The Patient Protection and Affordable Care Act, best known as Obamacare, was expected to be a mixed bag for insurance companies.
On one hand, insurers were no longer going to be allowed to deny coverage to people with pre-existing conditions, and were going to be required to spend at least 80% of their premiums on the medical care of their members. In short, insurers' medical expenses were expected to go up.
Source: University of Michigan Medical School Information Services, Flickr.
Conversely, a large influx of newly insured members -- whether Medicaid-based, partially subsidized, or fully paying – were expected to more than offset the higher costs of treating sick and elderly patients, as well as the 80% cap on the medical loss ratio.
One insurer, however, is warning that the pendulum may already be swinging too far in one direction and could bid Obamacare adieu sooner rather than later.
Hasta la vista, Obamacare?
Aetna (AET +0.00%) CEO Mark Bertolini -- who has not been shy in his criticisms of Obamacare or Obamacare's health exchanges previously -- told CNBC yesterday that, while it's still too early to make any clear determinations as to Aetna's next move, if Obamacare fails to attract a sufficient number of uninsured individuals, under the right circumstances his company could pull out of the program altogether.
This is a truly disturbing scenario, and its reality was brought to light by a question Bertolini's presented to CNBC's anchors on Squawk Box with regard to 2015's health insurance premiums. Bertolini asked, "Are they going to be double-digit [increases] or are we going to get beat up because they're double digit, or are we going to have to pull out of the program?"
Are Bertolini's worst fears coming true?
Bertolini's worries ultimately draw from two conclusions about Obamacare. First, that the program requires a significant number of new enrollees -- 38% by the estimate of the Department of Health and Human Services -- to be healthy young adults, because this group of individuals is needed to help offset the higher costs of treating elderly and terminally ill patients. Second, Bertolini cautioned that Obamacare needs to draw in individuals who were genuinely uninsured previously, not simply switching from a private or employer-based coverage to a public type of coverage.
Bertolini's worst fears, though, seem to be coming true.
Source: White House on Flickr.
The first set of age demographics from HHS earlier this month showed that a mere 24% of the 2.15 million enrollees to date were in the 18-to-34 age range, well below the 38% the department has targeted. Obviously, there's still a lot of time left before the March 31 coverage cutoff date for 2014 to avoid the individual mandate penalty, and young adults are often procrastinators when it comes to paying their bills, including insurance premiums, so not all hope here is lost. However, if young adult enrollment continues at its current pace, it's quite plausible that a scenario to see a scenario in 2015 in which where premiums rise 15%.
The other concern, as Bertolini pointed out, is that only one in nine new enrollees in Obamacare was truly uninsured prior to the start of the program. Most Obamacare enrollees are simply switching out of prior health insurance programs if Obamacare offers them larger subsidies. It's a smart move by consumers, but it's an unintended consequence for insurers and Obamacare itself that could cause insurers like Aetna to lose money.
Don't forget about this
One personal concern that I have, which has been much of an afterthought thus far, is the May 15 deadline by insurance companies to submit premium rates for 2015.
Now, mind you that the open enrollment date for health insurance coverage in 2015 has been pushed back to Nov. 15, after this year's midterm elections, giving insurers a six-month gap between submission and open enrollment. Also, keep in mind that Obamacare's demographic enrollment data is still in its infancy. To me, it seems illogical to expect our nation's insurers to study their data and deliver reasonable premiums estimates for 2015 by May 15. Perhaps I'm not giving our nation's insurers enough credit, but given the number of issues the government had with the Healthcare.gov online insurance exchange which was in planning for three years, I'm certainly concerned about how much time is being allotted for insurers to comb over their enrollment data before submitting their 2015 proposals.
Is this a genuine problem?
The real question, of course, is whether Bertolini's fears and possible warnings are overstated, or if national insurers would actually consider bowing out of Obamacare.
For Aetna, the decision wouldn't be business-altering. According to Bertolini's interview, Aetna only receives about 3% of its total revenue from Obamacare. I think the rapid growth of Medicare Advantage, a supplemental insurance program for seniors that helps defray the costs that Medicare doesn't cover, could more than offset the revenue lost from pulling out Obamacare if Aetna chose to do so. Aetna also exited New York and California's state-run health exchanges, which thus far are two of the three top-performing exchanges based on cumulative enrollment.
WellPoint (WLP +1.46%) seems far less likely to make such a move. I suspect WellPoint is seeing remarkably strong enrollments in New York and California, and its purchase of Amerigroup to gain access to the large jump in government-sponsored enrollees should be working wonders.
Companies such as WellPoint and UnitedHealth Group (UNH +2.90%), the nation's largest insurer, also have relatively little built-in risk even if Obamacare is presenting less than ideal enrollment figures so far. The reason being that so-called "risk corridor" provisions exist within the PPACA that cover insurers' losses if they pay out more than 108% of the premiums collected from customers. In other words, subsidies will be put into place if adverse selection puts previously profitable insurers between a rock and a hard place. This alone should disincentivize most insurers from jumping ship.
Insurers are still going to need a significant amount of time to digest all of this recent enrollment data. We're unlikely to have any real reading of enrollment demographics until at least mid-April, basically giving them a month or less to formulate their 2015 premium pricing. I'm certainly not one to shed a guess in either direction before the facts are in, but the figures certainly point to a choppy and uncertain future over the coming months.
