UnitedHealth considers ditching ACA's exchanges due to giant losses

(This story was updated at 1 p.m. ET.)

UnitedHealth Group has lost $425 million from health plans sold on the Affordable Care Act's marketplaces, which forced the company to lower its profit projections for the rest of the year. The company suggested it may exit the exchanges altogether by 2017.

It's a potentially huge blow to President Barack Obama's healthcare reform law, which has already suffered from the demise of half of its not-for-profit health insurance co-ops. The exchanges are the primary conduit to expand health coverage to middle-class Americans. If a major publicly traded insurer bows out, others may follow and destabilize the entire individual market.

UnitedHealth reported a $425 million shortfall from exchange products, and that includes $275 million UnitedHealth expects to lose from its 2016 plans. There's also another $200 million to $225 million in potential exchange losses that can't be booked until next year, the Minnetonka, Minn.-based health insurer and services conglomerate said.

“We cannot sustain these losses,” UnitedHealth CEO Stephen Hemsley said on an investor call Thursday.

UnitedHealth will evaluate its public exchange status during the first half of next year before deciding if it will leave the market. It has also “pulled back” significantly on marketing its 2016 plans and cut commissions to insurance brokers to minimize enrollment growth.

It's a swift turn of events for the nation's largest health insurer, which only a month ago touted its exchange strategy and said it was expanding into 11 new markets next year. UnitedHealth barely participated when the ACA's marketplaces kicked off in 2014.

“We continue to expect exchanges to develop and mature over time into a strong viable growth market for us,” UnitedHealth President and Chief Financial Officer Dave Wichmann said on the company's third-quarter earnings call in October.

Much has changed since then. Hemsley said many of UnitedHealth's 550,000 exchange enrollees were sicker than expected and “strong users of services.” In addition, many people have been signing up outside of the open-enrollment period, and those typically are the people using the most services, Hemsley said. The ACA established special enrollment periods so people could still sign up for coverage if they experienced a life-changing event, such as getting married or having a child.

Open enrollment for 2016 plans started Nov. 1. Although 1.1 million people selected a health plan through the federal HealthCare.gov site in the first two weeks, only a third of those people are new to the marketplace. Insurers are hoping more new consumers, especially those who are younger and healthier, will sign up so they can balance the risk from the initial surge of sick members. But many have shied away from the exchanges due to rising premiums, high deductibles and limited provider networks.

Anticipating that things will get worse before they get better, UnitedHealth lowered its 2015 profit from $6.25 to $6.35 per share to $6.

“We saw no indication of anything actually improving,” Hemsley said. He also suggested that UnitedHealth should have stayed out of the exchanges until after 2017.

UnitedHealth is not the only insurance company that has been battered in the early stages of the exchanges. Health Care Service Corp., the Blue Cross and Blue Shield insurer for five states, lost $282 million in 2014 due in large part to the new individual exchange plans. The CEOs of Aetna and Anthem have similarly voiced their concerns with the public exchanges, but they have indicated they will continue to be patient.

“We think it's way too early to call it quits,” Aetna's Mark Bertolini said last month.

However, the Obama administration may not want to let the losses pile up if they jeopardize the viability of the marketplaces. Since the large national carriers have spoken out about the exchanges, some view the outcry as a public lobbying effort to get more help from HHS, even beyond the ACA's three risk-mitigation programs.

“I would be extremely surprised if HHS does not do at least a few things to rectify the situation,” said Ana Gupte, a healthcare managing director at Leerink Partners. For example, the government could take a harder line on hardship exemptions, which insurers have complained “allow people to go in and out (of the exchange) as they please,” Gupte said.

“They cannot afford to lose all the publicly traded insurers and the Blue Cross plans,” she added. “The exchanges would collapse without them.”

HHS and the CMS did not answer questions about what they would do if UnitedHealth or other large insurers abandoned the federal and state exchanges. However, CMS spokesman Aaron Albright released the following statement:

“The health insurance marketplace is entering its third year and continues to grow, giving millions of Americans access to quality affordable insurance. As we've seen during the first two weeks of open enrollment, every day, tens of thousands more Americans turn to the health insurance marketplace for health coverage and even more return to the marketplace for another year. In fact, about 9 out of 10 returning consumers will be able to choose from three or more insurers for 2016 coverage.”

Healthcare stocks took a beating Thursday morning in light of UnitedHealth's announcement. UnitedHealth's shares were down 5% by noon EST. Anthem's stock plummeted 7%, while Aetna lost 6%. Hospital chains HCA and Community Health Systems were down 6% and 9%, respectively.