Robert Town and Katherine Hempstead on UnitedHealth's Exiting Insurance Exchanges

Tuesday’s announcement by the Minnetonka, Minn.-based UnitedHealth Group that it will withdraw from most of Affordable Care Act (ACA) health insurance exchanges it operates in is perhaps the single biggest jolt yet to the government program. As the company pleaded inability to continue in those state health insurance marketplaces because of losses, the focus has shifted to whether other insurers would follow that path, and the need for the industry to find new marketing and risk-pooling strategies.

UnitedHealth’s insurance arm, UnitedHealthcare, is staring at losses of more than $1.1 billion in the state health insurance marketplaces between 2015 and 2016, according to its chief operating officer and chief financial officer Daniel J. Schumacher. Many nonprofit health insurance co-operatives have exited the ACA’s state markets over the past year, but UnitedHealth’s decision is significant as it is the largest health insurance and managed care services provider in the U.S., with projected revenues of $182 million this year.

Other insurers might follow UnitedHealthcare’s example. “It’s not surprising that you are going to see net exit in these exchanges over time,” said Robert Town, Wharton professor of health care management. Many insurers entered the ACA markets and wanted to see if they could make a profitable business there, he added. “Many will find that it is not a profitable business line, and they will exit. No one should be shocked by there being a little creative destruction on the exchanges.”

Town said the approaches health insurers have taken thus far to the group and individual insurance markets may need to be revised for them to be profitable. “It is about the learning process that insurers have to go through to succeed on these exchanges,” he added. “There [will] be experimentation, new types of plans and [new] network structures that insurers have to experiment with to see what is popular, what works and how they can manage the risk that they [will be] exposed to.”

A Work-in-progress

Finding the right business model for health insurers is “a work-in-progress,” according to Katherine Hempstead, senior adviser to the vice president at the Robert Wood Johnson Foundation, where she directs its work on health insurance coverage. For example, she said health insurers could borrow lessons from the property and casualty insurance markets, where providers have been able to succeed and inspire brand loyalty.

“No one should be shocked by there being a little creative destruction on the exchanges.” –Robert Town

“I don’t think we’re there yet with health insurance,” Hempstead said, referring to brand loyalties or customer experience and satisfaction benchmarks.

Town and Hempstead discussed the options ahead for health insurers and the ACA state insurance exchanges on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

UnitedHealth’s latest move did not come as a surprise. Back in November 2015, it had warned that losses may compel it to exit some state health insurance exchanges. The other shoe dropped when the company’s CEO, Stephen J. Hemsley, said in an analyst conference call on April 19 that the company would stay only “in a handful” of the 34 state markets it operates in next year.

United’s Woes

“The smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis,” Hemsley said. It has thus far announced plans to withdraw from marketplaces in Arkansas, Michigan, Connecticut and parts of Georgia. In Georgia, it will continue to offer insurance through its subsidiary Harken Health.

Town was not surprised that UnitedHealth couldn’t make it work in the state health insurance marketplaces. “[UnitedHealthcare] has always been a bit ambivalent about the ACA marketplaces; it was late to enter many of the marketplaces and it was never a big player in almost every place it was,” he said. Therefore, it could not achieve the scale of operations that was necessary to succeed in the state exchanges, he explained.

UnitedHealthcare’s woes also reflect the difficulties in operating in the state exchanges. Town said the company’s business model was to have a modest share in many places. That is in contrast to the strategies of rivals like Blue Cross Blue Shield, who aim to collect large market shares in a few places, he added. “That is part of the reason [UnitedHealthcare was] ambivalent about the exchanges. The [state] exchanges are not set up for them to do well.”

Hempstead pointed to other problems she noticed at UnitedHealthcare. The company faced problems in achieving a stable enrolment from customers and had high utilization of its coverage (which means more payouts), she said. In some southern states, it had priced its offerings lower than those of others, and saw limited prospects of increasing them to sustainable levels, she said.

Industry-wide Pains

Other insurers have also faced difficulties in the ACA-defined market places, Hempstead noted. “Most carriers have noted some difficulties,” she said. “It is hard to think of a lot of carriers that have had an unambiguously positive experience. Definitely, there are headwinds for this market.”

“It is hard to think of a lot of carriers that have had an unambiguously positive experience.” –Katherine Hempstead

However, she thought the prospect of consumers directly buying their health insurance will become reality. Already, many consumers in employer-sponsored insurance plans are expressing their need for more choices, she said. Town agreed, and said the ACA exchanges “are part of a long, slow trend towards consumerism in health insurance,” adding that new health plans are emerging to address those demands.

Town noted that a few state exchanges are doing well and insurers have found it profitable, especially in California. However, replicating that model in other states is not easy because they do not have large enough populations to support multiple insurers on the exchanges, he added, citing relatively sparsely populated states like Wyoming and New Mexico.

Hempstead said those smaller states were challenging places to provide health insurance coverage even before the ACA, and that they would continue to be that way. “It is always hard for carriers to make a profit there,” she said. “In general, for the exchanges, it would be useful to find some ways to increase the pool of people so that the products are more affordable, and that the carriers’ experience is a little bit better.”

Strategy Recast

For insurers that are facing pressures similar to those of UnitedHealthcare, the only option is to change their strategies to stay solvent, Hempstead noted. “We might see some changes in the business model of these companies,” she said. “Lots of carriers need to rethink how to sell insurance.” Their options include moving away from the employer-sponsored market to sell directly to consumers, she added.

Here, she found it encouraging that UnitedHealth will retain group firm Harken Health in Georgia. Harken Health has a new business model in selling insurance directly to consumers that builds on the familiar doctor-patient relationship, overlaying that with a range of insurance plan options. She referred also to a few other “nascent examples” of firms like Zoom+ of Portland, Ore., that are trying new approaches of selling health insurance directly to consumers. “You see the articulation of a brand and a specific kind of customer experience that so far has been lacking in all of the carriers’ approaches.”

Looming Concerns

One big concern as insurers exit state markets they find unprofitable is that many states will be left with just one insurer operating on them, creating monopolies, said Town. He cited a study from Kaiser Family Foundation that examined the impact of United’s withdrawal. “In 29% of counties (536 out of 1,855 counties) where United participates, its exit would result in a drop from two insurers to one,” the Foundation wrote in its analysis.

“If it is not an attractive marketplace for insurers to compete in … the benefits of competition are not going to materialize.” –Robert Town

Town found it troubling that such an outcome will result in “increase in market power of insurers in many locations.” How that translates into premiums is complicated and uncertain, because of the nature of subsidies and the nature of risk-selection, he added. Hempstead agreed with him, but pointed out that many state markets were not competitive even before the ACA. “In some places, the remaining carriers [will have] a lot more pricing power.”

Options to prevent undesirable consequences include merging different consumer groups to create larger risk pools; or merging the exchanges of smaller states. The ACA has provided for that merger option, Town noted, and said that discussions are currently underway between states precisely for such mergers over issues like regulatory differences.

According to Town, it is critical to make market sizes sufficiently large enough, or else consumers lose along with insurers. “In the long run, the concern is the availability of options for consumers in many places,” he said, referring to areas where insurers will find only modest numbers of consumers.

“The whole premise of these exchanges in the ACA is that competition will lead to better outcomes,” Town said. “If it is not an attractive marketplace for insurers to compete in, you are not going to have much competition, and the benefits of competition are not going to materialize.”