The Patient Protection and Affordable Care Act, set to go into full effect on Jan 1., is certain to have broad-reaching impacts on the way that insurance companies sell their products to consumers. Some insurers, like Aetna (NYSE:AET), have been jockeying for position in the Medicaid arena, purchasing Coventry Health Care for $5.7 billion to take advantage of the coming Medicaid expansion. Other insurers have chosen to enter new markets and utilize the transparent state-run health exchanges being formed under the PPACA, also known as Obamacare, to expand their presence.
Over the weekend, Aetna made it very clear to consumers and the government that increasing levels of competition may not be the end result of state-run health exchanges.
On Saturday, Aetna informed California Insurance Commissioner Dave Jones that, in addition to not participating in California's health exchange, it planned to pull out of the state altogether with regard to offering individual health plans. Keep in mind that Aetna still intends to offer health plans to businesses and Medicare beneficiaries, which is where the bulk of its profits are in California, but it is nonetheless going to send 49,000 current members out into the cold (or should I say the palm trees?) to find another health plan.
A case of deja vu
If this sounds eerily familiar, it should be, because we saw very similar anti-competitive announcements from three of the nation's biggest insurers in California last month: Aetna, CIGNA (NYSE:CI), and UnitedHealth Group (NYSE:UNH), which all decided not to participate in Covered California, the state's health exchange.
The logic behind their absence in participating in a public health exchange does make some sense. Combined, these three health-benefits providers comprise just 7% of all outstanding individual health plans in California. With the big four -- Kaiser Permanente, Blue Shield of California, Anthem Blue Cross (a WellPoint (NYSE:ANTM) subsidiary), and Health Net (NYSE:HNT) -- taking the majority of California's individual health insurance business, the costs of fighting for new members may not have been justified.
Does this defeat the purpose of Obamacare?
The biggest concern remains whether these new exchanges will increase competition among insurers through better pricing transparency, or whether health insurance for individuals will cluster in the hands of just a few companies in each state. Based on what we're witnessing from California, it looks as if four insurers will control the bulk of the market. Even if Obamacare's state-run health exchanges have resulted in lower-than-expected premiums for individuals on the surface, putting majority control in the hands of just a handful of insurers won't obligate them to pass along these cost savings to consumers and could lead to less price competitiveness, defeating the whole purpose of Obamacare.
For Aetna's bottom line, its choice not to participate in Covered California isn't a big blow by any means since it derives most of its premiums in the state from enterprise and Medicare members. But, Aetna is sending what could be a bigger message that not even the most populous state in the country is enough allure to enter a crowded state-run health exchange. If the impetus to enter new markets is discouraged by state-run exchanges, then the chances of seeing meaningful reductions in premium pricing could be lost.
It certainly makes me wonder if CIGNA or UnitedHealth are next to exit California on an individual plan basis, and whether we'll see similar insurers dropping out of prominent markets in other states. One thing is for sure, though -- there are still more questions than answers as we approach the full implementation date in January.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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