The Los Angeles Times is reporting that “prosecutors Wednesday accused the parent company of insurance giant Anthem Blue Cross of California of falsely stating that it had changed its procedures for canceling the policies of patients after they become sick.” Wellpoint’s denials, issued earlier this year, were in response to charges that the company used a computer algorithm to rescind the insurance policies of women who were diagnosed with breast cancer:

In an amended civil complaint filed Wednesday in Los Angeles County Superior Court, prosecutors said WellPoint issued three “false and misleading” press releases in April and May to burnish its corporate image as it fended off assertions about its cancellation practices in a news story and criticism from the Obama administration that followed.

The prosecutor’s office contended that WellPoint continued to target women with breast cancer. It said the company also falsely stated that it had changed its procedures this year before the new federal healthcare law took effect. The law bars rescissions nationwide except in cases in which policyholders lie on applications.

Prosecutors acknowledged that WellPoint’s rescissions in California had slowed to a “trickle” but said the Indianapolis company continued to misrepresent itself.

“This is a company that seems willing to say anything — true or not — in order to maintain their profit level,” said Chief Asst. City Atty. Jeffrey Isaacs.

The allegations first came to light in April after a report by Reuters’ Murray Waas revealed that “tens of thousands of Americans lost their health insurance shortly after being diagnosed with life-threatening, expensive medical conditions.” WellPoint “specifically targeted women with breast cancer for aggressive investigation with the intent to cancel their policies.”

Interestingly, today’s prosecutor’s findings come just days after a Congressional report found that health insurers regularly rescinded policies of sicker patients to bolster profits.

Responding to Kathleen Sebelius’ call on states to review proposed premium increases, WellPoint has announced that it “will conduct a third-party review of all its individual market 2010 rate filings.” The move comes just days after independent analysts in California discovered that WellPoint “overstated future medical costs” to justify its 39% premium increases in the individual health market and committed numerous other methodological errors.

“We have to be sure that the processes we use and the work we produce are reliable and accurate, so they do not in any way distract from the real challenges facing us—the unrelenting increase in the cost of health care in America,” CEO Angela Braly wrote in a memo to staff.

This is an important first step, but lawmakers have to ensure that the third-party review is a legitimate and independent third-party, not a company hired and paid for by WellPoint. As Sen. Tom Harkin (D-IA) recalled during a recent committee hearing, reviewers seldom embarrass the hand that feeds them:

HARKIN: You mentioned they were found justified after an independent review….The independent review was done by INS…’They found the insurance rate review process acceptable and reasonable, using INS’s methodology.’ But as was pointed out in a newspaper article, it said that, ‘While INS is technically independent, there is no way the firm would contradict and embarrass the agency that hired the firm.’ So it’s the companies that hire the firm to do the independent review. ‘If INS were to contradict the insurance division, it would likely not be hired in the future by the INS insurance division or any other insurance regulator.’ So, you wonder about that independence. I wonder about that myself in terms of these rate reviews.

Watch it:

In other words, state regulators will have to check WellPoint’s math. And, as long as the process is transparent, the review will carry far more legitimacy.

Last week, independent analysts in California discovered that WellPoint “overstated future medical costs” to justify its 39% premium increases in the individual health market and committed numerous other methodological errors. The company has since canceled the increases, but the discrepancy has led HHS Secretary Kathleen Sebelius to ask other states to review WellPoint’s increases:

In light of this recent finding, I urge that, to the extent you have authority to do so, you re-examine any WellPoint rate increases in your state to determine whether any mistaken assumptions similar to those made in California were made in your state.  Even small errors can mean unaffordable premiums for policyholders.

I also ask that you review the authority you have under your state law to determine whether you have all of the regulatory tools needed to approve health insurance rates before they take effect.  The ability to require insurers to modify an increase if a proposed rate increase is unjustified has been shown to be effective in many states.  The Affordable Care Act expressly contemplates support for state efforts in rate review, appropriating a total of $250 million to states to assist in meaningful rate review.  We intend to issue guidance on applying for that funding in the near future.

In February, a survey from the Center for American Progress Action Fund found that “double-digit hikes have been implemented or are pending in at least 11 other states among the 14 where WellPoint’s Blue Cross Blue Shield companies are active: California, Colorado, Connecticut, Georgia, Indiana, Maine, Nevada, New Hampshire, New York, Virginia, and Wisconsin.” And the Wall Street Journal reports that New York, Connecticut, and Iowa are taking a second look at the increases and possibly “considering additional action on other companies’ rate increases as well.”

Of course, as some consumer activists have pointed out, given business model, errors like these may be “not an aberration but may be the norm,” suggesting that lawmakers will have to do more than rely on state regulators — whose effectiveness varies from state to state– to prevent insurers from over-charging consumers. If more errors are discovered, Democrats could be in a good position to push through Sen. Dianne Feinstein’s (D-CA) federal rate-review authority.

WellPoint’s premium rate hikes reinvigorated the Democrat’s health care reform push and provided fresh evidence of the need to control rising health care costs and improve the affordability of insurance. But Anthem Blue Blue Cross Blue Shied in California — a subsidiary of WellPoint — is now canceling the scheduled increases after regulators “found that the company overstated future medical costs used to justify increases” and committed numerous other methodological errors. “Correcting the flaws could drop the rate hikes to an average of 15%,” the analysis concluded:

“There will be no rate increases at this point,” Insurance Commissioner Steve Poizner said. “The application was in error. There were all kinds of methodological mistakes.” [...]

WellPoint acknowledged the errors in its rate filing, calling them “inadvertent miscalculations.” Anthem, it said, would file new rate increases for individual policy holders in May, but a spokeswoman declined to say exactly when or indicate how large they would be. …The report from the actuarial consulting firm, Axene Health Partners of Winchester, said that, among its errors, Anthem overstated medical costs by inflating the effect of aging. Reworking the numbers could reduce the average rate hike by 10.2%, it found.

For months, WellPoint, along with AHIP, insisted that growing provider costs and the departure of healthier people from the risk pool necessitated the steep increases, but this report helps explain why the rates were so much higher than medical inflation. Even if we bend over backwards and assume that the company was inadvertently making mistakes without checking its math that doesn’t bring us to a comfortable solution. The sheer carelessness of committing “methodological errors” that cost beneficiaries thousands of dollars is appalling, particularly for an industry that spends millions convincing the public it’s moving to contain health care spending.

In too many states, regulators don’t force insurers to live up to their own hype and as a result companies don’t have any incentive to double check their figures or submit lower increases. Democrats have already seized on the story to argue for a national rate review board that could reject unreasonable increases in states that lack such authority, but I suspect that any real action will occur on the state level. State regulators must begin auditing insurers and literally reviewing the math behind premium increases.

Consumer Watchdog has also put out a release urging Congressional investigators to look into “whether Anthem Blue Cross executives made misrepresentations to Congress in testimony claiming the company’s rate increase was actuarially sound,” arguing that if Americans are required to purchase coverage, insurance companies should be required to show that the premiums they charge are reasonable.

If they don’t, more stories about insurer antics and abuses could very will bring about the kind of public option and rate review provisions that Democrat’s weren’t able to stuff in this health care bill.

Responding to a Reuters article detailing how WellPoint used a computer algorithm to rescind the health insurance coverage of breast cancer patients, Congressional Democrats sent a letter to the major insurance companies urging them to “ensure that rescissions occur only in cases of fraud or intentional misrepresentation of material fact” and “immediately institute a policy of independent, external third party review.” In less than 24 hours, WellPoint, UnitedHealth, Humana and Blue Cross of California have all agreed to implement “the new standard in May 2010,” but their pledge, while certainly significant, should not be taken at face value.

After all, federal law has required insurers to end rescissions since Congress passed the Health Insurance Portability and Accountability Act (HIPAA) in 1996. That law gave states the authority to enforce the rescission ban, but permitted the federal government to take over if states failed to adequately protect consumer interests. Over the last 14 years, insurers have been able to take advantage of weak state regulations to purge their rolls of costly patients without triggering a response from the federal government. What’s still unclear is how or if the federal government will enforce the rescission requirement under health reform. The new law restates the rescission prohibition and leaves enforcement of the rule to the states. The federal government is again the regulator of last resort. A fail-safe, if you will.

In short, regulators must trust but verify. As health policy analyst Peter Harbage said, “People have this idea that someone is going to flip a switch and rescission and other bad insurance practices are going to end. Insurers will find ways to undermine the protections in the new law, just as they did with the old law. Enforcement is the key.”

HHS Secretary Sebelius has issued a statement touting the new progress, but she can also encourage states to reevaluate their regulations to ensure they’re in compliance with the federal guidelines (and the insurers new promise). And if states can’t protect their residents from insurance rescissions, then the federal government must. Otherwise, it will be another five or ten years until the next crop of rescission horror stories crop up in the press.

Reuters’ Murray Waas has a fascinating look into how WellPoint — the nation’s largest insurer — has stretched the nation’s relatively lose anti-rescission laws to cancel health insurance coverage for individuals when they need it most. After they become ill.

The insurer is using a computer algorithm that automatically targeted “policyholders recently diagnosed with breast cancer” and investigated them for “fraud”:

Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information. WellPoint declined to comment on the women’s specific cases without a signed waiver from them, citing privacy laws.

That tens of thousands of Americans lost their health insurance shortly after being diagnosed with life-threatening, expensive medical conditions has been well documented by law enforcement agencies, state regulators and a congressional committee. Insurance companies have used the practice, known as “rescission,” for years. And a congressional committee last year said WellPoint was one of the worst offenders.

But WellPoint also has specifically targeted women with breast cancer for aggressive investigation with the intent to cancel their policies, federal investigators told Reuters. The revelation is especially striking for a company whose CEO and president, Angela Braly, has earned plaudits for how her company improved the medical care and treatment of other policyholders with breast cancer.

The disclosures come to light after a recent investigation by Reuters showed that another health insurance company, Assurant Health, similarly targeted HIV-positive policyholders for rescission. That company was ordered by courts to pay millions of dollars in settlements.

While the practice of rescinding coverage is fairly common — since “it is important for these companies’ profit margins that they get rid of policyholders with expensive diseases” — the deliberate nature of these rescission are truly shocking.

Theoretically, existing federal law, as well as well as the new health care reform, protects consumers from rescission and policy cancellations. Insurers have been required to renew policies in the individual health insurance market under the Health Insurance Portability and Accountability Act (HIPAA) since 1996, but they often “do not follow federal standards and instead follow state laws that offer weaker consumer protections.” The federal law allows insurers to cancel policies due to non-payment of premiums; “fraud or other intentional misrepresentation”; if the insurer is leaving the market; if an individual or employer moves out of geographic area of the plan; or, in the case of an association policy, if an individual has left the association contracting with the plan” — and states are responsible for enforcing these rules and have jurisdiction to create even stronger regulations.

But insurers take advantage of weak state regulations — in fact, insurers have used their political power to prevent states from adopting stronger regulations — and the lose definition of ‘fraud’ to purge their rolls of costly patients. “The legally accepted definition that it is intentional misrepresentation, but state laws all very” and intentional is hard to determine, health policy wonk Peter Harbage told me during a phone interview. Did an individual intentionally exclude a prior condition or was the condition undiagnosed or simply forgotten? “Insurers have tried to stretch the definition as far as they can and that’s what we’re seeing with WellPoint,” he said.

Democrats have promised that the new health care law will end such abuses, but Harbage is skeptical. The new reform law restates existing HIPAA regulations without giving the federal government greater oversight abilities. “People have this idea that someone is going to flip a switch and rescission and other bad insurance practices are going to end,” he’s quoted in the article as saying. “Insurers will find ways to undermine the protections in the new law, just as they did with the old law. Enforcement is the key.”

To that end, Harbage says that there are at least three things lawmakers can do to strengthen the existing legislation: consumer education, prior review and data tracking. “Third party review of recissions is realistic. Having the state review every rescission before it’s made is something that could happen. At a minimum, you could have states track who’s being rescinded. They don’t even know when a rescission occurs. Regulators could be much more proactive in educating people about their rights. People generally have no idea where they can go or who they can turn to,” Harbage said.

Incidentally, WellPoint has a long history of exploiting the so-called ‘fraud” loophole to rescind or cancel coverage. As Waas notes, a 2007 investigation by the California Department of Managed Health Care selected 90 instances in which Anthem Blue Cross of California “dropped the insurance of policyholders after diagnoses with costly or life-threatening illnesses to determine how many were legally justified” and found that none were. Similarly, an “investigation last year by the House Energy and Commerce Committee determined that WellPoint and two of the nation’s other largest insurance companies — UnitedHealth Group Inc and Assurant Health, part of Assurant Inc — made at least $300 million by improperly rescinding more than 19,000 policyholders over one five-year period.” Read that full report here.

The new federal health care law requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market. Starting in 2011, insurers that don’t meet these requirements will have to issue rebates to consumers “based on the amount insurers’ spending falls below these minimums.” Yesterday, a new report released by the Senate Committee on Commerce Science and Transportation found that while many of the nation’s largest insurers “modestly increased the percentage of premium dollars they spent on medical care in 2009,” the disparities “in medical spending between market segments remained larger than ever.

Health insures, in other words, still view the individual and small group markets as their most profitable sectors and they continue to spend a smaller percentage of premium dollars on actual medical care — shifting a significant amount towards administrative expenses and profits. For example, while the largest insurers used about 15 cents out of every premium dollar for administrative expenses in the large group market, “they used more than 26 cents out of every individual premium dollar for administrative expenses,” the report notes. [Note: the original report says "medical expenses" rather than "administrative expenses." I contacted the staff and they said that this was a mistake.]

Some insurers are already meeting the new federal requirements, while others will have to spend more on medical care to comply with the law:

The analysis found that the largest for-profit health insurers spend a lower percentage of their customers’ premium dollars on patient care than other health insurers. The analysis also found that in the individual and small group markets, health insurers spend a significantly smaller portion of each premium dollar on medical care than they do in the large group market.

Look:

The problem will come when insurers that fall short, try to meet the new minimums. The ratio is closely monitored by Wall Street investors and so insurers will have every incentive to continue spending less on care and increasing profits. They may try to artificially inflate their MLR by reclassifying administrative costs as ‘medical care.’ Already, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio. As the report notes, “By reclassifying these expenses as medical benefits, the executives projected that WellPoint’s 2010 medical loss ratio (which the company calls its “benefit expense ratio”) would increase by 170 basis points, or 1.7%. Because WellPoint expects to collect more than $30 billion in premiums from its commercial health care customers in 2010, this “accounting reclassification” means that the company has converted more than a half a billion dollars of this year’s administrative expenses into medical expenses.”

Health and Human Services Secretary Kathleen Sebelius has written a letter to the National Association of Insurance Commissioners (NAIC) requesting their assistance in defining medical loss ratio (MLR) standards in the new health care law and has issued two formal requests for public comment on how best to define the term. Since the MLR requirements are one of the few ways to prevent insurers from earning outrageous profits before most of reform’s provisions kick in, HHS “and state insurance commissioners will have to remain vigilant and focused on ensuring that consumers get the benefit of the new federally mandated medical loss ratios.” These definitions, in other words, have to be air tight to ensure that companies can’t simply reclassify their expenses.

The health care law tries to control premium costs and insurer profits in the period between now and 2014 in two big ways: 1) it requires insurers to spent a certain percentage of their dollars on medical care and 2) it allows the Department of Health and Human Services to work with the states to disqualify insurers with outrageous rate hikes from participating in the exchanges.

But many health care policy wonks have warned lawmakers that that law does not go far enough in actually enforcing these rules and they argue that insurers will likely game the system. Already, Aetna and Cigna have announced that they plan to jack up rates in the short term and now, Consumer Reports is calling for an investigation into WellPoint in light of an electronic message the company sent “to investors describing how it would simply re-label administrative costs as ‘medical care’ in response to the new health reform law.”

In the March 17th message, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio (MLR, a techinical terms which measures how much insurers spend on administrative spending v claims). The ratio is closely monitored by Wall Street investors and the new health reform law “requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market.” Here is how WellPoint put it:

“WellPoint’s (WLP) medical cost ratio should rise and its overhead-expense ratio decline this year as the insurer reclassifies various types of costs. Disease management, medical management and a nurse hotline, for example, ‘are being reclassified because they represent additional benefits provided to our members,’ representative says. They’ll now be part of the medical cost ratio, the percentage of premium revenue used to pay members’ health-care costs. These are claims-related costs incurred to improve member health and medical outcomes, WLP says. Accounting rules allow the changes, which better align MCR with anticipated health reform guidelines, Stifel Nicolaus says.”

Wellpoint is heavily invested in the individual health insurance market and has been among the most aggressive in opposing reform and skirting state regulations. In fact, the company has paid millions in fines for canceling individual health policies of pregnant women and chronically ill patients, illegally rescinding policies, denying prescription drugs to the elderly, and committing “serious violations that completely undermine the public trust in our healthcare delivery system.” In the fourth quarter of this year, net profits jumped to $2.74 billion from $331.4 million — mostly because the company sold a subsidiary — and CEO Angela Barly admitted that the company dramatically increased rates in the California individual health insurance market to ensure adequate profits. Meanwhile, the percentage of revenue spent on providing medical care, or medical loss ratio, “dropped to 82.6% from last year’s 83.6%.”

So while, WellPoint’s desire to skirt regulations may not come as a surprise, the story highlights just how vulnerable the MLR metric is to manipulation. As I noted here, establishing a medical-loss ratio still allows insurers to shift a disproportionate amount of premium dollars into profits. If anything, plans could pay more for certain services (to meet the benchmark), exclude certain benefits from coverage (benefits which would attract a sicker risk pool), or in the case of WellPoint, reclassify some administrative services as medical care and still meet the mark without necessarily providing more care.

As James C. Robinson points out in this Health Affairs article, “High ratios can be achieved either through a large numerator (high medical expenditures) or through a small denominator (low insurance premiums).” In 2007, for instance, 6 of the 7 largest publicly-traded health insurers reported that their profits increased by 10%, while their medical loss ratios also went up.

All of this suggests that regulators are going to have to be careful in how they define medical expenses and will need to “review the math on insurer medical loss ratios and premium calculations.”