Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Obamacare has survived an endless series of lawsuits and empty congressional votes mostly unscathed. But a business -- one of the insurers expected to make the law work -- just delivered some of the most worrying news for the law since its passage.

UnitedHealth, the country's biggest insurer, on Thursday substantially lowered earnings expectations for 2016, citing diminished hopes for its individual health care exchange business, part of a system set up and subsidized by the law. It is pulling back on marketing individual plans and considering whether to stay in the business at all for 2017. 

Unhealthy

It's a rapid about-face: Just a month ago, UnitedHealth was still optimistic about the exchange business, which it only fully jumped into this year. It has apparently found the water icy cold.

For one thing, exchange customers are switching plans frequently in search of the lowest possible premium, and keep entering and exiting the system in an unpredictable way. Perhaps most worryingly for insurers, United Health reports that people on exchange plans have been using much more care than expected. This is particularly true for those who join during special enrollment periods rather than during open enrollment. These are people who join due to a qualifying life event, lose their plan, face a qualifying hardship, or have a change in family status. According to UnitedHealth, they have costs 20 percent higher than expected, and that's helping drive losses. 

The company sees anemic enrollment growth throughout the industry. The Department of Health and Human Services just predicted that 10 million people will be covered under individual plans by the end of 2016. The Congressional Budget Office had previously predicted it would be 20 million. All in all, the market is much more expensive to cover, smaller, and more aggravating than UnitedHealth had hoped. 

The financial impact of this disappointment is large. The company expects a $425 million hit to earnings for the fourth quarter of 2015 as it recognizes expected 2016 losses. UnitedHealth stock was down more than 5 percent in early afternoon trading, and all of the major health insurers took a hit from the news: 

Synchronized Diving
Source: Bloomberg
Intraday times are displayed in ET.

As bad as the situation looks for UnitedHealth, it might be even worse for other insurers. UnitedHealth is enormous and diversified, and individual exchanges are a relatively minor part of its business. Aetna and Humana have more exposure to the exchanges, according to data compiled by Bloomberg Intelligence. Both firms are already cutting back on the number of plans offered.

Exposure
Source: Bloomberg Intelligence

You could call this an overreaction to foreseeable early hiccups in a relatively new system. There are lots of previously uninsured and uninsurable people hitting the market at once, and many are finally getting care they may have delayed for years. UnitedHealth may find in its review that there's a long-term path to profit as the exchanges stabilize and mature.

For now, it seems pretty fatalistic, saying it has seen no sign of things improving. Hemsley left the door open to sticking around, but said there need to be changes to the market, including "a balanced risk pool and... adequate control over entry and exit into the marketplace."

Insurers may be hesitant to keep booking losses on the hope that things will turn around. A major insurer exodus would be a huge problem for the exchanges' ability to function. They were designed to promote competition, to keep premium prices and costs down. Premiums are already rising, and exits would likely accelerate that trend.

There's the potential of a cycle that's bad for everyone who's not a Republican candidate for office: Insurers may lose money on a large new market, consumers may face less choice and higher premiums, and the government may lose key partners that make the law work. 

UnitedHealth is the first insurer to be candid about the extent of its Obamacare disappointments and admit it's thinking of pulling out. If things are as bad as it suggests, it's unlikely to be the last.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net