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Can Insurers Survive Obamacare in 2016?

By Bruce Japsen – Feb 11, 2016 at 9:06AM

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The nation's largest health insurers have yet to get a handle on medical expenses of the Affordable Care Act's individual insurance plans after two years, but year three could be the year they make money.

Health insurance companies are limping into the third year of subsidized private health insurance coverage on public exchanges under the Affordable Care Act. Despite initial optimism about Obamacare, it's hardly been a picture of success for insurers.

UnitedHealth Group (UNH 0.74%) lost $720 million in 2015 on the public exchange business, and Anthem (ELV -0.09%) said the 64% year-over-year decline in fourth-quarter profits could be traced in part to higher-than-expected medical expenses for patients buying Obamacare plans. Meanwhile, Aetna (AET) chairman Mark Bertolini said its individual commercial coverage "remained unprofitable" in 2015.

There's reason for optimism, however, as this year's health plans offer new exchange products with better cost controls coupled with price increases to help stabilize the market. That's good news for investors who've been reading alarming headlines about exchanges and calling into question whether insurers are committed to the business.

"Going into 2016, we are still assuming we will be profitable on our individual and exchange business... as we continue to see those markets hopefully begin to harden around pricing," Anthem's chief financial officer, Wayne DeVeydt told analysts on the company's fourth-quarter 2015 earnings call.

Demise of co-ops means more for big insurers
Larger insurers say they are poised to gain some traction now that smaller operators have left the exchange market. As of the end of 2015, about half of low-cost insurance cooperatives have failed.

"We are seeing co-ops struggle in the moment with more than half of those now insolvent," DeVeydt said of cooperatives created mostly by medical-care providers. "We should be, hopefully, a net recipient of that, and hopefully start getting some of that revenue back."

A new report by researchers by the Robert Wood Johnson Foundation-funded Urban Institute indicates larger managed care plans, like Blue Cross and Blue Shield plans owned by Anthem and other large carriers, have broader medical-care provider networks and more competitive prices.

"In the case of the co-op failures, while some of those closures were abrupt and affected large numbers of consumers, other options were available on the marketplace," said Kathy Hempstead, who directs coverage issues at the Robert Wood Johnson Foundation, in a statement accompanying the Urban Institute report.

Insurers' price hikes mean exchange plan profits
Some health plans that entered the market with lower prices have also had to raise premiums to stay in business, making the playing field level for all companies on exchanges.

In UnitedHealth Group's case, the insurer said they raised prices, and while they haven't committed to the exchanges beyond 2016, they at least hope to stem their losses this year by no longer selling the exchanges' most-expensive "platinum products." The most-popular products on exchanges are lower cost "silver" plans. And that should halt the hemorrhaging the company experienced last year, executives said.

"We have withdrawn platinum products, increased prices, eliminated marketing and commissions, intensified clinical engagement and medical management with this membership group, and reduced operating cost as appropriate," UnitedHealth Chief Financial Officer David Wichmann said on the company's fourth-quarter earnings call.

The large health insurers have said the exchange business amounts to less than 5% of their total portfolios, which also includes Medicare and Medicare plans, as well as commercial coverage for employers.

Aetna, for example, has 1 million members who bought ACA-compliant individual insurance plans, but that's less than 5% of its record 23.5 million enrollees in all of its medical plans. Anthem and UnitedHealth Group have even fewer ACA individual insurance plan members.

"Some of the pricing that we continue to see in our markets, our 14 states, is still well below what we think appropriate rates are for a sustainable environment," DeVeydt said. "I think the fact that we're closer to breakeven in 2015 and a profit margin that's below the targeted 3% to 5% in 2016. I think [this] is a good indication [that] our price point isn't wrong, as much as others need to strengthen their price points."

Should insurers be right about their prices, that will bode well for their stock prices and the future for investors in health plans with products on the Obamacare exchanges.

Bruce Japsen 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.

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