Two thirds of Obamacare insurers losing money
A report from the Commonwealth Fund shows why so many insurance companies are abandoning the Obamacare exchanges.
Simply put, they can't make any money.
Two-thirds of the insurers failed to turn any profits from plans they sold to individuals in 2014, although a majority of those insurers didn't profit in the prior year, either, according to a report from the Commonwealth Fund. One-third of the insurers did succeed in turning a profit.
When researchers analyzed data from the Centers for Medicare and Medicaid Services on insurers' profits, they found that companies underestimated their spending on the new enrollees by 2 percent. Estimating how much the new consumers would cost was a difficult challenge for insurers, because they had to make all kinds of assumptions about how sick or healthy the new customer base would be.
A federal reinsurance program designed to smooth insurer losses helped ease the way for some insurers in the first few years of the Affordable Care Act's exchanges, the authors noted.
"One insurer can have a very different experience than another, so to draw accurate conclusions about how insurance companies are faring in the ACA marketplaces it's important to look at their experiences comprehensively," said Mark Hall, the study's lead author and a professor at the Wake Forest University School of Law.
"When we do that it is clear that estimating exactly how much these new enrollees would cost them was a challenge but the reinsurance program protected them from large losses on enrollees with high medical costs," he said.
But that reinsurance program ends next year, leading insurers to recently propose bigger premium increases than during the first few years of the exchanges. One major insurer, UnitedHealthcare, is withdrawing from the exchanges next year, citing too-big losses
The problem is that as the Obamacare program has progressed, new enrollees are sicker than past customers.
UnitedHealth said in an earnings call Tuesday that it has generated more losses from its Obamacare business in the second quarter of this year. It has lost about $200 million this quarter and expects to lose $600 million by the end of the year.
The company said the latest losses are because of the Obamacare population getting sicker over the past year.
"The reality is the severity of chronic conditions inside the population actually increased on a year-over-year basis," said Daniel Schumacher, chief financial officer for United, on the earnings call. He said the prevalence of people with conditions such as hepatitis C, diabetes and HIV have increased from 2015, but he did not specify by how much.
Losing money in Obamacare's exchanges is not new for UnitedHealth, which has said it plans to leave a majority of the 30-plus markets where it offers Obamacare plans next year.
The explanation is unique, though, as some experts believe the Obamacare enrollee population is becoming healthier.
When Obamacare was implemented in 2014, insurers generally "underestimated how costly this population was going to be," said Katherine Hempstead, who covers health insurance issues for the Robert Wood Johnson Foundation. As a result, Obamacare insurers set prices too low, which resulted in higher claims costs, eating into any potential for profit.
Companies were reassured by government that the pool of consumers would grow healthier as the program moved along. Instead, the "young invincibles" are signing up for coverage at a far lower rate than would be necessary for insurers to make money. Hence UnitedHealth's decision to abandon the marketplace.
There is nothing unexpected about this. The plain fact is, people don't think of insurance until they get sick and need it.
The fine for not having insurance is still far lower than it would cost a healthy person to purchase coverage for the year. Obamacare supporters are demanding that Congress raise the fines to punitive levels in order to force people to purchase insurance.
Eventually, to save Obamacare, that's what they're going to have to do. When profits depend on the ratio between healthy and sick customers, more healthy people must be browbeaten into purchasing Obamacare insurance on the exchanges for insurance companies to make a profit.