Did California Just Expose a Major Flaw in Obamacare?

Excited or not, the Patient Protection and Affordable Care Act, also known as Obamacare, is set to be fully implemented in just six months and one week. Targeted at revamping our entire health care system, it will mandate individuals to carry health insurance and require that health-benefit providers are spending at least 80% of premiums collected on health care for its members.

In addition, this new health reform aims to keep the inflationary costs of premiums reasonably low as health insurance exchanges that are being set up in each state should allow for competitive and transparent pricing. The idea here is that having more pricing visibility will allow consumers to make smarter choices when selecting their own health insurance. But, as California showed us yesterday, there could be a major flaw with that thesis.

Source: White House. 

Don't call us, we'll call you
With few states having unveiled detailed plans for their state-run insurance exchange, all eyes were focused on California, which offers quite the blend of individual and commercial customers, as well as a number of soon-to-be Medicaid participants under the PPACA's Medicaid expansion. Yesterday, California unveiled the 13 contract winners who will be participating in its insurance exchange in the coming months. There were some very familiar on the list, including Kaiser Permanente, Blue Shield of California, Anthem Blue Cross -- which is run by WellPoint (WLP +0.00%), the nation's second-largest health insurer -- and Health Net (NYSE: HNT), which collectively make up a big portion of California's individual insurance market.

However, notably missing from the list were UnitedHealth Group (UNH 0.01%), CIGNA (CI +0.00%), and Aetna (AET +0.00%), which all kindly bowed out of being included into California's health insurance exchange.

When questioned about not wanting to take part in California's insurance exchange, according to The Los Angeles Times, UnitedHealth commented, "We are simply taking the time to carefully evaluate and better understand how the exchanges will work to ensure we are best prepared to participate meaningfully in their development." Similarly, a CIGNA spokesman was quoted as saying, "We will continue to offer individual plans going forward [in five of 10 states], but we've decided not to participate in Covered California in 2014."

On the surface this may not appear to be a big deal since UnitedHealth, CIGNA, and Aetna combined for only 7% of the total health insurance market in 2011 according to research compiled by Citigroup, and are focused primarily on the commercial side of the business. But, the message that these three large insurers are sending California is much more important.

Here's the problem
For one, with UnitedHealth not participating, it tells me that even the largest insurer in the nation is still very skeptical as to how things will play out in these insurance exchanges. California offers a moat of possibilities, but it's simply not worth the price of admission based on UnitedHealth's decision. A lack of a large national insurance presence in California's exchange is only bound to increase the mounting skepticism over how effective these exchanges will ultimately be in manufacturing competition among insurers. Even more so, a lack of recognizable health insurance names could diminish consumer interest in researching these health plans, which would defeat the entire purpose of setting up the health exchanges.

Perhaps the bigger concern here is that a lack of competition from rivals who are big enough to make a difference -- no offense given to the remaining nine plan participants -- could cause pricing power to clump into the hands of the aforementioned "big four" in California, including WellPoint and Health Net. Some would point out that this could be a good thing, which may result in savings due to less competition. Alternatively, these insurers are under no obligation to pass those savings back to plan holders. So while the costs of competition are dropping, those plan premiums won't necessarily be going any lower.

Onward we march
As I've been saying for weeks, there is really only one certainty when it comes to the implementation of the PPACA -- and that is that we really don't know much.

People are certainly going to remain skeptical about how effective Obamacare will be at controlling costs; and California's inability to draw national insurers to the plate in the individual insurance market is only going to heighten those fears in the interim. However, there are multiple benefits to the bill that can be brought to light that we've discussed previously, including the medical loss ratio cap of 80%, which ensures plan members get the care when they need it.

I'm sure there are still plenty of questions yet to arise with regard to Obamacare. The good news is that in a little more than six months we'll finally have some answers.