Health insurers exiting marketplace exchanges may regret it in the long run

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August 6, 2016
By HELEN KARAKOUDAS, CHRS | Director, ACA Insights


With Aetna, the last of the five major national health insurers projecting a loss on Affordable Care Act individual plans for 2016, there’s no more denying it: Marketplace exchanges – our public avenues to private insurance – are in bad shape.

Citing expected losses of more than $300 million for 2016 on its plans in marketplace exchanges, Aetna announced this week that it was reevaluating its presence in 15 state exchanges and scrapping plans to enter into another five states in 2017.

This word comes on the heels of UnitedHealthcare abandoning most marketplace exchanges starting in 2017. The list of national insurers willing to cover individuals on the exchanges is vaporizing.

So it may not be politics that shuts down the exchanges. It may be the absence of financially strong carriers willing to cover individuals through the health insurance marketplace. Yes, insurers’ worst fear has become reality: too many sick enrollees; not enough healthy ones. As a result, premiums are skyrocketing on individual marketplace plans as losses mount for the carriers.

Other ACA areas very profitable

On the surface, then, headway for an industry with a key ACA presence seems doomed. But scratch a little deeper and you come up with an entirely different view of what’s happening.

These same insurance carriers have benefitted – and continue to benefit – from two segments of the Affordable Care Act that are profitable:

  • the mandate that all employers of a certain size offer coverage to employees putting in a certain number of hours
  • and the expansion of Medicaid.

In UnitedHealthcare’s announcement that it was abandoning or curtailing operations in 22 state exchanges, the insurance giant pointed out that despite losing $1 billion in two years on the exchanges, the company grew and remained profitable overall. Fourth-quarter revenues for 2015 increased 30% to $43.6 billion. Full-year revenue for 2015 jumped 20% to $157.1 billion. UnitedHealthcare cited growth in their profitable employer health insurance business and Medicare Advantage plans as significant contributors to the bottom line.

Going beyond the exchange results in Aetna’s announcement, you find that Aetna posted better-than-expected profit and revenue growth in the second quarter and reaffirmed its 2016 operating earnings guidance.

Clearly, a law that forces employers to rethink their health benefits has been a great thing for the employer health insurance business. Companies that offered limited or no coverage now have their feet held over an IRS fire.

A need to reboot in the ACA market

What is essentially happening here is that, with respect to their ACA offerings, national insurance carriers are no longer all in. They instead are choosing which part of the ACA market serves them the better route toward increasing shareholder wealth.

For the insurance industry, the problem with marketplace exchanges – the online alternative for people who can’t get a compliant plan through an employer – is that too few healthy people have signed up to offset the risk.

Everyone predicted a few years of losses while the newly insured with preexisting conditions sought medical services that, for years, had been deferred. No one predicted how deep the losses were going to be. At the same time, programs in the ACA that were aimed at helping insurance carriers sustain these initial losses have been blocked by Congress, which views them as a bailout for the insurance industry.

Yet the outcome for insurance carriers abandoning the marketplace exchanges may not be one they anticipated.

Exposure as the public option gains support

The call is on for a government-run, so-called “public option” health insurance program that would compete with private plans on the marketplace exchanges. That’s what President Barack Obama outlined in a piece for the Journal of the American Medical Association published July 11, 2016.

The president who signed the law overhauling access to health care in the U.S. is now saying a public option is needed to drive down insurance costs while promoting greater choices. The Democratic Party candidate for president, Hillary Clinton, was quick to endorse this call for action.

So the movement begins for a government-run health insurance program that would compete with national insurance carriers on their turf.

While the White House has continued to downplay the exodus of carriers from the health insurance marketplace, the reality is that more are leaving than joining. Adding to the woes, little remains of the 23 nonprofit health insurance co-ops formed through the Affordable Care Act. Of the 23 that opened at the start of 2014, a dozen had discontinued operations by the end of 2015. Of those remaining, six are expected to discontinue operations in 2016.

The marketplace exchanges are acutely unwell. Is a government-run health insurance program their only viable resuscitation?

The unlikely potential competitor

The opening of a government-run health insurance program may just be the beginning of a public option that would take away market share from the carriers. Insurance carriers focusing on Medicaid expansion are the most at risk. Let the government come in with their own plans and Medicaid will be the first to be eliminated from the private sector. It is, after all, a program primarily funded by the federal government.

“Medicare for All” calls ring out as the possible government solution. Expand Medicare to include individuals under 65 through a premium payment program and you have the eroding of market share from the private sector.

Where does this leave us?

The United States health care system is unique, compared with most other developed nations. From stem to stern, administration and delivery of services is largely through the private sector. The ACA, as initially created, did not put our government in charge of health care – it eliminated barriers for individuals getting health insurance.

The government entering into the insurance carriers’ world for those 65 and under would be a big departure in public policy and a huge blow for an industry used to internal competition for market share.

Helen Karakoudas

By Helen Karakoudas, CHRS

The cherry picking going on now for what the carriers are willing to engage in under the ACA will be good for the insurance industry’s financial results in the short term.

Enter the federal government into this arena and U.S. insurers’ long-term financial growth may be significantly threatened.

A version of this article first appeared on LinkedIn Pulse.

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