WellPoint Profit Up, Coverage Is Down

Pity poor Blue Cross of California. Judging from a letter the big health insurer recently sent Mark Galanter, a Los Angeles classical pianist and teacher who belongs to one of its health plans for individuals, the company’s ability to provide him with coverage sits on a knife’s edge.

“As you may know,” it stated mournfully, “healthcare costs continue to rise due to many factors, including escalating hospital and doctor fees, demand for high-tech procedures and increased use of emergency rooms for non-emergencies.”

Accordingly, Blue Cross said it was jacking up his monthly premium by more than 25% to $157, raising co-pays by as much as 230%, and requiring “preservice review” before approving any inpatient hospital service. On the plus side, Blue Cross will start covering the cost of wigs, as long as they come with a doctor’s prescription.

Galanter, who had been hit in November with a nearly 40% rate increase just for turning 40, says he tried to complain to a Blue Cross representative. “It was almost a waste of breath,” he says.

As it happens, Blue Cross left one item off the list of factors affecting Galanter’s premiums: profit. A couple of weeks ago, its parent, WellPoint Inc., reported that net income for the fourth quarter of 2005 had tripled to $652 million from a year earlier. Not all the increase was due to higher premiums and lower benefits; some resulted from charges that modestly pared profit a year ago. In any case, for calendar 2005, WellPoint reported a profit of nearly $2.5 billion.

It’s fair to note that Blue Cross’ premium increases aren’t the largest among California health plans. But it’s also worth observing that the company -- formed by the 2004 acquisition of Thousand Oaks-based WellPoint Health Networks Inc. by Indianapolis-based Anthem Inc. -- said it reduced spending on medical benefits in the fourth quarter to 80.1% of premiums, compared with 81.2% a year earlier (based on the combined results of the two companies). That’s among the lowest rates in the business.

As WellPoint’s chief financial officer, David Colby, told Wall Street analysts, 2005 “will be a tough year to top.” But WellPoint will try. Colby said the company would soon repurchase up to $2 billion of its shares, another way to transfer premiums from customers to shareholders.

Now, nobody is more a fan of corporate profits than I, but if an insurance company’s coffers are bursting full while it harangues customers about their irksome “demand for high-tech procedures,” something’s askew.

This occurred to our state health insurance regulators last year, when many of Blue Cross’ 7.6-million California customers squealed about an earlier round of rate hikes. The rate hikes were troubling, because the Anthem-WellPoint deal had been briefly stalled by California Insurance Commissioner John Garamendi over a planned post-deal payout to WellPoint executives of as much as $385 million, as well as by the prospect that California customers would be stuck with the merger’s $4-billion tab. (WellPoint says the executive payout has been less than $250 million so far.)

Garamendi’s stance pressured Cindy Ehnes, director of the state’s other health insurance regulatory agency, the Department of Managed Health Care, into exacting a promise from WellPoint that no merger costs would be paid by California Blue Cross premiums.

The jury is out on whether that promise is worth the agency press release it was printed on. Following last year’s customer complaints, Ehnes commissioned an audit to determine if Blue Cross was complying with its promise. Normally the term “audit” evokes images of pitiless accountants poring over a company’s books, subjecting every scrap of paper to gimlet-eyed scrutiny. This wasn’t that kind of audit.

Because the agency doesn’t have authority to set health plan premiums, the agency limited the audit to determining whether Blue Cross changed its method of calculating premiums after the merger. As Deputy Director Kevin Donohue told me, “if they didn’t change their methodology, then there’s no legal basis to conclude” that Californians are paying for the merger costs.

The auditor, an experienced healthcare actuary named Richard Rush, reported in November that he hadn’t found any evidence that Blue Cross had altered its premium-setting formulas, and therefore “the increases cannot be attributed to the costs of the merger.”

But Rush noted that his analysis didn’t involve verifying the actuarial assumptions WellPoint used to set rates. These included, he wrote, healthcare cost inflation, the cost of federal and state regulations, risk factors such as geography and age, administrative costs including commissions paid to brokers and agents, profit margins, and other contingencies. In other words, almost everything that goes into a health insurance premium was outside his analysis.

Rush told me it’s rare for healthcare regulators to challenge the assumptions underlying premiums, and that tracking methodology was a sound analytical procedure. But his report did mention that it’s still possible for merger costs to creep into Californians’ bills indirectly, via changes in WellPoint’s corporate structure and in how it allocates overhead to Blue Cross of California.

Garamendi, as it happens, has also commissioned an audit of Blue Cross. That examination by the healthcare consultancy Mercer Associates hasn’t been completed, but Mercer is evidently charged with peering deeper into the insurer’s books than Rush was. “They’re looking line by line,” says Nettie Hoge, deputy commissioner for policy and planning. (A Blue Cross spokesman, sounding a bit like a patient on a colonoscopy table, acknowledges that the exam is “much more thorough than the DMHC’s audit.”)

There’s no guarantee that Mercer will unearth any improper accounting. But at least Garamendi’s agency is making an issue of insurance company finances. “Our question,” says Hoge, “is if premiums are rising beyond the rate of regular profitability, then where is the money going?”

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and view his weblog at latimes.com/goldenstateblog.