UnitedHealth Group dropped a bombshell on Nov. 19 when it told investors that it would take a $425 million (26 cents per share) write-down for the fourth quarter of 2015 to pay for losses on Affordable Care Act (ACA) exchanges for 2015 and projected ahead for 2016. A small slice of that amount was also for a balky Iowa Medicaid contract, but the thud heard around the industry was the sound of people throwing previous projections out the window about the financial viability of health insurers doing business in the ACA individual marketplaces.

“In recent weeks, growth expectations for individual exchange participation have tempered industry wide, co-operatives have failed, and market data has signaled higher risks and more difficulties while our own claims experience has deteriorated, so we are taking this proactive step,” said Stephen Hemsley, CEO of UnitedHealth, in a statement. “We continue to be pleased with the growth and overall performance of our company outside of the individual exchange products and look forward to strong, positive and broad based earnings growth across our enterprise in 2016.”

In a call with analysts after the statement’s release, Hemsley said exchange losses could go as high as $500 million in 2016, thus the company allocated $275 million of the overall $425 million write-down in the current year’s fourth quarter to start to cover the expected hit. He also made clear that UnitedHealth is not sticking around the marketplaces if the bleeding does not stop. “We cannot sustain these losses. We can’t really subsidize a marketplace that doesn’t appear at the moment to be sustaining itself,” Hemsley said.

The insurer also said it expects full-year 2015 earnings at $6.00 a share as a result of the write-down, well below the $6.31 consensus estimate by Wall Street analysts. UnitedHealth’s stock price cratered more than 5% on the developments, closing $6.62 lower at $110.63 per share on Nov. 19. And as UnitedHealth goes, so goes the sector as all major publicly traded stocks nosedived on Nov. 19, such as Aetna Inc., which closed the day down $6.97, or 6.5%, to $99.89, and Humana Inc., which ended down $6.83, or 4%, at $164.25.

Market observers tell AIS it remains a simple fact that the problem with the ACA exchanges is that enrollees are sicker and older than health insurers had projected. And there does not appear to be a clear-cut strategy or avenue to attract younger, healthier consumers to them, although the tougher penalties for not having coverage that kick in next tax season could help do the trick.

“Every plan I talk to tells me that they don’t expect their Obamacare business to be profitable even in 2016 after their big rate increases. That does not bode well for the rate increases we can expect to be announced in the middle of next year’s elections,” said Robert Laszewski, president of Health Policy and Strategy Associates, LLC.

Jon Kingsdale, managing director at Wakely Consulting in Boston, tells AIS that the news on UnitedHealth was not shocking to him “because I have always thought for years that the marketplace opportunity was more plans with deep local penetration and relationships with providers, most of whom are local. And that is not United’s strength. That is the strength of the Blues. That is the strength of a lot of local health plans.”

He says while the ACA exchanges could be a growth area, it is not a national market. “Colorado is as different than Utah and Wyoming and whatever else New Mexico could be. Your market share in Colorado gives you no clout in the New Mexico exchange. Price is king and that reflects on reimbursement arrangements with hospital and doctors, and you need deep market penetration and preferably strong relationships,” Kingsdale says.

What was thought to be a flawed business premise for mainly the Consumer Operated and Oriented Plans (CO-OPs) that have gone out of business in droves in recent weeks and months has now struck the nation’s largest carrier. And more shockingly, Wall Street analysts and market consultants had consistently patted UnitedHealth on its back for being so smartly conservative in its ACA exchange strategy, only entering four marketplaces in the first year (2014), and then building to 24 in 2015 and 35 for 2016.

Other insurers have set the tone for what has now become a stream of bad returns on ACA marketplace coverage, like Health Care Service Corp., which in June said it lost $382 million on ACA exchanges in 2014. At the time, market consultants said the first-year losses were expected, since the reform law assumed such developments and came up with the 3Rs program (risk corridors, reinsurance and risk adjustment) to ease the pain in the first place. But the 3Rs have not proven reliable and now insurers are divulging major losses for this year and next.

“Overall, the exchanges have not been profitable for anybody. Plans are seeing a continuation of higher unhealthy risk profiles, which are utilizing health care at a significant clip. This has not abated,” Vishnu Lekraj, senior equities analyst for Morningstar, Inc., tells AIS.

Christine Arnold, securities analyst for Cowen and Company, in a Nov. 19 note to clients said all options are on the table for what UnitedHealth does next in the individual exchange marketplaces. “In our view, the announcement raises more significant red flags for the sector and potentially calls into question the long-term viability of the public exchange business (absent a change) given a deteriorating risk pool,” she said.

Across the sector, Arnold said fourth-quarter individual results are likely to worsen as “more members run through out-of-pocket maximums and deductibles and since members have 90 days to pay premiums.”

And UnitedHealth’s future in the exchanges will likely depend heavily on how well the steps it has taken to mitigate 2016 losses actually work, she says. “UnitedHealth is employing a full range of tactics in order to limit individual enrollment growth in 2016 including reducing its marketing efforts, access to products, and broker commissions for individual products as it continues to assess the market,” Arnold said.

For now, Arnold said “the company will continue to evaluate the public exchange market during the first half of 2016, as it attempts to determine the extent of its participation in 2017.”

Excerpted from the 11/23/15 issue of AIS’s Health Plan Week.

© 2015 by Atlantic Information Services, Inc.