Here's a quiz: Following are two quotes about the Obamacare exchanges, from two health insurer investor calls. Match each to the right company.
1. "We continue to expect exchanges to develop and mature over time into a strong, viable growth market for us."
A. Aetna
B. UnitedHealth
C. WellPoint
D. Cigna
2. "We cannot sustain these losses. We can't really subsidize a marketplace that doesn't appear at the moment to be sustaining itself."
A. Aetna
B. UnitedHealth
C. WellPoint
D. Cigna
Yes, it's a trick question. Both quotes come from UnitedHealth. The first dates from Oct. 15, the second from Thursday morning — just 35 days later. That was an extraordinary call in which the Twin Cities-based insurer abruptly said it expected to lose hundreds of millions of dollars on its exchange policies in 2015 and 2016, and that it would be assessing whether to pull out of the market altogether in the first half of next year.
This was part of a terrible, horrible, no good, very bad news cycle for Obamacare; as ProPublica journalist Charles Ornstein said on Twitter, "Not since 2013 have I seen such a disastrous stream of bad news headlines for Obamacare in one 24-hour stretch." Stories included not just UnitedHealth's dire warnings, but also updates in the ongoing saga of higher premiums, higher deductibles and smaller provider networks that have been coming out since open enrollment began.
It now looks pretty clear that insurers are having a very bad experience in these markets. The sizable premium increases would have been even higher if insurers had not stepped up the deductibles and clamped down on provider networks. The future of Obamacare now looks like more money for less generous coverage than its architects had hoped in the first few years.
But of course, that doesn't mean insurers need to leave the market. Insurance is priced based on expectations; if you expect to pay out more, you just raise the price. After all, people are required to buy the stuff, on pain of a hefty penalty. How hard can it be to make money in this market?
What UnitedHealth's action suggests is that the company is not sure it can make money in this market at any price. Executives seem to be worried about our old enemy, the adverse selection death spiral, where prices go up and healthier customers drop out, which pushes insurers' costs and customers' prices up further, until all you've got is a handful of very sick people and a huge number of very expensive claims.
Some commentators, including me, worried a lot about death spirals in the early days of the disastrous exchange rollout. Some commentators, also including me, have eased off on those fears in recent years. Why the change? Because when the law was passed, I was mostly focused on whether the mandate penalty would be enough to encourage people to buy insurance. Over time, as the exchanges evolved, the subsidies — and the open enrollment limitations — started to look a lot more important than the penalty.
Most of the people buying exchange policies are subsidized, so to them, it doesn't much matter whether their premiums go up, because the price of the cheaper plans is capped as a percentage of their income. And it's dangerous to just buy insurance when you get sick, because unless you meet a handful of qualifications, you can buy only once a year, which means you might have to go without insurance for months after a cancer diagnosis or bad auto accident.
To be sure, over the long term, that could change, because the subsidy calculation has a weird time bomb in it. Right now, subsidies are calculated so as to make the second-cheapest Silver plan on the exchange cost a fixed percentage of your income, or less. That percentage is calculated on a sliding scale — low for people near the federal poverty line, and rising to around 10 percent for folks making closer to four times the baseline. (People who make more than that aren't eligible for subsidies.) But the moment that subsidies start costing the government more than 0.504% of GDP, which would currently be about $85 billion, the expenditure is supposed to be capped, which would mean that subsidies would have to be decreased or withdrawn for some folks.
So concerns about the death spiral never quite went away. But they did recede, because, thanks to lower-than-expected enrollment, subsidy expenditures are supposed to come well below $30 billion this year. It's unlikely that we'll hit the trigger until 2019 or later, if indeed we ever do.
But on the conference call, Stephen Helmsley, the CEO of UnitedHealth, expressed concerns that the exchanges were seeing adverse selection anyway. Not just that the Obamacare insurance pool is sicker and more expensive than expected, which we already knew. But that the pool is experiencing adverse selection over the course of the year, as healthy people stop paying their premiums, and sicker people buy in. According to Helmsley, the people who bought insurance from them through the exchange, but outside of the open enrollment period, are averaging about 20 percent more expensive than the rest of the pool.
This is potentially extremely bad news for Obamacare. It may be that UnitedHealth simply had an especially bad experience, but with more than 500,000 people covered, that doesn't seem actuarially likely. Which raises the worrying possibility that only two years in, people have figured out how to game the special enrollment process so that it's safe for them to go without insurance, and then sign up for coverage if they get sick. That's not the only possible explanation. Perhaps people who have "qualifying life events" are simply more likely to buy insurance if they need a lot of health care. But we can't dismiss the possibility of gaming, either — or that healthier people are dropping insurance as they realize they won't hit their deductible.
Does that mean that we're definitely in for a death spiral? No. For starters, even if there is gaming, there might be a relatively easy fix, such as getting the government to tighten up on its vetting (though this would inevitably mean some people had to go uninsured until the next open enrollment process).
We should also remember that earnings calls always have a certain strategic element to them. It seems likely, from listening to the call, that UnitedHealth decided to do a certain amount of "big bath accounting." Having realized that they had some bad news for investors, executives decided to make that bad news as bad as possible, recognizing the maximum possible charge they could take against earnings and steadfastly refusing to allow for possible offsetting receipts, such as payments from the risk corridor program. Companies like to do this sort of thing because it is believed that getting all of the potential bad news out at once, rather than releasing it in dribs and drabs as it comes to pass, makes investors happier and your stock price higher. It also allows you to deliver a happy upside surprise when — oops! — the worst didn't happen.
An earnings call like Thursday's can also be a bargaining tactic. Health insurers are engaged in a sort of perpetual negotiation with regulators over how much they'll be allowed to charge, what sort of help they'll get from the government if they lose money and a thousand other things. Signaling that you're willing to pull out of the market if you don't get a better deal is a great way to improve your bargaining position with legislators and regulatory agencies.
That said, strategic positioning is obviously far from the whole story, or even the majority of it. UnitedHealth really is losing money on these policies right now. It really is seeing something that looks dangerously like adverse selection. And frankly, there's not that much the company can get out of regulators at this point, because the congressional Republicans have cut off the flow of funds. So while Obamacare certainly isn't dead, or certain to spiral to its death, it's got some very worrying symptoms.
