WellPoint explained why it wants to increase rates as much as 39 percent for individual insurance at its California subsidiary, Anthem Blue Cross, in a letter to HHS Secretary Kathleen Sebelius.
The company said it had lost millions of dollars in the individual health insurance market in California this year, and gave the following reasons for the rate increase.
1. Overall growth in medical inflation. Inpatient and outpatient medical costs in California are expected to rise by 10 percent in 2010, driven primarily by higher reimbursements to hospitals, while pharmacy costs are expected to grow by more than 13 percent.
2. The individual insurance market is unpredictable. Because the individual market is the last resort for people who cannot access group health insurance or government plans, it has a high "churn" rate, with the average policy-holder staying in the market for about three years. This makes it hard to predict costs.
3. Individual insurance-holders have become less healthy. As the economy worsens, individuals who do not need health services tend to end their coverage, leaving behind sick people who know they will need their coverage. These remaining policy-holders generate higher costs on average, requiring higher rate increases.
4. Out-of-pocket charges stay the same, even as overall costs rise. If a member does not change insurance plans, deductibles and co-payments typically remain the same after renewal. This means that higher medical costs can only be reflected in premium increases.
5. Individual policy-holders are moving to high-deductibles. More individual policy-holders are moving to high-deductible policies because they require lower premiums. As a result, this group was able to whittle down their premium increases to 2 percent in 2009, compared with a 13.8 percent increase overall. However, while Anthem was earning 2 percent more in premiums from these policy-holders, its average claim per member increased by 8 percent.
6. Individual policy-holders are getting older. Many individual policy-holders are aging, which means they are entering higher age brackets that automatically call for higher premiums.
7. Anthem loses money on people in the state high-risk pool. Anthem's PPO is the only statewide option in California's high-risk pool, which is made up of people who cannot get commercial insurance due to their medical conditions. The state requires the high-risk pool to absorb part of the costs of these individuals.
Read WellPoint's letter to Kathleen Sebelius (pdf).