Chief Financial Officer, UnitedHealth Group
Deveydt Says Health-Care Overhaul Will Benefit WellPoint
Jan. 27 (Bloomberg) -- Wayne Deveydt, chief financial officer at WellPoint Inc., talks about the impact of the overhaul of the U.S. health-care system on the company.
Deveydt also discusses WellPoint's fourth-quarter profit, proposed rate increases in California and the outlook for enrollments. Deveydt talks with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
About Wayne Deveydt
In a 2011 interview, Wayne Deveydt, then CFO of WellPoint, discussed the company's financial performance and strategy. He stated that investors initially focused on non-recurring charges in the fourth quarter, but later recognized the company had "beat consensus quite handily." Deveydt noted that WellPoint exited its non-Blue Cross states in 2010 by selling its UniCare brand, a decision he said was driven by the belief that health reform would make concentrated market share more critical. He added that, excluding that sale, the company grew in all its markets in 2010 and expected commercial enrollment growth in 2011, including net new growth exceeding 350,000 members from large national accounts. Deveydt also addressed the impact of the U.S. health-care overhaul. He said that scale would be important for success, stating, "If you can have scale which creates a low-cost product you'll be a net winner in this environment." He expressed support for mechanisms to bring healthy individuals into the insurance pool, such as mandates, saying, "It is imperative though that if you're going to allow individuals to access the market freely that you have to have a mechanism to try to get as many healthy lives into that pool to be able to spread those costs across." Deveydt indicated WellPoint would continue to seek acquisitions, particularly of Blue plans and smaller in-state players.
Transcript (25 segments)
I
Interviewer0:00
Pharmaceutical companies aren't the only ones whose profits could suffer because of healthcare reform or benefit moving in one direction or the other. Insurers are also guarding their bottom lines, not least of which is WellPoint, the largest US insurer based on membership. About 33 million people get their coverage through the Indianapolis-based company, whose shares have been trading up today. We spoke exclusively to the CFO Wayne Deveydt and asked him what investors are focused on when they were buying shares of WellPoint.
W
Wayne Deveydt0:30
Investors initially were somewhat disappointed when they saw the results. I think what they were really focused on was 2011, and when we gave them a chance to see some of the non-recurring charges we took in the quarter, and almost all of them being non-cash charges. With the change in healthcare reform, we made a decision to really evaluate our assets, restructure our organization, and essentially took some impairment charges that were non-cash related. And then we had some severance charges as well as we prepared for 2011 and thereafter. So I think as investors had a chance to digest the charges we took, what they found was not only did we have a very strong quarter but actually beat consensus quite handily, and we prepared ourselves quite well for 2011. And I think that's why you saw the market response so strong later in the day, and I think it's why today you're continuing to see the stock move up.
I
Interviewer1:10
You also had a bit of an issue with California with an attempted rate raise that was rebuffed. Now you say that you'll be profitable in California by 2012 and you expect a rate increase to be approved by that state. Do you think you've bounced back from that, or do you see problems ahead with other states like Connecticut and New York that have also begun to question their rate increases?
W
Wayne Deveydt1:28
Yeah, the interesting thing on the rate increase though is even in California when the rate increase was rebuffed, I mean we still lost over $110 million last year in our individual market. And so the one thing we're trying to emphasize is that it's just not a long-term sustainable program. You can defer rates, you can stop rates, but ultimately it's almost a snowball effect. Medical costs continue to rise in this country. Part of the reason they rise is we have an aging population. The majority of healthcare is consumed in the latter part of life, and we have baby boomers aging in starting this year for the next 19 years. And so healthcare costs aren't going to go down, they're only going to rise. And every day that you put off allowing an appropriate rate increase is another day that the cost gets even larger. So what we found was that with this year, we went forward with the commissioners and the regulators of our states. We've been educating them on those components, finding ways to drive down those costs, and we're optimistic that we'll get our rate increase. We don't believe we'll return to profitability though on California individual in 2011, but we do think we have a road to getting back to profitability by 2012.
I
Interviewer2:27
And because of healthcare reform, states now have more power to regulate insurance premiums. This has been a real challenge for WellPoint. In California, it originally asked regulators for 29% increases in premiums. I asked the CFO Wayne Deveydt if he expects costs to rise that much every year.
W
Wayne Deveydt2:43
No, no, I definitely hope not. You know, the problem is sometimes things get a little bit sensationalized because, you know, in the case of California this year, the average increase on about 700,000 lives is below 10% that we put forward. And so you're seeing things come down. But I think you would agree, as many would, even 10% does not seem like a long-term sustainable solution for the healthcare system. And so, and the costs are quite simple. It's basically, you know, the utilization of our consumer groups out there and the prices that we pay per unit. And so from our perspective, you know, we do expect medical cost over time to continue to rise, not decelerate. And so even in a year like this year where you have high unemployment, many individuals not going to the doctor, snowstorms, even, you know, a snowstorm can shut down a city and people will not go to the doctor, costs still went up this year. Because again, we have to really focus on the core underlying trend of what's driving cost, and it's utilization by consumers and it's unit price.
I
Interviewer3:36
Let's talk about enrollment a little bit because unlike UnitedHealth, Wayne, you guys at WellPoint have seen declining enrollment this year. I mean, what are you expecting for this year?
W
Wayne Deveydt3:45
We actually expect that we'll grow in 2011. What's interesting is in 2010, we made a decision to exit our non-Blue Cross states, in particular was our UniCare brand. And from that perspective, we felt with health reform and where it was going, it was going to be even more critical to have significant market share concentrated to get maximum value from our investments that we make within territories. And with that decision, we left about 560,000 members that we sold in 2010. And so if you actually bifurcate that sale out in 2010, we actually grew in all of our markets. So despite the tough economy in 2010, we actually had growth on a same-store basis. And as we go into 2011 now and not having the headwind of the sale, we expect us to grow in 2011 as well.
I
Interviewer4:26
Commercial enrollment is going to grow as well in 2011?
W
Wayne Deveydt4:28
Yeah, yeah, we feel very good on commercial enrollment. In fact, our one selling season for large national accounts, and these are customers with anywhere from more than 5,000 employees generally, some larger than 1,000, we will have net new growth exceeding 350,000 members on one selling season alone of this year.
I
Interviewer4:45
What do you do to boost your commercial enrollment? I mean, is it all about pricing or do you streamline your claims system? I mean, what do you offer in order to get more customers?
W
Wayne Deveydt4:54
You know, it's a combination of pricing and product, quite honestly. And from a pricing perspective, the more that we can drive down the price and make ours the most affordable choice, the more that we'll win. I mean, in some ways when you create an MLR and you put a floor on pricing, you've essentially commoditized the market. And with a commodity market, you win on brand, quality, and price. We've got the best brand in the business, we've got the lowest prices out there, and we think we have the best quality. And so it's one of the reasons we believe we actually saw membership in our core states grow. It's why we think we're going to grow next year. But you have to have product too. And healthcare reform is mandating what has to be in many of the products out there. And so essentially what we're trying to do is find mechanisms within the reform law to make sure that we can offer a variety of products so that people can pick depending on where they're at in their age, their health status, and quite honestly their financial capability of affording health insurance.
I
Interviewer5:42
Wayne, how important is healthcare reform to you and what happens here? I mean, talk about repealing the individual mandate. There's also concern about your obligatory insurance of people regardless of pre-existing risk. How key is that, or can you work through the uncertainty?
W
Wayne Deveydt6:00
I believe we can work through the uncertainty, although I will tell you, and you know, I know you appreciate this, investors want certainty no different than we do. So the sooner we can get clarity on health reform, the sooner we can move forward. From our perspective, it is the law of the land. We're moving forward underneath the law of the land regardless of what changes may be made, and we'll adapt accordingly. I will say this: it is imperative though that if you're going to allow individuals to access the market freely, that you have to have a mechanism to try to get as many healthy lives into that pool to be able to spread those costs across a wider base. So whether they go down the path of mandates or some other mechanism to get healthy lives into the pool, we are fully supportive of.
I
Interviewer6:39
So in terms of reform and then having a greater pool to play with, that's a good thing?
W
Wayne Deveydt6:44
Yes, we believe it is. From our perspective, it's going to drive a lot of top-line growth. You're going to have over 20 million potentially uninsured Americans today that will qualify for insurance that don't exist today. You're going to have almost another, you know, 10 to 15 million that will qualify for Medicaid. I mean, it's only going to grow.
I
Interviewer7:03
So let me ask you, net-net, in terms of greater costs versus lesser costs, I mean, when we have healthcare reform, it's going to be better in terms of the bottom line, isn't it?
W
Wayne Deveydt7:11
I think ultimately for WellPoint, scale is going to matter. And if you can have scale which creates a low-cost product, you'll be a net winner in this environment. And we think for our size, having one in nine Americans today, we'll be a net taker. And yes, it will be good for us.
I
Interviewer7:26
Speaking of scale, you have combined a lot of Blue Cross Blue Shield players and have been making acquisitions. Do you intend to continue on that acquisitive path? I know that you sold UniCare last year. Is that a turnaround?
W
Wayne Deveydt7:38
Yeah, really our first preference is always to buy a Blue plan. You know, that's really our bread and butter. It's what we do well. We're very good at integrating those plans as they convert. Today, you know, all the for-profit Blues have been converted into WellPoint at this point. As more Blues become available, we would fully expect to participate in hopefully having them join the WellPoint family. And we're always looking at other organizations. Right now, there's been a lot more focus on what I'll call in-state smaller players that are recognizing that they'll struggle in the new environment being able to be competitive. And so we're reaching out to smaller players within our states to say, hey, there's a chance here to partner and share in the scale that will come and be required as part of healthcare reform.
I
Interviewer8:16
So Wayne, just quickly, very likely that we could see some more deals from you guys this year in 2011? Just quickly.
W
Wayne Deveydt8:22
Yeah, yeah, I mean, I'd say that we're always a willing listener and potential buyer. The biggest thing struggle with is that it's been better buying ourselves over the last couple years.
I
Interviewer8:32
Interesting. All right, Wayne, we're going to leave it there. Thank you so much for your time. We appreciate it.
W
Wayne Deveydt8:37
Great, thank you.
I
Interviewer8:38
And that was WellPoint CFO Wayne Deveydt.