UnitedHealth Group, America’s largest health insurer, announced today that it would be abandoning Obamacare’s insurance exchanges, after absorbing hundreds of millions in losses. While the exchanges can continue to function without United, United’s departure could represent the “canary in the coal mine”: a signal that other insurers will not be able to remain in these highly unstable markets.
White House improvisations destabilized the market
UnitedHealth made waves last November when it reported massive losses in its Obamacare-based business. “We cannot sustain these losses,” said United CEO Stephen Hemsley on a conference call with investors. “We can’t really subsidize a marketplace that doesn’t appear at the moment to be sustaining itself.”
Because Obamacare’s individual mandate is so weak, and because the Obama administration created various loopholes to juice enrollment numbers, people who sign up for exchange-based coverage have had the ability to come in and out of the system whenever they need someone to pay for their health care. “We have identified higher levels of individuals coming in and out of the exchange system to use medical services,” said Hemsley. “Our own emerging claims experience…is worsening as the year end nears.”
United CFO Dan Schumacher added that “over 20 percent of our enrollment base were folks that had joined us after enrollment,” increasing to 30 percent, and that these late enrollees were consuming 20 percent more health care than usual enrollees. In theory, there shouldn’t be many late enrollees; but again, the White House allowed them in order to be able to claim that Obamacare was helping more people. Those late enrollees were often people who declined to pay premiums until they needed to go to the doctor.
Things got even worse over the last five months
In January, United stated that it estimated that it lost $1 billion on the exchanges over the last two plan years: $475 million in 2015, and $525 million in 2016. Today, United increased its estimated 2016 losses by another $125 million, or $650 million total for the 2016 plan year. United was forced to increase its “premium deficiency reserve,” or PDR, to take its Obamacare-based losses into account.
Needless to say, for things to get even worse—even with the problems well understood—is a red flag. “The smaller overall market size and shorter term, higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis,” said Hemsley on today’s call. “We will not carry financial exposure from exchanges into 2017.”
Could non-profit insurers be next?
What’s remarkable about the United story is that the company was quite prudent about entering the Obamacare exchanges. The company sat out year one of the exchanges—the year of the website crashes—because it wanted to see who would enroll in the exchanges before determining how to price its products.
United, after all, is accountable to shareholders, and didn’t want to lose money, even for a single quarter. This contrasts favorably with non-profit BlueCross insurers, who dove in headfirst in year one, taking on billions in losses after underpricing their products and being unable to take advantage of taxpayer-financed slush funds designed to cushion early losses.
In other words: if United is losing money, so are BlueCross plans. United is highly sensitive to losing money, because it’s a for-profit company. But even non-profit BlueCross insurers can’t lose money forever and stay in business.
Things are going to get even tougher in Obamacare’s exchanges as the “three R” program—risk corridors, reinsurance, and risk adjustment—begins to phase out. Premiums will continue to climb, and healthier enrollees will continue to face financial pressure to drop out.
Obamacare’s exchanges are unlikely to be fixed
In theory, you could make Obamacare’s exchanges work in one of two ways.
One, you could make them work like actual markets where people were free to choose the health coverage that’s best for them. But that would involve deregulating them, something that President Obama and Hillary Clinton are ideologically opposed to doing.
Two, you could stiffen the individual mandate, forcing people to buy costly insurance that they neither want nor need. But such a plan would never get through a Republican-controlled Congress, which would much rather repeal the mandate entirely.
That stalemate is unlikely to change anytime soon. Which means that negative headlines for Obamacare’s exchanges will continue for some time.
This piece originally appeared at Forbes