Why Are Health Insurers Ditching Obamacare?

Health insurer Aetna Inc. (NYSE:AET) announced its second-quarter financial data after the bell Tuesday, and despite beating our estimates for both earnings and revenue, the company highlighted some troubling signs about the effectiveness of the Affordable Care Act.

Aetna said that it expects to lose about $300 million dollars on its Obamacare business this year. The company also announced that it is cancelling plans to expand its Obamacare offerings to five new states, and it will reassess its existing business in the 15 states it already covers.

“While we are pleased with our overall results, in light of updated 2016 projections for our individual products and the significant structural challenges facing the public exchanges, we intend to withdraw all of our 2017 public exchange expansion plans, and are undertaking a complete evaluation of future participation in our current 15-state footprint,” said Aetna CEO Mark T. Bertolini.

Aetna joins a growing list of health insurance companies that are struggling to make money from the new law. United Healthcare (NYSE:UNH) , the country’s largest insurer, already announced that it will be scaling its Obamacare business down from 1,200 counties in eight states to just 156 counties across 11 states.

Insurance companies are also requesting higher premium hikes for next year. On average, insurers have requested that premiums for the benchmark silver plan, which federal subsidies are based upon, increase by 9%, with some requests hitting double digits in several markets. In 2016, premiums for this benchmark plan increased by 2%.

A large number—more than half—of the co-op insurers created and funded by Obamacare have also failed. As insurance providers disappear from markets, individuals have limited choices and often must pick from only one or two companies.

Insurers are saying that premiums are simply too low to cover the new patients, who tend to get sicker and be more costly to cover. People who are covered under Obamacare plans are more prone to serious diseases and, on average, cost 22% more per month to cover than those with employer plans.

As a result, insurance companies need to either raise premiums or cut their own costs. One method that we’ve seen insurers look towards to shave costs is consolidation. Two massive mergers have been attempted, with Anthem (NYSE:ANTX) looking to purchase Cigna (NYSE:CI) for $54 billion and Aetna attempting to buy Humana (NYSE:HUM) for $37 billion.

By consolidating their businesses, these companies are looking to increase efficiency and cut down on operating costs. This would, however, reduce the amount of major players in the industry from five to just three.

In an effort to protect competiveness in the market, the Department of Justice recently sued the companies involved in these deals to block the mergers. The DoJ is presumably most concerned with the effects that these new insurance giants would have on smaller companies in the industry. The mergers could also result in more expensive prices as individuals have less options to choose from.

Both Anthem and Aetna have already responded to the DoJ’s suits by promising to fight the blockage. As for right now, it looks like these massive mergers and/or increased premiums will eventually come as a result of the difficult climate for Obamacare providers.