Deal Breaker?

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Calif. Blues plan investigated for violating deal

Modern Healthcare

California regulators are investigating whether Blue Cross of California violated a legal commitment by raising premiums to fund a mega-merger that last year created the nation’s largest health insurer.

The $16.4 billion marriage between Anthem and Blue Cross‘ parent, WellPoint Health Networks, was fraught with controversy because it carried $4 billion in merger-related costs, including an estimated $265 million in executive bonuses (June 14, 2004, p. 8).

California Insurance Commissioner John Garamendi had blocked the merger until the insurers signed a sworn affidavit in November 2004 agreeing not to pass along those costs to California consumers in the form of higher premiums or benefit reductions (Nov. 15, 2004, p. 10).

But now, officials with both the state Department of Insurance and the state Department of Managed Health Care said they were looking into complaints by Blue Cross policyholders who this year have been hit with higher-than-usual rate increases, including some allegedly as high as 50%.

“We’re moving forward quickly” with an audit of Blue Cross‘ rate hikes, said Lynne Randolph, spokeswoman for the managed healthcare department, which oversees about 90% of the insurer’s business. “If their premium increases are substantially above their medical cost increases, then that’s something we’d be very concerned about.”

The Insurance Department, which has jurisdiction over the remaining 10% of Blue Cross‘ business, also is “thoroughly investigating” the matter, said spokesman Byron Tucker. “We’re not just taking the company’s word for it; we’re going to test the validity of their statements,” he said, adding that if any portion of the premium hikes is determined to be linked to the merger, the rates will be rolled back. “The department would not look kindly on any violation of an agreement brokered by Commissioner Garamendi,” he said.

Blue Cross spokesman Michael Chee said the rate increases were “absolutely not” related to the merger, but instead reflect the rising cost of medical care, drugs and technology paired with growing utilization by members.

Only consumers with individual policies received premium hikes, which averaged 13%, Chee said. About half of the insurer’s 850,000 individual policyholders saw rate increases of 15% or less, Chee said. He could not say how many policyholders received higher increases but added that no one saw their rates rise more than 23%.

“Our rate-increase request was filed and approved by the Department of Insurance in January,” Chee pointed out. While California law does not require prior approval of insurers’ intended rate hikes, Garamendi’s agreement with WellPoint gave state regulators the authority to specifically review and reject Blue Cross‘ rate requests.

The Foundation for Taxpayer and Consumer Rights argues that the insurer’s latest premium hikes far outstrip the industry average of about 10%. The Santa Monica, Calif.-based advocacy group last week sent letters to both Garamendi and Gov. Arnold Schwarzenegger, profiling-and demanding refunds for-Blue Cross members who have been hit with rate increases of 23% to 50%.

Based on consumer feedback, “there is evidence that the latest rate increases are higher than (those of) other insurers and higher than what Blue Cross had imposed before the merger,” said foundation advocate Jerry Flanagan.

Flanagan said the current controversy underscores the need for a law requiring California health insurers to obtain state approval prior to raising their rates. Twenty-six states currently have such laws, he said.

The foundation sponsored legislation in 2003 that would have created a prior-approval process in California, but the bill was killed by the state Assembly amid strong opposition from insurers, including Blue Cross.

Consumer Watchdog
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