Aetna Inc (AET), CIGNA Corporation (CI): Does This Move Defeat the Purpose of Obamacare?

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The Patient Protection and Affordable Care Act, set to go into full effect on Jan 1., is certain to have broad-reaching impacts on the way that insurance companies sell their products to consumers. Some insurers, like Aetna Inc (NYSE:AET), have been jockeying for position in the Medicaid arena, purchasing Coventry Health Care for $5.7 billion to take advantage of the coming Medicaid expansion. Other insurers have chosen to enter new markets and utilize the transparent state-run health exchanges being formed under the PPACA, also known as Obamacare, to expand their presence.

Aetna Inc. (NYSE:AET)

Over the weekend, Aetna Inc (NYSE:AET) made it very clear to consumers and the government that increasing levels of competition may not be the end result of state-run health exchanges.

On Saturday, Aetna Inc (NYSE:AET) informed California Insurance Commissioner Dave Jones that, in addition to not participating in California’s health exchange, it planned to pull out of the state altogether with regard to offering individual health plans. Keep in mind that Aetna still intends to offer health plans to businesses and Medicare beneficiaries, which is where the bulk of its profits are in California, but it is nonetheless going to send 49,000 current members out into the cold (or should I say the palm trees?) to find another health plan.

A case of deja vu

President Obama answers questions on health reform. Source: White House.

If this sounds eerily familiar, it should be, because we saw very similar anti-competitive announcements from three of the nation’s biggest insurers in California last month: Aetna Inc (NYSE:AET), CIGNA Corporation (NYSE:CI), and UnitedHealth Group Inc. (NYSE:UNH), which all decided not to participate in Covered California, the state’s health exchange.

The logic behind their absence in participating in a public health exchange does make some sense. Combined, these three health-benefits providers comprise just 7% of all outstanding individual health plans in California. With the big four — Kaiser Permanente, Blue Shield of California, Anthem Blue Cross (a WellPoint, Inc. (NYSE:WLP) subsidiary), and Health Net, Inc. (NYSE:HNT) — taking the majority of California’s individual health insurance business, the costs of fighting for new members may not have been justified.

Does this defeat the purpose of Obamacare?

The biggest concern remains whether these new exchanges will increase competition among insurers through better pricing transparency, or whether health insurance for individuals will cluster in the hands of just a few companies in each state. Based on what we’re witnessing from California, it looks as if four insurers will control the bulk of the market. Even if Obamacare’s state-run health exchanges have resulted in lower-than-expected premiums for individuals on the surface, putting majority control in the hands of just a handful of insurers won’t obligate them to pass along these cost savings to consumers and could lead to less price competitiveness, defeating the whole purpose of Obamacare.

For Aetna Inc (NYSE:AET)’s bottom line, its choice not to participate in Covered California isn’t a big blow by any means since it derives most of its premiums in the state from enterprise and Medicare members. But, Aetna is sending what could be a bigger message that not even the most populous state in the country is enough allure to enter a crowded state-run health exchange. If the impetus to enter new markets is discouraged by state-run exchanges, then the chances of seeing meaningful reductions in premium pricing could be lost.

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