Finance & Business World

WellPoint Inc.’s decision to cut 2008 guidance cast an ominous shadow over the health insurance industry Tuesday, as Wall Street worried about the wider impact of higher medical costs and a weak economy.

Shares of Indianapolis-based WellPoint Inc. plunged $17.11, or 26%, to $48.72 in afternoon trading, following its announcement late Monday that it would slash profit expectations. The company cited several factors, including medical costs, lower fully insured enrollment and a weak economy.

Its peers felt the weight of that decision, as several stocks tumbled 10% or more. The sector’s decline was in sharp contract to the overall market, with the Dow Jones industrials surging nearly 230 points. Standard & Poor’s 500 index and the Nasdaq composite index also posted gains.

"Following WellPoint’s sharp downward revision to its earnings outlook, we believe the company’s view of higher medical costs is likely systemic, and we expect other managed care plans to report similar issues," said J.P. Morgan analyst William D. Georges, in a note to investors.

Other issues, including election year concerns and credit risks will likely weigh down the sector for most of the year, he added.

Hartford, Conn.-based Aetna Inc., early Tuesday, reaffirmed that 2008 profit is expected to fall short of Wall Street forecasts. Shares fell $4.76, or 10.2%, to $41.75.

Goldman Sachs’ Matthew Borsch downgraded his view of the managed care sector to "Neutral" from "Attractive."

"WellPoint’s problems reflect company-specific underwriting error, but also reflect industry-wide pricing pressures that are now combined with upward pressure on underlying medical cost trends, substantially increasing the risk that the current cyclical slowdown in managed care becomes an outright downturn," he wrote.

Likewise, Bear Stearns analyst John Rex lowered his outlook on the sector to "Market Weight" from "Market Perform", saying he had already factored in political fears, less state funding and a light flu season.

"Yesterday, however, WellPoint opened up what we consider to be the ultimate managed care earnings fear: rising medical costs," he said, in a note to investors pay day loans. A health insurer’s medical cost ratio measures the percentage of each dollar in premiums health insurers spend on patient care. Higher ratios mean higher costs.

Citi analyst Charles Boorady, meanwhile, said the issues cited by WellPoint are most likely company-specific. He reaffirmed a "Buy" rating for the company, but lowered his price target to $81 from $100. He reaffirmed "Buy" ratings for several other companies.

Shares of Louisville, Ky.-based Humana Inc. fell $11.91, or 19%, to $50.79, while shares of Minnetonka, Minn.-based Unitedhealth Group Inc. fell $4.53, or 10.1%, to $40.52 and shares of Bethesda, Md.-based Coventry fell $9.08, or 18.4% to $40.32.

Philadelphia-based Cigna Corp. fell $4.05, or 9.5%, to $38.88 and Woodland Hills, Calif.-based Health Net Inc. fell $5.78, or 13.4%, to $37.28. 

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