Some of the country's biggest health insurers, including UnitedHealth Group (NYSE:UNH), Humana (NYSE:HUM), and Aetna (NYSE:AET), are walking back exposure to the Affordable Care Act next year. One reason why could be the expiration of reinsurance and risk corridors, two provisions that insurers have been relying on to reduce the risk of massive Obamacare losses.
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss why the expiration of these provisions could be behind insurers' decision to reduce their participation in the program.
A full transcript follows the video.
This podcast was recorded on Aug. 17, 2016.
Todd Campbell: There could also be not only this undercurrent of quid pro quo -- you passed my deal and I'll expand my exchanges -- but it could also have something to do with the fact that part of the risk corridors and the reinsurance provisions of the ACA that have been smoothing the profitability across the industry, those are expiring at the end of this year. So, they're looking at 2017 and they're saying, "OK, we're not going to get the benefit of reinsurance risk corridors," which, again, have been smoothing profitability across the industry, "and that means there's a lot of uncertainty regarding how we should be pricing our plans for next year. Why take on that uncertainty if the DOJ isn't going to work with us on leveraging a bigger foot print?"
Kristine Harjes: Todd, can you remind our listeners what exactly the risk corridor was?
Campbell: Sure. Risk corridor, basically, what they do is they collect money from plans that are profitable, those plans that have had extraordinary, unexpectedly high gains and then they redistribute those to the plans that have had unexpectedly high losses. It was a way of helping to rein in the need to price these plans at such a high level to guarantee profitability. It was the way for Washington to say, "Listen, we want you to participate, and we're going to provide a little bit of insurance to the insurers to make sure you don't lose your shirt by being part of the exchanges."
Harjes: Exactly. So, before we move on to the second part of our show, I want to bring back to you our investing take away. That's what we're doing this show for. Todd, what do you think, looking at this recent news and everything going on with the Department of Justice and these proposed mergers? How should an investor be looking at this?
Campbell: I think that United Healthcare, of the companies that have said they're going to walk away, is probably the one with the least question marks, only because it doesn't have the Department of Justice overhang. If these deals get scuttled by the DOJ, Aetna's going to have to pay a breakup fee. So, that's a drag on earnings. Then, there's the uncertainty of "how will all these changes shake out?" I don't know, I think it's best for most investors to avoid these names until we get a little bit more clarity. If you're really interested in insurance, maybe focus instead on some of the Medicaid players, or some of the other stuff, rather than the commercial insurers.
Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. 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.