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Will Nation's Top Health Insurer Kill Obamacare?

Word that top U.S. health insurer UnitedHealth might withdraw from insurance exchanges raised new questions about the future of Obamacare.
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Thursday’s news that the No. 1 U.S. health insurer, UnitedHealth Group, might withdraw from the health insurance exchanges mandated by so-called Obamacare legislation divided experts into two camps.

On one side were critics of the Affordable Care Act, the proper name of the 2010 federal legislation, who said the news pointed to a fundamentally flawed system put in place by the law and could trigger a flight for the exits by other insurers.

On the other were advocates of the law and efforts to execute its policies, who blamed UnitedHealth’s late, tentative entry into the market for the company’s financial stumble.

While the ultimate outcome of the debate is not yet clear, one fact is evident: Fewer enrollees than expected are signing up for health insurance through the exchanges and those that are aren’t healthy enough to offset the added expense of insuring people who previously lacked health insurance, many of whom have pre-existing medical conditions and other costly ailments.

Experts say that means insurers participating in the exchanges, either through the federal exchange at or various exchange created by states, are struggling to break even and consumers are at risk of seeing premiums climb rapidly, having fewer choices in the marketplaces, or both.

UnitedHealth Group CEO Stephen Hemsley stirred up the somewhat-dormant debate over Obamacare on Thursday by announcing that the company was lowering its earnings forecast for 2015 from between $6.25 and $6.35 a share to $6 a share for the year and expects to lose $275 million on its exchange business next year.

Biggest U.S. Health Insurer Says It May Abandon Public Exchanges

“UnitedHealthcare has pulled back on its marketing efforts for individual exchange products in 2016,” he said, adding that the company is “evaluating the viability” of continued participation in the exchanges in 2017.

Experts say that, in terms of the numbers, UnitedHealth dropping out wouldn’t be huge. Exchange enrollees comprise less than 5 percent of UnitedHealth’s business, Goldman Sachs analyst Matthew Borsch said in a research note.

In its quarterly conference call last month, the company said it insures 550,000 people through the exchanges, just over 5 percent of the roughly 10 million Americans who have health insurance through the marketplace. The company indicated in Thursday’s announcement that it had added fewer enrollees than expected since then, and the ones who had bought in were heavier users and more expensive to carry.

Policy experts say an exit from the exchanges by UnitedHealth would have troubling implications for the competitiveness of the market, and potentially even its viability, if other big insurance companies pull up stakes.

That appeared less likely on Friday, as insurer Aetna and other smaller players said the exchange business was meeting their expectations and is still seen as offering a good business opportunity as it stabilizes.

But Ron Pollack, executive director of Families USA, an advocacy group that supports the Affordable Care Act, said UnitedHealth’s comments “may, in effect, be a warning shot across the bow” by insurers chafing under Affordable Care Act requirements that make it possible for more people to get health insurance.

“I think they want to try and make sure the benefits of their participation are favorable,” Pollack said.

Aetna, Other Insurers Say Obamacare Plans Performing As Expected

If pushing lawmakers to rewrite requirements or restrictions they find objectionable succeeds in making the exchanges more profitable for insurers, experts warn that the flip side could be harm to consumers, if they're faced with fewer, pricier options for mandatory insurance.

“The fewer insurers there are, the higher the premiums are going to be,” said Sam Richardson, a health economist at Boston College. That’s bad for consumers, he said, and also bad for taxpayers who would have to pay for higher subsidies if premiums rose. “It may just be because people are so price sensitive, it’s very hard for (insurers) to make money here.”

Ipsita Smolinski, managing director and health care analyst at Capitol Street, told CNBC on Thursday that exchange participation collectively cost insurers $2.5 billion last year.

Other insurers recently have reported similar market conditions, if not results as negative as UnitedHealth’s. In its third quarter conference call last month, Anthem lowered its guidance for profits next year below analysts’ expectations, citing lower-than-expected enrollments through the exchanges, among other things.

Aetna CEO Mark Bertolini was likewise cautionary on the company’s earnings call last month.

“The individual business remains challenging, especially in light of the continued administrative changes for this new and developing membership pool,” he said, adding that Aetna would participate in 15 state exchanges next year, two fewer than this year.

“The (UnitedHeath) news will intensify the concern over sustainability of the ACA exchanges, which may ultimately have significant policy and political implications.”

Comments like that make clear that “the vast majority of public exchange insurance products are clearly not yielding a required level of return based on results reported by the large managed-care players,” Morningstar analyst Vishnu Lekraj said in a research note.

Analysts say premium hikes and the failure of 13 of the 25 nonprofit state co-ops, which were unable to deliver on their promise of providing an affordable option for policyholders, also are signs that insurers are struggling to find their footing in this market. The question that remains is whether or not this is an issue of growing pains or represents an inherently flawed model.

“The (UnitedHeath) news will intensify the concern over sustainability of the ACA exchanges, which may ultimately have significant policy and political implications,” said Borsch, the Goldman Sachs analyst.

Among them, said Richardson, the Boston College economist, is what the government will do if competition declines in the exchanges.

“It could be that only a couple companies end up being big players in these marketplace,” Richardson said. “That’s going to bring up prices and allow companies to be profitable but also increase costs to consumers and taxpayers.”

He said this would be still an improvement over the market for individual insurance before the Affordable Care Act, when companies could turn people away for pre-existing conditions and employ underwriting to charge higher prices to people it expected to visit the doctor more often and require more prescriptions.

It is unknown, Richardson said, how much competition there will have to be to keep prices affordable and whether the current structure of the health insurance exchanges can provide that.

“It’s really unclear what’s likely to happen,” he said.