WellPoint May Replace Goldman as America’s Newest Punching Bag

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by: Raymond Chung, CFA

Just when you thought that Goldman Sachs (NYSE:GS) had won the title of “America’s Most Demonized Company,” Wellpoint (WLP) decides to jump into the fray. While Goldman demonstrated sensitivity and tact by giving Lloyd Blankfein a $9 million non-cash bonus, Wellpoint’s Anthem Blue Cross of California is expected to increase some individual health plans by 30 to 39 percent. Similar increases are also expected in Indiana, and Anthem Blue Cross and Blue Shield has filed for a 23 percent rate hike in Maine. And for those who are not concerned because they have employer-based or group coverage, the insurance companies have not left them out. Healthcare insurance analysts predict 10-20 percent increases for this segment in 2010.

Rate hikes aside, the big consequence of these actions is that all other health insurance companies can thank WellPoint for giving new life to what might have been a dead issue in Washington D.C. -- healthcare reform. Had WellPoint prudently raised premiums, the company could have steered clear of controversy. Now, Health and Human Services Secretary Kathleen Sebelius has asked the heads of five major health insurance companies to meet with her on March 3. If some of the examples the San Francisco Chronicle has reported are true, the pendulum may have swung back in favor of the government. Below are some excerpts.

Bay Area resident Mary Deen said Anthem Blue Cross raised her rates from $134 a month last year to $263 a month - a 96 percent increase. Deen, who is self-employed, tried to get answers from the company but was given the generic excuse of higher medical costs. ‘It doesn't seem fair my increase is so high and I've never filed a claim,’ she said.”
California physical, occupational and speech therapists are also taking issue with Anthem. The therapists said the insurer cut their reimbursement rates by 30 to 50 percent on Feb. 1.
When one looks at WellPoint’s rationale for raising premiums compared to these examples and others not listed, its main arguments may not hold water.
First, WellPoint should not cite losing the more profitable, healthy customers because of high premiums as one of its reasons for the latest round of price increases. If WellPoint unfairly prices healthy customers like Mary Deen, then the company should not be surprised if she opts to buy a cheaper plan or leaves the company for a competitor. Rates are affordable and competitive elsewhere for customers like her. Second, WellPoint should not give the illusion that it has no influence over the cost of care. As attested by the above quote, the company clearly can wield some power when it chooses to.
Too bad there is not a tradable security for healthcare costs. It might actually give gold a run for its money as the most bullish sector over the last 10 years. All kidding aside, WellPoint has exercised poor business judgment at a time when scrutiny is high. More headlines about large premium increases will only r-energize the health care reform debate, and potentially cement this issue as a permanent fixture in U.S. politics.
Yes, WellPoint can justify its increases with a multitude of reasons, but the truth is the company and the industry may be due for a huge overhaul. Any business that depends on yearly double-digit price increases, much less increases of a 20-30 percent magnitude, just isn’t sustainable.

Disclosure: No positions