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Does This Staggering Loss Prove Obamacare Is a Failure?

By Todd Campbell - Jan 24, 2016 at 6:01AM

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The prospect of hundreds of millions of dollars in losses has UnitedHealth Group reconsidering its strategy.

Image source: Department of Health and Human Services.

UnitedHealth Group (UNH 1.17%), the largest health insurer in the country, can't seem to figure out the odds on Obamacare, and as a result, it's warning investors that it stands to lose hundreds of millions of dollars on the insurance plans it sells on the Obamacare marketplaces this year.

Mounting losses
UnitedHealth Group surprised investors two months ago by warning that it would lose $425 million on Affordable Care Act plans in 2015, and that it would recognize an additional $245 million in losses that were expected to occur in 2016.

UnitedHealth also estimated that -- on top of those losses -- it would lose another $400 million to $425 million on Obamacare insurance plans in 2016.

Even scarier, it appears that when UnitedHealth made those predictions, it underestimated just how bad the exchange business will be this year.

On Tuesday, the company's management increased the amount it expects to lose on Obamacare plans to more than $500 million in 2016!

That's a stunning revelation for a couple of reasons.

First, it suggests the actuaries working at the biggest health insurer in the country can't break the code on Obamacare pricing, and secondly, it suggests investors shouldn't put too much confidence in management having a grip on just how big of a profit drag these plans could be this year.

Billions on the bottom line
Hundreds of millions of dollars in losses is nothing to sneeze at, but before investors start panicking, they need to remember that UnitedHealth's other insurance businesses are humming along nicely.

The company just finished reporting its 2015 financials, and those figures include $11 billion in operating income and adjusted net-income per share of $6.45.

Supporting those profits were improved enrollment and revenue from its Medicare Advantage and Medicaid businesses. In 2015, Medicare related revenue grew 8% to $49.7 billion while Medicaid revenue improved by 23% to $28.9 billion.

Obviously, UnitedHealth's results would have been better if the company didn't sell plans on the exchanges last year, but UnitedHealth is far from a company that's operating on borrowed time.

What may be most perplexing to industry watchers is the difference between UnitedHealth's approach to the Obamacare exchanges and that of its chief rivals, including Anthem (ANTM 0.17%), the nation's second largest insurer.

UnitedHealth took a very cautious approach to participating on the exchanges during the first open enrollment in 2013-2014, selling plans in only a handful of states. It wasn't until after Obamacare signed up millions of new members that UnitedHealth opted to jump in with both feet and start selling plans in roughly two dozen states.

That decision now appears to have been a mistake given losses have management debating whether or not to retreat entirely from the program next year.

UnitedHealth's all-or-nothing approach to Obamacare contrasts with the approach taken by Anthem.

Anthem has been selling plans in 14 states since year one, and while Anthem's management admits it's still not generating the 3% to 4% margins from the business it wants, it has yet to say it's contemplating an exit. Instead, the company is tweaking pricing and reducing administrative expenses associated with its exchange plans -- something that's arguably easier for it to do because its approach has given it more data to digest.

Time will tell
If insurers can't make money on their plans, that could force them to hike premiums or increase deductibles; actions that could put them on the regulatory hot seat and cause more healthy "invincibles" to drop their coverage. That could result in a death spiral in which only those who are sick and costly to insure keep paying their premiums.

There's still hope that Obamacare can pan out for insurers, but a lot of that hope may rest on whether or not penalty increases that kick in this year will lead to healthier, more profit-friendly people getting health insurance. Time will tell if that's the case, but it may not matter to UnitedHealth. The company expects to decide whether or not to keep participating on the exchanges in the next few months. 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's client may have positions in the companies 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.

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Stocks Mentioned

UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$541.30 (1.17%) $6.24
Anthem, Inc. Stock Quote
Anthem, Inc.
$475.92 (0.17%) $0.79

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