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Is Obamacare About to Lose Yet Another Big Insurer?

By Todd Campbell – Apr 2, 2017 at 7:00AM

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Anthem may be considering significantly reducing its participation in the Affordable Care Act in 2018.

Although management has yet to confirm that it will exit the Obamacare marketplaces soon, reports are that Anthem, Inc. (ELV -3.79%) is close to announcing it will leave a significant number of states as soon as 2018. If so, then it will mark another high-profile loss for the Affordable Care Act exchanges, because Anthem is the country's second-biggest health insurer, and it sells plans in 14 states.

What's going on

Obamacare provides individuals and families without insurance an opportunity to buy health insurance through a federal or state-run marketplaces, or exchanges. These marketplaces allow insurers to compete on services and price to win members. Insurers, however, have yet to figure out how to price plans sold on the exchanges, and that's leading to significant losses on their Obamacare plans.

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After reporting hundreds of millions of dollars in losses on Obamacare plans in 2015, UnitedHealth Group (UNH -5.21%), the nation's biggest insurer, announced in 2016 it would stop selling plans in more than 25 states, taking their participation down from 30 states in 2016 to fewer than five states in 2017.

Other insurers are also reducing their exposure to the exchanges, including Humana (HUM -4.67%) and Aetna (AET), which had been hoping to merge together. After regulators blocked that merger, Humana announced this past February that it will cease selling Obamacare plans altogether, eliminating coverage for consumers in 11 states. Aetna is still considering what its plans will be for the exchanges in 2018, but it already cut its participation from 15 states in 2016 to four states in 2017. 

If Anthem follows their lead, it will be a big blow to the program, because it's been a significant player in the marketplaces since they first opened up for enrollment in 2013. If Anthem exits the exchanges in 2018, it would reduce competition in over 144 regions of the country. Importantly, a departure could leave consumers in states including Colorado, Kentucky, Missouri, and Ohio without any insurers on the marketplaces, according to the news website Axios.

What's gone wrong

Losses on exchange plans are the result of insurers incorrectly modeling for more young and healthy Americans signing up. Obamacare includes tax penalties to nudge healthy people to enroll in health insurance, but many people have decided to pay the penalty or file for an exemption rather than sign up for insurance. Those decisions have tilted membership pools toward older and sicker patients, who require more expensive healthcare services.

The makeup of members has also been negatively impacted by the Supreme Court's decision to make Medicaid expansion optional. Many Republican-led states chose not to expand Medicaid, shifting many less healthy people who would otherwise have ended up on the program to Obamacare's exchanges. Mandating insurers spend at least 80% of premium revenue on patient healthcare and limiting premiums on older members to no more than three times what's charged younger members have also presented problems for insurers when it comes to accurately pricing plans.

Insurers' ability to turn a profit on Obamacare plans has also been hurt by legislation that's broken the ACA's risk-sharing rules. Funding Obamacare's risk corridors would have offset insurer losses caused by lopsided membership pools, but Republican lawmakers passed legislation in 2015 that mandates risk corridors be budget neutral. Because less money is being paid into the risk-sharing program than is being requested by insurers, the government currently owes billions of dollars to insurers on losses on plans since Obamacare opened for business.

Unfortunately, insurers are now faced with a decision to increase premiums significantly to make up the difference or exit the marketplaces altogether, and following Donald Trump's election, the option to exit has gotten more attractive. 

Trump campaigned aggressively to repeal Obamacare and replace it with something else, and last month, Republicans in the House of Representatives proposed the American Health Care Act (AHCA). The AHCA has stalled in the House (for now), but reform could still happen, and that would ostensibly be done in a manner that would be more friendly to insurers. Also, it's unclear what the future is for Obamacare penalties for going without insurance, and absent those penalties, many more healthy Americans may drop their coverage, creating additional losses for insurers. 

Since any potential replacement plan may eliminate expensive, mandatory care such as preventative services while also rolling back age-rating and out-of-pocket limits, there seems to be less of an incentive for insurers to support the Obamacare exchanges.

What's next

House Republicans hoped to vote on the AHCA in March, but opposition from subgroups within the Republican Party caused the vote to be tabled for now. Efforts to rework the AHCA to win more support, however, appear to continue, so it's possible a vote on a replacement plan could still happen this year. If it doesn't, then uncertainty in the health insurance market could be enough of an added risk to convince insurers like Anthem to quit Obamacare, at least until they have a better handle on Washington's plans for reform.

Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

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