Anthem misses Street’s 3Q street profit forecast; threat to leave Obamacare a much bigger worry

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Health insurance giant Anthem Inc. (Indianapolis IN) said it expects its individual business under the Affordable Care Act to return to “slight profitability” in 2017, but won’t commit to providing such coverage in 2018 until there are “modifications” in risk pools and signup periods. If conditions don’t improve, Anthem could pull out of some or all states where the company offers insurance, according to the IndyStar.

@AnthemInc could pull out of some or all states where the company offers #Obamacare insurance Click To Tweet

“Clearly, 2017 is a critical year as we continue to assess the long-term viability of our exchange footprint,” Anthem CEO Joseph Swedish said during the company’s earnings call. ”We will continue to closely monitor this business, and if we do not see clear evidence of an improving environment and a path toward sustainability in the marketplace, we will likely modify our strategy in 2018. We believe both the pricing and regulatory environment need to be improved to drive toward a sustainable and affordable marketplace over the long term.”

An exit by Anthem would make it the fourth large insurer to exit Obamacare exchanges. Aetna Inc. (Hartford CT), UnitedHealth Group Inc. (Minnetonka MN and) and Humana Inc. (Louisville KY), as well as several smaller insurers, already have bailed on most marketplaces, contributing to less competition and higher premiums across the country. And on Thursday, Cigna Corp. (Bloomfield CT) said it would not expand its individual Obamacare plans into more states next year, according to Reuters.

Anthem’s frustrations are similar to those of other insurers that have pulled out. Since Obamacare exchanges opened in 2014, Anthem has signed up fewer people than expected, including an unexpectedly large share of older and sicker customers who drive up costs.

Anthem projected that it would have 3 million customers under Obamacare by 2018. Instead, 1.4 million people are enrolled in Anthem plans, a number the company expects to fall in 2017. Nationally, more than 11 million people signed up for individual Obamacare plans, well shy of the 20 million-plus who were projected.

One constant problem for insurers, including Anthem, has been a disproportionately older share of customers signing up for insurance, while the Obamacare individual mandate has proved too weak to attract enough young customers to balance the costs.

“We continue to experience higher than initially expected costs from members with chronic conditions,” Swedish said. “Overall, the financial performance of individual (Obamacare) products has been disappointing, as membership has been far short of our original expectations since its inception and operating margins have been lower than expected beginning in 2015.”

Anthem expects to make a slight profit in the Obamacare exchanges in 2017. But the company is hoping to see changes made to the law and how it is regulated that could improve its margins. Specifically, Swedish said he’d like to see more limited special enrollment periods, which would stop people from enrolling only after they become sick.

Anthem also wants more flexibility to create plans with less comprehensive coverage that might appeal to younger people.

“This is a specific recipe for solutions, and we believe these recipe characteristics represent a form of long-term, sustainable and affordable marketplace,” Swedish said.

In its third quarter, Anthem reported net income of $617.8 million, or $2.30 a share on revenues of nearly $19.8 billion. Adjusted net income was $2.45 per share, which was below Wall Street analysts’ expectations of around $2.49.

Anthem, which operates under the Blue Cross and Blue Shield plan in 14 states, said its medical membership has risen by 1.2 million members this year. That’s a 3.4% increase to about 39.9 million as of June 30. Shares closed the week up 2% at $119.29.

Steve’s Take: Now Anthem is following other big insurers, threatening to leave the Obama care exchanges. At this point Mr. Swedish’s threat may seem like déjà vu all over again, as Yogi Berra put it so aptly. After all, lots of health insurers are threatening to leave the exchanges. After Anthem’s threat, Cigna on Thursday (November 3, 2016)basically repeated the same threat. Of course, Cigna has agreed to be acquired by Anthem so there just may be some monkey-see, monkey-do going on with that.

In fact, however, this latest news about Anthem is much more important to the future of the ACA because Anthem runs the Blue Cross/Blue Shield organizations in 14 states, as Bloomberg points out. And though Anthem isn’t necessarily the sole company offering exchange coverage in any of those states, don’t forget that the Blues are essentially the heart and soul of the exchanges. Whereas other insurers have generally recoiled, the Blues have by and large stuck with Obamacare. If they bail, then there will be counties, and possibly entire states, with no Obamacare policies on offer, suggests Bloomberg reporter Megan McArdle.

Anthem doesn’t run all the Blue Cross organizations. But it’s still a leading indicator for what may be happening in other markets. Whether the Blues pull back–and how far–will say a lot about how Obamacare’s future will unfold from here.

As Swedish’s words foreshadow, 2017 is going to be a make-or-break year for the exchanges. When the 2018 rates begin appearing next summer, some light might shine on the mystery that has long befuddled healthcare policy experts: Are rates going up because insurers mispriced their insurance? Or are they going up because these exchange markets are too unstable for insurers to make money at any price?

I believe that the profit opportunity laid before the insurer markets was too tantalizing to forsake, and that’s why they all jumped in. None of them apparently factored in enough downside on the risk pool to make their feasibility studies conservative enough.

Obamacare is a new product. Selling insurance with a mandate, selling it on exchanges, selling it with all the mandated coverage and without the ability to price insurance based on health status–all these things were new variables, meaning insurers were flying blind to a large extent.

It wouldn’t be surprising if they mispriced, suggests Ms. McArdle. I see it as simply too mouthwatering a profit opportunity to let conservative assumptions about the makeup of the risk pool result in a pricing strategy too high to be competitive right from the outset.

Assumptions like employers “dumping” employees onto the exchanges, meaning that the influx of low-wage workers currently covered by employer health insurance has failed to materialize. Then there are the young, invincible, healthy people who have declined to sign up in larger numbers than anticipated.

Third, when it became clear in 2013 that a lot of people who already had individual insurance were going to lose their plans, Obama decided to keep his “if you like your plan you can keep it” promise by grandfathering in people with existing plans–which meant still fewer people buying on the exchange.

All of the foregoing assumptions, either downplayed or not even contemplated by the financial feasibility experts, have resulted in a smaller and sicker pool of customers than insurers were anticipating. Just blame the lowly number crunchers for not giving their greedy-eyed superiors what to me sounds like a perfectly plausible downside possibility. Or perhaps they did but minds were already made up to dive in.

There are other signs of mispricing. For example, the risk pool pretty much stabilized in 2016, with very few new enrollees. And unlike 2014, when insurers had no idea what the markets would look like, or 2015, when they had to start setting rates with only a partial year’s worth of claims data, 2016 rates were set with a full year’s experience of health costs. A simple mispricing correction should have shown up in the 2016 rates. But it apparently didn’t.

Despite the foregoing gloom and doom scenarios such as Mr. Swedish portends, insurers have good reason to want Obamacare to work. And the fact that they are starting to pull out would seem to signal that they now think this isn’t a simple pricing error; they think there’s a good chance that they will lose money in these markets no matter what price they charge. When 2018 premium rates are published, we’ll have a much better idea.

Steve's Take: Insurers leaving #Obamacare exchanges suggest more than pricing error is at work Click To Tweet

I’ve written before about how Medicare went through its own shaky phase from 1998-2002. During that tumultuous period, insurers canceled nearly half of their contracts to participate in the managed-care program then known as Medicare+Choice and now called Medicare Advantage.

Between 300,000 and 1 million customers lost their plans. Total managed-care enrollments fell to 4.6 million from 6.4 million. The future of the program was very much in doubt. Sounds like a death spiral to me. And yet, enrollments in Medicare Advantage today number 17.2 million.

For more about the striking parallels between the evolution of Obamacare and Medicare, go to my post “Medicare’s Forgotten History Shows How to Rescue Obamacare,” dated September 12, 2016. Quite possibly there are some constructive lessons to be learned from that era which reside in historical fact, not in today’s fact-free, political rhetoric.