UPDATE: WellPoint price hike defense fails to satisfy feds

Health insurer WellPoint is blaming the Great Recession and rising medical costs for its planned 39 percent rate increase
for some California customers of its Anthem Blue Cross plan.

But Health and Human Services Secretary Kathleen Sebelius
isn’t buying the explanation proffered in a letter delivered to her Thursday.

Sebelius said "it remains difficult
to understand" how premium increases of that size can be justified when WellPoint Inc. reported a $4.75 billion profit
in the last quarter of 2009. She also noted that the premium increases are 10 times higher than the increase in national health
care costs.

President Barack Obama has seized on the premium hikes in California as an ill omen of what will happen
around the country if lawmakers fail to enact health care overhaul legislation. "If we don’t act, this is just a preview
of coming attractions," he said at a press conference Tuesday.

Brian Sassi, the head of WellPoint’s consumer
business unit, said in the letter to Sebelius that because of the weak economy, healthy people increasingly are dropping coverage
or buying cheaper plans. That reduces the premium revenue available to cover claims from sicker customers who are keeping
their coverage.

The result was a 2009 loss for the unit that sells individual policies to people who don’t get
insurance through their employers, he said. Higher rates for this group, which accounts for about 10 percent of Anthem’s eight
million customers in California, are needed to cover the shortfall expected from the continuation of that trend, according
to the letter.

"When the healthy leave and the sick stay, that is going to dramatically drive up costs,"
Sassi said in an interview. He declined to specify the size of the unit’s loss.

Affected customers can choose plans
with lower premiums but higher out-of-pocket costs, he said.

Sassi told Sebelius that insurance costs also continue
to rise because medical prices are increasing faster than inflation, and people are using more health care. That use increase
is driven by an aging population, new treatments and "more intensive diagnostic testing," he wrote.

Sebelius
ordered a federal inquiry earlier this week after the size of proposed premium increases for individual policies was widely
publicized. A congressional committee also has asked for information on the increases and requested testimony from WellPoint
CEO Angela Braly at a Feb. 24 hearing.

WellPoint is the largest publicly traded health insurer based on membership
and is a dominant player in the individual insurance market in California. Based in Indianapolis, the company runs Blue Cross
and Blue Shield plans in 14 states and Unicare plans in several others.

WellPoint as a whole made a profit of $4.75
billion in 2009, though $2 billion of that came from the sale of a business.

Rates for individual health insurance
policies tend to rise much faster than those of employer-sponsored coverage.

The pool of customers is more stable
for group health insurance. In the individual market, healthy people are more inclined to drop coverage when they see big
price hikes because they don’t have employer help paying for it, said Robert Laszewski, a health care consultant and former
insurance executive. That leaves behind sicker customers who stay because they still need coverage.

Sassi said
as much as one-third of their individual insurance customers leave every year. That volatility can lead to big changes in
the mix of people covered and rate swings. Administrative costs also can be higher for individual lines because the insurer
has to sell each policy individually instead of to a larger group.

Sassi said a minority of Anthem Blue Cross’s
800,000 individual policy holders in California will see rate increases as high as 39 percent. Most premiums will rise around
24 percent when the rates take effect March 1.

The Democratic health care legislation now stuck in Congress is
largely aimed at addressing the problems of small businesses and people buying insurance on their own.

The bills
would set up big new insurance pools called exchanges that would promote competition. In many states the market for individual
health insurance is currently controlled by one or two dominant insurers.

Premiums for the new coverage wouldn’t
necessarily be cheaper. In order to participate in the exchanges, insurers would have to offer more comprehensive benefits
than are often available now in the individual market. But federal subsidies would be available to help offset the cost for
moderate income people.

Rep. Chris Van Hollen, D-Md., a member of the House leadership, said he thinks the WellPoint
case should send a powerful message to lawmakers wavering about what to do on health care overhaul. "The results of doing
nothing will be skyrocketing increases in premiums," he said.

The price shock could help Obama make his case
that Republicans need to come to the table on health care. GOP leaders are going reluctantly to the Feb. 25 health care summit
convened by the president. It’s unclear whether they can find common ground, since Republicans want to start over from scratch,
and Obama is unwilling to give up on the goals embodied in the Democratic bills.