The last two weeks in November were tough for health insurance carriers’ stocks as UnitedHealth Group (UHC) announced they may be pulling out of the health exchange market by 2017.  Following that announcement, the S&P 500 Health Care Services sector index went down 3.1% on November 20th.   Insurer Aetna is also pulling out of several “unprofitable” state exchanges in the next year as well.   Other carriers Aetna, Anthem, Centene, and Kaiser Permanente reported however that their earnings forecasts were on track for 2016, unlike UHC’s estimated $425 million loss for 2016.  Ironically, Kaiser Permanente’s CEO Bernard Tyson stated on November 20th, “While there have been challenges [with the exchanges] at times, we believe at the end of the day they are causing healthy disruption, and are forcing the health care industry to respond better to consumer needs.”  That’s all well and good for a privately-owned company to report.  Rather, UHC, the largest health insurer in the United States, pointed out a number of problems that not only affected their lowered earnings prediction but can and possibly will degrade other insurers’ earnings as well.  As enumerated in this Wall Street Journal editorial from November 22nd, the exchanges are proving unprofitable for UnitedHealth Group because of:

  • An expensive risk pool that lacks the younger and healthier consumers who are supposed to buy overpriced plans to cross-subsidize everyone else.
  • Enrollment growth continues to lag.
  • People join the exchanges before they incur large medical expenses—insurers are required under ObamaCare to cover anyone who applies—and then drop out after they receive care.
  • The collapse of the ObamaCare co-ops is recoiling through the market.

That “higher overall risk pool” is why premiums on the exchanges have increased as much as 10% for 2016, and sicker subscribers drive up costs for everyone.  As some insurers have paid out more in claims than they earned in premiums for 2015, they asked for substantial rate increases to cover their costs.  When insurers cannot get their rate increases for the individual (exchange) market, they increase the small and mid‐size group rates to compensate and maintain solvency.  Since the profile of the average person who purchases insurance on the exchange is not a “young invincible” who can afford to pay their entire premium without a subsidy and has low claims, insurers are finding it difficult to fund large claims for little premium.  The Affordable Care Act isn’t going away quickly no matter who is elected in 2016, but with a financial outlook like this, exactly how long it can be sustained is questionable.

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