California health insurer Anthem Blue Cross canceled rate hikes of as much as 39% for thousands of California policyholders Thursday after state regulators said the plan was "seriously flawed."
The move came after a consultant to state regulators found that Anthem overstated future medical costs used to justify increases averaging 25% for many of the company's 800,000 customers with individual policies. Correcting the flaws could drop the rate hikes to an average of 15%, the outside analyst said in a report.
"There will be no rate increases at this point," Insurance Commissioner Steve Poizner said. "The application was in error. There were all kinds of methodological mistakes."
Policyholders welcomed the decision.
"It's wonderful news," said Denis Robinson, a San Fernando Valley lawyer whose rates were set to rise 26%. "I'm not OK with a rate increase that is so extraordinary, along with a promise that they may rise again within the year."
Anthem's planned rate increase provoked intense criticism from consumers, regulators and elected leaders in Sacramento and Washington, including President Obama, after the company began notifying customers in January.
After news surfaced of the planned March 1 increases, Poizner ordered an investigation and WellPoint agreed to postpone them. Last week, the company said it would further delay them. Based in Woodland Hills, Anthem is the largest for-profit health insurer in California and a unit of WellPoint Inc., the nation's biggest health insurance company by membership.
WellPoint acknowledged the errors in its rate filing, calling them "inadvertent miscalculations." Anthem, it said, would file new rate increases for individual policy holders in May, but a spokeswoman declined to say exactly when or indicate how large they would be.
"We think it is in the best interests of our customers and those seeking insurance coverage in California to refile our rates, taking into consideration healthcare reform law and the most recent cost and utilization information available," said Brian Sassi, president and chief executive of WellPoint's consumer business unit. "Our goal is to make healthcare reform work for our members."
The insurance industry has long argued that premiums are being driven up by soaring medical costs. Those pressures and the loss of younger, healthier policyholders in the difficult economy have resulted in Anthem losing money in the individual market, executives said.
WellPoint Chief Executive Angela F. Braly told investors this week that the prolonged delay in the California rate hikes has only made matters worse, even as WellPoint reported a 51% jump in earnings during the first three months of the year.
On Thursday, Sen. Dianne Feinstein, (D-Calif.), seized on the Anthem controversy to rally support for a bill she has introduced that would give the federal government new authority over insurance rates, traditionally the province of state regulators.
"The discovery of inflated rate increases submitted by WellPoint/Anthem Blue Cross demonstrates exactly why we need to give the secretary of Health and Human Services the authority to review rates and assure they are reasonable," Feinstein said. "This underscores the great need for transparency and accountability in the insurance market."
State lawmakers also cited the Anthem case as a further reason to tighten regulation of health insurance rates. Increases can only be blocked in California's individual market if insurers fail to spend 70% of their premium revenue on medical claims.
The state consultant on the Anthem case found that one of seven Anthem insurance products in the rate filing failed to meet the 70% threshold after correcting for its flawed methodology.
The report from the actuarial consulting firm, Axene Health Partners of Winchester, said that, among its errors, Anthem overstated medical costs by inflating the effect of aging. Reworking the numbers could reduce the average rate hike by 10.2%, it found.
Poizner said the findings raised serious concerns about the "underlying integrity" of the data, eliminating any chance of the higher premiums going forward. Poizner and other state leaders said they would closely scrutinize any subsequent rate-hike request.
"I think it's just the lull before the second storm," said Assemblyman Dave Jones, (D-Sacramento), who is seeking a change in state law that would require insurers to get approval before increases take effect. "Anything above zero at this point is terrible for California consumers."