The Nation's Largest Insurer Just Dropped a Bombshell on Obamacare

Image source: White House on Flickr.

There's little denying that Obamacare (officially the Patient Protection and Affordable Care Act) has been a polarizing law since its inception.

The give and take of Obamacare
On one hand, the uninsured rate in this country is the lowest it's ever been. Data from the Centers for Disease Control and Prevention from the first quarter showed that, including Medicare patients, only 9.2% of the adult population was uninsured. On the surface, it would appear that Obamacare is meeting its goal of reducing the uninsured rate and providing consumers more choice and better transparency when it comes to selecting a health plan.

But we've also seen a laundry list of problems emerge. Aside from the technical glitches that kept millions of Americans from completing their enrollment two years prior, Obamacare has drawn ire for its use of penalties to coerce the uninsured to buy insurance. Also, the beefed up minimum essential benefit requirements for plans sold on marketplace exchanges pushed millions of consumers to buy new plans and/or change their primary doctors because some insurers simply chose not to update low-cost plans that pre-dated Obamacare.

However, what really matters in the end is if President Obama's legacy law can actually lower the uninsured rate while also helping to control rising medical costs.

Image source: NIH Image Gallery via Flickr.

The nation's largest insurer just dropped a bombshell on Obamacare
The jury is still out on this question, because we simply haven't gathered enough data to make a proper assessment in two-plus years. But the nation's largest insurer, UnitedHealth Group (UNH 5.22%), appears to have made up its mind -- and it doesn't have the most glowing review of Obamacare.

UnitedHealth Group, which operates under health-benefits provider United Healthcare in about two dozen states, may stop offering healthcare plans on Obamacare's marketplace exchanges beginning in 2017. This warning comes after UnitedHealth Group lowered its full-year profit expectations as a direct result of Obamacare. If United Healthcare decides to stop offering plans via Obamacare's exchanges, approximately 500,000 people will need to find new plans, and potentially new primary care physicians, in 2017. The insurer also noted that it would stop actively advertising to potential Obamacare enrollees in order to minimize its losses.

Per UnitedHealth Group, Obamacare enrollees tend to either be sicker and/or more willing to use their health insurance compared to members that enroll from other avenues (i.e., Medicare Advantage, employer-sponsored, or private market). This is resulting in higher medical expenses for UnitedHealth Group and weaker profits.

No one exactly expected insurers to rake in high margins under Obamacare, but the presumption had been that a high volume of new members would more than make up for the drop in margins from Obamacare plans, ultimately becoming a positive for insurers in the end. Yet based on UnitedHealth's quarterly results and its threat to leave Obamacare, it's clear that this presumption hasn't been correct.

Image source: Flickr user Steve Wilson.

There's more to it than just sicker individuals enrolling
Aside from higher medical costs as a direct result of sicker individuals enrolling, there are other issues as well.

For example, the individual mandate penalty, or the penalty uninsured consumers pay for not purchasing health insurance, may not be doing a good enough job encouraging younger adults to enroll. Some healthier young adults feel invincible and don't believe it's necessary to purchase health insurance, or they're finding the cost of the penalty to be far more reasonable than the cost of purchasing health insurance for a full year.

In 2014 the average penalty paid by non-compliant individuals was just $190. Yes, the minimum penalty rose in 2015, and it jumped dramatically once again in 2016. Even so, what non-compliant consumers wind up paying in penalties will likely be much less than what the cheapest silver or bronze plan would cost over the course of a full year. In short, taking the penalty could be saving young adults money.

Another problem is the risk corridor. The risk corridor is an Obamacare program designed to buoy newer, smaller, or inexperienced insurers by providing them with financial assistance if they're losing a lot of money (presumably from treating a lot of sick patients). This capital was expected to come from the federal government, as well as from well-off insurers that were raking in the dough. The problem is that few insurers are doing really well under Obamacare, and a Republican-led Congress is doing everything possible to block funding to the risk corridor. A lack of available capital to the risk corridor is what helped shut the door for a dozen of Obamacare's 23 health cooperatives, leading to higher premiums and fewer plan choices for consumers in select states in 2016.

Image source: Flickr user Francisco Osorio.

Is this the beginning of the end for Obamacare?
The real concern here is this: if UnitedHealth Group, the largest insurer in the U.S., and an operator in two-dozen Obamacare exchanges, can't make money on the Obamacare exchanges, then who can?

If UnitedHealth Group follows through with its threat to leave Obamacare, it would fall on smaller insurers to pick up the slack. Without much help from the risk corridor, these insurers would need to be on solid footing by the end of the year, or we could have a mess on our hands.

If you're looking for potential beneficiaries of a United Healthcare exit, I would suggest Centene (CNC -0.63%) and Molina Healthcare (MOH -0.96%) may be able to step up in select states. Centene and Molina are both relatively new entrants to the individual insurance market and are working out the kinks in pricing their policies. But having focused on government-sponsored members via Medicaid for decades, both companies are profitable and understand what it takes to make money on tighter margins. In other words, Centene and Molina could actually be better off playing the numbers game, even if they enroll sicker individuals in some states.

But UnitedHealth's possible exit raises questions about the Obamacare's long-term viability. The 2016 elections could very well spell its doom if a Republican president and Republican Congress are voted into office. UnitedHealth's public lashing of Obamacare could also cause other national insurers to rethink their participation in the program. Cigna and Aetna haven't fared much better than UnitedHealth, and it's not out of the question that they, too, could wind up pulling out altogether for the sake of their margins.

Still, it's important to keep two key points in mind. First, there's no way of knowing with any certainty whether or not Obamacare would be just fine relying on smaller insurers to pick up the slack. It may work out just fine, or it could be a colossal failure. After a little over two years we still don't have a lot of data to go off of, and we really should give it more time before deeming Obamacare a success or failure.

Secondly, it's imperative that investors and consumers keep in mind that insurers aren't generating a substantial amount of revenue from Obamacare plans. For many we're talking about a low-to-mid single-digit percentage of annual revenue generated from Obamacare plans. Losing Obamacare enrollees might sting over the short-term for UnitedHealth, but the difference it could make in the company's margins could make an exit a particularly smart move over the long run.

If I were you, I'd be paying close attention to UnitedHealth's strategy moving forward, as well as the 2016 elections.