In October, UnitedHealth Group (NYSE:UNH) announced plans to expand its presence in Obamacare exchanges and expressed confidence that the exchanges would develop "over time into a strong, viable growth market." Just over a month later, that optimism has evaporated.
The nation's largest health insurer now says that it is pulling back on marketing efforts related to Obamacare exchanges and is "evaluating the viability of the insurance exchange product segment" going forward. CEO Stephen Hemsley cited higher risks and lowered growth expectations. Did UnitedHealth just signal doom for Obamacare exchanges?
Not doomsday yet
It's too early to proclaim the demise of the exchanges. For one thing, UnitedHealth hasn't finalized any decision yet about pulling out. The company plans to watch how things go during the first half of 2016 and then determine what it will do in 2017. However, losses from the Obamacare exchanges caused UnitedHealth to lower its full-year 2015 earnings outlook.
None of the other major health insurers have sounded nearly as gloomy. Anthem (NYSE:ANTM) recently stated in an SEC filing that it expects to hit earnings targets for 2015. Molina Healthcare (NYSE:MOH) CEO Mario Molina told USA Today that the Obamacare exchanges have proven to be a "profitable line of business" and found UnitedHealth's dilemma "a little puzzling".
The U.S. Department of Health and Human Services was quick to downplay the significance of UnitedHealth's warning. HHS spokesman Ben Wakana said that the company's statement "is not indicative of the marketplace's strength and viability." Wakana added, "The reality is we continue to see more people signing up for health insurance and more issuers entering the marketplaces."
Tip of the iceberg?
Still, though, the challenges referenced by UnitedHealth appear to be troubling enough to cause concern about the future of Obamacare exchanges. After all, if the largest health insurer in the country can't be successful with Obamacare, how can others fare well over the long run?
In a call with analysts, Stephen Hemsley confirmed a big fear that some had about the Obamacare exchanges from the beginning. Individuals with the most health problems appear to be signing up for insurance more while enrollment of healthier Americans lags.
UnitedHealth's announcement of a potential pullout comes on the heels of reports about financial woes for several non-profit health cooperatives that compete on the Obamacare exchanges. One co-op has already shut down, with four others planning to do so by the end of the year.
While Anthem continues to project confidence in the viability of its Obamacare exchange business, the company's CFO admitted that it will lose money on its Obamacare plans for 2015. Anthem has also lost market share on the exchanges.
And although Molina Healthcare talks about its profitability with the Obamacare exchanges, the reality is that the company's presence in that market is relatively small, with only 226,000 members. Nearly two-thirds of Molina's Obamacare exchange membership comes from one state -- Florida.
There could be a silver lining for investors in UnitedHealth's bad news. If the company bails out of Obamacare exchanges, the move should improve its bottom line. If UnitedHealth sticks with its Obamacare plans, it will mean that the underlying profitability issues with the plans can be resolved. Either way, UnitedHealth benefits over the long run.
Investors also might want to focus less on potential problems in the Obamacare exchanges for insurers and pay more attention to where the real money is being made from Obamacare -- Medicaid expansion. Molina Healthcare is a good example: just look at the company's trailing 12-month revenue and earnings percentage growth.
Molina's success stems largely from its Medicaid business, which has grown thanks to Obamacare. The company should continue to thrive as more states look to managed care to control Medicaid costs.
Are the Obamacare exchanges doomed to fail? Maybe -- but maybe not. Regardless of the outcome for Obamacare, though, some health insurers (and their shareholders) can succeed.
Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Anthem and 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.