WellPoint logoThird quarter financial results for WellPoint are available, and it doesn’t look good for policyholders. WLP reports 3Q profits of $1.53, significantly better than the expected $1.37. The number of persons covered continued to decline, down 1.5 million, 4.5% in the last year, largely from unemployment. Despite that huge decline, revenues were down only .7% because they jacked up rates. The medical expense pay out ratio was down 1.4% over last year at 81.1%, meaning that they kept more of their premiums instead of paying them out for medical expenses.

Like most financial companies, WLP has the ability to manage its reported income. For example, in this quarter, according to its 10-Q, the company recognized as income $112mn in reserves for prior periods that it now thinks it won’t have to pay. The company also wrote off $205mn in intangibles. The net effect was to reduce income by $93mn, about an 11% difference.

The bad news for policyholders is in the 10-Q, at 37, a section titled Cost of Care. WLP expects medical costs to rise dramatically over the next year:

While our cost of care trend varies by geographic location, based on underlying medical cost trends, we now believe our 2009 cost of care trend estimate to be 9.0%, plus or minus 50 basis points. This change … is driven by higher expectations for the H1N1 flu, increasing COBRA membership, and inflation in the price of prescription drugs.

WellPoint wants to please Wall Street, so will try to stay ahead of the trend line, which means much higher premiums. Those rising rates are already happening, and it is hurting small businesses. You might have thought this would be a problem for health insurance companies; maybe it would even help the public option. Unfortunately their lobbyists have somehow overcome the ugly facts and persuaded the famously fact-free Blue Dogs and enough wishy-washy moderates to weaken the public option.

It’s not a coincidence that WellPoint released its study of the impact of reform ahead of this earnings report. The company wants people to fear reform so much that they ignore the role of insurance companies in higher premiums The Wall Street Journal reinforces the fear:

In some states, such as Missouri, Wisconsin and Ohio, WellPoint says costs would more than double for average individuals and nearly quadruple for younger, healthier people. On average, the company says that 70% of small businesses could expect to pay higher prices as a result of the new legislation.

Here’s WellPoint’s explanation for rate rises in Ohio:

…[t]he proposed reforms eliminate or constrain many of the rating factors and practices currently allowed by law and utilized by the industry in these markets, which result in premiums sometimes varying significantly by the risk of the individual and group. Thus, certain proposed reforms will result in lower-risk individuals and groups facing increased premium costs post-reform and higher-risk individuals and groups facing decreased premium costs post-reform. Additionally, other market reforms will generally increase premiums for everyone regardless of risk.

WellPoint is saying that if it can’t use all those unfair practices to weed out the sick, it will reallocate premiums, and also raise prices. It turns out that the single most important factor is the strength of the individual mandate. The more people who are forced to buy insurance, the less the impact of the changes. The money we are currently dumping into this system isn’t enough. WellPoint says we have to add a whole bunch more, one way or another.

The alternative is for government to eliminate useless expense and force costs down.