How Raising Premiums Can Backfire: WellPoint Edition

(MoneyWatch)  Squeezed by inexorably rising medical costs and shrinking profits, insurers like WellPoint have tried to compensate by hiking premiums to stanch the bleeding. I've argued previously that this strategy amounts to hounding a shrinking customer base with higher prices, as premium hikes drive more people out of insurance plans altogether. Lo and behold, that seems to be exactly what's happening, according to the WSJ.

In the first six months of this year, WellPoint lost 189,000 members in the business and individual plans it insures -- the most lucrative part of any health insurer's business -- and expects to shed another 150,000 by the end of the year. And yet Wall Street remains unimpressed with the company's efforts to restore profitability, with WellPoint shares still down about 42 percent since the beginning of the year.

In particular, WellPoint is angering business customers with big premium hikes in its high-deductible health plans, which are supposed to offer employers a break on monthly fees while shifting supposedly non-catastrophic healthcare costs onto their workers:

One WellPoint plan now seeing big price increases in some states is its flagship high-deductible product, called Lumenos. Company executives say they had underestimated the extent to which the money employers put in companion savings accounts to help workers pay for those deductibles encourages spending on health-care services that the plan was originally designed to brake.

"It used to be a good deal, but now some of my clients are getting 38% rate increases, and that hurts," says Jeff Miles, a California employee-benefits consultant.

Richard Taw, a Los Angeles cardiologist whose medical practice has four staffers, decided against switching to a Lumenos plan after learning premiums would jump 32%. He is staying with his Blue Cross of California plan from WellPoint, which has a $2,400 deductible per person. Its premiums rose 20% at the start of July. "It was a big surprise without any real explanation," he says.

The problem here is twofold. First, high-deductible plans and health-savings accounts were sold as a way of making individuals more cost-conscious about their healthcare, not simply as a way of making them pay more. WellPoint, however, seems to be losing money on the plans specifically because many employers have balked at cramming further cost-shifting down the throats of their employees.

Second, of course, is the fact that even employers who do force workers to bear more costs have simply shifted healthcare costs into the future, since people who have to pay more for doctor or hospital visits often just put them off for as long as possible. Although that's presumably sometimes justified, in many cases it worsens chronic health conditions like diabetes or kidney disease, which then cost much more down the line.

As I never tire of pointing out, insurers are in a box here. They've effectively reached the limit of their decade old strategy of raising premiums just fast enough to guarantee a profit over rising medical costs. But they aren't making great strides in finding alternative business models, either. No wonder Angela Braly looks distinctly uncomfortable these days.

Image via Flickr user VirtualErn, CC 2.0