(Reuters) — WellPoint Inc., the second-largest U.S. health insurer, on Wednesday reported first-quarter profit that beat analysts' expectations and said that the individual exchanges created under healthcare reform were operating at a profit.
It raised its outlook for 2014 and shares gained 6%, or $5.73, to $101.12, far outpacing the 1% to 2% gains in competitors like Aetna Inc. and UnitedHealth Group Inc.
WellPoint said that it continues to watch expenses for its at least 600,000 new exchange customers, but that so far it was making its expected profit on the business.
“We anticipated that exchange enrollees would generally be older than our legacy individual customers, and our pricing assumptions for both on and off exchange products reflect this view,” CEO Joseph Swedish said during a conference call.
WellPoint also said it is keeping an eye on the costs of the pricey new hepatitis C treatments, which cost $50 million in the first quarter alone. It has built in $100 million in additional hepatitis C drug costs for 2014, the company said.
Gilead Sciences' new treatment Sovaldi broke sales launch records during the first quarter with its $84,000 price tag. An estimated 3.2 million Americans have this virus that can cause liver wasting disease and for the first time, this drug promises many of them a cure.
WellPoint's stance on the profitability of the exchange business came as a relief to investors who have worried that the new customers would have medical expenses that are a drain on the insurers.
That, along with business-wide low medical costs and cost containment during the first quarter, could extend out in the year and helped buoy shares, analysts said.
“There's probably more upside than downside to the 2014 numbers that they’ve offered,” Leerink Partners analyst Ana Gupte said.
Net profit fell during the quarter, largely because of investment spending related to healthcare reform and the higher administrative costs of adding new commercial customers.
WellPoint, which runs Anthem and Empire Blue Cross Blue Shield plans, reported net income of $701 million, or $2.40 per share, down from $885 million, or $2.89 per share, a year earlier.
Excluding net gains on investments, WellPoint’s profit was $2.30 per share. Analysts on average had expected $2.12, according to Thomson Reuters.
The company said it had spent less on medical claims than expected.
WellPoint raised its outlook for 2014 earnings by about 20 cents per share, saying that it now expects to earn at least $8.40, excluding items. During an investor day last month, the company gave an outlook of more than $8.20 per share.
The company added 1.2 million members in its commercial business, which includes large national employers, local employers and the individual markets.
WellPoint is selling individual policies on the new exchanges created under President Barack Obama’s national healthcare reform law in the 14 states where it operates Blue Cross Blue Shield plans.