The big news driving markets today, and pressuring the Dow Industrials, is that insurance giant UnitedHealth Group (UNH) is lowering its 2015 earnings projection to $6 a share from a previous range of $6.25 to $6.35.
Now, reduced profit forecasts aren’t ever a good thing. But this revised profit forecast has a more pernicious, and extremely troubling, cause.
The reason why UNH expects lower 2015 earnings, simply put, is Obamacare.
According to the company’s announcement today, it anticipates big losses on the business it does via the Affordable Care Act (ACA) exchanges.
The anticipated losses are so great that UNH is actually considering withdrawing from the exchanges.
Consider that for just a moment.
The nation’s largest health insurer can’t make a profit, and indeed is losing a lot of money, on a federal scheme that was supposed to provide them with a whole lot of new customers.
This is bombshell news. It is also one of the clearest signals we’ve seen so far that Obamacare is failing.
Moreover, the very real threat of UNH to actually pull out of the healthcare exchange business has got even Obamacare proponents worried that the top-down federal program is in big trouble.
A story at MarketWatch explained the situation using what principals from UNH cited as the reason for the problems with the healthcare law:
UnitedHealth Group’s chief executive, Stephen J. Hemsley, said it made the move, which included a downgrade of its earnings projections for 2015, amid reduced growth expectations, the expected shutdowns of the majority of the health law’s nonprofit cooperative insurers, and signs that its own enrollees continue to increase their use of medical services, raising costs.
… the insurer said it is "evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017."
That proclamation sounds to me like the "last exit before toll" moment for UNH — and maybe for the entire Obamacare program.
For the record, I doubt that UNH’s profit struggles in its healthcare exchange business will force anyone in the Obama administration to recalibrate the ACA.
Yet the problems here are not just relegated to one health insurer.
According to MarketWatch:
Several other big publicly traded insurers also flagged problems with their exchange business in their third-quarter earnings. Anthem Inc. (ANTM) said enrollment is less than expected, though it is making a profit. Aetna Inc. (AET) said it expects to lose money on its exchange business this year, but hopes to improve the result in 2016. Humana Inc. (HUM) and Cigna Corp. (CI) also flagged challenges.
The story went on to cite an analysis by McKinsey & Co. showing that for 2014, the first year of the exchanges, the collective losses suffered by health insurers totaled some $2.5 billion, or an average of $163 per consumer.
While health insurers participating in the Obamacare health exchanges are busy losing money on the deal, enrollees in the program are actually paying up big-time.
To stop the fiscal bleeding from their Obamacare plan offerings, insurers have raised plan premiums in an attempt to mitigate the medical costs of current enrollees, which have run much higher than the companies were anticipating.
And, not only are premiums going up, but their choice of plans and plan options now are being restricted.
According to a just-published paper from think tank American Action Forum, titled, "Still Marked by Uncertainty: 2016 Health Insurance Marketplace," the Affordable Care Act offered:
… the promise of stability and affordability. The new individual marketplace was to rival that of the employer sponsored insurance (ESI) marketplace in stability and predictability, while premiums were to rise at rates much lower than the historical average.
… In this study we find that the cost of both the benchmark Silver plan and the lowest cost Bronze plan will increase by 10 percent in 2016.
So, let’s review.
Health insurers are losing money on Obamacare exchanges, and now the biggest U.S. health insurer is about to exit stage left.
The, enrollees have to pay about 10% higher premiums next year, and for plans that offer less.
Moreover, those plans will come with higher out-of-pocket costs such as higher deductibles and bigger co-pays.
So far, I haven’t heard anything good, but unfortunately, there is more bad news.
UNH dropped 5.6% in today’s session
According to MarketWatch:
Analysts say the danger is that higher rates might discourage enrollment, particularly by the younger, healthier consumers that the marketplaces need to draw in, since they are the ones that are most likely to feel they can go without insurance.
That would have the effect of driving premiums even higher in the future, because insurers would need more rate increases to cover the costs of a smaller, sicker pool of enrollees.
At its worst, this cycle can feed on itself, creating what the industry calls a "death spiral."
When the whole Obamacare idea was proposed, there was a phrase often bandied about that it was going to "bend the cost curve" so that healthcare became less expensive.
Well, so much for that idea.
It’s ironic to me that with a product that is basically illegal not to have … and one that you can get a subsidy to pay for if you qualify … that the government still can’t get enough healthy people to enroll in the exchanges so that the scheme works.
Sadly, I think recent events show that Obamacare is yet another government boondoggle suffering the fate that so many government plans suffer … and for basically the same reason.
That reason is a failure to respect simple and immutable laws of economics.
Are you the least bit surprised that health insurers are losing money on Obamacare exchanges? Have you seen your health insurance premiums go up, even if you aren’t in an Obamacare exchange? Everyone I’ve spoken with has seen their personal health insurance costs go up, and that’s not a coincidence.
It was another mixed day of trading in the markets that ended with the major U.S. indices finishing flat to down. Gold provided a small bright spot, with the December futures contract gaining $9 on interest-rate hike expectations.
Here’s what else we will remember about today …
• The House of Representatives passed a bill to rigorously vet potential Syrian and Iraqi refugees. The "American SAFE Act of 2015" calls for background checks and approval from the FBI, Homeland Security and other high-level officials on each applicant. President Obama has said he plans to veto the bill.
• Mobile payment processor Square (SQ) had a solid first day of trading. Shares opened up at $11.20 and closed just above $13, a 45% gain over its $9 IPO price.
• Match Group (MTCH) found a love connection with its new home, the Nasdaq. The parent company of dating service sites like Match.com and Tinder jumped 22.8% above its $12 IPO price to close at $14.74.
• No Santa rally for Best Buy (BBY)? The big-box retailer dropped 2.1% today after reporting a revenue miss in Q3 and issuing cautious holiday sales guidance.
Good Luck and Happy Investing,
Uncommon Wisdom Daily