By now, we’ve all heard the excuses that Wellpoint, Inc. has given for hiking premiums up to 39% for its Anthem Blue Cross of California customers who can least afford it – those in non-group plans, as first reported in the Los Angeles Times.

It’s not our fault, the company says, rising medical costs are forcing us to raise premiums.  Healthy people are dropping coverage so sicker people are left, requiring drastic rate increases to cover their medical claims.

Wellpoint, Anthem’s extraordinarily profitable parent company, is blaming these large rate hikes on the so-called “death spiral.”  In a nutshell, here’s what that is:  Insurers are supposed to spread risk.  All policyholders pay premiums and insurers pool the money to pay for those who incur medical costs.  In a death spiral, as medical costs rise, pushing up premiums, healthier people who don’t need much medical care leave the pool until only sicker customers remain.  Insurers say they are forced to charge these customers exorbitant premiums to cover their high medical costs, and the vicious cycle continues as more customers leave. 

We can’t accept Anthem’s reasons as true without knowing the underlying facts.  Insurers can split up pools of individual policyholders however they want.  They may intentionally plunge certain blocks of their business into a death spiral by isolating aging customers or those with high medical costs in a pool.  They don’t add new, potentially healthier customers to these pools to spread risk, and they refuse to offer customers in the pool different policies that they offer new or healthier customers.  In industry parlance, they “close a block” of business.

The effect of this common practice is that sicker or older (i.e., less profitable) customers face rapidly rising premiums until they eventually are driven out of the insurers’ plans.  (Most state laws prohibit insurers from canceling sicker customers outright.)  It’s just another way that insurers cherry pick.

Jonathan Cohn of The New Republic has a nice, in-depth description of this practice.  Karen Pollitz, of the Health Policy Institute at Georgetown University, told the Milwaukee Journal Sentinel:  “These practices persist because they are amazingly invisible.” 

California law requires insurers to notify regulators when they close blocks and to offer customers comparable policies or pool the blocks with other “appropriate” blocks.  But it’s not clear if the rules are being enforced or evaded.

Wisconsin is trying a seemingly simple solution.  The state recently enacted a requirement that insurers allow policyholders to change to a different plan upon renewal without imposing new pre-existing condition exclusions or new medical underwriting based on health status.  In effect, they cannot close a block.  (It’s in the state’s budget act at section 3174, page 592).

The reform bills in Congress would stop the death spiral practice by requiring insurers to pool all non-group market customers together.  But for the millions of people soon to be hit with double-digit premium hikes, we need regulators to act now to stop insurers from spiraling their customers right out of coverage.