Insurers nationwide are struggling to break even on Obamacare's exchanges

Insurers around the country are struggling to make money on the Obamacare exchanges. That’s the bottom line of a story published today by Politico.

Most insurers want their expenses for medical coverage to be around 85% of premiums, but the majority of insurers on the Obamacare exchanges are not able to maintain that balance and more than a third of the plans Politico surveyed are actually paying out more than they take in. From Politico:

A POLITICO review of 2015 financial filings from nearly 100 health plans across a dozen geographically and politically diverse states found that less than a quarter of them hit the standard break-even point for insurers, at which payouts are kept to about 85 percent of premiums taken in. And 40 percent of them had medical costs that outright exceeded the premiums they brought in. The bottom line: many of those insurers lost tens of millions of dollars on their Obamacare policies last year…

Nationwide, an analysis by McKinsey found that insurers lost $2.7 billion on individual customers in 2014, the only year since Obamacare coverage expansion for which full numbers are available–with 70 percent of carriers sustaining losses. Preliminary data from 2015 suggest the rate of losses likely doubled.

This failure to achieve a sustainable market is happening even in states where the total number of enrollees has been high. Politico focuses on North Carolina as an example of the law working as expected (enrolling a lot of people) but also failing (insurers losing a lot of money).

Since insurers can’t decline to cover anyone under Obamacare’s rules, they only have two options left. The first is to raise rates substantially so premiums once again exceed claims by a reasonable margin. The other option is to simply drop out.

That’s what United Health, the nation’s largest insurer, has decided to do in most states. And there are clear signs that other insurers are considering doing the same. Blue Cross Blue Shield of Minnesota announced it was getting off the exchange last month after an anticipated $500 million in losses. As Politico reports, the same scale of losses could drive BCBS off the exchange in North Carolina as soon as next year:

The largest insurer, the nonprofit Blue Cross Blue Shield of North Carolina, has repeatedly stated it can’t continue to sustain the losses it endured during the first two years of Obamacare enrollment, and it is currently weighing whether it will continue competing on the exchange at all for 2017. Though the insurer has submitted plans to do business again in every county in the state, it plans to hike rates nearly 20 percent on average. A final decision on 2017 participation won’t be made until August.

“All options are on the table,” Wilson said—even getting out of the Obamacare business.

The Politico story closes by noting that most remaining insurers say they will stick with the marketplace despite losses. But those large companies have some obvious ulterior motives driving them at this moment:

Many plans also have a non-altruistic (and largely unspoken) motivation for sticking with the exchanges: their other government business, specifically Medicare and Medicaid, has seen huge growth in recent years. Insurers now receive $200 billion annually to provide coverage to Medicare beneficiaries. Many plans are willing to take a hit in the individual market if they can keep securing much larger windfalls from other government programs.

Another sensitive consideration: four of the five largest publicly traded insurers, including Anthem, are currently seeking approval from the Obama administration for controversial blockbuster mergers that would reshape the industry. The last thing those companies want to do is antagonize federal regulators by abandoning the president’s signature domestic achievement.

Either the big insurance mergers will go through or they will not. Either way, at some point in the not too distant future, the political incentives for continuing to lose hundreds of millions on the exchanges will end. At that point, we could see leading insurers drop out of the exchanges, further reducing competition.

Democrats, perhaps aware how tenuous the program really is at this point, have recently embraced a plan to fix it. Both President Obama and Hillary Clinton embraced the public option, a government-run plan intended to compete with private plans, in the last week.