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Health Insurer's Proposed Premium Increases Spark Furor Posted: March 19th, 2010

Proposed premium increases by Anthem Blue Cross in California, by as much as 39 percent for some individual health plans, sparked a flurry of criticism from consumer groups, state regulators and policymakers -- and even from the White House. While consumers facing rate hikes cried foul, health insurers claimed the increases are necessary to maintain profitability -- and even to remain solvent -- in certain markets. Should health insurers be free to raise premiums, or should regulators clamp down on premium increases on behalf of consumers? Even the health reform law won't stop premium hikes.

Rate Hikes in California Cause Controversy

In the case of Anthem Blue Cross, a division of WellPoint, Inc., California regulators have been given additional time to review the company's proposed premium increases, and the California Department of Insurance has hired an independent actuary to review the company's 2010 rates. A decision is expected around April 1st.

California Insurance Commissioner Steve Poizner said he has asked the actuaries to review the rates "with a fine tooth comb" to ensure they are in compliance with state law. Poizner has also said that if they find the increases were unwarranted, he would take action to get Anthem Blue Cross to "follow the law and lower their rates."

Insurance Profits Targeted on Capitol Hill

The controversy surrounding Anthem Blue Cross has put premium increases in the spotlight, leading many in Washington to state that health insurers raise premiums to rein in big profits. At a hearing last month, members of the House Energy and Commerce Committee raised the issue of health insurers' profitability at the expense of their policyholders, with some even questioning whether it is reasonable for health insurers to be profitable at all.

Representative Bart Stupak (D-Michigan), the chairman of the Subcommittee on Oversight and Investigations and a member of the Energy and Commerce Committee, asked, "Is it reasonable to expect every year companies are going to have profits and we got to have at least 2.5 [percent]?" Stupak was questioning WellPoint's President and CEO Angela Braly, who testified at the hearing. He later said, "The only way we will get more affordable [health care] is to knock off these profits that are being paid for by the average American. I mean, I don't mind you making a profit, but at the end of the year, 2009, a horrible year, you still made $2-something billion and that is not enough?"

Braly replied that WellPoint serves 34 million Americans nationwide and said, "We feel that it is appropriate for our business to be sustained so that we can be there for those members when they incur those health care costs. We want to be solvent as an organization and be able to continue to invest in ways in which we can get to a more affordable, higher-quality health care equation."

Another member of the Energy and Commerce Committee, Representative Betty Sutton, (D-Ohio), said that millions of Americans are being "devastated by shocking increases in their health insurance premiums. And let us be clear, health insurance companies have been socking it to the American people and businesses for years. Health Care for America Now recently released a report that found that in 2009 the health insurance industry had record profits."

Is the Outcry Warranted?

A close look at WellPoint's revenues does not indicate the company is reporting record profits. Its net income as a percentage of total revenue shows that for the past three years, the company had net income increase of 5.5 percent in 2007, 4.6 percent in 2008, and 4.8 percent in 2009. The report Sutton cited was by Health Care for America Now, a partisan grassroots organization whose goal was to win comprehensive health care reform. The organization acknowledges its principles are backed by the president, vice president and members of Congress.

Braly indicated at the hearing that all health plans are in the same situation, dealing with rising medical costs. In addition, she explained that there has been a higher proportion of healthy individuals forgoing health insurance, which leaves a higher risk pool of insured individuals who use significantly more health care services.

The profits of health insurers have come under fire from even the White House. President Barack Obama spoke of health insurers' premium increases when speaking about the health care reform bill. In a speech in Fairfax, Va., on March 19, President Obama said, "If this vote fails, the insurance industry will continue to run amok. They will continue to deny people coverage. They will continue to deny people care. They will continue to jack up premiums 40 or 50 or 60 percent as they have in the last few weeks without any accountability whatsoever."

The president's reference to the industry running "amok" does not give much credit to state regulators, whose job it is to closely regulate the insurance industry. State insurance departments receive actuarial justifications for rate increases proposed by health insurers. Additionally, all state insurance departments oversee health insurers' financial stability and require insurers to have sufficient reserves to protect policyholders and ensure solvency.

Rate Increases Are Justified

Health insurers set premium increases to medical cost trends, which have been rising much faster than inflation in recent years. PricewaterhouseCoopers' Health Research Institute reported that medical costs continued to grow in late 2008 and early 2009, despite the worst contraction by the U.S. economy in a quarter of a century. This year, growth in medical costs is expected to be 9 percent, slightly lower than in previous years, according to its report. Therefore, a 9 percent growth in medical costs will prompt health insurers to increase premiums by at least 9 percent, so a policy that cost $5,000 can expect to rise to $5,450 this year. A further increase would be needed if, for instance, a state insurance department mandates additional reserve requirements.

Profit Margins Exaggerated

While the profitability of health insurers has come under attack many times, it has gained momentum in recent months as the health care reform bill approached a final vote. However, research from independent sources has shown that the massive profits cites by lawmakers may be largely exaggerated. A look at some of the health insurers' 10K filings with the Securities and Exchange Commission shows that the nine largest for-profit, publicly traded health insurance companies reported combined operating income of $13.8 billion during 2008, but that is on a base of $251.6 billion in revenue during 2008, or 5.5 percent profit.

In comparison, based on data from a Goldman Sachs report, an analysis of 30 not-for-profit Blue Cross plans across the country, with total revenue approximating $115.5 billion during 2008, resulted in $1.5 billion in underwriting income or an underwriting margin of only 1.3 percent. These profits were barely enough to meet the reserve requirements established in each of the states where the companies operate.

In addition, the Fortune 500 annual ranking of America's largest corporations casts doubt on the health insurance industry as a profitable one. The annual ranking, which shows the top industries based on growth in revenues as well as their percentage in profits, shows that out of 50 industries, health insurance and managed care companies ranked 35th, with a 2.2 percent profit in 2008 as a percentage of revenues. For 2007, the health insurance industry and managed care companies ranked 33rd.

Reasons Behind Rate Increases

America's Health Insurance Plans (AHIP), an industry trade group that represents 1,300 member companies, sent a letter to Capitol Hill highlighting key factors that are contributing to premium increases. They include:

  • Sharp increases in provider rates
  • Increased uncompensated care costs
  • Increase cost-shifting as providers seek to offset the costs of treating more Medicaid patients
  • Consolidation among hospitals and other health care providers
  • New state laws that include benefit mandates, regulations and premium taxes
  • Economic factors that have led to people dropping coverage, resulting in a risk pool with older, less healthy people

AHIP's President and CEO Karen Ignagni, in response to premium increases, said, "It's time to stop the politics of vilification and focus on what Americans need most: real health care reform that addresses the serious and urgent problems facing our nation."

One thing is clear: That the underlying cause of higher premiums is rising medical costs, and health insurers that are raising premiums to keep in line with these costs are being blamed for the rising costs of health care in this country. While profitability has come under fire, the industry as a whole is in the lower third of profitable industries.

Mary Lou Byrd