Corporate Research Group’s Weblog

Here’s a link to photos of the various resorts WellPoint took its customers on retreat.  The slides were presented today during hearings before the House Committee on Energy and Commerce regarding WellPoint’s proposed individual price hikes in California.  To sum up: It was a rough day for Angela Braly.

Just a little more data for thought on the California health plan market, given all the anger over WellPoint’s proposed rate hikes.  In 2008 — per our latest of tally of financial data from the state Dept. of Managed Care – health plan net income fell 95% to about $235 million among 18 top California plans.  That’s a net margin of 0.2% on revenues of $80.8 billion.  In 2007, the same 18 plans had net income of $4.5 billion on revenues of $80.6 billion — a net margin of 5.6%.  The numbers are skewed by Kaiser, which posted a loss of $794 million in 2008, compared to $2.2 billion in profits in 2007 (Kaiser reports for both its health plans and hospitals).  As for the roundly vilified WellPoint/Blue Cross of California, net income in 2008 was down 60%.  The California DMC regulates and requires financial reporting on the majority of health plan membership in the state, including all HMO lives; the remainder — e.g., most PPO lives — are under the jurisdiction of the state department of insurance.  So the above tally isn’t complete, but it gives a sense of the ups and downs of health plan profitability.

I do like a good conspiracy theory.  Here’s one from Matthew Holt of The Healthcare Blog on the fallout from WellPoint’s planned price hikes in California:

Wellpoint is terrified that its individual market bonanza is disappearing, and it’s desperately looking around for an alternative. And someone there remembered that in that reform bill it was dissing not so long ago are billions of dollars in subsidies — which now look pretty good given that all Wellpoint has to give up is an individual business that on which it’s losing money.

But health reform was dead and buried post Scotty Brown. “Hang on,” someone in the Wellpoint war room thought, “what can we do to change that agenda?  Perhaps if the White House had a poster child for health care cost explosions in the absence of health reform?”

“What would happen if we arbitrarily announced a 39% price increase?”

A bit closer to home, I attended the annual UBS healthcare conference earlier this month (post-Scott Brown, but pre-California rate hikes) where WellPoint chief financial officer Wayne DeVeydt discussed his company’s concerns that healthcare reform would result in “higher costs and fewer people with coverage.”  During a Q&A session, I asked DeVeydt the following: “This may sound cynical, but why do you care about rising costs under reform when rising costs lead to higher premiums and rising premiums are a built-in driver of EPS growth?”  His response: The idea that “if costs go up we win” might have been true five years ago, but today “the issue has become affordability.”  Then came the rate hikes of up to 39%.

You could argue — credibly, I think — that the managed care industry never really cared about rising costs because of the positive correlation with EPS.  Built into WellPoint’s EPS growth projections delivered to Wall Street during the years when it was routinely targeting 15% annual earnings gains were those very premium hikes. 

And if the issue is affordability, then the very reforms Obama wants — and both the House and Senate have already passed — would be a big help.  Maybe Matt has a point — unless a few years from now we learn that WellPoint never really cared about affordability either.

Here’s a video of President Obama talking about the planned WellPoint individual rate hikes in California.

HHS Secretary Sebelius turned up the heat on the managed care industry, releasing a five-page report condemning several companies for huge premium increases on individual health plan products.  We highlighted several of the rate actions and rationale by health plans in a prior post.  As I’ve said, I don’t blame health plans — particularly for-profit plans — for raising premiums to cover costs on money-losing products.  That’s what for-profit companies do.  But Sebelius – and President Obama — are correct that the rate increases are further proof of a broken individual market and the need for comprehensive reform.  Personally, I would prefer to see the Administration focus on persuading House Democrats to simply pass the Senate bill and then improve the legislation later.  But I guess Team Obama feels that political rhetoric is more important to keep reform in the spotlight and generate favorable public opinion.  (And I have to admit, the image of WellPoint CEO Angela Braly and staff scrambling to do damage control is funny: Cancel Investor Day!  We’re off to Washington!).  Either way, health insurers are an easy target, and it’s not like they don’t deserve criticism — whether this current round of rate hikes is justified or not.

Pennsylvania’s eight-year-old AdultBasic health insurance program is raising premiums and reducing benefits in the face of rising costs — offering important lessons about the nation’s broken individual insurance market, the need for comprehensive healthcare reform and the structure and limitations of state-administered health insurance programs.  (Hat tip: Jaan Sidorov of Disease Management Care Blog)

As the name implies, AdultBasic provides a subsidized basic individual health insurance package to adults who are poor, but not poor enough to be eligible for Medicaid.  The program provides subsidized benefits to about 40,000 adults.  Effective March 1, these people will get hit with a 3% premium contribution increase to $36 per month, jacked up copays and a new 10% co-insurance with a $1000 annual out-of-pocket max.  Another 3500 people who buy into the program will see their monthly premiums rise to $600 from $330. 

So what have we learned?

1. Despite huge and growing demand, the program is significantly underfunded.  There are 380,000 people on the waiting list to receive the subsidized AdultBasic benefit and the wait time is currently two years.  The size of the waiting list has more than doubled since January 2009.  Funding — amounting to $171.8 million in 2008 — comes from tobacco settlement dollars and a premium tax on the state’s four not-for-profit Blue Cross Blue Shield plans.  

2. In addition to serving people who can’t afford insurance, the program also attracts those who can’t get coverage because of pre-existing conditions — suggesting a degree of adverse selection in the program’s risk pool.  This parallels the experience of other health plans that have recently jacked up individual premiums – most notably WellPoint, igniting a national firestorm.

3. While the state administers the program, coverage is currently contracted out (following competitive bids) to four health plans on a fully funded basis: Highmark (serving 20,000 AdultBasic members), Independence Blue Cross/Keystone (11,500), Blue Cross of Northeastern Pennsylvania/First Priority (4000), and UnitedHealth/Unison (4000).  There is no government option.  Like in the broader individual market cost-control is largely the job of private health plans; unfortunately, this is an industry that has proven unable (some would say unwilling) to meaningfully bend the cost curve.

4. Rising costs (and subsequent rising premiums) are a symptom of a broader problem.  Or to quote Pennsylvania insurance commissioner Joel Ario in announcing the changes last month:

States are facing a daunting healthcare challenge, as evidenced by the problems our AdultBasic insurance program is facing.  The bottom line is that Pennsylvania cannot solve the healthcare crisis without federal health reform. 

Since I’ve slammed the managed care industry (here) — along with obstructionists on the right (here) — for being disingenuous and/or telling lies about healthcare reform, it’s only fair that I point out when a pro-reform group whose agenda I tend to agree with is slanting the truth.  Healthcare for America Now! has issued a report showing that five leading managed care companies (Aetna, Cigna, Humana, UnitedHealth and WellPoint) enjoyed a combined 56% increase in 2009 net profits to $12.2 billion. 

‘Tis true, but it’s not the whole story.  Several one-time factors artificially boosted 2010 profits for the group.  For example, WellPoint sold its pharmacy benefits business in 2009 for a one-time after-tax gain topping $2 billion.  UnitedHealth settled a lawsuit in 2008 for a one-time pretax cost of more than $1 billion (which has the effect of lowering 2008 profits and making the 2009 increase appear bigger than it normally would have been).  Same for Cigna, which had an after-tax loss of $646 million in 2008 from its discontinued reinsurance business.  If you factor out these three one-time items, profits for the five companies would be up about 17% for the year – still a strong gain, but not quite the same as the 56% figure quoted in the report.  (Factor in net realized investment losses from imploding securities markets in 2008, and net income at the five companies actually fell in 2009).

Meanwhile, net profit margin — even using the unadjusted total net income figures cited by Healthcare for America Now! – would be about 5% combined in 2009.  (Overall, healthcare plans rank an unspectacular 88th in net profit margin compared to other industries, notes Yahoo! Finance, even though aggregate profits and cash flow are impressive).  Healthcare for America Now! writes:

The outsize earnings are a vivid reminder that without comprehensive national health care reform the gatekeepers of our broken health insurance system always will put the short-term interests of Wall Street before the needs of millions of patients and a national economy plagued by joblessness.

Ignore the part about the outsized earnings for 2009, and they’re onto something.  And remember, just because the other side is intellectually dishonest, that doesn’t mean we have to be.

WellPoint, which is seeking individual plan premium hikes of up to 39% in California, isn’t the only health plan to try to push through big increases over the past 12 months.

Blue Cross Blue Shield of Michigan (Detroit) sought to raise rates an average of 56% for individual health plans, but compromised with state regulators on a 22% increase for 190,000 individual members.  WellPoint – in Connecticut – sought to raise 2010 individual health plan rates in the 22% to 30% range, but received a 13% to 20% increase. 

Independence Blue Cross (Philadelphia) sought to raise rates 18% to 29% on average in three of its money-losing Personal Choice PPO individual health plans.  However, it ended up simply dropping the plans in question, offering members the choice of two new options: one with similar benefits but much higher premiums, the other with more affordable premiums but high deductibles (and HSA compatibility).

As shown below, the original Independence filings with Pennsylvania regulators provide some sense of how the relationship between premiums and costs can fluctuate in the individual market — leading sometimes to substantial losses in some products.  (The charts below were published in our 2009 report The Coming Explosion in Individual Health Insurance using data from the filings). 

In the case of WellPoint, the company says losses in the California individual product are tied to adverse selection and the down economy; i.e., the sick tend to keep their insurance, while the healthy tend to drop coverage — again, causing costs and premiums to get out of whack.  It really is a clear argument for some type of universal coverage — even mandated coverage — to protect the risk pool. 

There’s an upside to the political storm surrounding WellPoint’s plan to raise individual plan premiums in California up to 39% .  The company has canceled its annual investor day scheduled for Feb. 23 to prepare for a Congressional hearing on the rate hike.  While no investor day means no free bagels, it also means no endless, boring presentations.  Hurrah!

Blogger Bob Laszewski comments on WellPoint and its planned individual premium increase of up to 39% in California.

When the day is done this probably says more about why systemic health care reform is so critical than about any one company’s behavior.

I couldn’t agree more.

Brian Sassi, head of WellPoint’s consumer business unit, justifies the company’s planned California individual premium price increase in a letter to HHS Secretary Kathleen Sebelius:

In 2009, affordability concerns led a high proportion of Anthem individual members to switch from higher-cost products to lower-cost products, resulting in an average 2009 premium increase after product migration of 2 percent, considerably lower than the average rate increase of 13.8 percent initially reported in 2009.  Meanwhile in 2009, the average claims per member increased by 8 percent, dramatically more than our premium increase of 2 percent.  The fact that the weak economy caused more people to move to lower-cost options in 2009 contributed to the fact that Anthem’s individual business in California operated at a loss during 2009.

So WellPoint wants to raise rates for its individual health plan members in California by up to 39%, and everyone is shocked – shocked and appalled.  HHS Secretary Kathleen Sebelius is “very disturbed” and leading an inquiry.  WellPoint chief executive Angela Braly is being called to Washington to testify before Congress.  If the whole farce wasn’t so sad for the tens of millions of people without health insurance or with inadequate coverage, it would be laughable.  So what got us to this point?  Here’s a brief chronology:

The health insurance industry says it supports reform and even makes some important concessions on guaranteed issue and community rating of individual insurance.  Conservatives do everything they can to block legislation and unjustly demonize reformers.  In time, the industry shows its true colors by secretly funding advertising aimed at killing or significantly scaling back the reform effort. 

Despite this — and despite the influencial Congressional Democrats and Republicans who are in the pocket of the healthcare industry — both the House and Senate manage to pass legislation that would dramatically expand coverage and reform the nation’s broken individual health insurance market.  The Senate version would mean flat or reduced premiums (or subsidies that reduce an individual’s share of premium costs) for 177 million people, according to the Congressional Budget Office.  Another 14 million would pay more but receive much better coverage.

Then the liberal state of Massachusetts – the only state with near-universal coverage — shocks the nation by electing as U.S. Senator a Republican who has vowed to vote against healthcare reform.  Democrats retreat faster than the Union army at Bull Run.  Obama backtracks, calls on lawmakers “to coalesce around those elements of the package that people agree on” (apparently forgetting that Republicans and Democrats basically agree on nothing regarding healthcare reform), and doesn’t even address the topic until halfway through his hour-long State of the Union address — and only for five minutes.

Then a for-profit health plan called WellPoint seeks to raise premiums on a money-losing product – even though it is making substantial profits overall — and people are stunned by what is in essence a completely logical action for a for-profit company. 

You almost get the feeling that Congress, the President and the American people ought to really push hard for some kind of legislation that starts to address some of the underlying issues that bring about these eventualities — sort-of like the Senate bill that House Democrats could send to Obama’s desk simply by using their majority to vote yes.  Of course, that would take a little more courage than dragging Angela Braly on the carpet to explain why a for-profit company usually tries to make a profit.

A while back (in the wake of WellPoint’s sale of its pharmacy benefit management unit), we reported that Cigna was shopping its PBM (here) and that Aetna was reportedly doing the same (here).  Cigna officials confirmed at the annual UBS healthcare conference this week that its PBM unit was no longer on the block, citing the likelihood of minimal upside for cost efficiencies from selling the unit and contracting out PBM services.  “Our PBM is very well run,” said Cigna chief financial officer Annmarie Hagan.  As for Aetna, chief financial officer Joseph Zubretsky confirmed that the company never confirmed it was shopping its PBM.  He did say that the unit was meeting its earnings goals.