3 Crucial Obamacare Questions We Need Answered

During the Obamacare's first enrollment period, which ended on March 31, roughly 8 million people signed up for health-care insurance through online marketplaces and another 3 million gained coverage through Medicaid expansion.

That's a lot of new customers for health-care insurers UnitedHealth  (NYSE: UNH  ) , WellPoint (NYSE: WLP  ) , and Aetna (NYSE: AET  ) , but before declaring the Obamacare a success for insurers we'll need to answer three important questions heading into the next open enrollment this November.

Source: White House Flickr

1. What do the risk pools look like?
Insurers only profit if the cost of caring for these new customers has been appropriately priced. Insurers spend tremendous resources trying to model that expense correctly and are typically successful, at least based on the industry's earnings growth over the past decade. Net income at UnitedHealth, for example, hit a new decade high during the past 12 months.

However, modeling pricing for the Obamacare exchanges was more difficult. The law mandates that insurers use just five factors (age, location, tobacco use, individual versus family enrollment, and plan category) in determining Obamacare health plan prices.

The more limited data pool for setting plan pricing exposes insurers to greater risk; that's worrisome for investors given that the insurers' operating margins are small, for example 5% at WellPoint to 7% at UnitedHealth. That means there's little wiggle room to get pricing right and makes it especially important that the number of younger, healthy members adequately offsets the costs associated with older, less-healthy members.

So far it appears that the percentage of healthy people was modeled correctly. According to Aetna CEO Mark Bertolini on the company's first-quarter conference call, "absent more data on the underlying experience of this population we feel we are priced appropriately for both early renewals and for the ACA compliant plans at this time." Whether that holds up in the second quarter remains to be seen.

 2. What is the final tally, and how many already had insurance?
Big insurers clearly saw enrollment climb in the first quarter, but some of the growth tied to new Obamacare members was offset by declining membership in non-marketplace plans. That means a lot of the membership growth at these three insurers in the first quarter came specifically from the Medicaid expansion.

UnitedHealth's commercial and individual membership dropped by 345,000 people from a year ago, but the company's Medicaid membership jumped by 255,000 thanks to states adopting Medicaid expansion.

WellPoint estimates that its total new members from marketplaces through the end of open enrollment will be over 600,000. WellPoint's Medicaid business added 121,000 people in the first quarter thanks to expansion; that number was expected to increase to over 400,000 people, the company's said in its first-quarter conference call.

Following the end of the first quarter, Aetna reported 600,000 people had signed up for coverage through the marketplaces, with almost 500,000 having paid premiums as of the company's first-quarter conference call on April 24. Aetna also saw its Medicaid membership grow by 60,000 in the first quarter.

White House Flickr.

The first-quarter numbers suggest Medicaid expansion was a far bigger boost to insurers (at least early on) than the marketplaces. Whether that dynamic holds through the second quarter is a question mark.

The Obama administration said a rush of new applicants at the end of open enrollment drove the number of insured through marketplaces to 8 million. If the majority of those newly insured pay (and most were not previously covered by these insurers), then insurers' growth numbers for the second quarter could significantly exceed investors' predictions exiting the first quarter.

3. What will rates be next year?
Competition for new marketplace members is heating up as insurers that previously took a cautious approach to offering plans on the exchanges jump in. As a result, we're seeing some significant variation in pricing for 2015 plans thus far.

For example, projected rate increases by insurers already participating on the marketplace in Ohio include a 7% bump up for HealthSpan and a nearly 9% increase for Anthem. Meanwhile, Aetna plans to enter the Ohio marketplace in 2015; its prices may be more than 7% lower than prices for its plans offered last year off the marketplace in the state.

A similar situation is unfolding in Washington state. Fellow Fool Sean Williams reported that 13 insurers submitted pricing in Washington, including four new entrants.

Twelve of those submissions represented increases over 2014. The lone decrease was for plans offered by regional insurer Molina Healthcare, a big player in Medicaid that hopes to win individual market share in Washington. Otherwise, proposed rate increases ranged from just 0.6% for Kaiser's Health Plan of the Northwest to 11% for Group Health Cooperative.

Fool-worthy final thoughts
Fortunately, second-quarter earnings announcements are set for July, which means we should get insight soon into whether the reported rush of young applicants in March kept health-care costs in check for UnitedHealth, WellPoint, and Aetna. Those reports will also let us know how many of those 8 million newly insured members made their first payments and whether the Medicaid enrollment surge continues to prop up results. If the patient pools are in line and membership comes in better than hoped, insurers could be poised for earnings and dividend payment growth in 2015.

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