Wellpoint CEO Angela Braly

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.”

CIGNA CEO David Cordani appeared on Your World with Neil Cavuto yesterday to argue that health care premiums will continue to increase, despite the passage of health care reform. Acting as if insurers had no say in the matter Cordani blamed providers for any anticipated rate hikes. “Over the near term, the legislation did nothing to reduce the cost equation. In fact, aspects of the legislation actually increase the cost equation so the positive is, it expanded access, the negative is, it did nothing to reduce costs and will actually drive costs higher for insured lives of the next four to five years.”

Cordani also conceded that the industry will likely increase premiums to WellPoint-like levels in the near future:

CAVUTO: Could we have a WellPoint hike? Do you remember that a few months back where out of hte blue they proposed, I think a 38 percent rate increase. Could we see something like that after the fact, after the health care issue becomes law?

CORDANI: Neil, I think what you’ll continue to see — without any change in the system — health care costs will go up, so premiums will go up. Insurance commissioners in every state will continue to be very diligent…the underlining premium costs are driven by underlining health care costs and in an environment where emergency room utilization and costs have quadruped in five years, use of MRIs have doubled in the last five years, biomedical utilization is growing rapidly. The costs will continue to grow and that’s the opportunity that wasn’t addressed.

Watch it:

Overutilization of health care services and the leverage of dominant providers in certain health care markets do contribute to rising health care costs, but insurers shouldn’t pretend that they’re not contributing to this trend. The reality is, large insurance companies rarely use their bargaining power to negotiate with providers and often pass on higher costs to the beneficiary, raising premiums beyond health inflation to guarantee a profit. And as Cordani admits here, insurers will continue to increase premiums, particularly in the period between now and when the new insurance regulations kick in.

The Senate health care bill tries to address this problem by requiring insurers to spend a certain percentage of premiums on health care benefits (it establishes medical loss ratio targets) and stipulating that the Secretary of Health and Human Services, in consultation with the states, must develop a plan to look for “unreasonable increases.” Insurers are required to submit “a justification for an unreasonable premium increase” to the state insurance commission authority, who then makes the appropriate recommendations “to the State Exchange about whether particular health insurance issuers should be excluded from participation in the Exchange based on a pattern or practice of excessive or unjustified premium increases.”

Since the interim period between now and when the exchanges become operational is critical for winning over public support for the legislation and capitalizing on its success, Democrats might want to introduce some additional cost control mechanisms as stand alone measures. Legislation establishing a new federal rate review authority would allow the federal government to review and deny excessive, unreasonable or discriminatory health insurance premium increases and could help keep insurers in line. The federal authority could also help tow a tougher line on excluding insures who levy egregious premium increases from the exchanges. The President included the reconciliation in his own health care plan, but it was stripped from the House package because it did not comply with the rules of reconciliation.

Lawmakers will have to tweak the legislation over time, but insulating voters from steep premium hikes in the interim period is both good policy and good politics.

Today, during a hearing before the House Energy and Commerce Health Subcommittee, Reps. Bart Stupak (D-MI) and Henry Waxman (D-CA) questioned WellPoint CEO Angela Braly about the company’s proposed rate increases in California’s individual health insurance market. The congressmen read from a series of inter-company emails which revealed that WellPoint was rising premiums to increase its profits and padding proposed increases to allow room for negotiations with regulators:

- “The average increase is 23 percent and is intended to return California to a target profits of 7 percent, versus 5 percent this year.” [WellPoint email, October 7, 2009]

- “We’re asking for premiums that would put us $40 million favorable…if we get the increases on time, we will see an opt gain upside of $30 million downgrades and rate cap.” [WellPoint email, November 2, 2009]

- “[W]e needed to reach agreement on filing strategy quickly — specifically in the area of do we file wth a cushion allowed for negotiations.” [WellPoint email, 10/24/2009]

Watch a compilation:

Waxman also unveiled a slide shown at a meeting of the companies’ shareholders which showed that the company had asked for a rate increase of 25 to 26% in 2010 “but the assumed rate increase is just 20%.” This seems to say that you’re asking for a 25% percent increase but expected to see that lowered to 20% through negotiations.” “You are raising your rates far above what’s necessary. You’re trying to squeeze every dollar of profit you can out of policy holders in California and across the nation at a time when families are struggling to pay their bills, you’re trying to charge them inflated rates that pad your profits and support the salaries and the trips and the retreats and everything else,” Waxman said.

WellPoint admitted that it set its increases to keep up with medical costs and maintain a 2% profit. The company justified the increases in California by arguing that it was making up for lost profits in the individual market– a point somewhat belied by the fact that WellPoint has also increased premiums in at least 11 other states. “We are talking about profit increases in absolute dollars but again, when you look at the profit margin that is build into the rates for 2010 it’s less than a 22% profit margin,” chief Corporate Actuary Cindy Miller explained. “A 25% rate increase became necessary…to achieve a profit margin of less than 2% on an after tax basis.”

“$2.8 billion that was your profit in 2009, which is a year that everyone would consider was a horrible year economically in this country…what I’m concerned about is that our hard working Americans are asking to increase their premiums to the wealth of WellPoint’s investors,” Stupak observed. “I don’t mind you making a profit but at the end of the year, 2009 a horrible year, you still made 2 point something billion dollars, and that’s not enough,” Stupak asked, noting that WellPoint’s high profit margin is the reason “many of us believe in a public option.”

WellPoint CEO Angela Braly

WellPoint’s hikes created a political opportunity for reform, but California policy holders aren’t the only ones experiencing drastic rate increases. A new survey from the Center for American Progress Action Fund has 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.” Below is a sample:

- California: Average rates are expected to increase 25 percent in 2010, with increases as high as 39 percent for some policyholders.

- Colorado: Average rates are expected to increase 19.9 percent in 2010, with increases of up to 24.5 percent for some policyholders.

- Indiana: Rates are expected to increase 21 percent in 2010.

- Maine: Anthem Blue Cross and Blue Shield requested a 23 percent increase for 2010 after five straight years of double-digit increases for individual policyholders. Anthem is suing the Maine Insurance Commissioner for rejecting its request last year for an 18.5 percent rate hike and allowing a 10.9 percent increase.

- Ohio: Average individual rates are expected to decline 40 percent in 2010 due to a new state law that went into effect in 2010.

Hikes are the kind of thing that bring lofty political rhetoric about the need for reform into reality for millions of Americans. More importantly, they could convince those who already have coverage to pressure their lawmakers on reform. This morning, House members will have an opportunity to question WellPoint CEO Angela Braly about the rate hikes when she appears before the Energy and Commerce Committee. But let’s hope they use this report to do more than just talk.

Wellpoint CEO Angela Braly

Currently, a young and healthy individual may purchase comprehensive health insurance coverage for $107 per month in the individual market, and it is very reasonable that in the absence of a strong individual mandate, other elements of reform cannot overcome the impact of insurance market reforms and will multiply this premium for those purchasing coverage post-reform. We believe the pages that follow reflect a reasonable, honest assessment of the impacts those purchasing coverage would see post-reform. As shown, we do expect some individuals that currently exhibit higher risks to experience a drop in premiums as the result of reform. However, most purchasers will face higher premium costs post-reform, and as shown, purchasers of average age and average health are expected to face higher premiums post-reform.

If policy makers don’t require enough younger and healthier applicants to join the risk pool (and offset the costs of covering sicker applicants), premiums will increase for everyone, Wellpoint says. And it’s a valid point: modified community rating and guarantee issue can only lower costs if the size of the risk pool is expanded and the healthy balance out the costs of the sick. The merged senate bill should certainly adopt stronger mandate measures. But comparing today’s individual market policy with a post-reform product from the exchange (or even in the remaining individual market) is apples to oranges. If properly designed, the post-reform insurance plan will not be the porous, inadequate, high deductible policy currently available in the non-group market. Americans would be purchasing regulated policies from insurers that can’t rescind coverage or deny certain basic benefits. In other words, if you’re paying more, you’re getting a better plan.

The reality is, some reform provisions would tend to make premiums higher than current-law premiums; other provisions would “tend to make them lower.” Americans from different income brackets will pay different amounts for health care, but on the whole an analysis of Congressional Budget Office data suggests that reform will offer health insurance policies that are more affordable than what is currently available in the individual market.

If premiums do increase, however, insurers bear a fair share of the blame. As Families USA points out, insurers are “like a poker player who complains about his hand when, in fact, he is the dealer.” For all their concern about health care costs, Wellpoint has a poor track record of controlling prices or providing adequate coverage. According to a 2008 study by the American Medical Association, “WellPoint controls the largest market share in 9 of 42 states studied (CA, GA, IN, KY, ME, MO, NY, OH, and VA), dominating 71 percent of the market in Maine, 58 percent of the market in Indiana, and over half the market in Georgia, Kentucky, and Virginia.” It is the poster child for why progressives want to force large for-profit conglomerates to compete with a public option that places people before profits.

Wellpoint is heavily invested in the individual health insurance market and “has been among the most aggressive in pursuing healthy customers who are less likely to use benefits to pay for medical care.” The company has a “long history of putting its bottom line ahead of the welfare of its policyholders and their health care providers”:

- WellPoint Inc. has been barred from adding customers to Medicare plans after it denied prescription drugs to the elderly, endangering their lives.

- In 2006, WellPoint’s profits increased 34% as premiums and fees surged.

- WellPoint Inc., the nation’s largest health insurer that covers about 1 in 10 people in the U.S., fared the worst among its peers in a survey gauging how quickly HMOs process and pay claims to doctors.

- In March 2007, the state’s Department of Managed Health Care fined Blue Cross of California and its parent company, WellPoint, $1 million after an investigation revealed that the insurer routinely canceled individual health policies of pregnant women and chronically ill patients.

- California regulators uncovered more than 1,200 violations of the law by the company in regard to unfair rescission and claims processing practices.

- In December 2007, Insurance Commissioner Steve Poizner announced his office was imposing a $12.6 million fine against Blue Shield, saying the company had “committed serious violations that completely undermine the public trust in our healthcare delivery system.

Consider the source, but also understand the criticism. If we want to ensure affordable and comprehensive coverage we have to improve affordability standards (by injecting some real competition into the marketplace) and hold insurers accountable.