High unemployment major factor in WellPoint cut of 600 workers

By J.K. Wall, The IBJ

jwall@ibj.com

WellPoint Inc. provides health insurance to more customers than any of its peers. But as more people lose jobs, fewer are paying health premiums to the Indianapolis-based company.

As a result, the company will lay off 600 workers and eliminate another 900 open positions. That amounts to a 3.5-percent reduction of WellPoint's nationwide workforce of 42,000.

A WellPoint spokeswoman declined to say how many of the cuts happened in Indiana. "No one location or group of locations was targeted for reduction more than any other," Cheryl Leamon wrote in an e-mail.

Laid-off workers were notified Thursday, Leamon said, and will receive severance and placement help. However, she declined to provide details of the severance.

WellPoint anticipates these actions will result in a fourth quarter 2008 after-tax charge of about $24 million.

"With the current state of the economy, we made the difficult decision to adjust the size of our workforce as we continue to meet our members' needs while appropriately controlling operating expenses," WellPoint CEO Angela Braly said in a statement.

Some Wall Street analysts have hoped that declining utilization of health care services would improve WellPoint's profit margins. For example, in an August survey by the National Association of Insurance Commissioners, 22 percent of U.S. consumers said they were going to the doctor less often because of economic troubles. About 11 percent of patients said they're taking fewer prescription drugs to save money.

"Our bullish thesis on the shares centers on the opportunity for WellPoint's large commercial business to benefit from the potential for decelerating utilization trends," wrote Morgan Stanley analyst David Veal in a Jan. 13 research note.

But other analysts have said WellPoint needs to reduce its administrative expenses to maintain its profit levels. For example, Citigroup analyst Charles Boorady lowered his outlook for WellPoint's stock price this week after WellPoint was sanctioned for allowing computer problems to delay and deny claims for some of its Medicare customers.

Medicare's "report identified issues as recent as January 2009 suggesting significant investments in [general and administrative expenses] remain," Boorady wrote in a Jan. 12 note to investors.

In a news release, WellPoint described its job cuts as "streamlining its administrative cost structure in response to the ongoing economic downturn." However, it also emphasized that the cuts would not impact any existing compliance staff involved in its efforts to comply with the demands of the federal Medicare program.

The past 12 months have been especially difficult for WellPoint.

Computer problems have caused claims-processing problems at WellPoint since October 2007. They caused WellPoint to under-price its 2008 policies, and in March and April the company had to wipe out its projected profit growth for the year.

Also, WellPoint's investment portfolio was hammered by the failure of Lehman brothers, Fannie Mae and Freddie Mac, as well as the stock market crash in September and October. The company recorded investment losses of about $1 billion for 2008.

"We continue to build on momentum from our 2008 performance improvement plan, making the necessary changes to enhance our claims processing and customer service functions and streamlining operations," Braly said.