The meaning of Aetna’s collapse

Obamacare isn’t working, and Aetna just proved it.

On Tuesday, Aetna—one of the largest health insurance companies in the United States—announced that it plans to withdraw from insurance exchanges in over 500 counties across eleven states, raising new doubts about the efficacy of President Obama’s ambitious 2010 health care overhaul.

The move is a surprising one for Aetna, which worked closely with the Obama administration on crafting and extolling its landmark reform effort. In an April conference call, Aetna Chairman and C.E.O. Mark Bertolini assured investors that the company’s continued participation in the Obamacare insurance exchanges was a “good investment” which eliminated the need for Aetna to spend heavily to grow its membership on its own.

But in a public statement posted online on Tuesday, Mr. Bertolini had a far different story to tell. A poorly balanced risk pool—fueled by the vast influx of older, sicker consumers into the public insurance exchanges—has caused Aetna to hemorrhage cash to the tune of $200 million in the second quarter of 2016 alone. And trapped in Obamacare’s web of regulatory restrictions, the company could not manage its high-risk membership without hiking premiums substantially and pushing lower-risk consumers away.

“The vast majority of [health insurance companies] have experienced continued financial stress within their individual public exchange business due to these forces,” Mr. Bertolini explained. “We are encouraged by a recent announcement that the U.S. Department of Health and Human Services will explore new options to modify the risk adjustment program [established under Obamacare], and remain hopeful that we can work with policymakers from both parties on a sustainable public exchange model that meets the needs of the uninsured.”

Another reason for the move, as Jonathan Cohn at The Huffington Post pointed out, may be the U.S. government’s effort to block Aetna’s acquisition of Humana, a rival insurance company. As Mr. Bertolini explained in a July 5th letter to the U.S. Department of Justice, the merger would have permitted Aetna to weather its losses from participating in the public insurance exchanges and perhaps to expand its role in the market. But without Humana, something would have to be done to wipe clean Aetna’s balance sheet.

“[I]f the deal [to merge Aetna and Humana] were challenged and/or blocked,” Mr. Bertolini wrote, “we would need to take immediate actions to mitigate public exchange and [Affordable Care Act] small group losses. Specifically, if the [Justice Department] sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint.”

“To Obamacare critics, Aetna’s retreat is proof the law is failing. To supporters, it shows the company was using its participation in Obama’s signature domestic policy initiative as a bargaining chip in order to secure approval of a controversial business deal.”

— Jonathan Cohn, The Huffington Post

And take action, Aetna did. Its withdrawal from the public insurance exchanges is startling in its scope; by the 2017 plan year, the insurer will slash its coverage area by 70 percent, maintaining individual health coverage plans for 242 counties across only four states. But Aetna’s move to reduce its exposure in the public insurance exchanges is far from unprecedented. Other insurers, including UnitedHealth Group, have taken drastic measures to mitigate their losses, citing similar rationale as Aetna did in its statement this week.

So what will Aetna’s exit mean for Obamacare and the future of health care policy?

It is undeniable that President Obama’s 2010 health care reform has reduced the number of uninsured Americans to a historic low. Last year marked the first year in our nation’s history that the uninsured rate dropped into the single digits, a critical milestone for a health care overhaul which made a priority of boosting coverage rates, particularly for low-income families and the sick.

But with the benefit of broader insurance coverage have come several devastating drawbacks. Smaller insurance companies, unable to stay afloat in an industry caught in a regulatory stranglehold, have been absorbed by their larger competitors, who are better suited to weather red ink and adapt to new regulations. This frenzied push for consolidation, which produced a record $296 billion in mergers and acquisitions in the first six months of 2015 alone, has reduced competition in the health insurance market, diminishing the incentive for insurers—as consumer choice dwindles—to offer sensible prices to those they serve.

The strict regulatory framework of Obamacare has also made it difficult for insurers to distribute risk effectively. Not only does the Affordable Care Act ban insurance companies from refusing to sell health care policies to people with preexisting conditions, it also prevents these companies from charging them higher premiums, even though they place a greater burden upon the health care system.

Though well-intended, this provision prevents insurers from managing risk and distributing costs, ultimately forcing them to withdraw from the public insurance exchanges or to hike premiums for all of their members, the latter of which would worsen the exodus of healthy people from the public exchanges. And when insurers exit the public insurance market, consumers lose. With fewer options available, it is more difficult for average Americans to find the coverage they need at a price they can afford.

A legislative solution to this problem is desperately needed, but it is nowhere in sight. Political will to change the Affordable Care Act is nonexistent. Republicans would like to enact their own health care reform package, completely dismantling President Obama’s reform under a G.O.P. administration and legislative majority, and thus have little interest in taking ownership over a policy which they see as the opposing party’s dumpster fire. In the meantime, Democrats are unwilling to give ground to the measure’s detractors by acknowledging the need for significant changes to Obamacare, even if rolling back some of the reform’s more draconian regulations would benefit consumers and allow for a fairer distribution of health care costs.

With hope, Aetna’s exit will inspire Congress to take another look at Obamacare and make a few changes—but it probably won’t. However, it may inspire other large insurers to pull out of the public insurance exchanges, further destabilizing the insurance market and putting new pressure on lawmakers to tweak President Obama’s landmark health care policy for the better.


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