Buh-Bye, California
Efforts to get California’s health insurance exchange up and running as mandated by the Patient Protection and Affordable Care Act (PPACA), aka Obamacare, has been struck a blow in recent weeks as major insurers announce they are pulling out of the market.
Health insurance in the nation’s most populous state has long been dominated by Anthem Blue Cross, Blue Shield of California and Kaiser Permanente, which combined control nearly 90 percent of the market. That said, competition on the exchanges is a key element in keeping costs down.
Consequently, Obamacare’s viability took a big hit when UnitedHealth Group (NYSE: UNH), the largest private health insurer in the US, Aetna (NYSE: AET) and Cigna (NYSE: CI) announced they were pulling out of the Golden State’s individual insurance market.
While the immediate impact isn’t huge—about 58,000 consumers will now have to find new insurers—it’s problematic for Obamacare when three of the nation’s largest insurers won’t participate in the exchange. It’s a clear example of how certain aspects of Obamacare are forcing some insurers to make the strategic decision to exit more marginal markets.
Among those provisions scaring off insurers: the requirement that insurers must accept all applicants regardless of their medical history and caps on out-of-pocket spending.
Thanks to those rules, it has become much more lucrative to focus instead on the employer insurance market, especially as more large employers are making the decision to self-insure. Under self-insurance plans, large employers essentially take on the cost and risk of providing insurance to their employees and then contract out administrative responsibility to insurance companies.
This outsourcing option makes sense for many employers, because it allows them to keep a much tighter lid on costs. As a result, administrative services are becoming a much more important profit center for insurers than actually selling insurance.
Not only is outsourcing a higher margin business model for insurance companies, it also removes their medical cost liability risk while exempting them from much of Obamacare. Insurers also generate higher margins because they already have the resources in place to administer those plans.
The jury is still out as to whether this trend benefits consumers, though. One of the primary mechanisms that was supposed to keep costs down was competition for business on the exchanges. Some states have mandated price caps on their exchanges, literally forcing companies to aggressively manage costs.
A number of non-profit groups have come into existence as well to offer health coverage, many of which were seeded with federal money specifically for that purpose. Since they don’t have the overhead costs of larger companies, they’re able to significantly undercut the prices of many of their for-profit competitors.
This trend has the potential to setup a bifurcation in the insurance market whereby heavyweights such as Aetna and UnitedHealth largely maintain a lock on the employer insurance market, while individuals increasingly deal with smaller, local non-profits.
Individual consumers will have smaller networks of providers, potentially reducing access to some of the best doctors and hospitals in the country, while those with employer plans will still enjoy greater flexibility in selecting providers.
Over the long haul, it will also likely enhance the profitability of the major insurance companies.
UnitedHealth, Aetna and Cigna will probably actually see some improvement in earnings as a result of their decision to exit the California market. California is one of the more rapidly aging states and its overall regulatory burden is higher than many other states.
Because California only accounted for about 1 percent of business at the Big Three, they’ll likely see greater reductions in expenses than decreases in revenue. In fact, California is often pointed to by insurance companies as one of the most expensive states to operate in.
In addition, all three will still be participating in insurance exchanges in states where they already have a large presence, so they’ll easily be able to increase their book of business in a more cost effective manner.
Opponents of Obamacare are pointing to the withdrawal of three of the nation’s largest insurers as a sure sign of looming failure of exchanges. Meanwhile, supporters are bemoaning the reduced competition and the increased odds that the health care business is simply evolving into specific areas of expertise.
Insurers themselves will come out as winners, thanks to lower costs and higher margin businesses, while consumers will still realize lower costs thanks to new entrants in the market.
In California’s case, its exchange is now on track to have 13 participants and the state’s insurance authorities have said that proposed rates were lower than expected.
Fears that insurance exchanges would devastate insurance company’s profits clearly seem to have been overstated and, so far, it looks like they should create a win-win situation for both consumers and insurance companies, although insurers will become increasingly choosy about which markets they operate in.
Health insurance in the nation’s most populous state has long been dominated by Anthem Blue Cross, Blue Shield of California and Kaiser Permanente, which combined control nearly 90 percent of the market. That said, competition on the exchanges is a key element in keeping costs down.
Consequently, Obamacare’s viability took a big hit when UnitedHealth Group (NYSE: UNH), the largest private health insurer in the US, Aetna (NYSE: AET) and Cigna (NYSE: CI) announced they were pulling out of the Golden State’s individual insurance market.
While the immediate impact isn’t huge—about 58,000 consumers will now have to find new insurers—it’s problematic for Obamacare when three of the nation’s largest insurers won’t participate in the exchange. It’s a clear example of how certain aspects of Obamacare are forcing some insurers to make the strategic decision to exit more marginal markets.
Among those provisions scaring off insurers: the requirement that insurers must accept all applicants regardless of their medical history and caps on out-of-pocket spending.
Thanks to those rules, it has become much more lucrative to focus instead on the employer insurance market, especially as more large employers are making the decision to self-insure. Under self-insurance plans, large employers essentially take on the cost and risk of providing insurance to their employees and then contract out administrative responsibility to insurance companies.
This outsourcing option makes sense for many employers, because it allows them to keep a much tighter lid on costs. As a result, administrative services are becoming a much more important profit center for insurers than actually selling insurance.
Not only is outsourcing a higher margin business model for insurance companies, it also removes their medical cost liability risk while exempting them from much of Obamacare. Insurers also generate higher margins because they already have the resources in place to administer those plans.
The jury is still out as to whether this trend benefits consumers, though. One of the primary mechanisms that was supposed to keep costs down was competition for business on the exchanges. Some states have mandated price caps on their exchanges, literally forcing companies to aggressively manage costs.
A number of non-profit groups have come into existence as well to offer health coverage, many of which were seeded with federal money specifically for that purpose. Since they don’t have the overhead costs of larger companies, they’re able to significantly undercut the prices of many of their for-profit competitors.
This trend has the potential to setup a bifurcation in the insurance market whereby heavyweights such as Aetna and UnitedHealth largely maintain a lock on the employer insurance market, while individuals increasingly deal with smaller, local non-profits.
Individual consumers will have smaller networks of providers, potentially reducing access to some of the best doctors and hospitals in the country, while those with employer plans will still enjoy greater flexibility in selecting providers.
Over the long haul, it will also likely enhance the profitability of the major insurance companies.
UnitedHealth, Aetna and Cigna will probably actually see some improvement in earnings as a result of their decision to exit the California market. California is one of the more rapidly aging states and its overall regulatory burden is higher than many other states.
Because California only accounted for about 1 percent of business at the Big Three, they’ll likely see greater reductions in expenses than decreases in revenue. In fact, California is often pointed to by insurance companies as one of the most expensive states to operate in.
In addition, all three will still be participating in insurance exchanges in states where they already have a large presence, so they’ll easily be able to increase their book of business in a more cost effective manner.
Opponents of Obamacare are pointing to the withdrawal of three of the nation’s largest insurers as a sure sign of looming failure of exchanges. Meanwhile, supporters are bemoaning the reduced competition and the increased odds that the health care business is simply evolving into specific areas of expertise.
Insurers themselves will come out as winners, thanks to lower costs and higher margin businesses, while consumers will still realize lower costs thanks to new entrants in the market.
In California’s case, its exchange is now on track to have 13 participants and the state’s insurance authorities have said that proposed rates were lower than expected.
Fears that insurance exchanges would devastate insurance company’s profits clearly seem to have been overstated and, so far, it looks like they should create a win-win situation for both consumers and insurance companies, although insurers will become increasingly choosy about which markets they operate in.