Health insurer WellPoint blames a shift in demographics and rising medical costs for its planned 39 percent rate hike for some California customers.
In a memo obtained by The Associated Press, WellPoint Inc. tells Health and Human Services Secretary Kathleen Sebelius that because of the weak economy, healthy people are dropping coverage or buying cheaper plans. The decline in premium revenue means there's less money to cover claims from sicker customers who are keeping their coverage. That resulted in a 2009 loss for the unit. The insurer says its 2010 rates aim to cover the shortfall expected from the continuation of that trend.
"When the healthy leave and the sick stay, that is going to dramatically drive up costs," Brian Sassi, who heads WellPoint's consumer business unit, said in an interview with The Associated Press.
The letter to Sebelius said 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," the letter said.
WellPoint said a minority of customers will see 39 percent increases and that those customers have an option to choose plans with a lower premium but higher out-of-pocket costs.
The federal inquiry was launched earlier this week after the premium increase planned for some customers who buy individual policies from WellPoint's Anthem Blue Cross subsidiary was widely publicized.
Congress also has asked for information on the increases and requested testimony from WellPoint CEO Angela Braly at a Feb. 24 hearing.
Rates for individual health insurance policies tend to rise much faster than those of employer-sponsored coverage, said Robert Laszewski, a health care consultant and former insurance executive.
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. 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.
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.
Individual insurance makes up only 6 percent of WellPoint's total enrollment of 33.7 million people.
Sebelius had called the increases "extraordinary" and told the insurer in a letter she was disturbed to learn about them. She also has demanded that the insurer answer questions about how much of a profit it will make from the hike.
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.
Sassi said in the letter to Sebelius that the Anthem Blue Cross unit at the heart of the inquiry lost millions in 2009. He declined to offer specifics in an interview.
The executive said Anthem Blue Cross set some of its prices, or premiums, too low last year for the claims it received. It set 2010 prices based on what it thinks future prices will be.
"We need to make sure that our premiums cover the cost of claims," he said.
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.
Shares of WellPoint fell 15 cents to $59.86 in afternoon trading.