Under Pressure

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The final leg in the health reform debate marathon may seem like a distant memory. The media has been focused on financial reform, immigration reform and most recently, the oil spill in the Gulf of Mexico and the man who tried to bomb Times Square.

But some recent health care news provides good reason to look back on what pushed health care over the finish line. Remember those astounding proposed Anthem Blue Cross rate hikes in California? The ones that shocked consumers in the individual insurance market who were told their monthly premiums were set to skyrocket as much as 39%? Back in February, the Obama Administration blasted the hikes in public, while inside the White House, the hikes were celebrated as a timely and convenient illustration of why more regulation of the health insurance industry was needed.

The blasting worked, at least temporarily. Under pressure from Health and Human Services Secretary Kathleen Sebelius, Anthem agreed to delay the rate increases while independent actuaries reviewed their calculations. (Also, health reform passed.)

As I wrote at the time, Anthem’s justification for raising rates so dramatically made some sense. The company said rising health care costs and a less healthy pool of purchasers forced it to charge substantially more for policies. I also said at the time that rate hikes of some magnitude would probably happen anyway eventually. Of course, the White House was not interested in these caveats, which would have been clutter to its public relations campaign to emphasize the dire need for reform.

Well, earlier this week the California department of insurance released the report from those independent actuaries. The 145-page document is here, but here’s my one-paragraph summary:

Anthem used some bad math to calculate its rates, which the company is calling “miscalculations.” Since the new federal regulations are mostly years away, the only major state regulation that applies to Anthem’s rates now concerns its “medical loss ratio.” This is the percentage of premiums that are spent on medical care and in California, it must be 70% in the individual market. The actuaries – who spent a total of 500 hours analyzing Anthem’s books – said the company didn’t need to hike its rates as high as it claimed in order to keep its MLR above 70%. But after correcting the math, the actuaries said major – if somewhat lower – rate hikes were still necessary. While Anthem originally said it needed to raise rates in the individual California market an average of 25%, the actuaries said it only need to hike rates an average of 15%.

It’s impossible to know at this point whether Anthem intentionally fudged its original math, but keep in mind, this a company whose sole business is measuring risk and setting premiums. They should be better mathematicians. The actuaries found, for instance, that the company double-counted the impact of the aging, a central variable in calculating insurance risk. The company also over-stated the underlying trend of rising medical costs. Anthem now says it is withdrawing its proposed rate increases and will come back with revised numbers later this month.

But the actuaries’ report also included these bullet points.

* We have no concerns in how Anthem structures their rates
* We have no concerns in how Anthem makes area rating
* We have no concerns regarding Anthem’s use of underwriting
rating tiers.
* We have no concerns regarding Anthem’s age/gender slope for
making rates
* We have no concerns with Anthem’s use of or selection of
deductible leveraging factors
* We have no concerns with Anthem’s selection of lapse rate
assumptions. We question whether the currently proposed and
requested rate increases would results in comparable lapses. We
confirmed that these lapse assumptions were consistent with
Anthem’s recent lapse study.
* We have no concerns about the claims data used by Anthem in
projections, and were able to reconcile claims data to that shown in
their General Ledger.

In other words, Anthem screwed up enough that their proposed rate hikes were substantially overstated. But the company is not using bad formulas or misleading claims data to come up with their rate increases. So the actuaries report is clearly bad for Anthem, but not a death sentence.

Still, as it did earlier, the Obama Administration is using the Anthem case to apply pressure to the industry. Sebelius has called on governors and state insurance commissioners to examine the practices of Wellpoint, Anthem’s parent company, in all states. More reviews will likely happen and more “miscalculations” could be uncovered. Insurers are on notice.

This is part of Sebelius’s campaign to humiliate insurance companies into acting more responsibly until federal health reform is fully implemented by 2014. The Secretary already got major insurers to end rescissions and start covering kids up to age 26 on their parents’ insurance policies. She did so not by legally requiring insurers do so now, but by applying public pressure and capitalizing on insurers’ desire to display good will to HHS, which is currently writing the actual regulations that will put reform legislation into practice. As for Wellpoint – my guess is the company is desperately hoping some other insurer steals the spotlight soon.