Is the Marketplace Unraveling Obamacare?

The Affordable Care Act (a.k.a. Obamacare/ACA) has been under attack through constitutional challenges, legislative defunding efforts and politicians running for national offices in 2012 and 2014 urging repeal of the law.

None of the challenges have shaken the foundation of the legislation designed to provide as many uninsured Americans as possible with affordable and subsidized health insurance.

The political threats were largely symbolic because President Obama vowed to veto any legislation that repealed the Act. Congress would need a two-thirds majority to override the veto and Congress has shown that it can’t agree on almost anything with a simple majority. In addition, the President handily won reelection in 2012 by running on passage of the Act.

The constitutional threat at the Supreme Court was swatted away by two conservative justices, Chief Justice Roberts and Justice Kennedy. So the Act lived on.

UnitedHealth’s Bombshell

But now, there’s a serious threat from the very business community that stood to gain the most by government forcing people to buy their product, the insurance industry. The industry was an early supporter of the Act as it stood to gain what economists call, “economic rent.”

On Tuesday, December 1, 2015, the head of the largest insurer in the U.S. dropped a bombshell and told investors that their company was losing money on the government-run health insurance exchanges and should have stayed out of participating in any of the plans.

Stephen Hemsley, the CEO of UnitedHealth Group, said offering policies through the health exchanges was “a bad decision. In retrospect, we should have stayed out longer. It will take more than a season or two for this market to develop.”

In mid-November the company announced that it might drop out of the exchanges altogether for 2017. Next year, he says the company will make decisions on a market-by-market basis about whether to keep selling exchange policies.

“A Money Loser” For Insurers

Lee Schafer, a business writer at the Minneapolis-based Star Tribune, said the company has earned a reputation for good management. “If it can’t sell insurance through an exchange and make money, the whole program created by the ACA to get more people private health insurance must be in trouble.”

Schafer wrote that it’s too soon to conclude that the ACA exchange market is on its way to a collapse. “What UnitedHealth did do was be a lot more direct than others in the industry about how it thinks this government-run market should really work.”

It’s pretty easy to understand why the company is having second thoughts. UnitedHealth is not making money with the customers it’s gotten through the exchanges.

In 2015, noted Schafer, the company is on 23 individual public exchanges, insuring about 540, 000 people as of last reported count. “While that’s a big chunk of customers—and risk—for just about any insurer, it’s not for a company the size of Minnetonka-based UnitedHealth, which has about 46 million people in all of its plans.”

As the company explained on a conference call for shareholders late in the week before Thanksgiving, it had thought in the fall of 2014 that its initiative with ACA-related exchanges would be roughly a break-even business in 2015.

Instead, it turned out to be a money loser, and the company expects the same result next year.

UnitedHealth was one of the companies that started slowly with the exchanges, sitting out the first year entirely. But before getting too wound up about Hemsley’s bombshell, the company said the same things about Medicare Advantage, before figuring out the economics and becoming the biggest participant in that program.

Overall Healthcare Spending Rising

Hemsley’s comments came right before the Centers for Medicare and Medicaid Services announced on December 2, 2015 that healthcare spending grew by 5.3% in 2014, the fastest rate in seven years. The jump, according to the agency, was primarily due to increased insurance coverage through Medicaid and the ACA, as well as a 12.2% spike in spending on prescription drugs. Another industry heavily engaged in “economic rent.”

So if overall healthcare spending is up, why hasn’t UnitedHealth figured out how to make money on policies it offers on the exchanges?

Unanticipated Risk

So far the company has found that people who signed up for its insurance plans through an exchange are using a lot more healthcare services than anticipated. What’s worse is that healthy people have been dropping their coverage and sicker people buying in outside of the normal open enrollment period, meaning they signed up when they could after a life event like a marriage or the birth of a child.

As the 2016 open enrollment period on the exchanges got underway, UnitedHealth still had policies listed on them. But it cut its marketing as well as cut commissions paid to brokers, creating an incentive for the brokers trying to help people find insurance to go somewhere else.

Small Risk and Risk Mitigator

There are a couple of points to keep in mind before declaring the demise of Obamacare. The individual market was about 7% of health insurers’ revenue in 2014. By far most Americans get their insurance coverage through their jobs or through government plans such as Medicare. So it’s a very small portion of an insurer’s revenue stream.

The other is that the authors of the ACA anticipated the difficulty some insurance companies would have as a new form of the individual market got established. Congress tried to protect them with something called the “Risk Corridor Program.”

The program is intended to reimburse insurance companies that ended up insuring too many costly customers, with money collected from insurers that had a good experience with costs.

But those numbers didn’t balance as the government reported in October that insurers had $2.87 billion in risk corridor claims for 2014. Insurers with a better-than-expected experience, however, only owed $362 million in risk corridor contributions. That means that risk corridor payments for 2014 will cover less than 13% of claims.

That shortfall is cited by critics of the Act as one reason that two-dozen or so nonprofit cooperatives created by the Act look like they are in danger of surviving.

Insurance Industry

Avik Roy, an ACA critic who serves as GOP presidential candidate Marco Rubio’s health care advisor, suspects UnitedHealth may just be the first domino to fall. Other commercial insurers, such as Aetna, Anthem, and Cigna, have raised premiums by double digits and still say they can’t make the numbers work in their favor. Hence, they have withdrawn from counties where their losses were particularly acute.

For example, state filings of the non-profit Blue Cross Blue Shield (BCBS) show that the company barely broke even in the first half of 2015. In Texas last year, BCBS collected $2.1 billion in premiums and paid out $2.5 billion in claims.

The big private insurers like Aetna and UnitedHealth are in much better shape to withstand losses. Yet it’s no surprise that generally prices through the exchanges increased this year, along with deductibles.

But not everyone was crying that the sky was falling. Some big insurers followed up UnitedHealth’s announcement with calming statements of their own, saying that unlike UnitedHealth they weren’t thinking about quitting the market.

Anthem, an operator of Blue Cross plans, added that its executives were “continuing our dialogue with policymakers and regulators regarding how we can improve the stability of the individual market.”

Anthem has a big stake in talking up “stability” and keeping government regulators happy. The company is seeking government approval to acquire Cigna for $48 billion.

Sign-Up Projections Falling Short

Another factor cited by ACA critics is that things will get worse if there are far fewer patients enrolling in the exchanges than projected, but those signing up are too old or sick for anything resembling a balanced risk pool.

The government has reported that it only expects 1.3 million new members to buy coverage next year, compared to the 8 million projected when the law as passed. This means that overall enrollment by 2016 will be somewhere between 9.4 million and 11.4 million. That’s only half of the 21 million initially predicted.

This, argues critics, forces companies to jack up rates so much that only those eligible for full subsidies (the relatively poor) or the sick find it worth their while to buy coverage. The relatively young and healthy are opting to pay the penalty and “go naked.” This, in turn, is forcing insurers to raise prices even more, which is causing more healthy people to drop out, unleashing the dreaded adverse selection spiral.

The Tribune’s Schafer said we already knew that through the ACA we decided to deliver an important benefit to people but also that it should be run through private insurance firms. “What UnitedHealth has told us is that it’s also up to us to make sure those private firms have a fair shot at making money at it.”

Wait and See

Hemsley told investors that the company tried to grow conservatively and did not believe markets would form this slowly. He said the company will narrow decisions on whether to stay in the exchanges. “We will not knowingly lose money on this product line in 2017.”

However, noting UnitedHealth’s experience with Medicare Advantage, he added that any decisions on the exchange business may not be permanent.