New York Attorney General Subpoenas Cigna, Aetna in Expansion of Insurance Industry Investigation
Health insurers Aetna and Cigna acknowledged Tuesday that New York Attorney General Eliot Spitzer (D) has served them with subpoenas -- "the best evidence yet" that Spitzer's investigation of insurance bid-rigging and collusion allegations is "moving beyond property and casualty insurers and brokers and now also covers life and medical insurers," USA Today reports (Valdmanis, USA Today, 10/20).
Last week, Spitzer filed a civil lawsuit in state court against Marsh & McLennan that alleges the property-casualty insurance broker said it awarded contracts through competitive bidding but actually fixed prices with some insurers. That lawsuit came after Spitzer subpoenaed insurance brokers and carriers to examine a practice in which insurers reward brokers with contingent commissions when they reach volume or profitability targets on business the brokers bring to the insurers. Some say the payments "give brokers a financial incentive to place a client's business with insurers paying the most generous bonuses," the Wall Street Journal reports (Francis/Fuhrmans, Wall Street Journal, 10/20).
Spitzer said that anti-competitive practices, some of which are illegal, have contributed to insurance rate increases for businesses and individuals, USA Today reports (USA Today, 10/20). Last week, Spitzer said that "virtually every line of insurance" would be investigated for fraud (Phelps, Minneapolis Star Tribune, 10/20).
Spitzer's office declined to comment on the subpoenas issued to health insurers. People familiar with the investigation said earlier this week that no other civil lawsuits are expected "for at least a few weeks," the New York Post reports (Wilner, New York Post, 10/20).
Aetna officials said they are "cooperating fully" with the probe. Cigna did not respond to media inquiries abut the investigation, according to Investor's Business Daily (Hoover, Investor's Business Daily, 10/20). However, Cigna CEO H. Edward Hanway on Tuesday told employees in a memo, "We conduct our business with the highest level of ethics and professionalism and in accordance with Cigna policies and all applicable laws and regulations" (Levick, Hartford Courant, 10/20).
Shares for Aetna, Cigna, UnitedHealth Group and other health insurers lost a combined $6 billion in share prices on the news of Spitzer's expanded insurance probe. Aetna shares fell by $11.57, or 12%, to $86.17 (Dunaief, New York Daily News, 10/20).
Cigna share price decreased by $6.85 to close at $59.73. UnitedHealth, the nation's largest health insurer, also saw its share price decline by $6.85, or 9.34%, to $66.50.
UnitedHealth officials did not comment on the investigation or whether Spitzer's office had contacted them, the AP/St. Paul Pioneer Press reports (Singer, AP/St. Paul Pioneer Press, 10/20).
California Insurance Commissioner John Garamendi (D) on Tuesday said he would seek to outlaw incentive commissions and file separate lawsuits against insurers (USA Today, 10/20). Garamendi might announce as early as Wednesday that the state is hiring San Diego-based class-action law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP to "lead a legal fight" against insurers and brokers on behalf of customers who have not received the best prices and terms, including individual employees because they "typically pay some or all of the cost of benefits sponsored by their employers," the Journal reports.
The strategy "would contrast with the picture so far painted by Mr. Spitzer," who has focused on how brokers may have cheated corporations on liability insurance packages, according to the Journal. However, the Journal reports that Spitzer has "indicated that the employee-benefits sector is a coming front" (Wall Street Journal, 10/20).
In addition, Garamendi is expected on Wednesday to announce proposals for new regulations that would penalize an insurance broker "who places his or her own financial or other interests above that of his or her own client." According to the Los Angeles Times, the rules are intended to "eliminate[e] conflicts of interest in the selling of insurance policies" (Lifsher/Kristof, Los Angeles Times, 10/20).
Insurance regulators in Connecticut and Pennsylvania on Tuesday also announced that they are examining Spitzer's allegations against the insurance industry (USA Today, 10/20).
Although concern among investors caused health insurer share prices to decline, the health insurance sector is "less likely to produce bid-rigging" than the property-casualty insurance sector because there are "no dominant brokers" in health insurance as there are in other insurance industry segments, the Post reports (New York Post, 10/20). Eric Veiel, a Wachovia Securities analyst, said, "The bid-rigging charges leveled against the property-casualty industry are unlikely to emerge in health lines, as the industry's structure includes a number of characteristics that would make bid-rigging difficult to execute" (Hartford Courant, 10/20).
Several managed health care industry analysts also have said that the contingency fees offered in the property-casualty insurance market are not common in the health insurance sector. Some said Aetna and Cigna may have received the subpoenas because they sell some lines of group life, accident and disability insurance (Wall Street Journal, 10/20).
However, Robert Hunter, director of insurance for the Consumer Federation of America, said, "Employers might be paying contingency commission deals similar to the ones listed in the Spitzer complaint [against Marsh & McLennan]. It may well be that people are paying more than they should because of a kickback" (New York Daily News, 10/20).
NPR's "Morning Edition" on Wednesday reported on the expansion of the Spitzer investigation to health insurers. The segment includes comments from Bob Hunter, insurance director of the Consumer Federation of America, and Larry Wachtel, market analyst with Wachovia Securities (Arnold, "Morning Edition," NPR, 10/20). The complete segment is available online in RealPlayer.