(Bloomberg View) — Well, the hammer has fallen: The largest health insurer in the U.S. has started pulling out of select Obamacare exchanges.
Five months ago UnitedHealth Group Inc. (NYSE:UNH), which had been singing sunny songs to investors about its bright future on the exchanges, abruptly began crooning the blues. In an earnings call barely a month after executives assured investors that all was going swimmingly, they confessed that they were losing a ton of money on their Obamacare policies and described a pattern that sounded as if consumers were gaming the system — signing up for a few months, using a ton of services, and then canceling their policies. If this continued, they said, they would have no choice but to pull out of the exchange business.
All Obamacare news is a sort of Rorschach test upon which viewers project their own deepest hopes and fears about the program, and the UnitedHealth news was no exception. Supporters of the law saw a company that had come late to the exchanges; offered a high-cost, high-value product; and consequently experienced losses as the sickest people rushed to buy their policies. The law’s detractors saw the canary in the coal mine, a view that gained some credence as other companies made similar statements.
My view fell in the middle. Widespread gaming of the insurance rules would pose an existential threat to the exchanges, because it would require enormous premium hikes, which would in turn force more people to game the system as the premiums became less affordable. However, there were steps the administration could take to control the gaming, such as demanding documentation of the “qualifying life events,” like marriage or job loss, that allowed people to buy policies outside of the open-enrollment period.
Moreover, there was reason to take UnitedHealth’s grim forecast with a pinch of salt. Every time a highly regulated firm makes a public statement, it’s likely to be part of a multidimensional game of political chess that the firm is playing with regulators. So you can’t quite take their more fearsome predictions at face value. As with so much about this law, we’d have to wait and see. When I was asked on a panel a couple months back to estimate the probability that UnitedHealth would pull out this year, I put it at about a third.
I’m not quite sure how to score that prediction now: It is pulling out, but not everywhere. The two state markets it’s leaving are probably especially unprofitable — UnitedHealth had only 544 customers in Arkansas, which left it vulnerable to cost overruns from a few very sick patients. But so far, it’s staying in other markets, which means it must have some hope of turning a profit there.
So is this a case for optimism or pessimism?
Well, other companies haven’t announced that they’re pulling out, which is a case for mild optimism (though they still have a few weeks left to pull the trigger). However, no one has yet proven to be able to reliably make money on exchange policies, and certain local markets seem to be in deep trouble, with few insurers and high premiums. So some mild pessimism is due.
That local element is important. Areas with deep markets and lots of insurers seem to be able to deliver a product at a reasonable premium — maybe without all the choice of doctors and hospitals patients would like, maybe with high deductibles, but with premiums that you can fit into a family budget, especially when subsidies are included. On the other hand, some states — particularly rural ones, since there’s not much scope to offer “narrow networks” in communities served by a single hospital — are seeing a worrying combination of premium increases and insurer exits.
For example, Alaska’s exchange seems to be tumbling towards collapse, with essentially one and a half insurers. (Moda Health, the second insurer, has had financial troubles that leave its future uncertain.)
See also: Moda Health keeps going
Rates rose almost 40 percent last year, putting the benchmark silver plan at around $720 a month for a 40-year-old nonsmoker in Anchorage. Wyoming is down to a single insurer, and the uninsured rate has actually increased since 2013, presumably in part because the state has some of the highest premiums in the country. So does Vermont, which is now down to two insurers. Mapping a one-size-fits-all national policy onto low-population rural states seems to be a recipe for some problems.
What we don’t yet know is how things will evolve in other states. Will tighter regulations on special enrollment periods reduce the amount of gaming going on? Will the bigger mandate penalties mean younger and healthier people finally buy insurance — or will the end of the temporary risk corridor program that has been defraying insurer losses mean that premiums soar still higher? Will insurers ever manage to make money on the exchanges?
If insurers can’t figure out a way to make money, more will probably pull out, and the exchanges will be in a parlous state. If they can, things will stabilize. Unfortunately there’s no way to know what will happen — or where — except to wait and see.
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