U.S. News

Bleak Economy Pushing Health Insurers to Raise Rates, Analysts Say

Reed Abelson|The New York Times

Health insurers lately seem more afraid of Wall Street than of Washington.

The nation’s insurers have come under sharp attack by the Obama administration for seeking seemingly staggering rate increases on policies they sell to individuals.

Stethescope and money

The health and human services secretary, Kathleen Sebelius, recently pounced on WellPoint’s Anthem Blue Cross unit for wanting to raise premiums as much as 39 percent in California, and on Thursday she issued a scathing report detailing double-digit increases sought by other insurers last year and so far this year.

Angela F. Braly, WellPoint’s chief executive, was forced to cancel an investor presentation to prepare for the grilling she is likely to receive before Congress next week about the insurer’s rate increases.

But as bad as it may play politically, for insurers like WellPoint, the challenging business environment may leave them little choice but to raise prices if they want to protect profits, analysts and some health economists say.

The weak economy and the unrelenting rise in the cost of medical care make it increasingly difficult for companies to avoid substantial rate increases — even if those increases provide fresh fodder for Democrats seeking to pass the now-stalled health care legislation in Congress.

“If they are losing money, they need to raise prices,” said Charles Boorady, an industry analyst with Citigroup.

Even so, he faults WellPoint for seeking the increases in the current political climate. He likens it to someone waving a five iron on a golf course during a lightning storm. “You’re asking to be electrocuted.”

Under that political pressure, the company has said it will delay the California rate increases until at least May 1.

But from a business perspective, WellPoint, one of the nation’s largest insurers and the operator of commercial Blue Cross plans in more than a dozen states, may have few alternatives as a company accountable to shareholders demanding higher earnings. The money WellPoint makes from selling policies to individuals and small businesses is an important source of its overall earnings. But the company says it lost millions of dollars last year in California on individual policies.

“They’re not prepared to lose money on this line of business,” said Cathy Schoen, senior vice president for research at the Commonwealth Fund, a nonprofit research group in New York. In fact, she said, many carriers choose not to sell policies in the individual market.

Many health policy analysts point to the sharp price increase sought by Anthem as evidence that the way individual insurance is sold in this country needs to be changed.

“What they did is actuarially sound and totally legitimate,” said Andrew Kurz, a former insurance executive with Wisconsin Blue Cross and Blue Shield who is a vocal critic of the current health care system. “It’s the marketplace that is wrong, not Anthem.”

Insurers say they disagree with the Obama administration on whether the current legislation adequately addresses what is wrong with the health care system. In the individual market especially, the companies say, healthier people tend to opt out, leaving sicker people with higher medical costs for the insurers to cover. That is a big reason the insurance industry continues to push for mandatory coverage for everyone.

“Increases in the cost of coverage in the individual market shine a spotlight on the urgent need to reduce the growth of underlying medical costs and to bring everyone into the system,” said Karen Ignagni, the chief executive of America’s Health Insurance Plans, a trade group, in a statement. “If reform doesn’t address these pieces, it will not solve the serious problems that individuals, families and employers face.”

While WellPoint officials have been outspoken opponents of the current health care legislation in Washington, they say California illustrates the need to change the system. Although California is an important market for WellPoint, the state’s largest insurer, California’s economic woes have proved increasingly challenging. As companies have laid off workers, the number of people Anthem covers under employer plans has declined sharply. Those seeking individual coverage have tended to be people who know they are likely to have high medical costs.

Although the company would not disclose exactly how much it had in operating losses in its individual-policy market in California, it said its medical claims last year were 6 percent higher than it had forecast, so the company did not charge enough in premiums last year.

Bleak year ahead

“We missed the pricing,” Brad M. Fluegel, a senior executive for WellPoint, said in an interview after a conference call the company held Thursday to provide its view on the California controversy.

This year does not look much better, according to WellPoint. The company says it expects its medical claims for the individual market in California to increase about 10 percent in 2010, and it says it needs to raise its rates. WellPoint says the high rates also reflect the continuing escalation of medical costs as hospitals charge more and drug costs go up.

While some members may see a 39 percent increase, the company says the average for those plans should run around 25 percent, which it says will probably prompt many people to switch to plans with fewer benefits but significantly lower premiums.

It is not only profit-making companies like WellPoint that are losing money in the individual market.

Blue Cross Blue Shield of Michigan, for example, is a nonprofit insurer that was cited in Secretary Sebelius’s report on Thursday for having tried to get a 56 percent rate increase last year on the coverage it sells to individuals. After lengthy negotiations with state regulators, the insurer was granted a 22 percent increase. It says it still lost $280 million on the business.

Unlike other insurers in the state, Blue Cross Blue Shield of Michigan is required to cover everyone who applies, regardless of any existing medical condition. The plan has doubled its enrollment in the individual-policy market in the last two years as the state’s economy has continued to weaken.

The Obama administration is quick to counter that the insurers generally seem to make plenty of money, especially the commercial companies that still manage to reward their executives handsomely and keep their shareholders happy with increasing earnings. They say the insurers are asking for increases that far outpace the overall rise in underlying medical expenses.

The insurers “want to continue to raise your premiums by outrageous margins — often 5 to 10 times greater than health costs are rising,” Dan Pfeiffer, the White House communications director, wrote Thursday on the White House blog. “And all the while, they’ve been pulling down massive profits.”

There is no question that the insurers often turn to the individual and small group markets to raise rates because that is where they have the clout — in contrast to the resistance they often encounter when trying to raise the fees they charge large employers. And individuals, in particular, often have few alternatives if they have a pre-existing medical condition, because no other carrier will sell them a policy.

Meanwhile, insurers’ pricing power is dwindling in their core business of providing coverage to large companies. Rather than selling insurance to big employers, they tend to be paid only to handle claims, and that business has become increasingly competitive as the companies fight over market share.

That is why insurers have little choice but to raise rates on policies to individuals and small groups as medical costs rise, said Michael Turpin, a former UnitedHealth insurance executive who is now an official at USI Holdings, an insurance broker.

“As competition increases in larger accounts and margins thin, there are fewer and fewer levers for insurers to pull,” he said. “They’re getting squeezed.”