WellPoint Strategic Analysis: SWOT, Competition & Growth

Environmental Forces Analysis

WellPoint is subject to impacts from many different environmental factors. The health care coverage industry is not considered to be cyclical, but rather subject to several key demand drivers. These include government regulation, demographic shifts, social factors, technology changes, and other forces. No one factor dominates the industry, but each has an impact and must be accounted for by WellPoint's management.

There are few economic variables that directly impact WellPoint's business. The industry is not cyclical and is subject to demand drivers that are largely unrelated to macroeconomic circumstances. That said, there are a few ways in which macroeconomic factors can affect WellPoint. One is that the overall health of the economy affects the ability of corporations — especially small businesses — to provide health care for their employees. Individual WellPoint customers may also face decisions regarding their health care coverage that can result in a slowdown in business during tough economic times. Even large corporate customers can see a reduction in sales if they are forced to reduce the size of their workforces, which in turn reduces demand. WellPoint is moderately vulnerable to economic downturns by virtue of its relative concentration in a handful of geographic regions. This lack of geographic diversification means that WellPoint bears some economic risk.

Another economic variable involves WellPoint's investment portfolio. The company is exposed to capital markets through this portfolio. When markets decline, WellPoint may be forced to sell securities at a loss or at a reduced profit, or may be unable to derive strong returns under poor economic conditions. WellPoint is therefore moderately exposed to economic risk, even though it operates in a non-cyclical industry. Additionally, depressed financial markets can impact WellPoint's ability to raise investment capital for expansions or acquisitions and can increase or decrease its cost of capital, which also affects capital budgeting decisions.

WellPoint is more significantly exposed to legal and regulatory risk. There are two main components to this type of risk. The first is that regulatory changes can affect market potential, service offerings, and other variables. The Obama administration's health care reform platform, for example, contained several changes to national health care policy that would impact WellPoint's business. Several states were also reviewing their health care systems. Changes in coverage policies can be either positive or negative for WellPoint. Another way in which WellPoint is affected by the regulatory environment involves Medicare and Medicaid. A significant portion of WellPoint's business is derived from these programs, which are funded at the federal and state levels. Consequently, the amount WellPoint can earn from those programs is partly determined by governmental decisions regarding funding levels.

WellPoint also bears significant legal risk. The health care industry is subject to substantial litigation risk, ranging from failure to adhere to complex Medicare/Medicaid regulations to human resources-related legal action to malpractice exposure. The company uses insurance to hedge against these risks, but the health care industry faces litigation in many forms from many stakeholders, and some recent judgments appear to have increased exposure for industry players such as WellPoint.

WellPoint's operations are also subject to influence from societal values and lifestyle choices. One important dimension is public sentiment regarding health care coverage providers and the health care industry as a whole. As federal and state governments evaluate their health care strategies, the potential impact of public sentiment has increased in recent years. At present, societal values appear to favor privately provided health care options, which is positive for WellPoint.

Lifestyle choices are a strong demand driver for WellPoint. The company's inflows and outflows are tied to the demand for health care services, and societal lifestyle factors — including diet, exercise habits, and smoking rates — have a significant influence on the volume and cost of health care consumed. These broad trends can produce increases or decreases in the amount of care people need and therefore directly affect WellPoint's business.

WellPoint is also subject to technological shifts. Many parts of the health care industry experience rapid technological advancements that can expand the range of products and services available to WellPoint and, in some cases, dramatically reduce health care costs. Technological shifts can also influence societal behavior by altering lifestyle factors such as diet and physical activity.

Information technology represents another important dimension of technological impact. WellPoint can derive significant cost savings and customer service improvements from superior IT systems, as can its competitors. Advanced systems allow for greater control and management of the business and better communication with staff and other stakeholders. The company had yet to fully leverage these possibilities, but a newly appointed CIO made this a stated priority for the coming years (O'Donnell, 2008).

Demographic trends are a major demand driver for WellPoint. On average, people's health care requirements increase as they age, and there are significant correlations between health care demand and income, race, and other demographic variables. Shifts in U.S. demographics can have either a positive or negative impact on WellPoint's business. The demographic environment is especially important for WellPoint because the company is only somewhat diversified geographically. If it were a nationwide carrier, favorable demographic shifts in one region could offset unfavorable shifts in another. WellPoint's lack of geographic diversification, however, leaves it more exposed to localized demographic changes.

Competitive Forces (Porter's Five Forces)

Competition in the health care insurance industry is intense. Porter's Five Forces framework provides a useful lens for evaluating competitive dynamics in the industry.

Supplier power is high. Health care providers exercise a high degree of control over the industry's cost structure. Insurance companies can assist with negotiation or choose between providers, but providers are reasonably concentrated within each geographic region. There are also switching costs associated with changing preferred providers. Strong supplier information further increases their leverage.

Buyers have moderate power. They have little control over the offerings of insurance companies, but many have the ability to switch providers, at least periodically. Employers face lower switching power due to the high cost and logistics involved. Buyer information is generally weak, which decreases their leverage. The average American consumer knows considerably more about products such as cars or televisions than about health care plans. There is only a low-to-moderate degree of differentiation in the industry, and consumers often do not fully understand the differences that do exist.

There are high barriers to entry. The insurance business is heavily regulated, and the market already has many established players. There is a steep proprietary learning curve, as evidenced by the fact that most of the industry's main players operate almost exclusively in the health care sector. Government policy encourages competition, but the regulatory complexity discourages new entrants. High capital requirements and low initial access to distribution channels further reinforce these barriers.

The threat of substitutes is minimal. Substitutes to private insurance include paying out of pocket, Medicare, and Medicaid. The latter two carry their own eligibility requirements, and buyers have a low inclination to substitute — partly due to perceived low differentiation among insurers and the burdensome paperwork that switching involves. While an out-of-pocket option presents a price-performance tradeoff, the prospect of hospital bills running into tens of thousands of dollars deters most buyers from pursuing it.

The degree of rivalry is intense. Ongoing claims obligations represent a very high barrier to exit, and most firms in the health insurance industry operate primarily within that industry rather than diversifying into other lines of insurance. The industry is fragmented but firms lack significant points of differentiation, which increases competitive intensity. The industry is not experiencing strong growth, and margins are being squeezed by rapidly rising health care costs.

Overall, the industry is profitable but subject to moderate-to-intense competition. The lack of differentiation, the high barriers to exit, and relatively high barriers to entry mean that existing firms must compete aggressively for share of a market that is not growing quickly. High supplier power creates an unfavorable cost structure. Buyer power, however, remains only moderate. WellPoint illustrated this dynamic when, after a difficult first quarter of 2008, it announced plans to raise premiums to cover increasing benefit costs (Hamilton, 2008), and subsequently succeeded in reducing its benefit expense ratio (BER) over the following two quarters.

Works Cited

WellPoint 2008 Annual Report. (2008). WellPoint. Retrieved November 28, 2008, from

Financial information from Reuters. Retrieved November 28, 2008, from http://www.reuters.com/finance/stocks/overview?symbol=WLP.N

Hamilton, David P. (2008). How insurance really works, courtesy of WellPoint. BNet Healthcare. Retrieved November 28, 2008, from http://industry.bnet.com/healthcare/2008/04/24/how-insurance-really-works-courtesy-of-wellpoint/

No author. (2007). Porter's five forces. QuickMBA. Retrieved November 28, 2008, from http://www.quickmba.com/strategy/porter.shtml

Industry statistics from Insurance Information Institute. (2008). Retrieved November 28, 2008, from http://www.iii.org/media/facts/statsbyissue/health/

O'Donnell, Anthony. (2008). Lori Beer named WellPoint CIO, EVP. Insurance & Technology. Retrieved November 28, 2008, from

No author. (2007). SWOT analysis. QuickMBA. Retrieved November 28, 2008, from

Seligman, Phillip. (2006). A promising prognosis for WellPoint. Business Week. Retrieved November 28, 2008, from

Carroll, John. (2006). Consolidations should bring nationwide contracts. Managed Care. Retrieved November 28, 2008, from

May, Troy. (2004). Garamendi poised for lawsuit over Anthem-WellPoint veto. San Jose Business Journal. Retrieved November 28, 2008, from