WellPoint Raised Rates to Boost Profit, Waxman Says (Update3)

By Alex Nussbaum and Nicole Gaouette
Bloomberg News
February 24, 2010


Feb. 24 (Bloomberg) -- WellPoint Inc. sought to raise health insurance rates in California to boost profits and cover costs ballooned by executive pay and corporate retreats, U.S. Rep. Henry Waxman said, citing internal company documents.

In a hearing today that became a debate on stalled health- care legislation, Waxman said the Indianapolis-based company also may have manipulated calculations to justify the proposed 39 percent rate increase for Californians who buy their own policies. WellPoint Chief Executive Officer paid more than $9 million in 2008, said the proposal was driven by surging costs and a recession that forced healthy people to drop coverage.

Democrats are seeking an almost $1 trillion overhaul of the U.S. medical system, an effort complicated by their loss of a Senate seat in January. The disclosure since then of WellPoint's planned rate increase gave President Barack Obama a rallying point for the legislation, which he will push at a meeting with Democratic and Republican lawmakers tomorrow. Waxman said company documents proved the need for change.

"Corporate executives in WellPoint are thriving, but its customers are paying the price," said Waxman, chairman of the Energy and Commerce Committee, one of three in the House with jurisdiction over health care. "WellPoint executives may get richer but our nation's health is suffering."

WellPoint rose $1.13, or 1.9 percent, to $60.14 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 47 percent in the past 12 months.

Insurers Summoned

The House today also voted to revoke insurance companies' 65-year-old exemption from federal antitrust laws. The move would enable the Justice Department to more aggressively enforce consumer protection laws, said Representative Louise Slaughter, a New York Democrat. The Congressional Budget Office and Congressional Research Service have disagreed, saying the measure won't necessarily lower premiums.

Minutes after the WellPoint hearing, the Obama administration released a letter inviting Braly and the CEOs of insurers UnitedHealth Group Inc., Aetna Inc., Cigna Corp. and Humana Inc. to a March 5 meeting in Washington to discuss rising premiums. The administration was "eager to hear the justification for these increases and steps we can take to create a more stable system," Secretary of Health and Human Services Kathleen Sebelius said in the letter.

Obama earlier this week also proposed giving the federal government authority to block "unjustified" rate increases.

WellPoint paid compensation of at least $1 million apiece to 39 executives in 2008 and spent $27 million over two years on executive getaways, Waxman said, citing documents obtained by his committee.

The company lost $10 million on the individual-coverage market in California last year and was beset by doctors demanding 6 percent pay increases from the health plan, hospitals seeking 10 percent more and drugmakers raising prices 13 percent, Braly said.

Elephant's Tail

"The elephant in the room is the growth of health-care spending," Braly, 48, told lawmakers. "Despite the attention we've garnered in this debate, we are the tail on the elephant and we need to address the elephant."

Legislation Democrats are pushing would do nothing to remedy what drives higher premiums, she said. Illinois Representative Jan Schakowsky, a Democrat, pressed Braly to disclose her own pay -- $1.1 million in salary, stock compensation of $8.5 million, and a $73,000 cash payment.

"Now it makes sense that you need a premium increase," Schakowsky said.

"What I expected was not for you to come and lecture us about what we should put in our bill," said Schakowsky, who described the proposed premium increase as "so incredibly audacious at a time when people are suffering."

Smaller Average Increase

While some policyholders might have to pay as much as 39 percent more, some would pay less and the average increase would be 25 percent, Braly said.

A premium increase averaging 23 percent would "return California to target profit of 7 percent," a WellPoint employee told the company's chief actuary in an Oct. 7 e-mail, according to a memo released by the House committee. Other e-mails suggested the company "padded" its request in anticipation of having to scale it back under criticism, the memo said.

WellPoint had to decide "do we file with a cushion allowed for negotiations/margin expansion," said an Oct. 24 message, the House committee said.

The e-mails were written in the middle of the rate-setting process and came before Anthem, the California division of WellPoint, saw medical costs in California rise faster than expected, said Cindy Miller, WellPoint's chief actuary, in testimony before the panel.

No 'Core Solution'

Deals that the White House and Senate lawmakers cut with drug companies, hospitals and physician groups to advance their health overhaul left the measure "without the most-important part, the core solution for lower cost, higher quality health care," Braly said.

Bart Stupak, a Michigan Democrat, questioned Miller's claim that the company lost money on the individual market in California, saying that internal documents showed that the insurer "used five different methods of counting" when it was calculating profit.

WellPoint generated $4.75 billion in earnings last year, boosted by proceeds from the sale of its drug-benefits management unit to Express Scripts Inc. of St. Louis. The company recorded a profit margin of 7.8 percent last year, up from 4.1 percent in 2008, according to Bloomberg data.

Braly said she opposed legislation overhauling health care because it lacked an individual mandate to buy insurance and included age-rating bands, or limits on how much more older people would pay than younger people. That would significantly raise rates for younger people, Braly said.

Representative Phil Gingrey, a Georgia Republican, took the opportunity to call for a change of the system, then attack Democrats for their health plan.

"If it was a popular bill we would not be sitting here today," he said. "If it was a good bill, we would not be sitting here today."

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