Obamacare Insurance Plan Deadline Delay Will Have Little Impact on Carriers

Individual insurance does not represent a substantial part of the business.

Mar 18, 2014 at 6:30PM

The Obama administration earlier this month announced that insurance companies can extend by up to two years the period in which they offer plans that do not meet Obamacare's essential health benefits. Fears that this delay in eliminating "noncompliant" plans will adversely affect the insurance pools and the insurance carriers have probably been overstated. The new deadline will probably do very little to change the industry's plans and will have only a minor impact on their financials.

Even if some companies extend their existing insurance plans the overall impact to their business will still be minor. Individual policies are only a small piece of how consumers purchase and receive health coverage. Prior to 2014, an estimated 11 million consumers had an individual market plan as their sole form of coverage. At the end of February, enrollment in qualified health plans through the federal or state-run marketplaces stood at slightly more than 4 million.

WellPoint (NYSE:ANTM), represented by the Blue Cross Blue Shield brand, competes in California and a number of other states. Only 12% of the company's nearly 15 million policyholders were in the individual market as of 2013.

For Humana (NYSE:HUM), another active participant in the Obamacare health insurance exchanges, the number was only 5%. With exchange enrollment likely to represent an even smaller percentage of the companies' 2014 revenue  it would be surprising if the impact was more than minor. These segments are dwarfed by the size of their small group units and other businesses.

Another critical point to remember is that this delay would not actually prevent the insurers from canceling plans. It just moves the date when these older plans must be eliminated. Prior to the Affordable Care Act, individual plans were regularly canceled and consumers migrated to new policies annually. The insurers are likely to continue this practice.

The additional essential benefits are also a potential revenue and profit opportunity. By increasing the mandated coverage the regulations will boost paid premiums. The insurance companies have very little incentive to wait in canceling their existing plans that do not meet Obamacare requirements.

For the carriers that may end up losing money in the first year, the transition programs should also help to mitigate any initial losses from bad demographics. The latest federal budget proposal projected $5.5 billion would be used in 2015 to help cover insurance carrier losses during this period. This seemingly large number should be put into the larger context of the entire health insurance industry. In 2013, Humana earned $38 billion in  premiums, WellPoint $66 billion, and the larger UnitedHealth (NYSE:UNH) in excess of $100 billion. The individual segment is a very small piece of the industry's total revenue base. 

Surveys also indicate that many of the initial Obamacare enrollees are those who were previously insured. A recent Mckinsey survey reported that only 27% of participants did not already have some form of insurance. This may indicate that the risk pools are not simply attractive to the unhealthy uninsured, with existing policyholders helping to balance out the pools.

Concerns about demographics and health status in the new risk pools are still very real. They will likely impact the profitability of initial exchange business. At the carrier and industry level, however, the financial downside will still be small. At worst, it will simply cause insurers to raise premiums in later years to stabilize the new risk pools. Overall, the exchange business is an incremental business opportunity, and changes to deadlines and implementation are likely to have only a marginal impact on business.

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Jonathan Wu has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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