Corporate Research Group’s Weblog

WellPoint chief executive officer Angela Braly said in a conference call with Wall Street analysts last week that her company lost $110 million in the individual health insurance business in California in 2010. 

“We have recently filed additional rate increases for that market,” she said, adding, “We ultimately believe that appropriate rate increases will be approved and obtained in order to maintain the sustainable market for individual members in California.”

Add this to the debate over whether the company was justified in seeking rate increases in the state.

Equity analyst Carl McDonald of Citi on UnitedHealth Group’s stock price:

Utilization will have to remain at its unusually low level in order for United’s stock to maintain its 11x multiple — With the market trading at 13.6x, United is now at less than a 20% discount. This makes some sense if volumes stay low, but the discount is harder to justify in an era of minimum MLRs, premium rate regulation, deteriorating Medicare margins, and the pressure exchanges will likely put on commercial margins in the future.

Blue Shield of California remains in the hot seat concerning individual rate hikes averaging 15% annually for 2010 and 2011; in some cases the rate of increase is as high as 59%.  The increases impact 194,000 individual plan members.  Blue Shield notes that despite the increases, its individual plans will lose $10 million to $20 million in 2010 and another $20 million to $30 million in 2011. 

The hikes are in line with cost trends, Blue Shield says, noting that the price of medical services is rising 7% annually, utilization is up 5%, and the health plan’s share of costs is up 3%.  Specifically, Blue Shield says, hospital costs rose nearly 15% in 2010, drug costs 12% and physician costs 9%.  Similar increases are expected in 2011. 

In accordance with state law — and following a public outcry — Blue Shield announced it had hired a third-party actuary to review the increases and make public the findings.  The actuary — David Axene – embarrassed WellPoint last year by finding a significant error in the company’s justification for requesting rate hikes of up to 39%.  WellPoint had to reduce the rate of increase.

While agreeing to a third-party review, Blue Shield didn’t agree to a request by California Insurance Commissioner David Jones to delay the increases until March 1 to give the state time to conduct its own review. Jones doesn’t have authority to reject the rate hikes; however, he says his office will still conduct a review.

It seems to me Blue Shield has struck the correct balance.  If Axene finds the increase aren’t justified, the company has agreed to make refunds.  If he finds the increases are justified, it’s pretty hard to question his credibility.

Things look rather dodgy for health insurers in 2011 and beyond. 

Healthcare reform will take a big bite out of industry profits.  The industry is struggling with longer-term challenges like the continued erosion of fully funded commercial membership – which generates a significant chunk of industry profits.  And plans appear to be at or near the top of an insurance underwriting cycle that has helped boost profits significantly. 

Plans like UnitedHealth and Humana have already said profits will be down considerably in 2011.  Others are still assessing the impact reform will have on products, services and margins.  “It’s such a frustrating time,” says HealthPartners chief executive Mary Brainerd.  “The changes are rolling out piecemeal,” she adds.

That makes 2011 a transition year.  Health plans will feel the first real sting of reform – including the implementation minimum medical cost ratio requirements, the first wave of billions of dollars in new taxes, Medicare cuts and benefit mandates.  Longer term, plans must adjust to other changes – including the commoditization of the individual and small group markets through health insurance exchanges beginning in 2014.

Plans have made clear what they believe to be the formula for continue success: reduce administrative costs, diversify into new lines of business, squeeze brokers and providers, and invest in technology to better manage risk and care.  Getting there will be no small task.  (And if you’re waiting for reform to get repealed or significantly scaled back, don’t hold your breath).  Complete coverage appears in our annual report The Outlook for Managed Care 2011.