Dear Secretary Sebelius:

 

Reading through your last two letters to WellPoint, it seems like the crux of your argument is that a company that made $2.7 billion in the fourth quarter alone has no business raising premium rates on customers buying their individual product in California. Leaving the premise of your argument aside, we’re going to start with a quick fact, and then get to our point. The $2.7 billion earnings number for the fourth quarter you’re using includes a gain on the sale of WellPoint’s PBM to Express Scripts. Excluding that, the real earnings for WellPoint in the fourth quarter were $536 million. But never let facts get in the way of a good argument, I’ve always said.

 

Here’s our point. Pfizer made $3.8 billion in the fourth quarter, adjusted for one-time costs related to the Wyeth deal. Johnson & Johnson made $2.8 billion (excluding charges) in the fourth quarter. Where are their letters? When will the Congressional hearings with the CEOs of their companies be scheduled? Companies like Pfizer and Johnson and Johnson make more in a quarter than WellPoint makes in an entire year. We’re assuming you’ve just been tied up on other things, and those letters are forthcoming. We’re eagerly looking forward to them.

 

A couple more details while we’re chatting. The 39% rate increase you cite in your letter is the highest single rate increase the reporter who initially wrote the story could find. It is not the average rate increase that WellPoint’s 800,000 individual customers in California will receive. Second, one of the newer reasons why individual rates are rising this much is because of the weakened economy. In this environment, it doesn’t make sense for a younger healthier person that is strapped for cash to continue paying their health insurance premium, whereas an older sicker member that frequently uses health care services will do everything they can to try and maintain coverage. So as younger healthier members drop out, the risk pool deteriorates, and prices rise as a result. That is why it isn’t just WellPoint raising rates in California. Blue Shield of California, Aetna Health Net, UnitedHealth and every plan with an individual product in California are all raising rates, too.

 

There’s no question the individual market in the country is broken. But you’re wasting time fighting a symptom of the disease, rather than the root cause. I’m sure WellPoint would be happy to provide a full summary of how often they’ve been asked by hospitals for rate increases of more than 40%, and the hospitals I’m sure would be happy to provide detailed information on how much money they lose serving Medicare and Medicaid patients each year, which is a major reason why they need to increase commercial rates so much.

 

You’ve also asked for an accounting of how much of the individual premium goes to medical costs versus profit and SG&A. As you review that information, keep in mind the enormous broker commissions that health plans are forced to pay to sell the individual product. California law requires that health plans spend at least 70% of premiums on medical costs, something WellPoint will have no difficulty complying with, considering the losses they have incurred on certain individual products in California, including a HIPAA guaranteed issue product ($58 million) and a high risk pool ($10 million). If you really wanted to have an immediate impact on the cost of individual policies, you might want to consider setting a cap on broker commissions. Brokers make an inordinate amount of money selling individual plans, and by reducing commissions, the cost of an individual policy would immediately drop by 10-15%. Brokers wouldn’t like this, of course, but travel agents weren’t happy with the introduction of Orbitz, and stockbrokers didn’t like it when the SEC made fixed commission rates illegal in 1975. Both travel agents and stockbrokers lived.

 

The position of Secretary of Health and Human Services has generally not been a political position, and it shouldn’t be. Your actions are troubling, because they have a decidedly political tone to them. We probably don’t have to remind you that the last time you took an overtly political position, it didn’t work out so well. (Back in October 2009, Sebelius sent a letter to Humana demanding that they stop sending letters to seniors informing them that if the health reform legislation passed, their Medicare premiums would rise and their benefits reduced. After a lot of back and forth, Sebelius was forced to retract her demands after it was determined that what Humana said was factually correct; moreover, Humana also has a 1st Amendment right to communicate with their customers).

 

You were an insurance commissioner once, and you understand all of the issues that WellPoint and the other plans in California are facing. That’s why we know this is all just political  grandstanding. Coming back to your initial premise, the profits generated by a company mean nothing in isolation. It only means something in the context of the revenues generated. In WellPoint’s case, its net margin was 3.6% in the fourth quarter.

Pfizer’s net margin was 23.2%. Willie Sutton robbed banks because that’s where the money is. If you want to fix health care, you have focus on where the dollars are spent. So it may feel good to raise a firestorm about WellPoint’s individual pricing, but like much of the health reform legislation proposed by the Democrats last year that did almost nothing to control costs, it won’t accomplish much in the end.

 

Sincerely,

Carl McDonald

Oppenheimber & Co.