A Big Mistake With California Obamacare

Someone has made a big mistake. We don't know yet, though, who the mistaken party actually is.

A few commentators are gleefully proclaiming that Obamacare has received good news from the state of California. They note that rates recently announced for the state's health insurance exchange are significantly lower than what the Congressional Budget Office projected. This, they say, signals that Obamacare could unleash competitive market forces that lower insurance costs.

Others, including my colleague Sean Williams, observe that several major insurance companies aren't participating in the California Obamacare exchange, including Aetna (NYSE: AET  ) , Cigna (NYSE: CI  ) , and UnitedHealth Group (NYSE: UNH  ) . Their question goes along these lines: "Why would these companies decline to participate in one of the largest markets in the nation if there isn't an inherent problem with how Obamacare will function?"

If the California Obamacare exchange is destined for success, three of the nation's largest insurance companies could have made a very costly mistake in not jumping into the fray. If these companies' caution proves wise, though, the insurers that are participating in California could be in for financial challenges if they underestimated costs. Who made the mistake? Here are a few things to consider.

Comparing costs
Back in 2009, the CBO originally projected that a middle-of-the-road "silver plan" could cost $5,200 per year -- or around $433 per month. Instead, the least expensive silver plan in California's exchange will cost $276 per month. That cost will be even lower for individuals qualifying for federal subsidies.

The most optimistic scenario calls for around 5 million people to purchase insurance through the California exchange. This flood of new members would enable those insurers participating in the exchange, including Kaiser Permanante, WellPoint's (NYSE: WLP  ) Anthem Blue Cross, Blue Shield of California, and Health Net (NYSE: HNT  ) , to make more money on higher volume while offering insurance at lower costs. Capitalism at its finest, right?

A gloomier scenario is that a much lower number will buy insurance through the exchange, possibly causing participating insurers to lose money because they based their rates on overly rosy assumptions. This prospect probably caused the hesitancy of Aetna, Cigna, and UnitedHealth.

While we won't know which scenario will unfold for a while, there are a couple of other cost comparisons to keep in mind. An individual in California can get coverage through Kaiser right now for as low as $82 per month -- but the state still has around 7 million people without insurance. Even with subsidies, a 21-year-old California who makes around $35,000 per year will have to pay $64 per month for the cheapest Obamacare plan.Around 2.6 million Californians will probably qualify for some level of federal subsidies, leaving around 4.5 million currently uninsured individuals with no financial assistance.

The other cost to remember is $95. That's the penalty (for an entire year) that a person must pay if he or she doesn't buy insurance.Will individuals who choose not to pay as little as $82 per month now for insurance prefer to pay a little less for insurance under Obamacare -- or will they instead go with the much cheaper penalty? Success or failure for the insurers and for California's Obamacare exchange hinges on the answer.

Comparing track records
For insurers, the primary challenge is making enough revenue to at least cover medical costs. Public companies must also generate profits to please shareholders. An organization's historical track record in making profits could provide a clue about how likely that organization is to make profitable decisions going forward.

In the case of California, two publicly traded companies opted to participate in the exchange while three chose to stay out. How do their track records compare?

AET Net Income TTM Chart

AET Net Income TTM data by YCharts

Over the past decade, WellPoint narrowly leads Cigna in net income percentage gain. UnitedHealth comes in close behind in third position. Aetna lags behind these three insurers, while Health Net turned in the worst performance by far.

On average, the three insurers deciding against participating in the California exchange have performed better in growing their bottom lines than the two that are participating. Does this mean these companies calculate risks more effectively? Not necessarily. There really are too many variables to draw a hard conclusion.

Another track record to consider is how well the companies have done in California in terms of market share. On this front, the insurers opting to compete in the exchange clearly fare better.

Source: California Healthcare Foundation


However, simply having a larger market share doesn't mean that companies electing to be included in the California exchange are making a better decision. A larger presence in the state, though, might have swayed these companies to hold premiums as low as possible to prevent erosion in market share. If so, this could imply that the lower costs hailed for the California exchange won't necessarily carry over to other states.

Mistaken?
We could argue that all of these insurers have made the best decision for their respective organizations -- regardless of their participation in the California exchange. Each one has differences in their business models that undoubtedly factored into their calculations. Could the premise that a big mistake was made be mistaken itself? I don't think so.

If nothing else, the CBO made a big mistake. Maybe the government's calculation back in 2009 was just way off. Usually, the CBO has a decent track record in projecting costs. But it is still part of the government. Making mistakes is an area where the government has been known to excel.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool's new free report "Everything You Need to Know About Obamacare" lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more. 


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  • Report this Comment On May 25, 2013, at 2:21 PM, borninkenyafools wrote:

    "Someone has made a big mistake. We don't know yet, though, who the mistaken party actually is."

    How about the American voter's who voted for these fools .Can you name one thing they've ever done right?

  • Report this Comment On May 25, 2013, at 2:23 PM, borninkenyafools wrote:

    Remember you were told your health care premiums were going down $2,500 per year. how's THAT working out ? "Fools" will believe anything

  • Report this Comment On May 25, 2013, at 3:22 PM, nathan0999 wrote:

    The Bush administration was rightly criticized by liberals for allowing Congress to spend too much and infringe on our freedoms too much. However, Obama has raised waste and deficit spending even more and also control OUR WAY OF LIFE every step, making an art of it. He has put running over the courts and congress and taking our rights away on steroids. Gun control, Healthcare, even on your deathbed, the health panel will determine your fate. Where are the liberal cries of protest now?

    The voters and politicians don't really care that the country is going down the tubes because each hope to gain power over the other side in the process. Freedom and rights protect everyone of every persuasion and, when you infringe on someone you dislike, you need to remember you may be next.

    Americans used to have a pride in this country and a sense of “fairplay”. Now it's "me and my group over you". The country is hamstrung by all this fighting and the balkanization of our country means the end of the American dream. Chief Justice John Roberts and his Supreme Court is weak and indecisive and tend to “leave it to the hands of the voters” but wait, 51% of the voters are favoring freebies at the expense of the working class, so does the Latino voters favoring amnesty of the illegals. OUR FOREFATHERS WOULD BE SO SURPRISED THE BALANCE OF POWER NO LONGER APPLIES!

    Obamacare will have detrimental effect on your paycheck as you would have to contribute more and receive less health services, in order for the government to pay for someone else’s healthcare. Your employers may have to shift you to part time status or pay a fine just to stay afloat. Medicaid expansion is just another form of freebies but it would be much better than Medicare which most American hard workers would end up with.

    Then amnesty of 12 million illegals. How do they know the exact number? Are they in the US Census? What if that number is 15 million? 20 million? Once legalized they will sponsor their illegal parents and 10 siblings over. They all would be entitled to SSI even though they have NEVER WORKED A DAY in this country. Their SSI checks would equal or BIGGER than your Pension SS (you have worked & contributed for 20 years), plus they get foodstamps & free Obamacare!

    The US WORKERS would not be able to support the TAKERS including the sudden addition of tens of millions from a foreign country. It's UNSUSTAINABLE. The workers & taxpayers who are the roots of this nation and who really cared about the future are outnumbered. It's now the Democratic party plus the gang of 8 plus the unbalanced Court judges VS. the disarrayed GOP plus all lawful Americans. YOUR CHOICE to make the difference at the next midterm election or it would be the end of the US of A. It’s called B-A-N-K-R-U-P-T-C-Y.

  • Report this Comment On May 25, 2013, at 4:31 PM, zardoz333 wrote:

    well, i am not going to participate in t! i just hope sooner or later, that when they jail me,i hope i get a cell with a nice, gentle white guy with lots of cigarettes

  • Report this Comment On May 25, 2013, at 4:54 PM, Jamro wrote:

    I still have a problem for being fined for not accepting garbage....

  • Report this Comment On May 25, 2013, at 4:57 PM, doco177 wrote:

    1. Millions are and will lose the insurance Obama promised they could keep. Because ObamaCare forces employers to offer expensive Cadillac plans but also offers the option of paying a fine for not providing health insurance that can be cheaper than providing it, between seven and twenty million Americans are likely to lose their health insurance coverage according to the Congressional Budget Office. The original estimate was closer to four million.

    2. The cost of healthcare premiums is about to further skyrocket. Premium costs have already exploded, but that is a slow-motion explosion. In the near future, we could see costs double or worse. Naturally, these costs will hit an already burdened middle class hardest.

    3. Lost jobs. Lost jobs.

    The Federal Reserve's March beige book on economic activity noted that businesses "cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff."

    Meanwhile, human resources consulting firm Adecco found that half of the small businesses it surveyed in January either plan to cut their workforce, not hire new workers, or shift to part-time or temporary help because of ObamaCare.

    4. Potential doctor shortages that will mean rationing: The healthcare industry is already a bureaucratic quagmire. ObamaCare is about to add steroids. As the profession becomes tyrannized by government, the talented people currently practicing medicine plan to get out sooner than expected. Who knows how many will choose not to get in.

    Doctor shortages are what lead to the nightmare known as rationed care. Here's an unsettling example already being practiced.

    5. Somewhere around $800 billion in tax increases will hit America's middle class. This added burden will not only further oppress a middle class already reeling from a drop in wages over the last few years, but could damage the overall economy.

    6. Inflation, the cruelest tax on the poor. When businesses get socked with added costs brought about by higher taxes and burdensome government mandates, they pass those cost along to the consumer in the form of higher prices.

    7. Added bureaucracy. Even those Obama lapdogs over at the Washington Post's Wonk Blog are admitting that applying for health care is about to get more burdensome than the byzantine paperwork involved in buying a home.

    8. To cut costs or to avoid having to provide insurance, workers on the economic margins are already losing hours, which means a lower paycheck. There are a million sad stories in ObamaVille; here are just a few of them.

    9. ObamaCare is projected to add $6.2 TRILLION to a deficit the GAO has already declared "unsustainable." That's "trillion" with a "t".

    10. More taxes than currently estimated are likely to hit because of situations like this one.

    Three years ago, Obama, Democrats, and his media lied to us about cutting the cost of health care, being able to keep our insurance, and not taxing the middle class.

    Today, those lies and what ObamaCare is and will do to the working and middle class are the biggest untold story in America.

    The govt becoming more involved in health care is the reason the costs have increased. So...Govt creates a crisis, then provides a solution that comes at the expense of liberty and freedom, costs trillions, and by most accounts won't solve the problem but in fact make it far worse.Corruption, incompetence, disregard of the Constitution, and above all lying are integral to the way that this country is being run.

  • Report this Comment On May 25, 2013, at 5:30 PM, Keal7 wrote:

    Gun control, Healthcare, even on your deathbed, the health panel will determine your fate. Where are the liberal cries of protest now?

    -nathan0999

    Why do such a large number of Americans not have the facts on what is going on?

    There is NO gun control. Didn't pass. (Even though what was proposed wasn't even that.) Health panel is only in govt healthcare (like Medicare). And has always been. The private insurance companies decides what they don't cover on their own. Always had and always will.

    --------------------------

    well, i am not going to participate in t! i just hope sooner or later, that when they jail me,i hope i get a cell with a nice, gentle white guy with lots of cigarettes - zardoz333

    What would a nice gentle white guy would be doing in jail in the first place? There shouldn't be a good odd of that happening in the first place. White or any race. Or we should be trying to fix the problem that's causing it.

    Meanwhile, IN FACT, there is no jail mechanism in the law actually.

    ----------------

    As far as the entire article. Shows what happens when people are brainwashed to hate something. The entire article is pretty much about COMPETITION and capitalism and what would be its effect on the exchanges. If the folks turning people against this had been the one selling this, the same people here would be happily defending competition and free markets since that is what drives this and the freedom of companies to take part and greater choice and disclosure to consumers. I expect it will also be peaked and improved as it unfolds, like anything.

  • Report this Comment On May 25, 2013, at 5:53 PM, LGarfield9 wrote:

    The other 3 declined because of the uninsured who have currently uninsurable medical conditions.

    They will join in to the exchange and bleed the insurers dry as there are no caps.

  • Report this Comment On May 25, 2013, at 5:56 PM, Mega wrote:

    "If the California Obamacare exchange is destined for success, three of the nation's largest insurance companies could have made a very costly mistake in not jumping into the fray."

    Part of the concept of an exchange is that it's very easy to enter at a later date. It's not like they have to build their own platform.

  • Report this Comment On May 25, 2013, at 5:57 PM, LGarfield9 wrote:

    I once worked for a company that offered health insurance to its employes. They offered to pay $10.00 of the cost the employe only had to pay the other $630.00. It was a good plan but at $5.25 per hr no one could afford to participate.

  • Report this Comment On May 25, 2013, at 5:58 PM, Mega wrote:

    In other, words, not joining Obamacare in CA will probably just be a minor mistake for those 3 companies, which they will fix in a few years.

  • Report this Comment On May 25, 2013, at 6:58 PM, kahutchins wrote:

    So why doesn't anyone talk about what coverage you would receive for the 62 bucks a month? I am sure it will be very minimal. And how much out of pocket will you pay each time you go see a dr or go to the hospital? Amazing people think they will get FULL coverage with this plan and that will not be so. And those who do buy up on the plans will be taxed as a Cadillac plan. They don't want someone who can afford to pay a little more to have something better so they are going to tax the crap out of us.

  • Report this Comment On May 25, 2013, at 7:30 PM, mortmain wrote:

    There must be a huge deductible with these policies. You can't insure an individual with a $2,000 deductible at less than $10,000 per year.

  • Report this Comment On May 25, 2013, at 8:08 PM, devoish wrote:

    seriously Keith

    That was a lot of disconnected statistics just to make the statement that "making mistakes is an area where the government has been known to excel".

    If you want to talk about insurer track records, remind yourself that if any of these insurers had put a little higher importance on customer satisfaction and a little lower importance on earnings or profits there would be no Obamacare.

    Best wishes,

    Steven

  • Report this Comment On May 25, 2013, at 8:41 PM, hoglegjack wrote:

    seems to me they miss the point intirely.. the way i see it people first have to have money to spend on insurance.. for people making $12 to $15 an hour just making it paycheck to paycheck is tough..so if it comes down to choosing $150 a month on insurance or $100 a year TAX.. i think most will go for the TAX

  • Report this Comment On May 25, 2013, at 9:04 PM, NOTvuffett wrote:

    This gang of idiots- they make brain hurt.

    Obama said insurance would go down about $2500 and that this policy would actually decrease the deficit. Obama would be a good comedian if he wasn't serious.

    What is the point of insurance? To insure yourself against a catastrophic loss. "Insurance" that pays for every little thing is not insurance at all. Should I pay for you to take your snot nosed brat to get a check-up once a year? Should I help buy birth control pills or an abortion for that biitch down the street even if I have moral objections to these practices?

  • Report this Comment On May 25, 2013, at 9:05 PM, airjackie wrote:

    interesting article but experience is the teacher. As a senior living in California we have as good a health care as Romneycare. Thanks to Obamacare California will be able to save money and use the extra money on other things. If only people would take the time to read the Obamacare like Jerry Brown did. Mitt Romney used the same plan and it's a success in Mass. To bad the policy did not help the people of Oklahoma as it becomes law Jan. 2014. But Brown got started early. As to insurance companies well it will be a rush to get customers because the large profit is in the large numbers.

  • Report this Comment On May 25, 2013, at 9:06 PM, dulven wrote:

    There is always some idiot that thinks they can foretell the future. Obamacare has NOT gone into effect yet! Give it a chance it probablly will not be perfect, but at least it will give the 48 million uninsured people a chance to finally have affordable health insurance. If it were left up to insurance companies only healthy people would have insurance. They are ONLY worried about profit margins NOT people. Government subsidised health care works well in other countries.

  • Report this Comment On May 25, 2013, at 9:37 PM, healthyinMN wrote:

    Here is the Problem???? Insurance companies were asked to have their price match the same price that they give to Employers.

    Currently, they give employers a lower price than the price they offer to individuals who buy directly from them.

    As you can see, if they do this, it eats in to the billions in profits they currently make.

    The insurances that offer the lower price will get new patients, and the ones holding out will lose patients in the long run

  • Report this Comment On May 25, 2013, at 10:18 PM, Daisey1000 wrote:

    I still have HOPE that something or someone will stop this feces from actually happening!!

  • Report this Comment On May 25, 2013, at 10:24 PM, deralynch wrote:

    What the writer fails to mention is with the existing $82.00 plan, nothing is covered until a very high deductible is met. With the new plans on the exchange, all plans must meet the standards required in Obamacare. Therefore, the insured will get one or two office visits a year, prescriptions, and testing done without an office co-pay. The writer also failed to mention the age of the person buying the insurance. That is a very relevant part of the purchase. One must remember, that those larger companies aren't exactly their customer's best friend and we all know it. They just happen to be the one that the company they work for choose for them.

  • Report this Comment On May 25, 2013, at 10:28 PM, deralynch wrote:

    One other thing. If your income is low, you will get a govt. subsidy to help pay for it or Medicaid which will be at no cost to the insured.

  • Report this Comment On May 25, 2013, at 10:30 PM, deralynch wrote:

    With an insurance plan and a prescription, even medications you can buy over the counter will be about half the price you'd pay without insurance.

  • Report this Comment On May 25, 2013, at 10:33 PM, deralynch wrote:

    Some of you really should go to healthcare dot gov and get the basics.

  • Report this Comment On May 25, 2013, at 10:41 PM, SammyP1 wrote:

    Meh. According to the LA Times, Aetna, Cigna, and United Health combined only accounted for 7% of California's individual health insurance market in 2011.

  • Report this Comment On May 26, 2013, at 1:10 AM, westofny wrote:

    The comments here are generally well-informed, but I would put my money on those that have a more pessimistic view of Obamacare. The consequences of adding millions of individuals to a healthcare insurance network with enhanced benefits in a system that has so many loopholes, exceptions, and complexity can't be good.

    Those who support Obamacare are jumping for joy at the plan pricing in California, but it most likely will not represent the real pricing as it extends into the future.

    I think there will be so many surprises smacking us in the face, we all will be punch drunk.

  • Report this Comment On May 26, 2013, at 3:24 AM, brianleavitt wrote:

    Wow an article that is trying analyze the actions of some healthcare providers strategies concerning participation in an exchange becomes a pulpit for all the hate and fear you can muster.

    I can only imagine that none of you really pay for your current health care coverage. I do, its a lot of $. and I am an employer as well (I pay their insurance too) and I for one am glad to have a choice. It's change, get over it, the world is always changing.

    We are not talking about buying cars or 3d printers, this is about how to provide good health care for as many people as possible. Health care as a profit center is simply wrong. You guys are crying like a bunch of scared little boys. Get over it.

  • Report this Comment On May 26, 2013, at 10:04 AM, fuskiegirl21 wrote:

    Obummercare is a train wreck waiting to happen. It will leave more people uninsured and without jobs or hours at a job. It is a disaster.

  • Report this Comment On May 28, 2013, at 11:23 AM, cgilbert315 wrote:

    Hi All, this whole thing is a shame. When Obamacare was passed, many Americans were foolish enough to believe this was insurance reform (which i think is desperately needed) and its not. Im still ticked that i cant get over the counter med needs via my HSA. its my money I should spend it the way I WANT TO! (now i sound like that stupid commercial). Here is an even scarier thought: 42%v of Americans have no idea Obamacare is a LAW... we're doomed

    http://www.obamacare.net/42-dont-know-obamacare-exists/

  • Report this Comment On May 28, 2013, at 11:23 AM, cgilbert315 wrote:

    Hi All, this whole thing is a shame. When Obamacare was passed, many Americans were foolish enough to believe this was insurance reform (which i think is desperately needed) and its not. Im still ticked that i cant get over the counter med needs via my HSA. its my money I should spend it the way I WANT TO! (now i sound like that stupid commercial). Here is an even scarier thought: 42%v of Americans have no idea Obamacare is a LAW... we're doomed

    http://www.obamacare.net/42-dont-know-obamacare-exists/

  • Report this Comment On May 28, 2013, at 11:25 AM, cgilbert315 wrote:

    sorry if oyu see a repeat post i didnt mean to do that..

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