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WellPoint Inc. (WLP) is one of the largest managed-care organizations in the United States. The company services over 35 million members through its affiliated health plans and specialty products, which include dental, vision, and mental health benefits, as well as life and long-term-care insurance plans. The company was formed as the result of a merger between WellPoint Health Networks Inc. and Anthem, Inc. in 2004, and is now an independent licensee of the Blue Cross and Blue Shield Association, serving members in 14 states. WellPoint’s 2012 acquisition of Amerigroup helped extend its reach in most of these markets. The company also operates under the UniCare and CareMore Health Group, Inc. names, and is licensed to conduct insurance operations in all 50 states.

CEO Joseph Swedish took the helm in late March. Swedish, the former CEO of Trinity Health Corporation, stated that his primary focus at this time is expansion for WellPoint in 2014, as the industry is likely to face a difficult pricing environment in the second half of the current year. With eight years of experience at that company, during which time he helped orchestrate a merger with Catholic Health East that united 70 hospitals and generated more than $13 billion in revenues, his understanding of the industry should prove to be an asset for WellPoint. Shares of the company have seen solid advances under the new leadership. Indeed, aided by improved medical loss ratios, management has been able to reduce operating expenses, sparking positive stock action.

The aforementioned pricing headwinds could be detrimental to near-term performance, however. In April, management had been expecting medical enrollment to decline by roughly 400,000  by the end of this year. This, coupled with rising medical cost trends (that are liable to increase by about 7%), and WellPoint’s inability to extract additional revenue from current customers will probably hamper the bottom line. What’s more, Medicare Advantage is expected to create headwinds this year, affecting profitability at CareMore, where WellPoint has already begun scaling down its investment strategy. The CMS (Centers for Medicare & Medicaid Services) has stated it does not intend to cut payouts on Medicare Advantage further, but HMOs are still dealing with rate cuts that have taken place in recent months.

Competition will likely suffer a similar fate operating under the Affordable Care Act. Cost increases have left UnitedHealth Group (UNH Free UnitedHealth Stock Report) preparing for flat bottom-line results at the year’s end. And, even though Aetna (AET) is still on track to grow at a solid pace this year, it too has expressed concerns regarding specialty drug spending with the healthcare reform set to get under way in the next six months. Some of these hurdles could be overcome by membership growth. Much like WellPoint’s addition of Amerigroup last year, Aetna recently closed a relatively large deal to acquire Coventry Health Care, Inc. Moves of this magnitude are few and far between, however, and capital spending should remain tempered in the immediate future.

Risks of this nature are prevalent in the managed care industry. Plus, the government plays an important role in WellPoint’s ability to manage its HMOs and PPOs. Legislative changes on both the state and federal fronts have the ability to adversely affect cash flows and total operational methods. Likewise, participation in Medicaid and Medicare programs depends on government funding and compliance with contracts and regulatory oversight. All told, managed care is a relatively safe investment when a proper entry point is chosen. And, though legislative risk is present, we note that WellPoint inc. is a well established organization that has harnessed its strong asset base and quality management to conduct operations worthy of an industry leader.

For a more detailed evaluation of WellPoint’s business prospects, as well as our take on the investment merits of the stock, subscribers are encouraged to check out our full page report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.