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Public Exchange Woes Hit Health Insurers: Stocks in Focus

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Public exchanges, formed to serve the underprivileged and patients, have not been too successful in serving the insurers. This is evident from losses incurred by most of the health insurers participating in these exchanges.

Affordability-Risk Pool Trade Off

The exchanges saw a deluge of very sick patients buying insurance cover online, thanks to the subsidies provided to the enrollees. They, however, failed to attract sufficient enrollments from healthy and young individual, which was required to balance the risk-return trade off. This led to increase in claims on business conducted on these exchanges.

Let us discuss how the big four insurers have been affected by this public exchange business.

Aetna Inc (AET - Free Report) , one of the nation’s largest health insurance companies, recently announced that it would pull back its participation from public exchanges, expecting a loss of $200 million in 2017. Aetna incurred pre-tax operating losses of $450 in 2016.

Lackluster results from this line of business prompted the company to substantially reduce its risk exposure to these products for 2017. Aetna carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Anthem Inc (ANTM - Free Report) , a Zacks Rank #3 (Hold) company, is another big insurer offering plans on Affordable Care Act (ACA). Anthem suffered a decline in enrollment in 2016 and the same continued in the first-half 2017.

This prompted the company to scale back its participation in this loss-making business for 2018. It pulled out of exchange plans in 11 states for 2017.Although management has been taking steps to ensure both a stable and sustainable individual market as well as a smooth transition for consumers, uncertainty remains.

UnitedHealth Group Inc. (UNH - Free Report) lost more than $1 billion on the exchanges in 2015 and 2016. After two years of losing money from plans sold on the ACA insurance exchanges, it exited nearly all of the exchanges for 2017. UnitedHealth presently carries a Zacks Rank #3.

Humana Inc. (HUM - Free Report) has already declared that it will exit its Individual Commercial business in 2018. After incurring mounting losses in this business in 2015 and 2016, Humana pulled back its participation from 11 states in 2016. The insurer anticipates incurring a modest $45 million loss on ACA exchange plans in 2017, excluding the effect of which, it estimates the earnings per share for 2017 to be at least $11.50. The company also carries Zacks Rank #3.

Continued Uncertainty

The health insurers that have been making significant losses on ACA exchange plans are uncertain about thefinal verdict from the Trump administration. This is because the administration has been vocal about removing cost reduction subsides that help insurance companies pay claims of patients buying coverage on public exchanges.

These players have been lobbying to keep these subsidies intact, which would otherwise lead to the health plan enrollees facing cost increases of 20-25% for 2018 coverage.

The U.S. Senate is working on a bipartisan approach for shoring up the ACA’s public exchanges by funding cost-sharing subsidies for low income patients.

The uncertainty on the CSR funding puts a question mark on the sustainability of these  exchanges. In the event of an unfavorable outcome, it will not be surprising to see an exodus of insurance companies from these exchanges.  This exit will lead to more Americans finding themselves with fewer healthcare options, causing an increase in uninsured rates, defeating the central tenet of the Health Care Reform Act.

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