem that revenue contraction of over 1% would be something of a disappointment. In this case, though, analysts were expecting a bigger decline and WLP's top line and profit performance were surprisingly strong.

While WellPoint did see a small increase in administrative fees, premium revenue dropped more than 1% (and that's more than 85% of the revenue base). Membership did grow over 1%, though, with strong performance in national and senior categories. (For more, see 5 Health Insurance Considerations.)

Looking at the profit picture, WellPoint saw operating profits rise almost 5% despite a small uptick in the medical loss ratio (up to 82.1). Especially noteworthy was the better than 5% year-on-year decline in general and administrative expenses, and it is impressive to consider that the company is still finding that amount of cost savings in the system.

Getting Ready for the Unexpected Consequences
Assuming that the health insurance reform pushed through by the Obama administration stays in place, the world of health insurance is going to get a lot more complicated in the coming years. For starters, no one really knows what the impact will be of essentially bringing this industry under federal regulation.

Consider the case of mandated medical loss ratios. Relative to where WellPoint is today, it seems that the federal minimums will probably force the company to spend more. How that happens will be interesting. KV Pharmaceutical (NYSE:KV.A) was blitzed in the media when it wanted to charge a premium for Makena (versus the lower-cost offerings from compounding pharmacies), but this may happen more frequently. After all, if the health insurers have to spend "x" amount on medical costs, will they have the same incentive to fight back against the likes of Pfizer (NYSE:PFE), Abbott (NYSE:ABT) and Johnson & Johnson (NYSE:JNJ), or will they find room to compromise?

Likewise, who knows what will happen with membership. In theory, the mandate for insurance should mean that WellPoint sees greater enrollment, though insurance exchanges could offer a lot of competition. What's more, what will happen with the expense structure of this industry? If companies like Unitedhealth, WellPoint and Aetna will be told what they must spend on medical costs, it seems likely that they will try to make it up from their corporate expense structures. How much will insurance customers appreciate longer wait times that may come from cutting customer support staff? (For more, see 6 Ways To Save On Insurance.)

The Bottom Line
Going into a period of such uncertainty, WellPoint seems like a good horse to ride. With the power of the Blue Cross brand behind it, and the efficiencies of large-scale operations, WellPoint will be a survivor. That is a significant contrast to companies like Centene (NYSE:CNC), Coventry or Magellan (Nasdaq:MGLN) - companies with good business prospects but more uncertainty heading into this new regime of rules and regulations.

If WellPoint can get back to business as usual and grow revenue in line with the insurable population while maintaining a stable free cash flow margin, the stock is still cheap enough to buy. Investors should note that "if," though - it may be the case that WellPoint loses customers to exchanges and finds it difficult to recoup higher medical payouts. Even in that case, though, the downside to the stock looks close to the current price, so this looks like a situation with relatively low risk and good potential upside. (For more on this topic, check out Investing In Health Insurance Companies.)

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Tickers in this Article: WLP, UNH, AET, CVH, CNC, MGLN, KV.A

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