AET Aetna Inc. (delisted)

Yesterday, the governor of New York ordered Empire Blue Cross Blue Shield, a unit of  WellPoint Inc. (WLP), to refund $61.1 million for alleged overcharging of premiums in 2010. Apart from WellPoint’s unit, Aetna Inc. (AET) and nine other health insurance companies were also asked for refunds.

The aggregate refunds demanded amounted to $114.5 million, of which WellPoint's share happens to be the highest. The second largest amount of $21.4 million was demanded from Excellus, which is a non-profit Blue Cross Blue Shield plan, while the third-largest amount of $11.5 million is to be paid by Aetna.

The refunds are related to policies covering around 574,000 people, mostly in the large group market. As declared by the governor, the refund mandate was a warning to insurance companies that the state is keeping a tab on their actions and any wrongdoings will not be accepted.

However, the companies claim that changed regulatory requirements were responsible for the overcharge. The New York Health Plan Association said that the state announced the refunds on the basis of the rates filed in 2009 for 2010. However, the state changed the requirements after that, leading to the discrepancy.

As per the new rules, insurance companies are required to spend 82% of their premium revenue on medical care. In case they are unable to do so, they need to refund the balance to the policyholders.

Nevertheless, the refund is not expected to significantly effect WellPoint’s financial position as the company has a strong balance sheet with cash and cash equivalents of $2.5 billion as on September 30, 2011. The company reported a 1.7% year-over-year growth in operating income to $1.77 per share in the third quarter of 2011, striding ahead of the Zacks Consensus Estimate of $1.69.

Currently, the Zacks Consensus Estimate for WellPoint’s fourth-quarter earnings stands at $1.11, down about 16.5% year-over-year. Of the 19 firms covering the stock, 3 revised their estimates upward, while 12 downward revisions were witnessed in the last 30 days.

For 2011, Zacks Consensus Estimate earnings are expected to be $7.07 per share, climbing about 5% year-over-year. The company carries a Zacks #2 Rank, implying a short term Buy rating, with a slight upward pressure over the near term.

On Wednesday, the shares of WellPoint closed at $68.57, up 2.40%, on the New York Stock Exchange.

 
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