Watching Obamacare Dominoes Topple

Watching a chain of cause and effect can be satisfying when it involves a long chain of dominoes or a Rube Goldberg machine.

When it involves the American health care system, not so much.

Last fall, UnitedHealth Group Inc. (UNH) disclosed major losses on policies it had offered through the Affordable Care Act’s exchanges. Nor was the country’s largest health insurer alone; competitors including Aetna Inc., Humana Inc. and Cigna Corp. have described the difficulties they face in attempting to make exchange-based offerings profitable.

So it is no surprise that UnitedHealth announced that it would reduce its exchange offerings for 2017. What did surprise at least some observers was the scale of the decision. According to The Wall Street Journal, the company will reduce its offerings from 34 states this year to “only a handful” going forward. In the same conference call, UnitedHealth steepened its projected losses on exchange plans for 2016 to $650 million. In contrast, the company’s overall earnings for the first quarter were better than expected.

Let’s break it down. UnitedHealth is making money in its employer-sponsored health insurance business. It is making money in its government-paid, nonexchange health insurance business. It is making money from individual health insurance policies sold outside the Affordable Care Act exchanges. But it is losing money hand over hypodermic on policies sold through the Obamacare exchange network. How come?

Simply because customers on the exchanges tend to buy insurance when they are sick and drop it if they get getter. They do so knowing that under Obamacare rules, insurers must sell them insurance again during the next open enrollment period, or even sooner if they qualify for a special exemption. You could not design a better system for making medical insurance a money-losing proposition if you tried.

As they say in the insurance business, “sickies never cancel.” Healthy customers, on the other hand, drop off as premiums rise out of reach and deductibles continue to climb, safe in the knowledge that they can always come back if their health takes a turn for the worse.

The cycle only reinforces itself over time. As more healthy customers leave, companies raise prices to try to compensate, driving yet more customers away. “We don’t yet have stable ACA markets,” Todd Van Tol, a partner with Oliver Wyman, told The Wall Street Journal. “Indications are, we have in many markets another round of significant rate increases.”

This instability is also reflected in the industry’s consolidation. Several major insurers are currently seeking federal permission to merge, which could leave customers with effectively fewer choices even in places where companies do not quit the exchanges altogether.

Not that customers are flush with choice now. According to the Journal’s coverage, UnitedHealth withdrawing its offerings will leave many Americans with very few options on the exchanges. In some parts of the country, especially the rural South, customers may only have one “choice” on their state exchange unless a new company decides to fill the hole that UnitedHealth leaves.

It is hard to imagine which company might step into the breach, however. Other big insurers are already struggling to manage their own offerings on the exchanges. And the small nonprofit co-ops, which were designed to offer cheaper insurance than their private sector counterparts, are already dying off at a rapid clip.

Even before UnitedHealth’s decision to reduce its exchange offerings, many Americans are simply choosing to do without insurance altogether. Many young and healthy customers simply cannot make the cost-benefit trade-off work as insurance costs continue to mount, especially when they know insurers will have to accept them later and the penalties for not purchasing insurance remain significantly cheaper than the cost of insurance itself. Try to get a year’s worth of coverage for $2,085 anywhere in the country and see how far you get. Between premiums and out-of-pocket expenses, the answer will vary from “not very far” to “nowhere.”

Other major insurers seem likely to hold on at least through 2017, but UnitedHealth will certainly not be the last major departure for the exchanges in the long run. The very structure of the Affordable Care Act made the failure of the exchanges inevitable. Until lawmakers tackle some sort of solution, there is not much to do other than watch the dominoes fall.

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