Health Insurer WellPoint Singing the Blues

The Wall Street Journal “Price Strategy Puts WellPoint in Bind” reports that the CEO of America’s largest health insurer, Angela Braly is having difficulty balancing shareholders need for profits with unaffordable premiums. To cope with rising medical expenses, WellPoint (WLP) sharply increased premiums. WellPoint lost 189K members in the first six months of 2008 and predicts 150K more will be lost by year end. Now neither shareholders nor policy holders are happy.

WellPoint’s membership loss story parallels UnitedHealth Group (UNH) membership losses, with some interesting twists. Premium increases had to be more dramatic because its increased medical costs took WellPoint by surprise. “Lengthy consolidation of old claims-processing systems” delayed claims processing and the revelation of increasing medical cost trends.

Another surprise was that high deductable, consumer driven health plans did not behave as envisioned. Employers were supplementing the high deductable plans with employer funded health savings accounts, making the deductables irrelevant from the employees’ perspective. Employees did not curtail their use of medical services in these plans as planned. WellPoint’s response was to dramatically raise the premiums for high deductable plans.

Unfortunately, the history that created WellPoint cannot be undone. WellPoint is an amalgamation of several formally non-profit Blue Cross plans converted to for-profit and merged. Does WellPoint’s origin convey upon it a certain degree of public mission in a manner similar to the Fannie Mae (FMN) and Freddie Mac (FRE)? Does WellPoint’s increasing dependence on Medicare for membership growth also carry an implied “contract” to forego some profits and provide lower premiums?

I think the GSE precedent applied to private health insurers is becoming more relevant every day. Both WellPoint and UnitedHealth are steadily shifting from “at risk” business to becoming plan administrators for the self-insured corporations and feeding off the government Medicare and Medicaid trough. When companies become especially heavy feeders from the government trough, they take on an implied social responsibility. Shareholders who refuse to acknowledge this are naive.

The United States is the only “first world” country that does not provide some form of national healthcare. Instead we “license” the work to private health insurance companies. Should these private health insurers pay a price for the government giving up its right to provide national healthcare or national health insurance? Should that price be the elimination of medical underwriting, community rating, coverage standards and premium caps?

Shareholders need to start viewing private health insurance companies as utilities; safe, low margin, slow growing businesses. Private insurers need to refocus themselves into public servants. This will become the new reality, regardless of which party wins the White House.

Disclosure: Author is long FNM, FRE and UNH.

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