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Aetna, Inc. (NYSE:AET) announced earlier today that it will significantly retrench from the Obamacare exchanges in 2017. The decision comes amid mounting losses associated with serving Obamacare patients, and the exit could cause Obamacare's costs to soar, jeopardizing the program's sustainability.

Heading for the exits

Aetna's decision to shrink its Obamacare footprint from 778 counties to 242 counties next year comes on the heels of a decision by the nation's biggest insurer, UnitedHealth Group (NYSE:UNH), to significantly ratchet back its Obamacare business earlier this year.

In April, UnitedHealth Group announced it will stop participating in most of the Obamacare exchanges in states it previously served. UnitedHealth plans were available in two dozen states last year, but they'll only be available in a handful of states in 2017.

UnitedHealth reports it lost $475 million on Obamacare plans in 2015, and previously, it said that its losses on the program could eclipse $500 million in 2016.

Aetna's struggle to turn a profit on the exchanges is behind its decision to abandon them, too.

Aetna offered Obamacare plans to 15 states this year, and it plans to only offer plans in four states (Delaware, Iowa, Nebraska, and Virginia) in 2017. In the second quarter, Aetna reports it lost $230 million on Obamacare because of rising utilization of high-cost care by Obamacare patients.

Aetna's decision comes only weeks after the Department of Justice sued to block Aetna's proposed merger with Humana, Inc. (NYSE:HUM), another insurer that has indicated it will reduce its participation on the exchanges next year.

Fewer choices and higher costs

The elimination of competition in many markets fuels what is already shaping up to be a big year for plan premium increases.

In July, the Kaiser Family Foundation evaluated 2017 proposed plan prices in 17 states for commonly purchased Silver plans. Their analysis found that the second-lowest-cost Silver plan (the benchmark plan used for calculating Obamacare premium subsidies) will see premiums increase by a population-weighted 9%. For comparison, plan premiums in these states increased by only 2% in 2016. States that will be hardest hit by increases are Tennessee, Oregon, and New York.

Source: Kaiser Family Foundation.

Kaiser also discovered the number of insurers participating in these markets will be lower than last year and about in line with the number of insurers offering plans in 2014.

Looking ahead

Obamacare premiums in the 17 states that Kaiser evaluated have increased an average 7% per year since Obamacare's launch, and now that Aetna's decided to exit Obamacare, the number of plan choices available to Obamacare patients is about to get much more limited.

Higher prices and fewer choices is not what policy makers had in mind for this program, but the Department of Health and Human Services isn't panicking yet. The agency continues to believe that most Americans will have multiple options next year, and since subsidies increase alongside premiums, most low-income Americans won't feel the sting of rate increases. That's true for most Americans; however, it may be less true in some states. Kaiser reports an average 5.8 insurers will offer coverage in the 17 states it reviewed, but residents of Connecticut, Rhode Island, and Vermont will only have two insurers offering plans next year. 

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