Jan. 12 (Bloomberg) -- WellPoint Inc., the second-largest U.S. health insurer by revenue, has been barred from adding customers to Medicare plans after it denied prescription drugs to the elderly, endangering their lives, the government said.

The sanctions, outlined in a letter to WellPoint today from the Centers for Medicare & Medicaid Services, followed a “sharp” increase in consumer complaints, the agency said. Elderly customers were stopped from receiving essential prescription drugs, and some were overcharged because of computer mistakes, the government said.

“WellPoint’s conduct poses a serious threat to the health and safety of both its prospective and current Medicare beneficiaries,” the agency said in the letter. “The recent failures in WellPoint’s information systems have resulted in beneficiaries not receiving necessary medications at their pharmacies.”

The complaints jumped in the past 12 days, Medicare said. The agency also disclosed the Indianapolis-based insurer’s plans were so flawed that the government in September ordered WellPoint to stop enrolling low-income people. WellPoint told Medicare that computer failures were to blame. Six months earlier, the company lowered its 2008 earnings forecast, attributing the change to problems with its computer systems.

WellPoint has been working with the agency for the past six months to resolve the issues and has hired a third party to evaluate the company’s compliance, WellPoint said in a statement distributed today by PR Newswire.

More Than 1 Million

The Medicare sanctions are “definitely not a good thing,” said Carl McDonald, an analyst with Oppenheimer & Co., in New York, in a telephone interview today. “It isn’t as significant now as it would have been a couple of months ago.”

McDonald was referring to “open enrollment,” the period during which elderly customers are free to change plans. That ended Dec. 31.

The shares fell $2.06, or 5 percent, to $38.90 in extended trading today. WellPoint declined 52 percent last year.

WellPoint has about 1.39 million enrollees in plans that provide only drug benefits under what is known as Medicare’s Part D program. Also, 460,000 people are in Medicare Advantage plans that include health and drug coverage. Each Advantage customer generates about $10,000 a year in revenue. The only insurers with more Medicare plan members are UnitedHealth Group Inc. and Humana Inc.

Able to Drop Out

The marketing and enrollment freeze will have no effect on members of WellPoint Medicare plans unless they choose to drop out, or “disenroll,” said Medicare spokesman Peter Ashkenaz in a telephone interview today. That choice is available to people who call 1-800-MEDICARE and request a special enrollment period to choose a new plan by the end of the month, he said.

Abby Block, the top CMS managed-care plan officer, said in the letter that WellPoint’s “longstanding and persistent failure to comply” with rules on administering the plans has disrupted enrollment, claims appeals, claims payments and other plan functions.

The company told the government in August that it had “many problems supporting its Medicare Advantage and Part D lines of business,” according to the letter.

According to the letter, WellPoint overcharged for monthly premiums; inaccurately processed enrollments and disenrollments; improperly handled grievances; erroneously rejected claims; and used unapproved marketing materials.

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: January 12, 2009 23:17 EST