WellPoint Math Error Ricochets

The Wall Street Journal

Obama Administration Urges States to Recheck Health Insurer's Rates After California Flub

The Obama administration's top health official is urging state regulators and lawmakers to investigate whether WellPoint Inc. made mathematical errors in justifying sharp rate increases around the country.

In a letter being sent to state insurance commissioners and governors late Tuesday, Health and Human Services Secretary Kathleen Sebelius calls for a national inquiry into the data underpinning rising health-insurance costs. Ms. Sebelius is seizing on WellPoint's decision last week to withdraw a request for up to a 39% price increases on individual plans in California after an actuary hired by the state found several mistakes in the filing.

"In light of this recent finding, I urge that, to the extent you have authority to do so, you re-examine any WellPoint rate increases in your state," Ms. Sebelius wrote. "Even small errors can mean unaffordable premiums for policyholders."

WellPoint has become a lightening rod for criticism over rising premiums. Chief Executive Angela Braly was called before Congress in February to defend its California rate increases. At that hearing, Ms. Braly pointed to mushrooming charges by hospitals, doctors and drug companies that are passed through to consumers in their insurance bills.

Other insurance executives were hauled into the White House in March to explain their prices, but WellPoint has borne the brunt of criticism in part because it is the biggest seller of plans to individuals and small businesses, and because of the size of its California rate boost.

In investigating the California rate filing, that state's Department of Insurance found mathematical mistakes, such as overestimating future medical costs and double-counting the effect of its policyholders aging, according to insurance commissioner Steve Poizner, a Republican candidate for governor.

A WellPoint spokeswoman, Kristin Binns, said she couldn't comment on Ms. Sebelius's letter since she has not seen a copy. WellPoint plans to refile the rates this month to correct "inadvertent miscalculations" in estimating future medical costs, and to reflect a standard in the health overhaul that insurers spend 80% of premiums on medical expenses, ahead of required implementation of the standard next year.

"The miscalculation was unique to the individual business rate filing in California," said Ms. Binns, who pointed out that many states have conducted rate reviews in which the company's actuarial conclusions were upheld.

Insurers have warned that the new health law will do little to contain rapidly rising prices and say they will keep raising rates to cover costs. Ms. Sebelius's request is an indication that the administration is looking to state regulators to make sure a central promise of its health overhaul—reducing the burden of health-care costs on consumers—doesn't go unfulfilled.

Ms. Sebelius's letter urges states to tighten their review processes, noting that new health law makes available $250 million to states for that purpose. Some state officials have already started acting in the wake of WellPoint's admission last week.

Connecticut Attorney General Richard Blumenthal said he will ask his state's insurance regulator Wednesday to comb through a local WellPoint unit's request to raise individuals' rates by 24% on average last year. Connecticut's insurance department had granted increases of up to 20%, said a spokeswoman for Mr. Blumenthal.

"If there were any similar errors the rates should be reduced," said Mr. Blumenthal, a Democrat who is running for a U.S. Senate seat in Connecticut.

In New York, where a WellPoint unit raised individuals' premiums by about 17% last year, actuaries are pulling out the company's filings and discussing the merits of the increases, said John Powell, assistant deputy superintendent for health at the state's insurance department. "We're going to see if any alarms go off for us," said Mr. Powell.

WellPoint said both New York and Connecticut have rate oversight processes in place to double-check the actuarial assumptions in companies' filings.

The issue extends beyond WellPoint, which is hardly the only insurer to request big rate increases and push California health insurance quotes.

"We're considering additional action on other companies' rate increases as well," Mr. Blumenthal said.

In Iowa, the insurance division recently asked an outside actuary to review the roughly 18% price increases proposed by Wellmark Blue Cross & Blue Shield, a local insurer. The review found no errors and the rates went into effect May 1, but the insurance division is now asking for independent reviews of all new rate filings.

Mr. Poizner in California said he plans to send the findings of the independent actuary to insurance commissioners in other states this week.

The National Association of Insurance Commissioners also expects its members to take a second look at filings of all insurers in the wake of WellPoint's errors in California, including an impact on New York health insurance quotes.

"We're being super cautious to make sure every increase is justified," said Sandy Praeger, the Kansas insurance commissioner and head of NAIC's health-insurance and managed-care committee.

Whether or not the companies can succeed in raising prices is critical on Wall Street. In an earnings report last week, WellPoint told analysts that it lost money on the individual business in California in March.

Insurer Blames Health Costs for California Rate Hikes

LA Times

WASHINGTON-- The head of the major health insurer that wants to boost rates in California by up to 39 percent defended her company before Congress on Wednesday, saying the increases would be tough for many customers but were necessitated by soaring medical costs.

In prepared testimony for a House investigative subcommittee, Angela Braly, president of WellPoint Inc., blamed the increases on the growing price tags for hospital care and pharmaceuticals. She also cited the ailing economy, which has caused many younger, healthier people to save money by dropping coverage, leaving her company covering an older, sicker population.

"Raising our premiums was not something we wanted to do," Braly said. "But we believe this was the most prudent choice."

WellPoint owns Anthem Blue Cross, whose plan to boost rates in California has made it a poster child for Democrats arguing that the nation's health system must be overhauled. Wednesday's hearing comes a day before President Barack Obama hosts bipartisan congressional leaders for a daylong, televised discussion of health care, a session he hopes will provide new momentum to Democrats' stalled legislation.

It also was occurring the same day the House planned to vote on legislation repealing the health insurance industry's exemption from federal antitrust laws. Obama and Democrats say the measure would help spur competition, but analysts say it would have little impact on how insurers do business because they already are regulated by states.

Democrats on the House Energy and Commerce oversight and investigations subcommittee also invited some California residents to describe their experiences with Anthem.

In prepared testimony, Jeremy Arnold of Los Angeles said Anthem informed him last month that his rates would grow by 38 percent to $319 a month, which could force him to take a less expensive policy with higher deductibles and hope he doesn't get sick.

"Hope is not an adequate health care policy," Arnold said.

Braly expressed some sympathy.

"Clearly, we understand that rate increases create a challenge for many of our members," Braly said. "However, it is important to know that many of our members often have a choice of coverage."

She said the company was dismayed when the health overhaul debate in Washington turned into "an attack on the health insurance industry," which she said was "very misleading."

After its rate announcement generated criticism, Anthem said it was postponing the increase from March 1 until May 1 while it is reviewed by California regulators.

Anthem covers more than 8 million Californians, including about 800,000 who buy their policies directly. It is on those individually covered people that Anthem has proposed rate increases of up to 39 percent, though the company says the average increase is 25 percent -- which the company says is in line with competitors.

Braly said the company lost $10 million on individually insured Californians last year.

In a report earlier this month, the Obama administration cited WellPoint's reported profit of $2.7 billion in the fourth quarter of last year as evidence that insurers' rate boosts need to be curbed.

But Braly cited a one-time sale of an asset and said the profit excluding that was $380 million after taxes. She said even if the company returned that profit entirely to its customers, they would each receive an average $5.13 per month.

Braly said the rate increases and growing costs show why a health overhaul is needed. She said the Democratic bills debated so far have been inadequate because they don't control the growth of medical costs and thus the tilt in California health insurance quotes.

"Changing how we finance health care without changing how we deliver health care is simply not sustainable," she said.

Interview with WellPoint's CEO: 'A Wasted Opportunity'

By JOSEPH RAGO

Wall Street Journal

New York -- Angela Braly is in good spirits considering that her company seems to have narrowly avoided being converted into a public utility, if not destroyed outright. One gets the sense that she's always in good spirits. After years of sustained political assault, the power of positive thinking probably helps.

Mrs. Braly is the CEO and president of WellPoint, the largest U.S. commercial health insurer by membership. Her company's affiliated health plans in 14 states cover 34 million people—or roughly one out of nine Americans. It contracts with 82% of the nation's primary-care physicians, 84% of specialists, and 94% of hospitals. That scale lands her on the most-wanted list in President Obama's Washington, though it's tough to imagine a less likely villain than the very Midwestern Mrs. Braly.

"It's just not clear where we go from here," says the highest ranking woman in the Fortune 500, sounding as astonished as anyone about Scott Brown's victory. Merely days before this interview in WellPoint's lower Manhattan offices at the edge of Ground Zero, Massachusetts voters effectively sent ObamaCare to its own death panel. The reflexive liberal response was to castigate the likes of Mrs. Braly. "I mean, to be fair, the status quo is working for the insurance industry, but it's not working for the American people," Mr. Obama said recently.

To actually be fair, the insurance industry was a cheerleader for the plan, at least until the policy substance congealed sometime in September. "Obviously, we've been involved in this discussion for a while—more than a year—and if you think about it we came to the table early, early on and said we're going to be advocates for responsible, sustainable health-care reform done right," Mrs. Braly says. "We really do have to get at the underlying question of health-care costs."

That was the core promise of ObamaCare. Overall health costs for people insured by WellPoint increased by 8.9% in 2009 alone, and arresting this climb was the reason so many industry groups, not only the insurers, joined with the White House and Democrats. Nobody thinks the status quo is a success. But as Mrs. Braly notes ruefully, "The nature of health care is very complex, and sometimes the nature of politics is very simple."

The tragedy, as she sees it, is what "a wasted opportunity" it all turned out to be. "Health-care reform" soon became "health-insurance reform" exclusively. "It was a pivot that was—unfortunate," she says, "because it is not going to solve the longer-term problem."

It's hard to see how WellPoint could be to blame for surging health spending, Mrs. Braly says, when 85 cents out of every premium dollar or more "is paid out in the actual cost of care, doctors, hospitals, suppliers, drugs, devices." Confiscating the 2009 profits of the entire insurance industry would pay for two days of U.S. health care.

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ObamaCare would have standardized benefits and then severed the connection between the prices insurers are allowed to charge and the true costs of health care. Insurers would have to offer coverage to anyone who applied regardless of health risks or pre-existing conditions—a rule that is known as "guaranteed issue"—and would not be allowed to vary premiums among customers except within very limited bands. Everyone would then be compelled to purchase health insurance coverage.

Mrs. Braly still believes insurers "could make [this system] work from an affordability point of view," but only if these rules are realistically designed and there is "a meaningful requirement that people join in the pool." She argues that the bill Congress was on the brink of passing would merely have ensured higher insurance costs.

"People won't buy insurance until they're sick," she explains. "If you can call on your way to the hospital and get coverage, it's not really insurance at that point." Thus "prices go up and the number of covered people goes down."

Such destruction wouldn't even qualify as an unintended consequence, considering that state governments have plenty of experience blowing up the insurance markets. "Look at New York," Mrs. Braly says. "Look at Maine. Look at what's going on in Massachusetts right now. Look at what happened in the '90s in Kentucky."

Take those states in turn. "In Maine, where guaranteed issue went into effect in 1993, there were 11 insurance carriers in the individual market, and now there are two: Us, and another company that would not be called in any circle an equivalent health insurance company." In Kentucky, 45 insurers fled the state, with WellPoint the last one standing, until the state started in 1998 to repeal most of these regulations.

Depending on the plan, WellPoint's monthly premium for a 20-year-old in Indianapolis, where the company is based, ranges from $53 to $202. But the same young adult looking for similar coverage in Albany would face costs anywhere between $832 and $1,047. Obviously health insurance costs vary across the country, Mrs. Braly says, but these disparities are almost entirely due to New York health insurance regulatory mandates. In a state with 19 million people, 88 New Yorkers between the ages of 18 and 24—88!—have bought WellPoint's best-selling individual insurance product because insurance laws make it perfectly rational not to acquire costly coverage until people need it.

This scheme would have been, and might still be, imposed on the rest of the country. At the request of several congressmen last year, including some Democrats, WellPoint mined its own actuarial data to model ObamaCare and found that it would as much as triple premiums for the small businesses and individuals who are most of the company's customers. The White House political shop promptly compared WellPoint to a tobacco company.

But wasn't this fracas predictable? In other words, given the state regulatory experience, not to mention the ideological inclinations of the Democratic Party, was it really politically wise for the industry to embrace ObamaCare?

Mrs. Braly concedes that it was "a risky move, but our decision, and I think it was the right one, and it was a bold one, was to ask how can we best serve our customers. Can we lower health insurance prices for our customers, can they get better service and better value? The answer is: Yes. . . ."

"We've been a heavily regulated industry for as long as I've been part of health care," she continues. Frankly, health care and politics are "inextricably intertwined." Mrs. Braly notes, too, that the government on its own is largely incapable of "navigating through the health-care system, coordinating the very uncoordinated parts of the health-care system." In fact, hired WellPoint to run some $97 billion in traditional fee-for-service benefits in 2008, or more than a fifth of the program's total budget that year.

Mrs. Braly concedes that some people with pre-existing conditions can find it difficult to find affordable coverage, especially if they lose their job, get divorced, move, etc. "It's when people have no option that we're really in trouble and need to find a solution," she says. But a better alternative to central insurance planning is public-private partnerships to create insurance pools for those with high risks. "That was a great idea that got pushed aside, and I think we need to revisit that concept."

Mrs. Braly suggests that the industry gambled politically in part because the cost problem seems so insoluble, and that the hand of the industry was forced because the market clout of doctors and hospitals is making it increasingly difficult to contain health costs. "Is there competition in the underlying delivery system," she asks, "and is that lack of competition potentially driving up costs? . . . People have been talking about competition among insurers, and what they really need to be talking about is competition in the delivery of health care as well."

Realistically, it's not as if there's a market that sets health prices. Instead, they're negotiated between providers and health plans. Perhaps the doctors and hospitals who were largely exempted from the tepid cost-control provisions in ObamaCare shouldn't have been.

"We know there's a lot of redundancy, a lot of waste," she says. "If we have a contentious discussion with a major hospital system that people want to have access to," Mrs. Braly explains, and WellPoint doesn't meet its asking price, "then the question is what do you do about that access?"

"Hospitals come in and ask for major increases," she says. "They come in and say, you know, we need a 40% increase. It would blow your mind, the difference we start with in some of these negotiations. . . . Why does that procedure cost $10,000 in this place and down the street it costs $1,000—and when the hospital that's getting paid $10,000 is asking for a 40% rate increase, you have to say, why?"

As Mrs. Braly diagnoses the U.S. health-care system, its two main strengths are (a) choice and flexibility and (b) cutting-edge treatments and procedures. But while American medicine has been shaped by specialization, scientific advancements and major technological breakthroughs, it is paradoxically antiquated. The modern managerial and corporate practices for obtaining better productivity and quality that have revolutionized every other sector of the economy have largely passed over medicine. "Remember, for the most part, for providers of health care, it's a cottage industry," she says.

The reason costs are rising so fast, Mrs. Braly says, is because the way the health-care market is structured doesn't give providers reason to control costs. The solution is to "reintroduce the consumer to the health-care equation," and on that front, she believes, insurers "are actually the part of the health-care delivery system that is there to create the value."

Mrs. Braly thinks patients will make more cost-conscious decisions if they have the incentives and the tools—namely, the information about cost and quality that is the basis of any ordinary market. "Data just sitting there is not helpful, and its got to be meaningful, provided to the doctor and the patient in a meaningful way," she says. Far from simply being a bill-paying outfit or a hedge against risk, she sees WellPoint's fundamental role as making "the health dollar more valuable, less wasteful, more efficient."

WellPoint is an industry leader in data analytics; Mrs. Braly uses the example of knee surgery: Before the procedure, the company tells the patient which hospitals perform the most surgeries, which ones have the best medical outcomes, and where the costs are lowest. Ultimately this sort of prudent purchasing is the only durable way to lower health spending.

The White House had a different agenda, and Mrs. Braly says the controversy over ObamaCare should come as no surprise. "This is the most personal thing you can deal with. . . . Not only do we come to it and say we need the right solution, the right process, the right information, the right business model, but this is about my life," she says. "It's about what we value as people."

Mr. Rago is a senior editorial page writer at The Wall Street Journal.