The Patient Protection and Affordable Care Act, which you probably know best as Obamacare, has been a controversial law since day one. Yet, in spite of proponents and opponents bickering about its benefits and shortcomings, the law has hit on its primary goal of lowering the total number of uninsured people.
The Centers for Disease Control and Prevention's first-quarter data showed that 9.2% of adult Americans were currently uninsured, inclusive of Medicare enrollees. That's the lowest uninsured rate on record. Enrollment data from the Centers for Medicare and Medicaid Services at the end of June concurred with this assessment, as nearly 9.95 million people were paying customers via Obamacare's marketplace exchanges.
Must-see quotes from UnitedHealth Group's CEO
However, as we recently learned when the nation's largest health-benefits provider, UnitedHealth Group (NYSE:UNH), issued a downside revision to its full-year profit guidance, Obamacare's marketplace exchanges may not be a sustainable platform.
UnitedHealth's press release painted a picture of red ink for the company's marketplace plans, and suggested that it could pull out of Obamacare's exchanges beginning in 2017. Should it do so, more than 500,000 enrollees would be forced to seek out a new provider and potentially a new primary care physician. UnitedHealth also announced that it was paring back its advertising for 2016 in the hope of minimizing its exchange-based losses.
This Obamacare bombshell came just days before UnitedHealth Group was to hold its annual investors-day conference. That event took place yesterday; here are the five quotes from UnitedHealth's CEO Stephen Hemsley that you absolutely must see.
There aren't any rays of sunshine
We could not sustain the eroding level of losses on our exchange products, and we needed to reflect where the pressure was and deal with it. We were not seeing any significant improvement in the direction of these trends, the growth of the risk pool, and the fluid entry and exit patterns. And above all, we felt we needed to address and cap it for 2016, and then determine to what level, if any, we would continue to engage in this product going forward.
Perhaps the biggest keynote of Hemsley's opening remarks to investors concerning Obamacare is that absolutely nothing seems to be going right. Admittedly, UnitedHealth isn't giving Obamacare a lot of time to evolve, but the simple fact remains that consumers have far too much flexibility to change plans, and people who are enrolling for care are seeking medical care far more than insurers had anticipated. Long story short, UnitedHealth's losses from its Obamacare exchanges are expected to adversely impact its 2015 and 2016 full-year profits.
There's no single factor to blame
Over the years, we've found that rarely does any single factor emerge; but instead, many ultimately contribute. So there likely won't be any single, broadly accepted marketplace conclusion for some time.
An interesting point by Hemsley is that there's not a single factor you can point your finger to that perfectly encompasses why the Obamacare exchanges aren't working for UnitedHealth Group. This is because the marketplace dynamics are still evolving. New health-benefit providers are still playing with their premium prices to determine what's optimal, and consumers are still adjusting to the purchasing process. It's likely going to take many more years before any concrete conclusions about the success or failure of Obamacare can be reached.
Taking the blame
So who is to blame? You're looking at him. It was, for us, a bad decision. Ultimately, I take accountability for sitting out the exchange market in year one, so we could, in theory, observe, learn, and see how the market experience would develop. This was a prudent going-in position. In retrospect, we should have stayed out longer. It will take more than a season or two for this market to develop.
It's a smart move, in my opinion, for Hemsley to put the onus of blame for UnitedHealth's recent woes on himself, and it gave the CEO a chance to pivot the discussion to UnitedHealth's non-Obamacare segments, which are actually performing quite well. Addressing the company's problems early, and being forthcoming, goes a long way with investors and Wall Street -- especially if its issues are easily fixable by simply pulling out of most, or all, of Obamacare's exchanges.
Keep this in mind
As you know, while we have pulled back aggressively this year, we have not made final decisions about this market for 2017. That call will need to be made in the first half of 2016. It will be a product-by-product, market-by-market determination. We will not knowingly lose money in this product line in 2017. And keep in mind that any such decision to pull back in a particular offering are not necessarily permanent in nature.
Although UnitedHealth's commentary suggests that there have been no rays of sunshine when it comes to its Obamacare plans, Hemsley's remarks imply that a complete pullout may not be likely, either. It's possible that there will be viable market opportunities for UnitedHealth in 2017, but it'll probably be much choosier about where it prices its plans.
Additionally, it's worth noting that UnitedHealth has been choosy about entering new markets before, only to have them turn out to be quite profitable. In 1999, UnitedHealth pared back its Medicare Advantage offerings after finding the market to be challenging. Today, however, Medicare Advantage comprises around a quarter of UnitedHealth Group's annual revenue, and it's a very profitable segment for the company. In time, it's possible Obamacare could be profitable for UnitedHealth, too, and it's willing to keep its eyes open for a shift in the market dynamics surrounding Obamacare's exchanges.
Obamacare isn't critical to our success
We will not allow one relatively small product line with one market segment to impair that critical agenda.
Lastly, Hemsley hammered home the point, once again, that UnitedHealth's business doesn't revolve around Obamacare. For UnitedHealth, Obamacare represents a low single-digit percentage of revenue, and while it would take a top-line hit by removing itself from some, or all, of the exchanges it's currently operating in beginning in 2017, it should actually see a medical-loss ratio decline, which would be beneficial to its profitability.
Ultimately, UnitedHealth may have been a little naive rushing into the exchanges as early as it did, just as it may be prematurely leaving without giving the marketplaces much of an opportunity to find an equilibrium. Still, the move to back away from a losing venture is almost always a smart one for insurers, and investors should feel pretty confident following the investors-day conference that UnitedHealth Group has a bright future.
The question that still needs to be asked, on a broader note is, "If UnitedHealth, the nation's largest insurer, is struggling on Obamacare's marketplace exchanges, then what chance do smaller insurers have of succeeding?" Only time will give us this answer.