WellCare profits up on Medicare business
By Mike Wells and Carol Gentry
5/5/2010 © Health News Florida
WellCare Health Plans Inc., which reported handsome first-quarter earnings today, faces a paradox in its government contracts: It's making too much money on its Medicare services -- at least, too much to meet upcoming spending requirements -- but not enough from Medicaid.
That’s what analyst Carl McDonald of Oppenheimer & Co. said in an advisory report issued today after WellCare released its first-quarter earnings report. The company said it netted $6.4 million, compared with a loss of $36.9 million for the same period last year.
WellCare provides managed care services exclusively for government-sponsored healthcare programs, focusing on Medicare and Medicaid.
Revenue was lower in this report than last year's because membership dropped 11 percent, to 2.2 million. The drop was anticipated, since the Tampa-based company ended a type of Medicare Advantage product called private fee-for-service plans; such plans are being phased out by all companies under federal orders after they created widespread confusion for beneficiaries and a spike in costs.
WellCare also was unable to enroll any Medicare beneficiaries for most of last year after being suspended by the Centers for Medicare and Medicaid Services for marketing violations.
The Oppenheimer analyst said that WellCare's high margins on its Medicare business will have to give way if the company is to meet the requirements of the Patient Protection and Affordable Care Act (ACA). It requires that by 2014, Medicare plans spend at least 85 percent of the premium dollar on patient care, rather than on sales, claims payments and other administrative costs, as well as profits. (Editor's note: The spending rules take effect sooner for commercial plans; see Insurers can't comply, official says).
WellCare reported its spending on patient care -- the "medical loss ratio" or MLR -- ran 78.7 percent on its Medicare Advantage HMO.
“While the 85 percent minimum Medicare MLR doesn't start until 2014, it is clear that WellCare is making too much money on its government business serving seniors, and the margin isn't sustainable,” McDonald said.
With Medicare margins likely to fall over the next few years, he said WellCare will either have to grow Medicare volumes “a lot” to sustain earnings or improve margins in the Medicaid business.
The latter is a more likely scenario, because Medicaid margins appear to be well below 1 percent, the report said. WellCare is Florida's largest Medicaid managed-care contractor.
Hawaii, one of WellCare's newest markets, lost about $25 million. McDonald said the company expects a big rate increase in the fourth quarter so that it can break even for the year.