Internal documents show one of the country's largest for-profit health insurers, in an effort to maintain profits, manipulated data to justify a rate increase on individual premiums in California this year by as much as 39 percent.

At a closely watched Congressional hearing Wednesday, Rep. Henry Waxman, the Democratic chairman of the House Energy and Commerce Committee, blasted WellPoint Inc. executives for publicly stating that the country's economic turmoil and rising health care costs was the reason its Anthem Blue Cross subsidiary intended to move forward with a massive rate increase in California when the company's own documents say otherwise.

Waxman said the company "may have manipulated its actuarial assumptions to keep its medical loss ratio (MLR), a key measure reviewed by California regulators, 'flat.'"

"WellPoint says the rate increases are a result of medical inflation and healthier policyholders dropping coverage," Waxman (D-California) said. "But the thousands of pages of WellPoint documents we have reviewed tell another story ... WellPoint says that its rate increases have nothing to do with increasing company profits. But an internal company e-mail says that its rate increase would 'return CA to target profit of 7 percent.'"

The email Waxman referred to was sent October 7, 2009, by WellPoint executive Barry Shane to Cynthia Miller, the company's executive vice president, chief actuary and integration management officer. It says:

Re CA rate filing ... I will try to keep you better informed re: key increases. Average increase is 23 percent and is intended to return CA to target profit of 7 percent (vs 5 percent this year). Still have another 1-2 weeks of discussion before we get finalized. Also, this has been a collaborative rate development process [with another executive] and his team fully engaged and encouraging a higher rate increase (while being aware of the risk associated).

Backlash

Last month, it was revealed that Anthem Blue Cross notified thousands of its 800,000 customers in California who hold individual plans that they would be affected by a rate hike as of March 1. The increase has been delayed by two months pending an independent review launched two weeks ago at the behest of California Insurance Commissioner Steve Poizner.

Poizner, a GOP gubernatorial candidate, said he "instructed" an outside actuary "to review the rates with a fine-tooth comb" to determine if the rate hikes are excessive and ensure that Anthem Blue Cross is spending 70 cents of every dollar on premium medical care as required by state law.

If the actuary finds "that these rate increases were unwarranted, I will immediately take action to get Anthem Blue Cross to follow the law and lower their rates," he said.

When news of the rate hike broke, it resulted in a major backlash against the health insurer and underscored the urgency of passing legislation to reform the industry.

Wednesday's hearing was chaired by Rep. Bart Stupak (D-Michigan) and comes a day before Republican and Democratic leaders gather at the White House for a hotly-anticipated bipartisan health care summit that will be broadcast live on C-Span.

The meeting will be led by President Barack Obama and is intended to get both parties to agree on provisions to be included in a health care bill, the cornerstone of Obama's domestic agenda. Obama has cited the Anthem Blue Cross rate hike several times in recent weeks in an effort to rally lawmakers behind his health care proposal.

Last week, the Department of Health and Human Services released a report,  Insurance Companies Prosper, Families Suffer: Our Broken Health Insurance System, that identified how other for-profit health insurance companies were planning massive rate increases in Connecticut, Maine, Michigan, Oregon, Rhode Island, and Washington.

The timing of Wednesday's hearing was not lost on some Republican lawmakers, such as Congressman Michael Burgess (R-Texas), who said it was a political ploy scheduled to promote Obama's "six-hour photo op."

Burgess, a doctor, defended WellPoint's rate hike, stating it could be due to a variety of factors, and "any number, no matter how big, may be acceptable."

But Stupak said the committee's probe "discovered internal documents that suggest a closer relationship between the proposed premium increases and WellPoint profits."

"The documents reveal that WellPoint sought inflated premium increases as a negotiating tool with the California Department of Insurance," Stupak said.

One such document released by the committee last week called into question recent claims by WellPoint to justify Anthem Blue Cross's rate increase in California. The company pointed out that healthy individuals had decided to drop their coverage. But according to data the company submitted to the National Association of Insurance Commissioners, in 2009 enrollment actually rose by more than 7 percent, from 583,967 individual policyholders at the end of 2008 to 627,082 individual policyholders at the end of the third quarter of 2009.

Cooking the Books?

California law requires WellPoint, as well as other health insurers, to spend 70 percent of its premium costs on medical care.

According to the committee's investigation, "to meet this requirement, WellPoint reported to the California Department of Insurance that its anticipated medical loss ratios for each plan as of March 2010 ranged from 72.0% to 78.9%, with one outlier of 144.8%."

"One factor that can have a great impact on medical spending is the number of healthy people, who are relatively inexpensive to insure and chose to leave a particular plan. This is known as 'adverse selection,'" according to the committee's analysis of internal WellPoint documents.

"If a company projects that a large number of healthy people will exit a plan, the estimated spending on medical care for the remaining sicker population is expected to rise and result in a higher medical loss ratio," the committee's analysis concluded. "Even if premium increases generate more revenue for a particular plan, if the pool of policyholders for that plan becomes more expensive to insure, the medical loss ratio will appear higher."

WellPoint uses the concept of "adverse selection" to justify its premium increases, according to the documents. During discussions WellPoint executives had with Energy Committee staff last year, the company disclosed that as much as seven percentage points of the average 25 percent increase in premiums is due to "adverse selection."

According to internal e-mails obtained by the Energy Committee WellPoint "may have manipulated its adverse selection projections to achieve a desired medical loss ratio."

In a September 3, 2009 email, David Shea, WellPoint's vice president for individual pricing, proposed for health plans regulated by the California Department of Insurance to “add 1.0% to margin for adverse selection to ultimately keep MLR flat.”

In the same e-mail, he also proposed for health plans regulated by the California Department of Managed Care to “[a]dd 2.0% to projected claims for adverse selection to lower the margin to flat.”

The medical loss ratio is the proportion of premium revenues that a health insurance plan uses to pay down medical claims. The rest of the money is booked as profit and also used for other expenses, such as marketing and administrative costs and executive compensation.

According to documents obtained by the committee, WellPoint put together a 12-point plan to reduce its medical loss ratio. 

In a document titled "WellPoint Individual Business 2010 Plan 1st Pass," the company identified "[o]pportunities (not reflected in forecast/Plan). Under the  "Risk Management" heading, the plan indicates that WellPoint's medical loss ration "should improve as we eliminate subsidies and other Risk Management Initiatives.”

That was followed by 12 risk initiatives followed, which included:

• “Application for those with prior coverage will be dated no earlier than the day after receipt.”
• “Pre-existing waiting periods have been adjusted to be the either 12 months or the legal maximum if less.”
• “Reinstatements will only be allowed for a period of 60 days post termination and will require underwriting and payment of back premiums.”

WellPoint executives also identified key issues confronting the individual market in California that helps to better explain why it was targeted with a double-digit rate increase.

"Lack of attention to risk management, decreased ability to use pre-existing claim denials and rescind policies, and maternity policies have led to first year loss ratios climbing from less than 50% five years ago to over 65% today," the company's 12-point plan document says.

Denials

WellPoint Chief Executive Angela Braly testified Wednesday that the rate increase in California, filed last November, was reviewed by an "independent actuarial firm" that concluded the company's "methodology was reasonable.

"Raising our premiums was not something we wanted to do--but we believe this was the most prudent choice given the rising cost of care and the problems caused by many younger and healthier policyholders dropping or reducing their coverage during tough economic times," Braly said, adding that the company "clearly" understands "that rate increases create a challenge for many of our members."

"However, it is important to know that many of our members often have a choice of coverage," she said. Still, WellPoint "determined that a rate increase averaging approximately 25 percent (excluding aging) was necessary."

Braly said she "was very disappointed to see the health reform debate change . . . to an attack on the health insurance industry, specifically pointing to our profits and citing this as the primary reason for premium increases, which is very misleading."

But Waxman wasn't buying any of it and he again pointed to the company's own internal documents, which he says show the health insurer's reasons for hiking rates are purely profit-driven.

In a November 2, 2009, email, Bryan Curley, WellPoint's regional vice president and actuary, wrote: "Note: we are asking for premiums that would put us $40 [million] favorable. Just a week earlier, Curley told Brian Sassi, president and chief executive of WellPoint's consumer business, that "[i]f we get the increases on time, we will see an op gain upside of $30 [million] after downgrades and rate caps."

The committee also took issue with Braly's statement that "raising our premiums was not something we wanted to do" noting that other documents "suggest that WellPoint padded its rate increase by five percentage points to counteract anticipated concessions to [California] state regulators concerning the size of its premium increases."

In an internal email dated October 24, 2009, Shane, WellPoint's vice president of consumer actuary, told Sassi, that WellPoint executives needed to "reach agreement on a filing strategy quickly - specifically in the area of do we file with a cushion allowed for negotiations/margin expansion, or do we file at a lower level that maintains margin, but does not allow for negotiation."

"It appears that WellPoint elected to file with 'a cushion,'" according to the Energy Committee's review of WellPoint's internal documents. "In an October 21, 2009, presentation to the WellPoint Board of Directors, Mr. Sassi identified the 'Key Assumptions' in pricing for the individual market in 2010. This slide differentiated the '2010 Rate Ask' from the '2010 Plan Rate Increase.' According to the slide, WellPoint's 'Rate Ask' would be 25 percent to 26 percent, while the 'Rate Increase' the company assumed in its '2010 Plan' was just 20.4 percent."

Watered Down Coverage

Other documents showed that WellPoint sought to reduce benefits coverage and place some of its California customers affected by the rate increase into less than generous plans.

WellPoint's strategy for shifting consumers into reduced benefit plans has three parts.

First, according to the committee's review of documents, WellPoint’s highest rate increases "seem to apply to their most comprehensive insurance plans."

For example:

Maternity care is a marker for a more comprehensive package of benefits. A chart of proposed rates shows that WellPoint’s highest rate increases apply to the only two product families regulated by the Department of Insurance with maternity coverage. The chart also shows that for the most part, WellPoint proposed lower increases within specific product lines for the versions with higher deductibles than for the versions with lower deductibles.

Second, WellPoint is developing new products, called “downgrade options,” to promote to consumers facing the high rate increases. In one e-mail, David Shea, the Vice President for Individual Pricing, states: “Jim has asked Bryan to price 5-6 downgrade options to be made available in conjunction with the upcoming rate action.” In another internal e-mail, Mr. Curley, the Regional Vice President and Actuary, proposed that WellPoint “create 5-6 CA look-alike plans for CA with a benefit or two removed to create a downgrade option upon renewal.”

WellPoint also introduced a completely new product line called CoreGuard, advertised to have “some of our lowest monthly rates” and a “higher percentage of member cost-sharing in exchange for lower premiums.” One of the CoreGuard plans has a $20,000 deductible for a family for in-network services and a separate $20,000 deductible for non-network services. On top of that, a family can spend an additional $15,000 for co-payments for non-network services. Enrollees can be liable for another $4,500 in prescription drug costs. This adds up to a potential $59,500 out-of-pocket maximum for a family, who are still liable for the cost of drugs not on the formulary and maternity services.

Third, company officials discussed scaling back benefits for existing plans. Indeed, in an October 2, 2009, email Shea sent to Curley and James Oatman, another executive, Shea wrote: "During our Plan review this morning Brian was mentioning that, in CA in the past, we mitigated rate increases by introducing product changes for existing members. We brought up the introduction of new products but he wanted to pursue existing product changes."

In another e-mail, Curley described different scenarios that would result in 6 to 10 percent reductions in benefits for four plans, such as raising deductibles in three of the four plans and adding 25 percent coinsurance payments.

Waxman said "actively developing...'downgrade options,' effectively reduces benefits for its policyholders."

"This 'purging' process cuts coverage for WellPoint policyholders when they need it most: when they get sick," he added.

The committee also heard testimony from three of Anthem Blue Cross's individual policy holders. Lauren Meister testified that she was notified that WellPoint will increase her rates by 38.6 percent this year. She said that WellPoint offered her an alternative plan that does not cover the brand name medication she needs to treat a chronic condition. Meister said WellPoint told her that the alternative plan would require her to pay $5,000 out of pocket before the insurance kicks in.

And Jeremy Arnold testified that he has experienced rate increases on his WellPoint policy totaling 74 percent between 2009 and 2010. Anthem has proposed to raise his rates by 38 percent this year.

Corporate Getaways

Waxman and other Democratic lawmakers on the Energy Committee criticized WellPoint for spending tens of millions of dollars on retreats for top executives and doling seven-figure salaries.

"One question we asked is where does all of this money go?" Waxman asked in his opening statement. "We have learned that in 2008, WellPoint paid 39 senior executives over $1 million each. And the company spent tens of millions of dollars more on expensive corporate retreats. During 2007 and 2008, WellPoint spent $27 million on 103 executive retreats. One retreat in Scottsdale, Arizona, cost over $3 million."

"Corporate executives at WellPoint are thriving, but its policyholders are paying the price," Waxman said. "WellPoint executives may get richer, but our nation's health is suffering."

The committee included photographs of the luxurious five-star hotels, such as the Four Seasons in San Diego and Hawaii, that corporate executives stayed at during their getaways.

WellPoint generated $4.75 billion in earnings last year and its profit margin soared to 7.8 percent, compared with 4.1 percent in 2008. Over the past 12 months, the company's share price increased by 50 percent. According to BusinessWeek, WellPoint shares rose 90 cents, or 1.5 percent, to $59.91 Wednesday in New York Stock Exchange composite trading.

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