Reform Update: Exit of PreferredOne from MNsure raises practical and political questions

PreferredOne was one of the biggest surprises of Obamacare's first open-enrollment period. The plan, which is affiliated with Fairview Health Services, captured 59% of enrollments through Minnesota's exchange. The previous year, by contrast, the plan had just 6.3% of the individual market.

But on Tuesday, PreferredOne delivered a new surprise: It's pulling out of the MNsure marketplace.

The move by PreferredOne bucks a nationwide trend toward more competition in the exchanges for 2015. A McKinsey & Co. analysis of plan filings in 19 states found that 123 out of 127 carriers that offered exchange plans this year would be participating in the next open-enrollment period. In addition, 30 new insurers are entering the exchanges in those states, and the number of products offered on those exchanges is expected to increase by 50%.

PreferredOne isn't discussing the decision. Calls to both the health plan and Fairview were not returned.

But theories abound as to why they pulled out.

Paul Keckley, head of the Navigant Center for Healthcare Research and Policy Analysis, believes it's simply the result of a poor business decision by a plan with limited experience in the individual market. “They decided to be the low price player and it caught up to them,” Keckley said. “Not surprisingly they got volume and not surprisingly they're losing money.”

But Allan Baumgarten, a Minnesota-based healthcare finance analyst, suggests that continuing technical problems with Minnesota's exchange may have played a key role in the decision. Baumgarten points out that enrollments must still be processed manually, creating an administrative headache for health plans participating in the exchange. He also suggests that the fee charged on premiums purchased through the exchange to pay for operations—which will be 3.5% in 2015—may have been a significant factor, noting that profit margins are typically tiny in the insurance business.

“We're not talking pharmaceuticals here,” Baumgarten said. “We're talking the insurance industry, and 3.5% is considered a good margin.”

Larry Jacobs, a political science professor at the University of Minnesota who closely tracks healthcare issues, said PreferredOne sought a significant hike in premiums for 2015 but was rebuffed by state regulators. The Minnesota Department of Commerce is expected to release 2015 rate information in early October. The filings are non-public until that time.

“PreferredOne tried to right the ship and they were turned down by the state and that's how they got to pulling out,” Jacobs said.

The decision by Minnesota's dominant carrier to drop out of the exchange is likely to be less disruptive than it would be in other markets. That's because just 44% (PDF) of exchange customers in Minnesota qualified for federal subsidies—roughly half the rate nationwide. That's in part because Minnesota has a state program—MinnesotaCare—that provides cheap coverage to residents who make up to 200% of the federal poverty level, and in part because Minnesota had some of the cheapest premiums in the country.

But the fact that more than half of the people who enrolled through the exchange are signed up for plans sold by an insurer that will no longer participate in the exchange is still certain to increase confusion in Minnesota. At the least it means that anyone who signed up for a PreferredOne plan and qualified for a subsidy won't be able to automatically re-enroll in coverage for 2015, which will be the default option for most exchange customers.

Rebecca Lozano, outreach program director for Portico Healthnet, a not-for-profit group in St. Paul that helps individuals sign up for coverage, said they anticipated some changes in the marketplace and that they already planned to stress the importance of reviewing coverage options for 2015 to clients. “There's still four other plans that people have the option to choose from that have really good coverage,” Lozano said.

The unexpected withdrawal of PreferredOne is also a political headache for Democrat Gov. Mark Dayton. Republicans have harshly criticized him for MNsure's troubles and the exit of the market's leading carrier has been held up as fresh evidence that the state-based exchange is a failure.

“Politically it's a thunderbolt right into the middle of the Minnesota election season,” Jacobs said.

Polling has shown Dayton with a comfortable lead against his Republican challenger, Hennepin County Commissioner Jeff Johnson, who isn't well known statewide. Johnson sought to capitalize on the development to change that dynamic.

“Nobody but Mark Dayton is to blame for this whole debacle,” Johnson said in a statement. “As he always does when his actions hurt Minnesotans, Dayton will try to blame everyone but himself.”

In the state's Senate contest, Republican challenger Mike McFadden, who is looking to unseat first-term Democratic incumbent Al Franken, is also seeking to make the exit of PreferredOne an issue. But most political observers believe it won't have as much salience in that contest.

“Dayton's got his fingerprints all over MNsure,” Jacobs said. “It's his. He's responsible for it.”

Since triumphantly announcing in April that 8 million individuals had signed up for health plans through the state and federal exchanges during the initial open-enrollment period, the Obama administration has been conspicuously silent about how many of those individuals actually paid their premiums and are enrolled in coverage. But on Thursday, CMS Administrator Marilyn Tavenner announced during testimony before the House Committee on Oversight and Government Reform that 7.3 million individuals remain enrolled in coverage. That suggests an attrition rate somewhat lower than 10% to 20% level indicated by most insurers. It's also significantly higher than the 6 million enrollments predicted for 2014 by the Congressional Budget Office. Tavenner described it as a “really strong number.”

Democratic Virginia Gov. Terry McAuliffe recently announced that he was giving up on efforts to expand Medicaid without approval from the Republican-controlled Legislature. But fresh polling data from Christopher Newport University (PDF) shows 61% of state residents support expanding the Medicaid program to residents with incomes up to 138% of the federal poverty threshold as encouraged under the ACA. By comparison, just 31% indicated opposition.

Follow Paul Demko on Twitter: @MHpdemko