Anatomy of a suddenly sick Obamacare insurer

Headlines have been screaming for months about big insurers such as Aetna (AET), United Healthcare (UNH) and Humana (HUM) pulling out of the Obamacare marketplaces because they couldn't make the exchange business profitable. As a result, dozens of counties throughout the country have been left with only one or no insurance choice on their exchange. 

Against that backdrop, two smaller insurers that focus primarily on the Medicaid market -- Molina Healthcare (MOH) and Centene (CNC) -- were frequently noted as companies that can successfully navigate the uncertain and complicated exchange business. Many states looked to them and small regional or local insurers to help fill the increasing gaps the big names were leaving behind. 

So it came as a bit of shock when Molina announced on Aug. 2 it would exit the exchanges in Wisconsin and Utah, scale back its exchange business in Washington state and leave the door open to pull out of other exchanges in the near future.

 What's more, in marketplaces where it will continue to operate, Molina has submitted an average 55 percent premium increase to state regulators, partly due to the uncertainty over the future of federal cost sharing payments.  

The news came amid Molina's report of a steep second-quarter earnings loss of $4.10 a share, compared to a 58 cent per share gain during the same period a year earlier. It also followed the ouster in May of Chief Executive Mario Molina and Chief Financial Officer John Molina, brothers who are sons of company founder David Molina. In the earnings report, Molina also announced a major restructuring, which includes about 1,500 layoffs, approximately 7 percent of its workforce.

Until all this bad news broke, Molina was one of the prime examples of an insurer that could actually make the exchanges work. (Centene still does and is expanding its exchange business.) Major insurers like Aetna and United Health, accustomed to the more stable employer-sponsored health insurance market, racked up losses in the exchange business in part because they were surprised by the large number of high-cost patients who signed up.

Molina's business focuses on administering Medicaid health plans for low-income and disabled patients. As a result, the company has experience with managing narrow networks of lower-cost health care providers. "The idea is to arbitrage low-reimbursement providers into exchanges where the competition is paying a lot more," explained Robert Laszewski, president of consulting firm Health Policy and Strategy Associates. "There's an opportunity for profit there."

Molina found it could compete for the no-frills end of the exchange market and enjoy a robust volumne of patient sign-ups. According to Laszewski's estimates, Molina had a track record of enrolling as much as 70 percent of eligible participants in the various markets it participated in. A pool that big offers enough healthy individuals to help stabilize risk, he added.

What went wrong?

According to Joseph White, interim CEO of Molina, the company became overwhelmed with its ACA business, including unexpected increases in medical costs and claims. "We did not adjust for growth in the ACA marketplace," White told analysts in a conference call last week. He explained that the company focused resources on existing processes and technologies instead of a full redesign that would have helped it better deal with ACA growth. 

"That was a mistake," said White. "The marketplace shares fundamentals of the Medicaid market, but it's also very different," he added.

In addition, speculated Laszewski, as Molina expanded into new markets and became a more dominant player in others, it may have strayed from its core base of low-income customers, adding costs and risks it couldn't deal with.

"Every company has to analyze every market to make sure they're making money in every market," said Dan Mendelson, chief executive of Avalere Health. Say a plan with bad risk drops out of the market, he added. "You may get saddled with that risk as you pick up those customers."  

Molina's bad news leaves exchange consumers with even less choice and more uncertainty than they were already facing in light of failed GOP efforts to repeal and replace Obamacare and the Trump administration's threats to discontinue support for the system. 

As commitment deadlines for insurers approach, state insurance commissioners are working hard to convince them to stay in the exchanges and keep at least a bare minimum of coverage. In addition, small, local, often nonprofit players such as L.A. Care Health Plan are trying to fill gaps where they can, while heeding the lessons from Molina's recent mess.

Will these efforts be enough? Consumers may have to wait until open enrollment begins on Nov. 1 to find out.