(Reuters) - WellPoint Inc's WLP.N quarterly profit missed analysts' estimates and the health insurer cut its full-year profit forecast on Wednesday on rising medical costs and lower membership, sending its shares and those of its rivals down sharply.
WellPoint executives said they were refusing to cut prices that could hurt profit margins in the face of competitive pressure among health plans, leading to lower enrollment.
"We are disappointed with the need to lower our guidance, but believe it is the right action to take, given the challenging marketplace we see," Chief Executive Officer Angela Braly told analysts on a conference call.
Shares of WellPoint, the second-largest U.S. health insurer by market value, tumbled as much as 12.8 percent in morning trading to $53.56, its lowest since late 2010. By midday, it was down 11.8 percent at $54.17. Shares of rivals UnitedHealth Group Inc (UNH.N) and Aetna Inc (AET.N) were both down more than 4 percent on the New York Stock Exchange.
"They hit on two things that give you pause, and that is the intensifying competition and rising medical costs," Jefferies & Co analyst David Windley said. "That's what is trashing the stocks. Those are two pretty central things to the profitability trends for managed care companies."
Several analysts said it was particularly discouraging that WellPoint was cutting its forecast after backing it only a couple of weeks ago, when it announced its $4.5 billion acquisition of Medicaid specialist Amerigroup Inc AGP.N.
WellPoint's second-quarter net income fell to $643.6 million, or $1.94 per share, from $701.6 million or $1.89 per share a year earlier, when the company had more outstanding stock.
Excluding items, WellPoint reported earnings of $2.04 per share, 4 cents below analysts' average estimate, according to Thomson Reuters I/B/E/S.
Revenue rose 2 percent to $15.17 billion, about $100 million below analysts' average estimates.
WellPoint said it saw an increase in the use of medical services during the quarter, stemming from a rise in physician office visits and outpatient services such as colonoscopies and physical therapy.
Americans' low use of healthcare services has proved to be a boon for health insurers over the past two years by reducing their medical claim costs and increasing profit. But investors have been bracing for utilization to start rising again.
WellPoint Chief Financial Officer Wayne DeVeydt said costs spiked in May, but retreated to more expected levels in June. WellPoint now expects the rise in medical claim costs to be at the high end of its forecast range of 6.5 percent to 7.5 percent this year.
"While we don't see trend rising outside of our expectations, we think it would be prudent to at least reflect that it could rise in the back half of the year," DeVeydt said in an interview.
Larger rival UnitedHealth last week also highlighted tough competition among health plans, as well as a challenging climate for Medicare and Medicaid reimbursement. The executives' comments sent UnitedHealth's shares down, even though the insurer reported a higher-than-expected profit and slightly raised its forecast.
WellPoint's latest setbacks come after other recent struggles for the company involving high costs for its Medicare plans for seniors that led to weaker results.
WellPoint forecast 2012 earnings per share in a range of $7.30 to $7.40. That amounts to a reduction of at least 25 to 35 cents from its April forecast of at least $7.65 per share, excluding items. Analysts have been looking for it to earn $7.76 a share.
The company's enrollment totaled 33.5 million at the end of June, down about 1.9 percent from a year earlier. It projects year-end enrollment of about 33.4 million, down about 200,000 members from its prior view.
The company pointed to competition heating up in New York, California, Virginia and Georgia.
DeVeydt also said the weak economy continued to take a toll, as employee layoffs translate to fewer workers enrolled in WellPoint's plans.
While WellPoint had not been accounting for a significant economic rebound this year, DeVeydt said, "what we weren't expecting is for it to be continually more sluggish and actually have even more members being laid off across the country."
Leerink Swann analyst Jason Gurda said the changes to enrollment and cost trend estimates "appear fairly modest and suggest to us that WellPoint's full-year guidance may not have been particularly conservative to begin with."
WellPoint expects about 15 cents per share in costs this year related to financing the Amerigroup deal, which is a major bet on the expansion of private industry's role in the Medicaid U.S. government health plan for poor Americans.
It comes on the heels of the U.S. Supreme Court's decision to uphold President Barack Obama's healthcare law, which is set to expand Medicaid eligibility by about 16 million people largely by raising income limits for the program.
WellPoint is the second health insurer to post results since the court upheld the law late in June. Large health insurance companies' shares have fallen since the decision on the legislation, which tightens regulations and adds new fees on the industry while also potentially paving the way for millions of new customers by expanding coverage to the uninsured.
Through Tuesday, WellPoint shares had fallen about 7 percent this year, underperforming a 1-percent decline for the Standard & Poor's Managed Health Care index of large insurers .GSPHMO.
Editing by Maureen Bavdek, Matthew Lewis and Bernadette Baum