Opinion ID: 2598249
Heading Depth: 1
Heading Rank: 19

Heading: Premium Rate Increase

Text: Anthem and BCBSKS allege the Commissioner's finding that the premium rate increases would be greater with the sponsored demutualization than without it is not supported by substantial evidence. Their assertion warrants a short review of this and related findings. The Commissioner found that due to rising medical costs, health insurance rates will increase whether or not the sponsored demutualization is approved, which increase she described as trend in the market. She also found that the sponsored demutualization would cause BCBSKS's premium rates to increase above trend and that the increases would be at least 6% to 7% greater than predicted increases without sponsored demutualization. More specifically, she found that in order for Anthem to increase the underwriting margin to 2.5% by 2005, its premium rates necessarily would be 7% higher than the premium rates required to achieve BCBSKS's projection of 0% underwriting margin by 2005, and would be 14% above trend. The Commissioner also found that Anthem's primary objective is to match or exceed its top competitor in underwriting margins and that its competitors have underwriting margins of 4.5% to 5%. In order for Anthem to achieve its goal of an underwriting margin of 4.5% to 5% by 2005, Anthem necessarily would need to increase premium rates significantly more than 14% above trend. In making her findings, the Commissioner gave substantial weight to the PwC report because, in the Commissioner's words, it is the only systematic, analytic review of the Kansas health insurance market. The Commissioner discounted the evidence presented by BCBSKS  the testimony of Professors Paul Feldstein and Henry Butler  on the ground that it centered on economic theories and the theoretical contestability of health insurance markets without linking the theories to actual Kansas premium rates. The Commissioner also discounted the evidence presented by the amici Kansas Medical Society and the Kansas Hospital Association  testimony of economist Carl Schramm  on the ground it was too general in scope and provided no analysis of the Kansas insurance market. The Commissioner also discounted as outside the scope of statutory review the testimony of Marvin Fairbanks of Stormont-Vail Healthcare about Anthem's handling of claims. Anthem and BCBSKS raise several objections to the Commissioner's findings, but focus on her finding that Anthem would be expected to reach a 2.5% underwriting margin by 2005, while by that same date BCBSKS would have reached an underwriting margin of 0%. They question the substantiality of the PwC report and the testimony of a PwC principal, Sandra Hunt, which they assert are the only evidence supporting the Commissioner's finding that Anthem would increase premium rates faster than BCBSKS. Specifically, they both contend that Section 6 of the report and Hunt's testimony rely on flawed assumptions, which makes the evidence speculative and conjectural, citing e.g., In re Providence-St. Margaret Health Center, 232 Kan. 787, 659 P.2d 199 (1983). As a PwC principal, Hunt led its team that performed the market impact analysis. She specializes in government health policy, statistical modeling, Medicaid managed care plans, and development of models for new health care delivery systems. She has 17 years of experience in health care economics research, including nearly 15 years as a consultant for the public sector and private industry. Hunt testified that the PwC projections were based on the assumption that Anthem, as a typical stock-owned company, has a goal of reaching a 3% underwriting margin by 2005, and that the 3% figure was derived from Anthem's IPO document. The PwC report states that BCBSKS's management has stated as its goal a return to underwriting gains ranging from 2% to 3% by 2007, and Hunt testified that there was documentary evidence for the statement. Anthem's 2-year accelerated underwriting margin goal was attributed by Hunt to pressure from stockholders to achieve underwriting gains, i.e., because it is a stock company, it would seek to achieve profitability sooner than BCBDKS, a mutual company. As she further explained in her testimony, the conclusion that Anthem would raise rates in the individual and small group markets 6 to 7% faster than BCBSKS is based on comparing a 0% underwriting margin for BCBSKS with a 2.5% underwriting margin for Anthem  notwithstanding the fact the PwC report shows that both of them would have goals of 2.5% margins  is based on her belief that Anthem's management would be more inclined to get to its goal quicker than BCBSKS would get to its goal. These opinions were joined by Kathy Greenlee, General Counsel for KID and head of the testimonial team. She testified that she believed Anthem had a goal of achieving underwriting margins in the range of 3%, not only because of its witnesses' testimony, but also because that was similar to Anthem operations in other States. She therefore characterized it as an expectation. She also felt Anthem was more likely than BCBSKS to achieve this goal because, as a stock company, it would have more incentive to reach the goal to satisfy shareholders. According to her, BCBSKS may have the goal, but they have not achieved that goal in the past. If they don't achieve that goal, the owners of that company will have a far different reaction than the owners of Anthem if Anthem does not achieve that goal. Greenlee stated that BCBSKS has not positioned the company to make profits in the past . . . they have run the company with a different philosophy. Anthem effectively cross-examined Hunt and Greenlee and attempted to show Hunt's opinion in particular was based on speculation because it was centered on the different inclination of BCBSKS from that of Anthem. Where Hunt used the word inclination, the PwC report couches the concept in terms of the difference between the underwriting losses tolerated by BCBSKS over the past several years and the industry standard goal of 2 to 3%, which Anthem reasonably may be expected to share. The PwC report states that BCBSKS has had underwriting losses for several years, that [u]nderwriting gains of 2% to 3% are a common goal of for-profit health insurers, and thus [i]t is likely that Anthem will expect a faster improvement in performance than would otherwise be required. Hunt's testimony about premium rate increases by Anthem centered on a greater urgency for Anthem to reach the 2 to 3% underwriting margin goal. The PwC report mentions Anthem's anticipated urgency but also concentrates on the difference between current operating practices of BCBSKS and Anthem. The PwC report states in its conclusions: It is likely that premium rates for BCBSK[S] will increase in the future regardless of a change in ownership status. However, it is also likely that premium rates will increase at a somewhat higher pace, or that provider payment amounts will be constrained, to earn underwriting gains that have not been required historically. . . . Overall, BCBSK[S] has had underwriting losses averaging 2% over the past several [6] years, with losses in 2000 reaching nearly 7%. The estimate for 2001 is an underwriting loss of approximately 3%. It is likely that Anthem will expect a faster improvement in performance than would otherwise be required, and market segments with large losses will see significant increases. . . . . Underwriting gains of 2% to 3% are a common goal of for-profit health insurers, and we would expect that premium rates in Kansas would increase by an amount sufficient to realize this level of gain. Compared to a steady state scenario of 2% underwriting losses, Individual and Small Group premiums are expected to be approximately 14% higher by 2005. Taking into account medical inflation and other components of premium increases, some market segments are likely to see premium increases ranging up to 20% per year for several years. For the small group market in particular, premium rates are estimated to nearly double current levels by 2005. . . . . In summary, it is likely that insurance coverage will remain available at current levels, but that premium rates will increase by 6% to 7% above the levels that might be expected in the absence of the Anthem purchase, with broad variation by market segment. Anthem and BCBSKS concede that when they attack Hunt's alleged assumptions, they are attacking her opinions that it was likely Anthem would reach the underwriting goal of 2.5% sooner than BCBSKS. We first observe that Hunt's testimony (both prefiled and live) and the PwC report  which contained her opinion of acceleration  came into evidence without objection by Anthem and BCBSKS. In fact, the PwC report and Hunt's prefiled testimony were introduced into evidence by BCBSKS. See Zurawski v. Kansas Dept. of Revenue, 18 Kan. App. 2d 325, 329, 851 P.2d 1385, rev. denied 253 Kan. 864 (1993) (an objection to evidence must usually be made at the time of the hearing and failure constitutes waiver of defect and so error may not be challenged on judicial review); K.S.A. 60-456(c) (Unless the judge excludes the testimony, he or she shall be deemed to have made the finding requisite to its admission.). We next observe that the admissibility of Hunt's testimony and the PwC report were not challenged as a point of error on appeal. While the failure of Anthem and BCBSKS earlier to object and later to challenge on appeal is not necessarily dispositive of the issue of whether substantial evidence exists, it does greatly dilute their argument that the report and testimony contain unsound assumptions. Second, the admissibility of the report and testimony was up to the discretion of the Commissioner. The record is unclear as to whether Hunt was testifying as a lay or expert witness. Through either scenario, however, because of facts demonstrating her background in the health insurance field and her knowledge of Anthem and BCBSKS, she was entitled to testify about her opinions. See K.S.A. 60-456(a) and (b); Hawkinson v. Bennett, 265 Kan. 564, 592, 962 P.2d 445 (1998) (Whether a witness, expert or layperson, is qualified to testify as to his or her opinion is to be determined by the trial court in the exercise of its discretion. That discretion is not subject to review except for abuse.). In Hawkinson, 265 Kan. 564, a layperson was allowed to testify about his calculations of loss of future profits over the objections of defendants which included, among other things, arguments that the evidence was too contingent, remote, and speculative. Anthem and BCBSKS cite Gas Service Co. v. Kansas Corporation Commission, 4 Kan. App. 2d 623, 641, 609 P.2d 1157, rev. denied 228 Kan. 806 (1980), for the proposition that allegedly speculative opinion testimony was, and should be, excluded. Gas Service, however, supports the Commissioner. The Court of Appeals did not exclude the testimony as speculative. Rather, after characterizing the issue as a question of fact, it found that the corporation commission adopted its staff's figures over those proposed by plaintiff. 4 Kan. App. 2d at 640-41. As a result, it was clear that the plaintiff's evidence was admitted, weighed by the commission, and simply found less persuasive than the commission's staff's figures. Once the Hunt testimony and the PwC report were admitted into evidence, it was up to the Commissioner to decide what weight and credibility, if any, to give to each. In Hawkinson, 265 Kan. at 592, this court held that the jury was free to give whatever weight, if any, it deemed appropriate to the challenged testimony on loss of future profits and how to calculate the loss. In the case at hand, the Commissioner determined that PwC performed the only systematic, analytic review of the Kansas health insurance market and, therefore, gave the report substantial weight. Third, under our deferential standard of review, we accept as true the evidence and all inferences to be drawn therefrom which support or tend to support the Commissioner's findings. We are not concerned with evidence contrary to her findings, but only the evidence in support of her findings. In addition to the above-mentioned testimony and report, we note the evidence establishes that in recent years Anthem has acquired a number of insurance companies. Testimony from Anthem's own officials demonstrate they have been successful in managing those companies to be profitable. According to the PwC report, Anthem's operating revenue and premium equivalent had grown from nearly $8 billion in 1998 to $11.8 billion in 2000 and, as of the date of the report, appeared on track to achieve $13.8 billion in 2001. All time periods show an operating gain. Overall, net income has grown from $172 million to $226 million, and may reach $285 million in 2001. Anthem's operating margin has also improved, from .7% in 1998 to 2.2% in 2000 and a reported 2.7% as of June 2001. The PwC report also reveals that a common goal of for-profit health insurers is underwriting gains of 2% to 3%. Furthermore, Anthem admitted that its first strategic objective is to meet or exceed the performance of its comparable competitors across several criteria, including operating margins, and that the operating margins of its comparable competitors average 4.5% to 5%. The evidence also discloses that BCBSKS's history, by contrast, has been more conservative. It has averaged negative 2% underwriting margins for the last 6 years. It may be fairly inferred from this evidence, and the evidence concerning Anthem's performance history and strategic objectives, that it is likely Anthem will expect a faster improvement in performance than BCBSKS would. BCBSKS additionally argues that the assumption Anthem would increase underwriting margins faster than BCBSKS is flawed because Hunt refused to take into account the Commissioner's authority to regulate rates, the elasticity of demand for health insurance, and the contestability of Kansas' health insurance market. Their latter two allegations are belied by the PwC report, which states: Increases in premium rates will be tempered by market conditions and the willingness of consumers to pay higher premiums. Premium increases could be mitigated by changes in benefit design or the number of people choosing to purchase insurance. . . . . It is possible that higher premiums could attract additional health plans to the Kansas market, resulting in increased competition. With regard to the Commissioner's regulation of rates, Hunt also testified: Actually, quite frankly, given the underwriting losses, particularly in the small group market, we would expect that the rate increases would be approved. In light of all the other evidence the Commissioner considered, we do not find this fatal to the Commissioner's findings. BCBSKS further asserts that Hunt refused to consider the effects of competition and adverse selection when forming her opinion about the transaction's effect on rates. However, as mentioned earlier, Hunt did acknowledge that increases in premium rates will be tempered by market conditions and the willingness of consumers to pay higher premiums. She also acknowledged that premium increases could be mitigated by the number of people choosing to purchase insurance, and it was possible that higher premiums could attract additional health plans to the Kansas market, resulting in increased competition. BCBSKS also faults Hunt for ignoring economic factors that would temper rate increases and cites the testimony of its own economic witnesses for the proposition that raising rates more rapidly than competitors is likely to result in policy cancellations and sharply reduce underwriting profits. As we have previously stated, the Commissioner did not credit the testimony of Feldstein and Butler on the ground that it concentrated on economic theories and the theoretical contestability of health insurance markets without linking the theories to actual Kansas premium rates. Finally, it should also be noted that making projections for insurance companies is not an exact science. As confirmed by BCBSKS's Vice-President of Finance, Donald Lynn: In my experience, a health care company's long-term five-year projections of future performance are inherently uncertain. Blue Cross and Blue Shield is no exception. Nevertheless, as the PwC report stated: While there are no clear guidelines available to predict precisely what will occur, indications of likely outcomes can be identified. As part of their argument about the lack of substantial competent evidence, Anthem and BCBSKS also complain that the Commissioner improperly shifted the burden of proof from the testimonial team to them. In support, they cite language from several of her findings, e.g., Anthem and BCBSKS provided no substantial evidence. A greater number of her findings, however, also provide that they presented no evidence or little evidence. More importantly, the Commissioner had concluded [ t ] he lack of evidence supporting a conclusion that Anthem will reduce medical expenses, change benefit design, increase membership or lower administrative expenses, necessarily points the analysis toward premium rate increase. This demonstrates, particularly in light of the PwC report and Hunt's testimony, that the Commissioner simply weighed the evidence and found that the evidence was more weighty and persuasive that the premium rates would be increased faster with the acquisition than without. She did not improperly shift the burden of proof. After examining the record in light of our deferential standard of review  where we do not reweigh the facts, try the case de novo, or substitute our judgment even if we would have found differently  we find the Commissioner's determination that the premium rate increases would be greater with the sponsored demutualization is supported by such legal and relevant evidence as a reasonable person would accept as being sufficient to support the decision.