Consumer Advocates Challenge Audit

Los Angeles Times

Blue Cross premiums in California rose sharply after an out-of-state insurer bought the company offering the plans, but consumers were not stuck paying for the $21-billion deal, according to a state audit released Wednesday.

There is no evidence that health insurance rate hikes were used to pay costs related to the acquisition of Thousand Oaks-based WellPoint Health Networks Inc. by Indianapolis-based Anthem Inc., according to the report of an independent auditor issued by the state Department of Managed Health Care.

To win approval from the state, the combined company — now known as WellPoint Inc. — had promised not to charge the 7.6 million Blue Cross of California policyholders for any of the estimated $4 billion in deal expenses, including financing and legal costs and severance pay for retiring executives.

Regulators launched the audit in May after receiving more than 200 consumer complaints about premium hikes just six months after completion of the deal. The increases averaged 8% for small-group plan members and 13% for individual plan members, the audit found, though some people complained of rate hikes as high as 40%.

The rate hikes “are distressing for policyholders and those concerned about the rising costs of healthcare, but cannot be attributed to financing the costs of the Anthem and WellPoint merger,” said managed healthcare department legal counsel Kathleen Knight. She said the state agency would continue to monitor all premium increases by the health insurer.

The increases were not “out of line with medical cost inflation,” driven by increases in the cost of medical goods and services, concluded the study by Richard Rush, an actuary at Denver-based consulting firm Leif Associates Inc.

The study also found that the portion of premium increases needed to cover agent or broker commissions was flat and that the remaining portion of the premium needed to cover administrative costs and profit decreased slightly.

In addition, rate hikes were similar to increases imposed on Blue Cross of California members during the three years before the acquisition, the audit concluded. During this period, rates for individual plans went up an average of 10% to 16% a year and small-group increases ranged from 8% to 18% annually.

WellPoint spokesman Robert Alaniz said that the company was very pleased with
the audit and that it would continue to comply with state mandates that premium
increases not be used to pay acquisition costs.

But consumer activist Jamie Court questioned the findings, noting that the auditor did not examine various actuarial assumptions underlying the insurer’s justification for the premium increases, such as healthcare costs and retention rates for members.

“An actuary that doesn’t challenge the assumptions behind money not spent on medical care is not doing an audit that is worth anything,” said Court, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “It’s not an audit unless you look at whether the assumptions are reasonable and true.”

Kevin Donohue, deputy director of the managed healthcare department, said state law did not give the agency authority to challenge or examine those assumptions from WellPoint.

“There is no right or wrong answer for these assumptions — that’s not what our auditor was trying to do,” he said. “Our whole goal here was to make sure they didn’t change their methodology, or business plan, after the merger,” he said. “That was the best that we could do.”