Pinal County, Arizona, is losing its access to Obamacare plans.

Photographer: Joshua Lott/Bloomberg

Aetna's Retreat From Obamacare Is More Than It Seems

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Aetna is pulling out of 11 of the 15 states it serves on the Obamacare exchanges. Longtime readers of this column will be unsurprised at the reason: It’s losing substantial amounts of money on its exchange policies.

That’s not necessarily the only reason, of course. Companies in heavily regulated industries -- and health care is now probably our most heavily regulated sector outside of nuclear power plants -- spend a lot of time engaging in n-dimensional chess games with the various government entities that have jurisdiction over their operations. Public statements and market moves may be exactly what they look like. Or they may be part of a complicated strategy involving some third, fourth or eighth factor that does not, at first glance, appear to be much related.

In this case, it has been delicately suggested that the company may have in mind its proposed merger with Humana (and that related announcements by Anthem are designed to aid Anthem’s Cigna merger). The government is currently suing to block both mergers; the companies would, obviously, like them to go through. The deals would consolidate an industry that currently has five major insurers down to three, giving them considerably more pricing power with both customers and providers. Because the individual market is a relatively small piece of their business, those mergers are probably worth a lot more to them than whatever goodwill the companies earn by losing money on the exchanges.

The losses are not to be ignored. Insurance regulators and the Securities and Exchange Commission do not give the firms much room to claim that they’re losing money if they’re actually making it hand over fist. Even if that weren’t the case, the failure of so many co-ops, which don’t have other lines of business, suggests that these markets are not, on the whole, a good place for insurers to make money. But it’s at least plausible that if the government weren’t blocking their mergers, these companies might be willing to go along with those losses for a few years in order to generate some regulatory goodwill for their broader business.

If that’s the case, the question is: What matters to regulators more? Blocking the mergers, or keeping the exchanges healthy? That’s not an easy question. As of this writing, it looks as if Aetna’s withdrawal will leave at least one county -- Pinal, in Arizona -- with no insurers at all selling exchange policies. And it seems unlikely that Pinal County will be the last to lose all its insurers unless something pretty drastic changes in these markets.

The state regulator has made hopeful noises about persuading someone to pick up the business. (Remember the regulatory goodwill we mentioned above?) But regulators in relatively small states don’t necessarily have that much clout with big insurers who can afford to keep taking these losses for years. California can plausibly say “Play ball with us or get ready to lose our nearly 40 million citizens as potential customers,” but a big corporation probably does not tremble in fear of the mighty market-shaking powers of the Vermont Department of Financial Regulation. And more locally concentrated firms cannot simply keep eating large losses for an indefinite period. It is obviously a problem -- for politicians, as well as customers -- if a growing number of people have a theoretical right to buy health insurance but cannot actually buy any.

But allowing the mergers to go through could well mean price increases in other markets. Bigger insurers gain more pricing power against rapidly consolidating provider networks. They also gain more pricing power with customers. Industries dominated by a few major players are not, in general, known for their high quality and low costs. Allowing the mergers to go through could stave off the immediate problem with the Obamacare exchanges at the cost of raising insurance costs for everyone else -- and giving Democrats big headaches in 2018 and 2020.

The calculation is further complicated by the fact that the exchanges and the mergers are regulated by different agencies. Health and Human Services ultimately oversees exchange operations, while the attorney general is the one trying to block the mergers. They both work for the same president, of course. But it would not be the first time that internecine battles between different parts of the same government further complicated an already complicated game.

Whatever the truth of the matter, and whatever the outcome, we can expect to see a lot of such quandaries going forward. The exchanges do not seem to be stabilizing; instead, they seem to be growing more unstable over time, particularly outside large urban areas where there are enough providers and slack capacity in the health-care system to provide some check on the problems that have plagued insurers elsewhere.

Insurers cannot simply go on eating those losses forever. They certainly won’t do so for free. Unless the exchanges get a rapid infusion of healthier customers who pay substantial premiums without using much care, insurers are going to keep pulling out of the areas where they are losing money. Or at the very least, they will demand benefits from the government to make it worth their while to stay.

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

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net