Managing Healthcare Costs: Wellpoint

Reuters published an excellent and scary article this weekend about Anthem/Wellpoint routinely targeting those with newly diagnosed breast cancer for investigation and possible termination of their coverage. The article is replete with multiple case studies of women forced to pay out of pocket or delay care while they fought with Wellpoint.

Wellpoint suggests that its efforts to find 'cheating' and kick sick patients off its insurance plan is part of its responsibility to prevent fraud and lower the cost of health care. There is some truth to this - if the sickest lie to gain voluntary insurance, it raises the cost for all. The truth is, though, it's always less expensive to care for a healthy population than to care for a sick population.

In some ways, this is old news. In 2008, Wellpoint paid California a fine of $10 million and agreed to resume coverage for almost 1800 it had kicked off the plan. (search for "cancellation" to find the story within this Wikipedia entry).

Health care reform will outlaw these practices, and the Reuters reporter suggests we need more vigorous regulatory enforcement. I agree - but I don't think that goes far enough.

We need
(1) Universal mandate - so that everyone chooses health insurance - not just those with illness. We can't make health care affordable if only those with adverse risk choose to be in the "pool." Health reform has this, although many worry the mandate might be weak enough than many healthy people will continue to opt out.
(2) A community-wide reinsurance pool so that exceptionally expensive cases can't threaten the financial viability of a health insurance plan. Katherine Swartz suggested an approach that would do this in 2003 (here's a link to an RWJ interview with her.)

Sick people are very expensive to care for, and that won't change. Rather than just setting up regulations to make it more difficult for insurers to shirk their responsibility, we should make structural reforms to make it less profitable to discriminate against those who need insurance most.

Angela Braly, CEO of Wellpoint, defended individual rate increases at Anthem of California before Congress today , She said that increased premiums in the individual and small group market were caused by increases in the cost of health care and healthier subscribers dropping their insurance. When NPR ran the story, the highlight was that she recited her 2009 compensation. For the record, she stated that her compensation included $1.1million salary, $70,000 performance bonus, and stock options valued at over $8 million.

Robert Reich, former Labor Secretary, has an op-ed in the New York Times decrying the health industry entitled “Bust the Health Care Trusts.” He notes the concentration in the health insurance industry, where “90% of the insurance markets in 300 metropolitan areas are ‘highly concentrated.’” Reich reminds us that the five largest health insurers made profits of over $12 billion last year, and supports the repeal of the McCarren-Ferguson Act, which exempts insurers from federal antitrust scrutiny and makes them subject to state regulation. The House voted to scrap McCarren-Ferguson earlier today.

It’s hard to be favor of 39% rate increases – and there certainly are instances where health plans with little competition have enriched themselves at the expense of public good. But there is a lot of demagoguery going on here.

· The Wellpoint CEO’s salary and bonus are relatively small for a company of this size. The stock grant makes total compensation appear large – but the stock grant dilutes the value of shareholders –and is not paid out of ‘health care dollars.” Executive compensation is easy to despise, but this expense represents a tiny portion of all health care expenditures. The really costly issue is the “friction” in health insurance and provider payment.

· The problem of the healthy dropping out of health insurance is real and worrisome. This is called a ‘death spiral,’ where soaring costs make the healthier people drop out – causing sequential increases in premium expenses, fewer people insured, and higher illness burden of the insured population. Paul Krugman wrote about this on Friday.

· Between 80-90% of all health care premium goes to pay those who deliver health care. We often focus on the 10+% of administrative costs, since it’s easy to oppose administration and bureaucracy. But most health care inflation comes from the health care delivery system (and in the US, the biggest issue is cost per unit, not utilization.)

· We face both insurer consolidation AND provider consolidation. In an environment where health plans must have virtually all providers “in network,” many provider organizations have been able to get substantial contractual rate increases. A market needs only a few viable health plans to have competition on the insurance side, and there are only a few markets where there are not multiple competing health plans The real challenge is how to promote meaningful competition on the provider side.

The Anthem rate increases in California are painful and represent a failure of social policy. We need structures to allow real pooling of risk among small groups and individuals. But keeping the healthy people in the plan is critical – and no one has a better idea for this than an individual mandate. And the public debate seems to omit the role increased provider payments play in increased insurance rates.