Anthem Blue Cross' 39% Rate Increase

When I heard the news that Anthem Blue Cross intended to raise premiums by as much as 39% for Californians, I was a bit puzzled as to why such a hefty increase would be necessary.  When the reason was stated as "rising healthcare costs" I realized that Anthem Blue Cross was not being honest.


While it is true that healthcare costs do increase, those increases do not have any effect on the profits of an insurer.  Let me give an example that will help to explain this:


Dr. Jones and Dr. Smith are both medical doctors, sharing an office in Los Angeles.  They both charge $100 for a physical exam, with an additional $50 for x-rays.  Dr. Jones accepts all PPO insurance plans (including Anthem), but is not an in-network provider.  Dr. Smith also accepts PPO plans, but is in-network with Anthem.


Mary and Blanche are patients of Dr. Jones and Dr. Smith, respectively.  Both women are policy holders of Anthem Blue Cross and have PPO insurance plans.  When Mary sees Dr. Jones, her insurance is charged $100 for the visit and $50 for the x-rays for a total of $150.  When Blanche sees Dr. Smith her insurance is charged the same.


According to Anthem's Fee Schedule, they allow $60 for an office visit, paid at 100% and $30 for x-rays, paid at 75%.  This means that Anthem will pay $60 for the office visit and $22.50 (75% of $30) for the x-rays for a total of $82.50.  Since Dr. Smith is an in-network provider, he has agreed to accept Anthems fees rather than his own.  His $150 invoice is reduced to $90 (he writes-off the remaining $60) of which Anthem pays $82.50 and Blanche pays the remaining $7.50.  Since Dr. Jones is not an in-network provider, he accepts Anthem's payment of $82.50, but then bills Mary for the remaining $67.50.  He does not have an agreement to accept Anthem's fee schedule, so his fees are what he charges.  


Note that in both cases Anthem pays the same amount.


Now, let's assume that Dr. Jones and Dr. Smith both raise their rates by 10%.  This increase only matters to the policy holders.  Anthem does not raise their fees because doctors raise theirs.  In fact, they have limitations on how often a doctor may raise their fees.  For out-of-network doctors, the increase in their fees will be passed along to their patients.  For in-network providers, the increase in their fees must be written-off as they are still bound by Anthem's fee schedule.  Anthem agrees to pay $60 for an exam.  Whether an in-network provider charges $100 or $1,000 they still can only collect the $60 agreed-upon fee.


What this means is that Anthem blatantly lied when they claimed that rising healthcare costs were the impetus for their increase in premiums.  Under questioning from the legislatures, however, Leslie Margolin (President of Anthem) and her cronies changed their tune.  They claimed that due to the economic downturn many healthy individuals had dropped their healthcare coverage as it had become too expensive to keep.  Those people who needed the coverage because of existing medical conditions kept the coverage, but were now costing the company too much money resulting in $68 million in losses.


From the sound of it, it would seem that Anthem has a good argument for raising rates, but consider that with $68 million in losses Anthem still managed to pay $39 million in bonuses and spent another $27 million on executive retreats.  If these unnecessary bonuses and retreats had been curtailed, their losses would effectively have been reduced to $2 million.  Added to this, if their need for revenue was due to policy holders dropping coverage because they could no longer afford the premiums, reducing the premiums would have kept those policy holders, and possibly attracted more, resulting in increased revenue for the company, since by their own testimony many of those who had dropped their coverage were healthy and rarely used the coverage.


It seems that Anthem did just the opposite of what it should have done.  Rather than a) reducing spending and b) lowering premiums to hold on to policy holders, Anthem chose to a) spend wildly and b) raise premiums, which would result in even more loss of policy holders.


Now Leslie Margolin is surprised that the legislature wants the government to regulate insurance rate increases.  Go figure.