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WellPoint Rate Hike Brings Calif. Probe

NEW YORK (TheStreet) -- Wellpoint (WLP), one of the most profitable health insurers, has increased its rates and the California state insurance commissioner has launched an investigation.

Citing state law requiring at least 70 cents of every dollar in premiums to be spent on medical care, California Insurance Commissioner Steve Poizner said he was "alarmed by the Anthem Blue Cross health insurance rate hikes." He added, "I have instructed my department to hire an outside actuary to examine their rates line by line," saying he would bring the rates down if they are found to be excessive.

Profit margins for health insurers aren't typically large. The average insurer spent 88% of its premiums, in the nine months to September, on medical expenses. This is before administration expenses tied to this care that averaged 10.5%. The average insurer, therefore, had a 1.56% profit margin through September, before investment income was factored in.

Wellpoint, though, isn't typical. Through September, for all of its insurance companies, it managed to keep medical expenses down to 83.3% of premiums and administration down to 9.3%. This gave it a 6.3% profit margin. Anthem Health Plans of Virginia reported a 15.1% margin on health care but even this wouldn't exceed the 30% California maximum.

Other groups, such as Aetna (AET), have thinner margins. Aetna reported an overall health profit margin of 1.3%. This was below average but mainly because its administrative expenses were higher than most. Centene (CNC) reported a health loss of 0.7%. Again, like Aetna, medical expenses were controlled, but expenses, of more than 15% of premiums, weren't.

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