Why can't big insurers make Obamacare pay?

Last Updated Aug 16, 2016 7:11 PM EDT

The decision by Aetna (AET) to dramatically reduce its presence in the health insurance exchanges created by the Affordable Care Act is more bad news for consumers who will be shopping for coverage in the fall.

The move by the nation’s third-biggest insurer to leave 11 of the 15 states and almost 70 percent of the counties in which it participates on the exchanges comes on the heels of similar moves from Humana (HUM) and UnitedHealth (UNH). Aetna insures about 838,000 people through the exchanges.

The retreat by big insurers likely means consumers will have fewer choices for 2017 coverage. That lack of competition puts a major wrench in the way the health care exchanges are supposed to work. Theoretically, competing carriers on each exchange offer consumers plenty of choices while keeping premiums affordable. In many urban and densely populated markets, that’s pretty much what’s happening.

But rural and less populated counties will be hard hit by the big insurer exits. At least one county in Arizona is at risk of being left with no insurer, according to an analysis by the Kaiser Family Foundation. And in five or so states, there will be only one insurer on the exchange.

Insurers say they are losing too much money to stay put. Aetna reported it has lost $430 million on its exchange business since 2014. Other leading insurers have also reported big losses.

“It’s no surprise that companies are adapting at different rates to a market where they compete for business on cost and quality rather than by denying coverage to people with preexisting conditions,” Kevin Counihan, CEO of federal exchange operator HealthCare.gov said in an emailed statement.

The question remains, why can’t big insurers make Obamacare work? One important reason: Not enough healthy people sign up.

“Fifty-five percent of our individual on-exchange membership is new in 2016, and in the second quarter we saw individuals in need of high-cost care represent an even larger share of our on-exchange population,” Aetna CEO Mark T. Bertolini said in a statement Monday.

It’s true that exchanges attract mostly low-income people who likely have health issues and can only afford the lowest premiums. According to government analysis, about half of all exchange customers chose the cheapest plans. “In rural areas where you may have only a handful of people in the exchange and all of them need lots of health care, you’ve got a disproportionate risk,” said Cynthia Cox, associate director of health reform and private insurance at the Kaiser foundation.

At the same time, Bertolini and other insurance industry leaders say the government is not doing enough to help insurers adjust for this added risk. Although Bertolini did say in his statement he is encouraged by the government announcement that it is looking at ways to modify the risk adjustment program.

Meanwhile, many young and healthy people, especially those that do not qualify for the government subsidies, continue to forgo coverage, despite the tax penalties imposed by the ACA for people who do not have health insurance. It is this group of healthy individuals that insurers and exchange designers were hoping would offset the cost of sick patients. Currently about 11 million people are covered by the exchanges, about half of the number originally expected to sign on.

The 2016 tax year is the first year people who do not have health insurance have to pay the full amount in penalties. The government is hoping that when uninsured consumers face the full penalty, they will change their minds and sign up. But that won’t happen anytime soon, said Cox. “Most people won’t know how much they owe until they do their taxes,” she explained. “We probably won’t see the effect the penalty has until 2018.”

Another reason exchanges are unprofitable for big insurers has to do with the products they are selling. Accustomed to offering expansive provider networks and a range of coverage for employer-sponsored group plans, big insurers designed similar high-cost plans for the exchanges. These broader networks are likely to attract patients with health issues who may be willing to pay more in premiums to stay with their doctors and other providers. Healthy people, on the other hand, are more likely to go for the lowest-cost plans, usually offered by smaller, regional insurers.

Insurers who have made money on the exchanges, such as Centene (CNC) and Molina Healthcare (MOH), usually offer narrow provider networks and have experience with low-income patients. “The companies that are doing well may see Aetna’s departure as an opportunity,” said Sabrina Corlette, a research professor with the Georgetown Health Policy Institute. She believes Aetna’s move is part of a natural adjustment process. “The exchanges are still quite new,” she said, adding that there is still a lot to learn about the best ways to do business in them.