* Premium increases reflect higher costs, company says
* Democrats point to rate hike, push reform (Recasts first paragraph to include healthcare overhaul context; adds reaction, analyst comment, share prices)
By Susan Heavey
WASHINGTON, Feb 11 (Reuters) - Health insurer WellPoint Inc WLP.N defended its rate hike of up to 39-percent for certain California customers as Democrats latched onto the increase to press their case for overhauling the U.S. healthcare system.
The controversy comes as Democrats struggle for a path forward to expand access to health insurance, while imposing new rules for the industry, after losing their supermajority in the Senate last month. It also highlights the friction between the Obama administration and health insurers who largely opposed Democrats' plans now stalled in Congress.
Earlier this week, U.S. Health Secretary Kathleen Sebelius challenged WellPoint after reports of the premium increases for people who bought their own coverage through the company's Anthem Blue Cross subsidiary in California.
WellPoint, in a response to Sebelius on Thursday, said the higher prices reflect greater medical costs and are in line with competitors.
"These rate increases are unfortunate but necessary to reflect the costs of paying for the medical services for our members in the current challenging environment," wrote Brian Sassi, head of WellPoint's Consumer Business Unit.
Although health insurance is regulated at the state level, Sebelius and other Democrats pointed to the rate jump as more evidence of the need to pass health reform legislation.
Both the U.S. Senate and House of Representatives have passed separate bills but have not been able to find a way to combine them into one final measure for President Barack Obama to sign into law. Obama has vowed to continue to work for a final bill, including hosting Republicans at a Feb. 25 meeting.
WellPoint's Sassi said rates are rising faster than inflation for those who buy their own insurance because people are using more health services while doctors and other providers are charging more.
But Sebelius said high costs alone could not account for Anthem's increase "that will leave consumers with nothing but bad options: pay more for coverage, cut back on benefits or join the ranks of the uninsured."
House Democrats are looking into the rate rise and have scheduled a hearing for Feb. 24.
Meanwhile, The Indianapolis Star also reported similar increases in Indiana on Monday, following a Los Angeles Times reported on the California rate increase last week.
Despite the headlines, some analysts see little risk for WellPoint other than more political bad news for an industry that has already become Democrats' top target in their fight to find a way to reconcile their two bills into law.
Wells Fargo Senior Analyst Matt Perry said this week the news offered Democrats "a chance to go back on the offensive against health insurers," but little else.
Shares of WellPoint gained nearly 1 percent to close at $60.52 on the New York Stock Exchange on Thursday.
INSURERS "RUN WILD"
The 39 percent figure was one of the higher increases and reflects consumers' age, Sassi said, adding that customers are free to choose lower-cost options. WellPoint is also cooperating with California's own review in which an external audit found the rates "sound and necessary," he said.
Overall healthcare costs outpace inflation, and studies have also shown people who get healthcare coverage through their employer also face significant premium increases.
Sassi pointed to the individual market as one "of last resort" but said policy changes in the congressional bills would have still raised costs for consumers.
Democrats' legislation includes a host of changes such as expanding access to health insurance while requiring companies to cover people with pre-existing conditions as well as ending lifetime caps on coverage.
Republicans are pushing Democrats to scrap the measure and start over.
But Senate Majority Leader Harry Reid said Anthem's case shows the current system allows insurers to "run wild."
Richard Kirsch, a national campaign manager for the liberal healthcare reform advocacy group Health Care for America Now, said rate increases like Anthem's are likely to continue, especially in the individual market.
Kirsch's group issued a report on Thursday showing how profits for the top health insurers -- WellPoint, UnitedHealth Group (UNH.N), Aetna (AET.N), Humana (HUM.N), and Cigna (CI.N) -- rose 56 percent in 2009, compared to 2008, despite losing 2.7 million enrollees.
The industry's lobby group, America's Health Insurance Plans, said insurer's profits were "well below" those for other healthcare industries. (Additional reporting by Donna Smith, editing by Matthew Lewis and Tim Dobbyn)