News that individual health plan rates are rising more than 10% for Americans buying subsidized policies on public exchanges is bad news for patients seeking coverage under the Affordable Care Act.
But the higher premiums and related fallout from growing pains in the program's second year are also beginning to raise some troubling signs for health plans and hospital operators for 2016.
And that could be a problem for investors in stocks of health insurance companies like Aetna, Anthem, Humana (NYSE:HUM), and UnitedHealth Group (NYSE:UNH), as well as hospital operators like Tenet Healthcare and HCA Holdings (NYSE:HCA). Even a brief interruption to revenue from the health law or dampened profits would be a sharp contrast to the bull run investors have seen since broader coverage for the uninsured began in January of 2014.
Already, UnitedHealth Group has lowered its profits expectations for the rest of this year and 2016 and won't commit to staying in the business of providing coverage to individuals on public exchanges beyond next year.
Here are the top three concerns to monitor:
1. Are patients paying their premiums?
HCA, the nation's largest hospital operator, said that in its third quarter it saw an uptick in patients who returned to the ranks of "self-pay," an industry term for the uninsured. These patients were what the company called "public exchange" patients who no longer have coverage and contributed to a 6.5% "growth in uninsured emergency room business." HCA chief financial officer William Rutherford said on the company's third-quarter earnings call that the company "saw 480 patients who were previously registered as health exchange convert over to self-pay in the quarter."
HCA management couldn't yet tell whether this was a trend, but it's something for investors to watch. "We believe this is likely due to non-payment of premiums," Rutherford said. For hospitals, it could mean a rise in care for which they aren't compensated, which has been an expense that has been falling since the beginning of 2014. Insurers, meanwhile, cannot count on a steady revenue stream of premiums nor can they be confident in figuring out risk pools used to pay claims.
2. Insurers offering patients the wrong products.
Across the country, health plans including Aetna, Humana, and others say they are pulling certain products from public exchanges because they are losing money, forcing tens of thousands of customers to switch plans. A report from the Robert Wood Johnson Foundation said "two-thirds of insurance companies" that offered PPO plans on public exchanges either stopped offering these plans for 2016 or reduced the number of plans they offered last fall for this year.
PPOs allow health plan subscribers to go outside of the insurance company provider network, though customers lose a discount if they do so. Because PPOs offer more access, they are expensive to operate. The insurers say they are offering these abandoned customers different products, but there's no guarantee they will keep the business as Americans pick new coverage during the public exchange open enrollment that runs to Jan. 31, 2016. It's unclear where the business will go but Anthem and Aetna, which are both poised to grow through their acquisitions of Cigna and Humana, respectively, are pushing plans with narrower networks to capture these customers. Time will tell.
3. Are Obamacare customers who they say they are?
Humana disclosed in its third-quarter earnings that its individual commercial insurance business lost 150,000 customers who had selected plans on the public exchanges because the federal government found these enrollees lacked "proper immigration documentation and/or income status." This contributed to an 11% reduction in Humana's individual commercial enrollees.
While rival insurers haven't made similar disclosures, a report from the Centers for Medicare and Medicaid Services in September found more than 420,000 people seeking coverage "failed to produce sufficient documentation on their citizenship or immigration status" as of June 30. If the issue worsens, it could cause problems as it did for Humana when it had to tell investors its individual business wasn't as big as it projected.
Turbulence in the Obamacare market
Should the rate of uninsured patients begin to rise, that could impact hospitals' bottom lines. Meanwhile, exchange patients being forced to pick another plan could mean people will stop getting coverage altogether, or at the very least, be a loss of business for one insurer over another. As patients maneuver in and out of plans, that could cause more turbulence like that we've already seen in UnitedHealth's inability to manage the individual commercial insurance business. This could hurt the bottom lines of health insurers and hospital companies, and it's something for investors to weigh if they are going to participate in in this space.
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and Anthem. 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.
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