Anthem Blue Cross Life and Health Insurance Co. this week began raising its rates for small business customers, despite objections from the state Insurance Department that the hikes are “excessive” and “unreasonable.”
Beginning Monday, Anthem began raising its small group health insurance policies by an average of 9.6 percent, rejecting the recommendation of Insurance Commissioner Dave Jones that it should lower its rates by 2.3 percent instead.
Jones said there was little justification for the rise, especially at a time when the company is generating a 25 percent return on equity from its California insurance lines.
Thanks to cumulative back-to-back rate hikes, Jones said, some small businesses have seen their insurance rates rise nearly 23 percent over the past 12 months. The average increase has been 16.5 percent over two years, he said.
“These ongoing and excessive rate increases are simply unsustainable, as many small businesses struggle simply to survive," Jones said.
Anthem spokesperson Darrell Ng responded that the "rate increases in the small group market are not unique to Anthem, but rather represent an economic reality faced throughout the entire industry as health care costs continue to escalate faster than our state’s economy as a whole."
Ng said that by law the company has to spend the vast majority of its income from premiums on medical claims.
"In the event our estimates of medical costs are not accurate, refunds are given to our customers,” he said. He added that the firm's profits are much smaller than the return on equity that Jones mentioned.
But the rate hike may be enough to impel some of those customers to seek other forms of insurance, including state-maintained insurance exchanges, which are being created as an alternative to traditional private insurance.
The rate hike will initially affect 7,000 small business groups -- representing about 45,000 customers -- whose policies renew between now and June. By the end of the year, the department estimates a quarter of a million Californians may be affected.
In its filings with the department, Anthem blamed the increases on projections of future rises in insurance claims and utilization, as well as rising health care reform fees.
But actuaries at the Insurance Department accused Anthem of overestimating future claims at a time when usage of health care is on the decline and health care inflation is running at less than 4 percent. And they said the company is charging its customers for federal fees and taxes that the government will not begin collecting until 2014.
In fact, the government has not even determined how much some of those fees and taxes will be. Insurance regulators say they are not aware of any other firm that is adding those fees and taxes to its current pricing.
In a conference call with Wall Street investors in January, the top executives at Wellpoint Inc. (NYSE: WLP), Anthem’s owners, said the chief factors impacting its expenses this year are lingering costs related to its acquisition of Amerigroup health care as well as its decision to set aside $300 million for future growth -- two items that are not related to rising medical expenses.
The executives projected a steady increase of earnings of 10 to 14 percent through 2017. But they said they would continue to exert “pricing discipline” on small group customers -- typically businesses with less than 50 employees -- with the idea that as many as half of them might migrate to the state insurance exchanges.
Since Wellpoint is participating in the exchanges, it expects to keep getting indirect business from those small groups, with less risk.
“We do feel that over time, [the small groups leaving Wellpoint] will be more than offset with the opportunities we have in the exchanges,” said Ken Goulet, who heads Wellpoint’s commercial, individual and exchange business.