Blue Cross Patients & Small Business Owners Demand Refunds in Wake of $4 Billion in Merger Costs

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Group Calls on Blue Cross and Regulators to Answer 10 Questions to Explain Rate Increases

Sacramento, CA — Patients and business owners attended a public hearing today blaming Blue Cross of California for breaking promises it made to not raise rates to pay for more than $4 billion in costs associated with its recent merger with Anthem and called on regulators to require cash refunds. Many Blue Cross enrollees have received two rate increase since the beginning of 2005, some as high as 50%, many without notification. The Foundation for Taxpayer and Consumer Rights (FTCR) submitted 10 questions to state regulators and Blue Cross officials that must be answered to show that rate increases were not caused by merger costs.

“Governor Schwarzenegger should look past the nearly $150,000 in campaign contributions he has received from Blue Cross and protect California patients who are struggling to afford their health insurance,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights. “This is an historic opportunity to pull the plug on unjustified rate increases — but it should not stop here, all health insurers should be required to justify their rate increases like auto and home insurers already do.”

Read the complete public testimony of Jerry Flanagan.

Prior to receiving regulatory clearance for its recent merger, Blue Cross‘ parent company, WellPoint, made legally binding commitments to state regulators not raise rates to pay for merger expenses which include at least $265 million in cash bonuses for company executives. The Department of Managed Health Care (DMHC) scheduled today’s public meeting to investigate rate increases following a request for an investigation made by FTCR. In a letter to the DMHC sent on April 18th calling for the investigation, FTCR cited widespread complaints of rate increases of 20%-30% and more.

Auto and property/casualty insurers have been require to justify rate increases to the elected Insurance Commissioner since Proposition 103 was approved by voters in 1988. Under Prop 103, the Insurance Commissioner must deny unfair, excessive or discriminatory rate increases. Though 26 states require some oversight of health insurance rate increases, no such requirements exist in California. However, the Blue Cross merger agreement gives explicit authority to the DMHC to assure that merger related costs have not been passed on enrollees.

As a result of skyrocketing profits, executive salaries, bonuses, administration and advertising, health insurance overhead costs have become the fastest growing component of health care spending. Recent mergers have resulted in an uncompetitive health insurance market which provides no incentives for efficiency. In California 7 companies insure over 80% of the population — many insurers have regional monopolies.

In recent months, patients and business owners around the state have contacted FTCR frustrated by massive rate increases to their Blue Cross policies. The group is conducting health care town halls throughout California with patients, business owners, doctors, nurses and hospital executives. A common theme of these meetings has been the need to rid the health care system of waste, inefficiency and profiteering and to reinvest savings to increase access to care.

“At a time when 7 million Californians — the majority of whom are working — cannot afford health insurance and countless more have been forced to cut back on coverage, we cannot to allow the nation’s largest insurer to break its promises,” said Flanagan.

Merger related costs and post-merger expenses:

* Blue Cross and WellPoint executives will receive at least $265 million in bonuses as a result of the merger. Including stock awards, total executive bonuses could top $600 million.
* Financing costs associated with the merger are approximately $4 billion.
* In April, 2005 WellPoint reported that post merger profits had increased 107% over the first quarter of 2004.
* WellPoint recently paid $185 million in cash to purchase Lumenos, a company specializing in high deductible and other “consumer driven” health plans.
* On top of multi-million dollar bonuses, company executives received big raises this year. For example, WellPoint President & CEO Larry Glasscock will receive a 15.5% raise in salary in 2005. Another WellPoint executive, Keith Faller, will receive a 20% increase in pay.

Among other questions, FTCR called on DMHC, WellPoint and Blue Cross to show that the companies had maintained adequate cash assets to cover post-merger costs and merger related expenses without the need for rate increases.

Key Questions for Blue Cross and DMHC:

1. Why are Blue Cross of California’s rate increases so much higher than the industry average [9-10%]?

2. What evidence has Blue Cross provided to DMHC that merger related executive bonuses were not paid by Blue Cross rate increases? What evidence has been provided to show that premium increase revenue was not transferred to WellPoint in order to subsidize merger related expenses? Will DMHC make this documentation public?

3. What evidence has been provided that Blue Cross‘ “practices and methodologies” for determining rate increases have not varied from pre-merger practices and methodologies? What are Blue Cross of California’s practices and methodologies” for determining rate increases? Will Blue Cross and the DMHC make this information public?

4. What evidence did Blue Cross submit to DMHC to demonstrate that merger related indebtedness incurred to finance cash requirements of the merger has not been included in post merger practices and methodologies for determining rate increases?

5. What actuarial documentation did Blue Cross provide to justify rate increases? Which DMHC actuaries review it? What was the result of that review?

6. What information did Blue Cross provide to DMHC to demonstrate that Blue Cross‘ administrative expense ratio has not exceeded pre-Merger levels? Will DMHC make this information public?

7. What documentation did Blue Cross provide to demonstrate that Anthem had cash on hand immediately prior to the closing of the merger that was adequate to provide for all costs relating to the merger? Will DMHC make this information public?

8. Recent announcements and actions demonstrate that WellPoint has sizeable cash assets on hand. For example, WellPoint‘s 107% profit increase, $185 million cash purchase of Lumenos and salary raises for top executives. What information has been provided to DMHC to demonstrate that WellPoint maintained adequate cash assets to cover these costs while paying for merger related costs? Will DMHC make this information public?

9. What documentation did Blue Cross of California provide to document that the multiple-charging of nearly 47,000 Blue Cross members in April was not the by-product of the merger, as the recent rate increases are apparently the result of the $4 billion in finance costs and $265 million in executive pay-outs associated with the merger? Will DMHC make this information public?

10. Will DMHC exercise its authority to audit Blue Cross‘ books? Will DMHC make this information public?

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The Foundation for Taxpayer and Consumer Rights (FTCR) is California’s leading nonpartisan consumer advocacy organization.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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