When even denying coverage adds to profit for health insurer

Altadena resident Mike Freas was twice rejected for health coverage by Anthem Blue Cross because of a preexisting condition, forcing him into a costly state-run program intended to serve as the insurer of last resort for people turned away by the private sector.

Yet now he finds himself in the strange position of sending Anthem a check for about $500 each month. Why? Because it turns out that Anthem Blue Cross also quietly serves as the administrator of the state insurance plan.

“Isn’t that a conflict of interest?” Freas, 53, wanted to know. “By rejecting people for coverage who might cost them some money, but then running the state-subsidized program that these people have to go to, aren’t they having their cake and eating it too?”

It sure looks that way.

“This is what happens when public programs get privatized,” said Jerry Flanagan, who oversees healthcare issues for Consumer Watchdog, the Santa Monica advocacy group. “Insurers get a fee even after they issue people a denial.”

California’s high-risk insurance program serves no more than 7,100 people at a time, and as such accounts for only a small fraction of Anthem’s profit. In the first half of the year, Anthem’s parent, WellPoint Inc., reported net income of $1.3 billion.

But administering the program nevertheless represents a revenue stream for the company, which means it can indeed make money off those to whom it denies coverage.

Leslie Porras, a spokeswoman for Anthem, said the company follows all rules set by the state. She declined to get into the conflict-of-interest question.

California’s Major Risk Medical Insurance Program, or MRMIP -- pronounced “Mister Mip” -- was established in 1991 to address the problem of people with medical problems being shown the door by private insurers.

As I’ve noted in a previous column, the biggest problem with MRMIP is that it lacks the resources to provide coverage to everyone who needs it. As many as 400,000 Californians have been shown the door by private insurers for one reason or another.

Under the program, state taxpayers pay about 40% of the premiums to enroll people in individual plans offered by a handful of insurers. Anthem and Kaiser Permanente are the leading providers of coverage under MRMIP, giving Anthem a dual role in the program.

Premiums can run as much as 37% higher than market rates for similar individual policies because of the enrollees’ medical histories.

Meanwhile, each plan comes with a $75,000 cap on annual coverage, one of the lowest such limits among similar state programs nationwide. The cap essentially means that MRMIP is catastrophic health insurance that will be there for you except in the event of a catastrophe. Cancer treatment, for example, can easily top $100,000.

As Lesley Cummings, executive director of MRMIP, told me in June: “It’s actually quite comprehensive coverage, up to where it stops.”

Administration of MRMIP has been outsourced to Anthem since 2003, when the insurer was the sole bidder for the contract. But you won’t find any mention of that relationship in the latest MRMIP handbook distributed to program participants.

A 2006 report prepared by the state Managed Risk Medical Insurance Board says Anthem is paid “for eligibility determinations, enrollment services . . . premium collection and payments to insurance agents and brokers for application assistance.”

The report says Anthem receives a flat fee for processing enrollments and “is also paid a per member per month fee for ongoing administrative” costs.

An MRMIP insider said Anthem receives about $600,000 in state funds each year to help run the program.

Ginny Puddefoot, a spokeswoman for the state program, said MRMIP “is not an attractive book of business” for Anthem because of the program’s limited size and funding.

She said that Anthem “operates the program in accordance with the business rules established by the state” and that state officials regularly monitor the insurer’s performance “to ensure compliance with those rules.”

A spokesman for state Insurance Commissioner Steve Poizner declined to comment on Anthem’s dual role in the California healthcare market, saying only that the Department of Insurance has no control over MRMIP’s administrative contract.

Freas told me he wouldn’t have discovered Anthem’s administrative role if it wasn’t for a billing issue once his MRMIP enrollment was approved, requiring him to drive the other day to what he thought was the agency’s office in Camarillo.

The nondescript office turned out to belong to Anthem. Freas, who was diagnosed in 2006 with an intestinal disorder, said that when he handed his check for health coverage to a clerical worker, the worker acknowledged being an Anthem employee.

“I certainly felt a bit uncomfortable being denied by the same company that was enrolling me in a state program,” he said.

Even though Freas picked Kaiser as his MRMIP insurer, Anthem will still receive funds from the state for processing his checks and other administrative matters.

Is this the end of the world? No. But if nothing else, a private insurer’s role in running a public plan serves as a warning to all those who think a public option is the be-all, end-all of healthcare reform. The lines can get blurry, even with the most well-intended program.

“Anthem Blue Cross denied me coverage, forcing me onto a public plan, and now they still make money off me,” Freas said.

When it comes to healthcare, there’s apparently no limit to how absurd things can get.

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David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.