Is Aetna Leaving ObamaCare?

Aetna, Losses, a Blocked Merger with Humana, and the Department of Justice – Why is Aetna Saying it is Pulling Out of the ACA Exchanges?

Citing losses, but on the back of the Department of Justice (DOJ) attempting to block a merger with Humana, Aetna has stated it will pull out of 11 ObamaCare exchanges. This story is similar to past insurers that have reduced ACA business including Humana and United, but the DOJ lawsuit aspect makes it a unique and slightly more complex story.

With the above in mind, the decision to pull out of counties Aetna was offering ACA subsidized plans in (rather than expanding to new regions) existed as a warning to the DOJ at first, but is now a plan on the table in light of the DOJ moving forward with a lawsuit to block the $38 billion merger between Aetna and Humana.

Despite all this, nothing is set in stone, and Aetna still thinks the merger will happen (which can of course change what plans are offered where). The two sides go to court in December.

We explain below.

TIP: Anthem also wanted to merge with Cigna. Plain and simple, the insurers want to merge under the ACA. The DOJ is blocking this to ensure competition in the marketplace. The ramifications create complexity, but the core story is as simple as that.

TIP: To be clear, Aetna is citing cost related issues, not the Department of Justice lawsuit, as their reason for pulling out of the exchanges. Despite the official word, many are skeptical due to the timing and upcoming suit.

Aetna Pulling Out of the Exchanges is About the Bottomline, but Not Just About Cost

In April Aetna had suggested the ACA marketplace was a good investment, one quarter and a DOJ lawsuit later and the tone has changed.

The Official Statement from Aetna

“Aetna cited the large losses that the company has incurred from the exchange business — $200 million in the second quarter alone — when explaining its decision to roll back its business”, Business Insider reported… “Providing affordable, high-quality healthcare options to consumers is not possible without a balanced risk pool,” Aetna CEO Mark Bertolini said in the statement. “Fifty-five percent of our individual on-exchange membership is new in 2016, and in the second quarter we saw individuals in need of high-cost care represent an even larger share of our on-exchange population. “This population dynamic, coupled with the current inadequate risk-adjustment mechanism, results in substantial upward pressure on premiums and creates significant sustainability concerns,” he said in mid-August…

…that is the official word, but, on deeper examination this seems more like the line the “Red state” governors give when discussing Medicaid expansion, an overly simple answer that doesn’t tell the onlooker the core story.

What is Insurance and Why Do Insurers Exist?

Before we can properly critique Aetna, we have to understand why insurance exists and what an insurers role is in society.

The first insurance was a type of Maritime insurance essentially meant to offset the risk associated with pirates, just like the first modern stocks, the concept was that “as some risk is unavoidable, utilizing group buying power and a big pool offsets the risk of ensuring a single entity”. Despite this, employing basic mathematics, we can use risk adjustment to offset any risk and ensure a profit (by raising premiums and cost sharing and by limiting benefits; or by limiting the customers we sell plans to).

Under the ACA, the only way an insurer has to avoid taking on risky customers is to avoid whole regions or markets. So on that level, Aetna pulling out of troubled regions makes a self-interested sense.

However, in our story, risk isn’t just a matter of taking on sick consumers, an idea that presupposes that those who would access subsidized coverage would be a more costly group (which isn’t completely false), risk in this case is more a matter of the aforementioned DOJ (Department of Justice) lawsuit over a potential merger with Humana… coupled with some losses and a fear of the GOP’s penchant for defunding risk adjustment programs (programs that are vital to the major insurers participation in the ACA; A GOP defunding tactic called starving the beast).

So, to distill this, Aetna is realizing costs of ACA subsidized markets (fair), weary of inadequate risk-adjustment funding (fair), but is primarily suspected of using these factors as an excuse to take a hardline stance with the DOJ.

So the main risk is a risk of not being able to complete the $37 billion merger, ObamaCare is just caught in the crossfire.

This would be like pulling out of the Dutch East India Company of the early 1600’s, not because one feared pirates, or because one thought a fleet of ships was prone to not making it back, but because one wanted to punish the Dutch government for blocking a merger between two maritime insurance providers (ok that is a rough analogy, but point being, its hard to see this as about insuring sick people; AKA literally the main role of an insurer).

The Department of Justice Sues Aetna Over Merger

The DOJ thing works like this:

The DOJ had previously asked Aetna what the affects of blocking the merger would be, Aetna responded with an assessment (that can read like a veiled threat and an honest assessment at once). The gist being “if you block a merger, or if we think you will block a merger, we won’t expand, as the litigation plus the risk of taking on new exchange consumers will be too great for the company…. In fact, now that we have sat down with the numbers, we may just pull out anyway”. (essentially they didn’t just make a veiled threat, they upped the ante). This article explains.

Or at least this was the tone in July, now that the DOJ has moved forward with the lawsuit Aetna is upping the ante on the threat again saying, “Actually numbers aren’t looking so great and we think we will pull out rather than expand business to the exchanges”.

Despite this, and to be clear, according to Politico.com, “Aetna denies a link between the DOJ lawsuit and its decision to exit most of the Obamacare markets, saying its prior bullish comments were made when the company still thought it would break even. Now, it expects to lose $300 million this year on the Obamacare. And it says it still expects to win approval of the merger at the end of the day.”

The Problem

If the major insurers keep pulling out of the subsidized markets then there is less competition to keep prices down and give consumers choice, if the major insurers merge into one for-profit entity the effect could be the same (or the coordination could drive prices down over the long term).

The problem is it is hard to tell what the right answer is.

All the while, the ACA is keeping some costs down, but healthcare is still putting a squeeze on the average American and still raking in tens of billions in profits for any company participating in the somewhat bloated industry (and this includes Aetna, Humana, and United).

Another part of the problem is that the mandate means consumers are forced to get a plan no matter what, so its this bizarre thing where demand isn’t directly attached to supply or price.

Obviously the best answer is the one that is fair, gives consumers choice, allows the insurers to hold a good bottom line to ensure employment, progress, and reasonable returns, yet also staves off any sort of extra inflation in the market.

The problem is that it seems to be unclear as to what the best answer is from a private or public standpoint. Certainly losing Aetna, Humana, and United is a slippery slope, but with America being tight on cash and the DOJ having a chance to make a stand, its not all that obvious that two of the three parties should just cave to the insurers demands.

Learn more from business insider: Now we know the real reason Aetna bailed on Obamacare and Obama allies cry foul over Aetna snub.