WellPoint, UnitedHealth, grapple with medical-cost mandate

A U.S. mandate forcing insurers led by UnitedHealth Group Inc. and WellPoint Inc. to spend 85 percent of revenue from premiums
on medical care is the newest front in the battle between the Obama administration and companies over industry profits.

In 2009, Minnesota-based UnitedHealth spent 82.3 percent of revenue from premiums to pay customers’ medical expenses
and Indianapolis-based WellPoint spent 82.6 percent, according to company filings. While individual insurers now decide what
categories to include in this ratio, the health law signed in March demands that all companies define medical costs the same
way beginning in 2011.

Many insurers include only customer claims in their current ratios. They want to keep the number low to impress investors,
said Sandy Praeger, of the National Association of Insurance Commissioners. Under the new law, lobbyists would include technology
expenses, wellness programs and pay-for-performance incentives. That would make it easier to reach the 85 percent threshold,
and free up revenue to boost profit.

“This has the potential to be a big issue for the industry next year,” Carl McDonald, an analyst at Oppenheimer
& Co. in New York, wrote in an April 8 note to clients. “Because the details of the calculation are left up to an
administration that has been blatantly anti-managed care, it will be difficult for many commercial plans to outperform until
this is cleared up.”

The law sets two thresholds for 2011: 85 percent for policies involving large companies, and 80 percent for small groups
and individuals.

State officials represented by the Kansas City, Mo.- based NAIC were initially asked by U.S. regulators to recommend by the
end of 2010 what should be covered under the thresholds. That timing was shortened Monday to June 1.

Lobbyist organizations led by America’s Health Insurance Plans, a Washington-based group representing 1,300 insurers,
and the Chicago-based Blue Cross and Blue Shield Association, with 39 members, are negotiating over how to shape the bill,
Praeger said.

“We’ve begun the discussions with some of the industry, or they’ve begun the discussion with us, because
they’re nervous about how this is going to be defined,” Praeger said in a telephone interview. “They want
to be able to say—when they go to Wall Street—that they’re really reserving a lot for profit. When they
come to us they want to say the reverse, that they’re paying a lot for medical.”

Final regulations for the provision will be approved by Health and Human Services Secretary Kathleen Sebelius.

Insurers believe wellness programs and technology systems to manage records should be categorized as medical care because
they help improve overall health, said Justine Handelman, executive director for policy for the Blue Cross group.

Robert Zirkelbach, a spokesman for AHIP, said his group’s members are concerned that refusing to include wellness programs
under the thresholds may lower interest among companies in supporting these efforts, hurting consumers rather helping them.

“We want to make sure that, however the regulations are structured, they aren’t going to disrupt those types
of initiatives,” Zirkelbach said.

Insurers already have made some changes in how they classify costs on their own.

WellPoint, the largest U.S. insurer by enrollment, last month announced it would count nurse call-in centers and wellness
programs as medical costs. That move increased the Indianapolis-based company’s projected ratio to 84.3 percent in 2010
from 82.6 percent in 2009, the company said.

Kristin Binns, a spokeswoman for WellPoint, said in an e- mail that company officials are “closely watching the NAIC
recommendation process, and are looking at the impacts depending on how various expenses are classified.”

UnitedHealth spokesman Tyler Mason said the insurer was “following discussions closely." He declined further comment.     

Cigna CEO David Cordani said he was confident the administration will allow insurers to count spending on nurses who advise
customers as a medical expense. Sebelius and congressional staff indicated a willingness to do so in conversations over the
past six weeks, Cordani said in an interview Monday.

Democrats want to use the new rules to deliver on their promise that patients will get more value from their premiums, Senator
Jay Rockefeller, a West Virginia Democrat, has said.

President Barack Obama and Democrats in Congress repeatedly criticized insurers in the run-up to the law’s signing
last month. They attacked WellPoint’s proposed 39 percent premium increase on some California customers as a preview
of what might happen if the overhaul wasn’t passed.

The regulations will require “insurance companies to dedicate more of the premiums dollars they collect to actual care
instead of profits, bonuses, advertising and other overhead costs,” said Nicholas Papas, a Sebelius spokesman, in an
e- mailed statement.

Robert Laszewski, a Washington, D.C. policy analyst who consults with the industry, predicts that the insurance commissioners’
recommendations won’t put excessive pressure on industry profits.

“This medical-cost ratio is a game,” he said. “What the regulators are now going to do is come up with
rules of the game,” Laszewski said. “Hire some lobbyists and make some really good arguments.”