The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Pointed Questions for WellPoint

Posted by Alan on February 21, 2010

On February 24th WellPoint CEO Angela Brady will appear before the House Energy & Commerce Committee. She will attempt to explain why the company’s California operating unit, Anthem Blue Cross of California, recently sought to raise rates on some individual policy holders upward of 39 percent. While the effective date of the rate increase was postponed, the hearing is not. And that it is being held the day before President Barack Obama’s bi-partisan health care reform summit with Congressional leaders is no coincidence. The Administration and others have pointed to the rate increase as one of the reasons comprehensive health care reform – or at least health insurance reform – is needed.

In preparation for the hearing, House & Energy Committee Chair Henry Waxman and Subcommittee on Oversight and Investigations Chair Bart Stupak sent a letter to Ms. Braly asking for background information. The information ranges from the general (“reasons for the premium rate increase”) to the specific (for 2005-2008, “a table listing, as applicable, premium revenue, claims payments, sales expenses, other general or administrative expenses, and profits for all individual health insurance products”) to what some might call a fishing expedition “all internal communications, including e-mail, to or from senior corporate management relating to the company’s decision to increase premium rates in California in the individual health insurance market.”)

The hearing will be closely watched, not only by lawmakers but by WellPoint’s competitors. It could provide an interesting glimpse into the rate making process employed by health insurance carriers. The information will certainly be cited by advocates – and opponents – of requiring carriers to spend a certain percentage of the premiums they take in on medical claims as opposed to administrative expenses and profits.

Ms. Braly’s testimony will also likely highlight the different ways politicians and business people view the same data. What to a member of Congress may look like profiteering could look to an executive like a prudent hedge against unknown risk.

The Associated Press has taken a balanced approach to explaining the issues behind the Anthem Blue Cross of California rate increase. The analysis is worthwhile reading for anyone following this particular controversy. Among its conclusions: rising medical costs are the main driver of rate hikes, not profits; health insurance rate regulations vary considerably from state-to-state; non-profit health plans also have large rate increases; carriers can’t, and probably shouldn’t, subsidize rates for one business line in one state with profits earned by other lines of business, especially in other states; and that there’s a lot of elements taken into consideration by carriers when they set their rates. While there’s little specifics many insurance professionals don’t already know (other than the make-up of WellPoint’s profits), it’s a very useful summary and analysis of the issues.

The timing of Anthem Blue Cross of California’s rate increase is generally perceived as constituting political malpractice. But there may be a silver lining. Ms. Braly has an opportunity to educate lawmakers on how and why carriers charge the health insurance premiums they do. If members of the Energy & Commerce Committee are willing to look beyond the politics of the rate increase, they might gain a better understanding of how health insurance works in this country.


4 Responses to “Pointed Questions for WellPoint”

  1. CHP said

    Each state differs in which health insurance carriers, plans, and benefits are available. Paired with the fact that health insurance carriers are confined to only sell within state lines, how can the federal government adequately determine if a premium increase is unreasonable for the citizens of a particular state, much less regulate those that are deemed unreasonable?

  2. Alan, first of all, welcome back! It seems as if you have been of vacation, and I for one really missed your blogs for the last couple weeks.

    As a customer/victim of the individual private market, I am wondering if you could answer a few questions.

    1. Is it true that group coverage enjoys legal protections unavailable to those on the individual market, vis a vis, pre-existing conditions and limits on annual rate increases?

    2. If the above is true, is the main reason because companies have the lobbying power/political influence to demand and/or successfully negotiate for such protections whereas those of us on the individual market are too fragmented and puny to do so for ourselves?

    3. I have in my head an analogy for health insurance in America today that may or may not have any merit: The system is like a corset cinched up over an increasingly obese woman’s torso, but with one a missing eyelet. This missing eyelet allows all manner of pressurized fat to spill out in one place. For insurance companies, this fat is profit. Unfortunately, some of the bulging fat is turning necrotic, and the insurance industry would like to cut this portion out, leaving only “healthy” fat behind.

    We in the private insurance market represent the fat/profit bulging out where there is little regulation to keep us inside the fold. We in the private insurance market with pre-existing conditions are the quickly-necrotizing portion of this fat that that the insurance companies are determined to excise.

    Other than its labored nature, what is wrong with this analogy?

    • Alan said

      Thanks for the kind words, Jim. After over 400 posts I just took a bit of a break. As for your questions:

      1. Yes, group coverage is treated by different rules than individual coverage. And group coverage for small businesses (50 or fewer employees) is regulated differently than coverage for larger groups. These federal and state laws and regulations provide for guarantee issue and renewability, limit what range of premiums can be charged (setting both a floor and a ceiling) and the like.
      2. The reason is not because of the lobbying power of groups (although they certainly influenced the specifics of the regulations), but because of the different nature of the markets. Where groups are involved, you have a far more likely chance of having both high and low risk individuals enter the pool of insureds. In the individual market, whether to obtain coverage is a personal decision. So high risk individuals tend to purchase coverage while low risk ones don’t. This makes reforming the individual market much more difficult than addressing coverage purchased for individuals by a third party: their employer.
      3. As far as your analogy goes, well, it’s not a pretty picture. So let’s try for something new. Let’s start with a few realities. Businesses need to make money. Whether they’re for-profit or non-profit, publicly traded or privately held, if they don’t make money they can’t keep their doors open, invest in new technologies, or offer new products and services. Additionally, running a business costs money, especially a business as highly regulated as health insurance. So health plans need to charge enough to keep the doors open and to attract capital. Their profits overall are not the large, less than 2.5% of late. Of course, when you’re talking about Fortune 100 companies that’s a lot of dollars in absolute terms, but it’s far less than most of the industries represented in that index (e.g., pharmaceutical manufacturers).

      In the individual market, this means its critical that carriers manage their risk. Insurance is about spreading the risk. If it was known every policy holder was to incur $1,000 in claims, the cost of coverage would need to be $1,000 plus an amount to cover overhead, regulatory fees, taxes and profits. The group market, by assuring that there are both high cost and low cost insureds, allows for this spreading of the risk. If carriers were to guarantee issue individuals coverage as they do with small group coverage then individuals would purchase coverage only when they need it and drop the coverage once they were no longer seeking medical care. This isn’t spreading risk.

      So in the individual market carriers select insureds that are unlikely to incur more in claims than they pay in premiums — at least initially. Carriers understand that circumstances change, but initially, carriers seek to insur individuals who are unlikely to cost in claims more than their premiums. This means that someone who is healthy, but has a history of health claims or uses expensive prescriptions, is going to find it difficult to obtain coverage. There was a time when the cost of Clariton was roughly $100 per month. Individuals applied for coverage costing roughly that amount and were shocked that a carrier would decline their application because they suffered from allergies. But if a carrier knows it’s going to pay out $100 per month in prescription payments and take in only $100 in premium that carrier knows it will lose money on that particular applicant. It then has two choices: charge everyone else more to make up the difference or decline that applicant. If they charge more, healthy people will leave the carrier to find less expensive coverage or drop it all together. This becomes a death spiral where the carrier retains high cost insureds and loses healthier members. Claims as a percentage of premium increases which requires higher premiums to cover them and the process repeats itself. This is what’s happened in New York where premiums are twice the average of other states.

      Consequently, the only way to make the individual market affordable while requiring carriers to accept all applicants is to require everyone to purchase coverage enabling carriers to spread the risk. Since this may not be possible politically, I’ve suggested allowing carriers to impose limited pre-existing limitations and higher premiums on individuals who fail to maintain coverage.

      Hope this answers your question, Jim. And let’s try to find a better analogy than the corset.

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