Announced Obamacare Deadline Delay Will Have Little Impact On Carriers

The administration is set to announce that insurance companies can extend the period where they offer plans that do not meet Obamacare’s essential health benefits, extending by two years the potential availability of non compliant plans. Fears that these delays will adversely affect the insurance pools and the insurance carriers have probably been overstated. The new deadline will probably do very little to change the industry’s plans and have only a minor impact on their financials.

Even if some companies do decide to extend their existing insurance plans the overall impact to their business will still be minor. Individual policies are only a small piece of how consumers purchase and receive health coverage. Prior to 2014 an estimated 11 million consumers had an individual market plan as their sole form of coverage. At the end of February enrollment in qualified health plans through the exchange stood at just over 4 million.

WellPoint (NYSE: WLP) represented by the Blue Cross Blue Shield brand competes in a number of states including California. Only 12% of the company’s nearly 15 million 2013 policyholders were in the individual market.

For Humana (NYSE: HUM) another active participant in the exchanges it was only 5%. With exchange enrollment likely to represent an even smaller percentage of the companies’ 2014 revenues it would be surprising if the impact was more than minor.  These segments are dwarfed by the size of their small group and other businesses.

Another critical point to remember is that this announced delay does not actually prevent the insurers from cancelling plans. Instead it just moves the date when these older plans must be cancelled. Prior to the ACA, individual plans were regularly cancelled and consumers migrated to new policies annually. The insurers are likely to continue this practice.

The additional essential benefits are also a potential revenue and profit opportunity. By increasing the mandated coverage the regulations will also increase paid premiums. Health insurance companies typically earn a % of total premiums, and as these premiums increase so will. The insurance companies have very little incentive to wait in cancelling their existing plans.

For the carriers that may end up losing money in the first year, the transition programs should also help to mitigate any initial losses from bad demographics.  The latest budget proposal projected $5.5 billion dollars would be used in 2015 to help cover insurance carrier losses during this period. While the number may seem large it should be put into the larger context of the entire health insurance industry. In 2013, Humana alone earned 38 billion dollars of premiums, WellPoint 66 billion and the larger United Healthcare (NYSE: UNH) over 100 billion. The individual segment is a very small piece of the industry's total revenue base. 

Initial surveys also indicate that many of the initial enrollees are those who were previously insured. A recent Mckinsey & Co. survey reported that only 27% of enrolless did not already have some form of insurance. This may indicate that the risk pools are not simply attractive the unhealthy uninsured, with existing policyholders helping to balance out the pools.

The concerns about demographics and health status in the new risk pools are still very real. They will likely have some impact the profitability of initial exchange business.  At the carrier and industry level however, the financial downside will still be small. At worst, it will simply cause insurers to raise premiums in the latter years to stabilize the new risk pools. Overall the exchange business are an incremental business opportunity and changes to deadlines and implementation are likely to have only a marginal impact on business.

 

Jonathan Wu

Jonathan is the CEO and Co-Founder of ValuePenguin. He reports on an array of topics, including the financial services industry, healthcare reform, and financial products for consumers. He previously worked in the financial services industry, including at such hedge funds as Avenue Capital Group.

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