Just days after reporting a 51% first quarter increase, on Friday WellPoint (NYSE: WLP) shares plummeted nearly 9% to $53.80 (-$5.28). The price drop follows the company’s Anthem Blue Cross unit’s announcement on Thursday that it had withdrawn its planned rate hike on California policyholders.
State Insurance Commissioner Steve Poizner said that the company decided to forgo its planned May 1st premium increase after an independent audit determined that the insurer’s justification for imposing hikes as high as 39% was based on “errors in methodology.”
Last January Anthem sent individual policyholders letters notifying them that their rates would go up by as much as 39%. After a barrage of public criticism and a federal investigation, on February 13 the insurer agreed to postpone the rate adjustment until May 1.
Later that month the California Department of Insurance commissioned outside actuarial consultant Axene Health Partners, LLC (Axene) to do a report on whether Anthem Blue Cross’ filings met the State’s required 70%-minimum lifetime loss ratio—the percentage of claims paid relative to premiums collected.
According to the report’s Executive Summary, Axene found a number of errors in Anthem Blue Cross’ methodology used to justify the rate increase. The most material of those errors included “double counting” aging in the health care cost inflation estimates used to project the lifetime loss ratio and “overstating” medical trends used to project claims for known risk factors. Also, while most of Anthem’s products crossed the 70% threshold, its SmartSense plan was found to be out of compliance as it had spent only 67% on patients’ bills.
While Anthem Blue Cross claimed that errors made in its application were unintended, Insurance Commissioner Poizner said that he had always been skeptical. In a prepared statement, the Republican gubernatorial hopeful declared victory:
This is a great victory for California consumers. I'm pleased that California consumers will not face rate hikes of up to 39 percent. In late January, because I was highly skeptical of the rate increase, I ordered an outside review to ensure that Anthem's filing complied with state law. Anthem agreed to delay their increase pending this review. The independent actuarial analysis found numerous and substantial errors in their filing that would have led to massive and unjustified rate increases. We notified Anthem of these errors and they admitted to the mistakes.
Health and Human Services Secretary Kathleen Sebelius applauded the rescission as well:
Today's announcement is good news for the more than 800,000 Californians who could have been hit with massive rate increases and gives them some much-needed temporary relief.
“Temporary” could be the sticking point. On Thursday Anthem Blue Cross determinedly pledged to refile adjusted rates in the Individual market—“likely sometime in May.”
WLP shares traded up slightly to $54 (+$0.20, +0.37%) in after-hours trading on Friday.
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