The third enrollment period for the Patient Protection and Affordable Care Act, which is more affably known as Obamacare, ended on Jan. 31, 2016, with the program generating a healthy tally.
According to data released by the Centers for Medicare and Medicaid Services, approximately 12.7 million people chose to enroll in a health plan during the three-month period. This included about 3.1 million enrollees via the state-run exchanges, as well as a tad more than 9.6 million plan selections via HealthCare.gov, the federally run marketplace exchange that operates in 38 states.
By comparison, the Congressional Budget Office forecast there will be only 10 million Obamacare enrollees by the end of 2016. Even though this 12.7 million figure will likely fall throughout the year as some people obtain health insurance through their employers or fail to make their payments, the final figures provided by the CMS already account for a good chunk of insurer-initiated cancellations. In other words, it appears quite probable that Obamacare enrollment come the end of 2016 will be notably higher than the 10 million-person estimate.
Enrollment rises, but so do losses for some insurers
It's only natural to think that better enrollment statistics should translate into growing profitability for health-benefit providers, but this has turned out to be far from the truth.
Last month, the nation's largest health-benefits provider, UnitedHealth Group (NYSE:UNH), warned investors that it could lose nearly $1 billion, collectively, between 2015 and 2016 from its individual marketplace plans under Obamacare. In total, UnitedHealth projected that the roughly half-million enrollees it netted for calendar year 2015 would grow toward 800,000 in 2016.
What's the problem? According to UnitedHealth Group CEO Stephen Hemsley during December's investor conference, the ease with which consumers can change plans on a year-to-year basis, as well as the higher medical-use rates of the newly insured, have made profitability practically impossible. Hemsley suggested during his presentation that the company should have waited on the sidelines for a longer period of time to allow the marketplace dynamics to develop, but it didn't. Instead Hemsley vowed not to let Obamacare plans continue to be a drag on UnitedHealth's operations and suggested that his company could completely exit the marketplace exchanges by as early as 2017.
Of course, UnitedHealth isn't alone in its struggles. Aetna's (NYSE: AET) CEO Mark Bertolini also announced that his company lost "in the mid-single-digits" on its Obamacare plans, but it expected to do better in calendar year 2016.
This loss by Aetna is of particular interest because it's in the process of buying Humana (NYSE:HUM), a company primarily focused on government-sponsored patients that's also competing on the individual marketplace exchanges. Humana announced last month that it was a taking a charge of $0.74 per share related to losses from its Obamacare plans, and that it was evaluating its plans for 2017 and beyond. Or, in other terms, Humana may wind up cutting its losses and exiting the individual exchanges as well.
These insurers are packing on the profits
Yet, for some insurers, the sky's the limit when it comes to profitability from Obamacare.
St. Louis-based Centene (NYSE:CNC), a company that focuses on government-sponsored plans, reported fourth-quarter results last week that utterly trounced estimates. Centene ended the year with 5.1 million members, a 26% increase over 2014, with Medicaid accounting for 3.5 million of its 5.1 million members. Furthermore, it reported premium and service revenue growth of 33% for Q4 and 36% for the year, as well as a 90 basis-point improvement in its health benefits ratio.
Market-topping results were also generated by WellCare Health Plans (NYSE:WCG), though to a lesser degree. WellCare, which makes the bulk of its revenues catering to government-sponsored patients, reported that adjusted premium revenue rose 6.7% in 2015 and its total Medicaid plan enrollment edged higher by 78,000 to about 2.4 million. Medical benefit ratios, which are a measure of how much the company spends on patient care versus how much it brings in via premiums, improved as well.
The key factor determining insurer profitability under Obamacare
So, why are some insurers completely kicking tail while others struggle? The answer can be found in the type of consumer they are courting. UnitedHealth, Aetna, and Humana are all losing money on their Obamacare plans targeted at individual payers. By contrast, companies focused on Medicaid enrollees are seeing profits soar.
Why are Medicaid enrollees such a critical part of the equation for insurers? First, the Medicaid expansion included within the Affordable Care Act has helped 13.5 million low-income Americans enroll for health insurance between mid-2013 and October 2015, per Medicaid.gov. Although only 31 states made the decision to expand their Medicaid programs, this meant a quick boost in enrollment for insurers catering to government-sponsored patients.
Secondly, Medicaid may offer lower margin potential compared to individual marketplace plans, but the payments from the federal government are guaranteed. This means that there are no worries about these consumers changing plans, and there aren't the same concerns about medical care usage.
Finally, Medicaid enrollment has no beginning or ending period like Obamacare's marketplace exchanges. With the exception of those people who were granted special enrollments, consumers had just three months during the year to enroll for health insurance via Obamacare exchanges. Medicaid is constantly accepting eligible members, which gives insurers an opportunity to cater to new consumers year-round.
These factors have allowed Centene and WellCare to outperform their peers, and have been the saving grace for Anthem, the nation's second-largest insurer, which has leaned on its government-sponsored care to boost profits.
Obamacare's future is still in flux
This bifurcation in profitability between individual plan insurers and government-sponsored insurers definitely casts a cloud over the long-term viability of Obamacare. It's pretty clear that having the government cover medical care for low-income consumers is working out nicely for insurers, but a lack of profits on individual payer plans suggests that the transparency and competitiveness of the marketplaces may not be working as intended. It's also possible other issues exist, such as not enough young adults signing up.
The more immediate issue for Obamacare is whether or not it'll be around a year from now. Despite remaining firmly in place with Barack Obama in the Oval Office, a new president may dismantle or repeal Obamacare as we know it. It's tough to predict what the law might look like next year with a new president in office.
For both consumers and investors, this bears close watching.