The Blue Cross business model

It’s true, as Jonathan Cohn points out, that the nation’s largest health insurer, Wellpoint, has been “among the most hostile to reform.” And as unearthed by Ezra Klein, at least one investment bank states the reason clearly: “Should health reform fail, Wellpoint would be a primary beneficiary.”

You may not know Wellpoint’s name, but even if you don’t live in California, you may have heard of their California subsidiary, Anthem Blue Cross. Their rate hikes have been repeatedly spotlighted by the White House, and have been the subject of over a half-dozen inquiries.

The scrutiny comes with the eye-popping rate hikes, and with being the biggest, both in the nation, and in many states like California. But the scrutiny should go beyond the rate hikes to their overall business practices—and the broken health system that rewards bad behavior. To reinforce Ezra Klein’s point, they have perfected a business model based on collecting premiums from the healthy and avoiding as much as possible actually providing coverage to those who are sick.

It starts with their aggressive denial of people with pre-existing conditions—we have many stories of people being denied not just in their 50s but in their 20s, and even for relatively minor issues like heartburn.

Most controversially, Anthem Blue Cross of California had the most number of rescissions in the state, the odious practice investigating patients after a major claim for the purpose of retroactively cancelling a patient’s coverage–even if they have paid months and months of premiums–if they found an inaccuracy on the patient’s application regarding their medical history. They created even more of an uproar when they sent letters asking doctors to turn their patients about unreported pre-existing conditions.

The company also works to ensure that mostly healthy people come to them in the first place. They specialize in cheaper, “bare-bones” plans with high-deductibles or that leave out key benefits. At a recent Congressional hearing, Chairman Henry Waxman of California grilled Wellpoint executives about why the biggest increases were going to more comprehensive plans, including those with maternity coverage, with an effort to shift people into plans where consumer face more financial risk. As the committee staff report indicates:

“Internal documents suggest that WellPoint’s business plan includes moving consumers into less generous plans. This strategy appears to have three components. First, WellPoint’s highest rate increases seem to apply to their most comprehensive insurance plans. Maternity care is a marker for a more comprehensive package of benefits. A chart of proposed rates shows that WellPoint’s highest rate increases apply to the only two product families regulated by the Department of Insurance with maternity coverage. The chart also shows that for the most part, WellPoint proposed lower increases within specific product lines for the versions with higher deductibles than for the versions with lower deductibles.”

Anthem uses benefit design, but also marketing, to avoid older folks and get more than its fair share of young and healthy people—also called “cherry-picking.” A classic example is a product like “Tonik,” which is marketed to 19 to 29 year olds, and has higher cost-sharing and omits maternity coverage—the most likely need for coverage for young women. It was perhaps the only insurance product that has been mocked by The Daily Show.

With this and other strategies, the company has been able to send over $525 million from California policyholders to Wellpoint’s Indiana headquarters in just 2009. Wellpoint got over $4.2 billion in earnings since acquiring Anthem in 2004, according to reporting by Lisa Girion of the LA Times. This is despite an agreement with state regulators that the merger would not siphon California policyholder dollars to the out-of-state . Anthem Blue Cross waited out the three years of the agreement, and sent $950 million to the corporate parent the week after.

These practices, yielding these dollars, are why the company has been on the front lines of opposing health reform.

When Governor Schwarzenegger proposed health reform in California in 2007, other insurers were willing (with caveats) to consider living by new rules, like guaranteed issue. As the biggest player in the market, Anthem Blue Cross of California stood alone apart, investing $2 million in an opposition campaign. (My organization and others launched a counter campaign,, which continues today).

In the current federal debate just a few months ago, Anthem Blue Cross took the unusual step of sending misleading E-mails to their subscribers attacking the House health reform bill.

Other insurers have been ambivalent about health reform, which would mean more potential customers–but that includes sicker patients that they would rather not take, and more accountability and oversight over their operations. Health reform would mean a profound transformation for the industry: insurers competing on cost, quality, and customer service, rather than risk selection and avoiding sick people.

Anthem Blue Cross of California, and its parent company Wellpoint, has internalized the perverse and inequitable incentives of the current, broken individual insurance market: it thrives and profits from the status quo. The only surprise in the investment bank’s analysis that Wellpoint would be a primary beneficiary of reform failing was that it was stated so clearly.

Anthony Wright is Executive Director of Health Access California, a statewide health care consumer advocacy coalition of over 200 groups. This article has been re-published from the Health Access Blog.

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