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Probe Creates New Pains for UnitedHealth

Melissa Davis

OKLAHOMA CITY -- Now, UnitedHealth (UNH Quote - Cramer on UNH - Stock Picks) has another major headache.

Already hurt by falling enrollment and rising medical costs, the giant health insurer learned on Wednesday that it faces a massive government investigation as well. New York Attorney General Andrew Cuomo has accused the company of using its popular Ingenix database to fraudulently lower the industry's costs for out-of-network care.

Cuomo also has subpoenaed 16 other major health insurers, saying that they participated in an ongoing scheme -- dating back a decade -- that has cost consumers "hundreds of millions of dollars" so far.

"Ingenix is at the center of it," Cuomo declared in a press conference on Wednesday. And "UnitedHealth owns Ingenix ... That's a gross conflict of interest."

Until now, Ingenix had been winning loud applause. Wall Street has long embraced Ingenix as the small UnitedHealth division that always posts big profits regardless of the industry environment.

To be sure, Ingenix offers some wildly popular services. The company collects a massive amount of information on health care costs and quality, for example, and then packages it in a way that makes money.

In this particular case, Inegnix was collecting cost information from health insurers so that it could establish "reasonable and customary" rates for certain services -- such as routine office visits -- and then sell the results back to the companies. Health insurers across the country, including heavyweights like Aetna (AET Quote - Cramer on AET - Stock Picks) and WellPoint, then used that data to determine how much they should reimburse customers who had racked up out-of-network bills.

Following a six-month investigation, however, Cuomo declared that system broken and in serious need of repair.

For starters, he suggested, the insurance companies that supplied information to Ingenix often manipulated that data first. After that, he added, Ingenix then took that manipulated data and further manipulated itself. Finally, Ingenix wound up publishing low-ball prices for health care services that cut the industry's share of out-of-network bills, Cuomo said.

For example, Cuomo said, a routine doctor visit might cost $200. But after all of the tampering, he said, Ingenix might set the price at $77 instead.

When patients would submit bills for out-of-network office visits, he said, insurers would then use the low Ingenix rate to determine their share of the bill. Thus, even though the insurers might have agreed to pay 80% of out-of-network costs, they would wind up paying just $62 of that $200 bill.

Cuomo believes that those companies owed more. He plans to penalize any offenders and, ultimately, change the industry's ways.

UnitedHealth -- which on Wednesday issued a statement standing by the quality of its reference tools -- could suffer the most. After all, the company managed the disputed information and also used that data itself.

Sheryl Skolnick, senior vice president of CRT Capital Group, sees multiple risks. She fears that health insurers -- and even major employers -- could be reluctant to use Ingenix data going forward. Employers, she says, may shy away from UnitedHealth itself if they believe that the company is using flawed information to settle its claims. Meanwhile, she adds, UnitedHealth could face "meaningful exposure" for any out-of-network bills it has underpaid so far.

Skolnick expects UnitedHealth customers to start questioning their out-of-network payments as well. She fears that the company's customer base could further erode as a result.

"We didn't like the growth prospects before and don't like them now," says Skolnick, who has a fair-value rating on UnitedHealth's stock. "UNH has a big problem on its hands."