WellPoint's WLP overall third-quarter results were good, although medical cost gains continue to be offset by out-of-control administrative costs. The stable consolidated results continue to mask significant volatility at the segment level. Health-care reform remains the most important issue affecting WellPoint's long-run value, and recent developments could be particularly unfavorable for the company. We are maintaining our fair value estimate.
We are particularly disappointed by WellPoint's administrative expense control. Selling, general, and administrative expenses consumed 15.8% of operating revenue in the quarter, compared with 14.5% in the prior-year quarter. Although the company announced a plan to trim its workforce next quarter, it seems management intends to use any savings to increase investment in information technology. Deterioration in the SG&A ratio was offset by an improvement in the medical cost ratio, which declined to 81.1% from 82.5%. Eighty basis points of the 140-basis-point improvement was attributable to favorable prior-period reserve development.
Consistent with the first half, WellPoint's "consumer" business saved the consolidated results. Operating income in this segment more than doubled from the prior-year quarter. The "other" segment was also a significant positive contributor, with operating income up 69% driven by the NextRx pharmacy benefit manager. The sale of NextRx to Express Scripts ESRX is expected to be completed in the fourth quarter. However, the commercial business continued to be extremely weak, with operating income down 31%. WellPoint announced a plan to transfer its UniCare (non-Blue plan) members in Texas and Illinois to Health Care Service Corporation, the operator of the Blue Cross and Blue Shield plans in those states. We believe this transaction reinforces our thesis about the importance of regional scale in the managed care business.
We continue to closely monitor developments in Washington, D.C., around health reform. There were two recent developments of particular concern to WellPoint investors, since the company is a relatively big player in the small-employer and individual markets. First, the Senate Finance Bill included strict insurance market reforms but a weak individual mandate, which could lead to adverse selection, higher premiums, and a smaller market for individual and small-group policies. Second, Senate majority leader Harry Reid (D-Nev.) recently indicated that he would include a government-run insurance option in the consolidated Senate reform bill. Although the public plan won't share Medicare's below-market provider rates initially, budgetary pressures could eventually force the plan to piggyback off Medicare's fee schedule and provider network, giving the public plan a significant competitive advantage over private companies. However, we still think it is very unlikely that Reid will be able to muster 60 votes in the Senate to prevent a Republican filibuster over this provision.
