Aetna’s announcement this week that it was pulling out of most of the states where it was serving the Obamacare individual exchanges was a head-scratcher; after all, just three months earlier, Chief Executive Mark Bertolini was calling its participation in the market “a good investment,” despite near-term losses.
Bertolini also had tried to tamp down speculation that its withdrawal was anything like a payback for the government’s move to block its $34-billion merger with Humana. That was “a separate conversation” from its evaluation of the exchange business, he said during an Aug. 2 conference call with Wall Street analysts.
Now evidence has emerged that Aetna was lying. The smoking gun is a July 5 letter from Bertolini to Ryan Kantor of the Justice Department, unearthed by Jonathan Cohn and Jeffrey Young of the Huffington Post via a Freedom of Information Act request. In the letter, sent before the DOJ formally announced it would sue to block the Humana deal, Bertolini explicitly ties the two issues together.
“Our analysis to date makes clear that if the deal were challenged and/or blocked we would need to take immediate actions to mitigate public exchange and ACA small group losses,” Bertolini wrote. “Specifically, if the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint. We currently plan, as part of our strategy following the acquisition, to expand from 15 states in 2016 to 20 states in 2017. However, if we are in the midst of litigation over the Humana transaction, given the risks described above, we will not be able to expand to the five additional states.”
All in all, Bertolini said, if the merger were blocked, “instead of expanding to 20 states next year, we would reduce our presence to no more than 10 states. … [W]e believe it is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked.”
As it happens, Aetna is cutting its participation to only four states.
Aetna’s withdrawal was widely interpreted as the latest in a series of blows to the Affordable Care Act exchanges. UnitedHealth Group had started the trend among major insurers last year, when it announced plans to bail out as of 2017. United, though the nation’s biggest health insurer overall, was a minor participant in the exchanges, however. But Humana, Aetna’s would-be merger partner, also announced a large-scale withdrawal from the exchange business. Other major insurers, including Cigna and Anthem—whose own plan to merge also has drawn opposition from the DOJ—have said they are still losing money on the exchanges but haven’t announced plans to cut back.
The merger partners have said that their deals are necessary to position them for the post-Obamacare healthcare world by strengthening their internal finances. The DOJ, however, maintains that the deals would reduce competition, which is necessary to keep ACA plan prices down.
Aetna spokesman T.J. Crawford told us by email that there’s no inconsistency between the Bertolini’s letter and his disavowal of a specific connection, since the merger is aimed at improving Aetna’s financial strength, a key to its participation in the Affordable Care Act exchanges. That impact “should not come as a surprise given a loss of deal synergies coupled with a potential break-up fee would raise further questions about sustaining a position in a business where we have yet to break even,” he observed.
Crawford said the letter was a direct response to the DOJ’s request for information on how the costs of a failed merger would affect “Aetna’s participation on the public exchanges related to the Affordable Care Act” and any other changes in its business plan.
In any event, Crawford continued, Aetna’s decision to pull back from the ACA exchanges was based on fundamental economic analysis. After the letter was sent, he said, “we gained full visibility into our second quarter individual public exchange results, which – similar to other participants on the public exchanges – showed a significant deterioration. That deterioration, and not the DOJ challenge to our Humana transaction, is ultimately what drove us to announce the narrowing of our public exchange presence for the 2017 plan year.”
The problem with these arguments is that Aetna had previously treated its participation in the exchanges as a sound business decision, despite its failure to break even in the market’s early years. Bertolini laid out a detailed case for continuing to serve the exchanges as recently as April, when he boasted of serving 1.2 million customers on ACA health plans. That was the foundation of a good business line, he told Wall Street analysts.
“If we were to go out and buy those members, it would cost us somewhere around $1.2 billion to acquire them,” he said. “If we were to build out 15 markets, it would cost us somewhere between $600 million to $750 million to enter those markets and build out the capabilities necessary to grow that membership. So in the broad scheme of things, we are well, well below any of those numbers from the standpoint of losses we've incurred in the first two-and-a-half years of this program.” He said he hoped that the administration would become more flexible in mandating specifications for ACA plans, but in any event “we see this as a good investment.”
The company’s claim that only after April did it realize how bad things were beggars credibility. Aetna has been selling health insurance since 1899 and has been in the Obamacare market since the exchanges opened for business in 2014. From the inception it took the long view, as Bertolini explained in April. As we observed earlier, if the economics of the exchanges really caught it by surprise between April and August, it should fire its entire financial analysis team. The only thing that really changed in that time frame was the DOJ’s move against the merger.
Indeed, two of our most assiduous Obamacare-trackers, Richard Mayhew of Balloon-juice.com and Charles Gaba of ACASignups.net, put the lie to Aetna’s poor mouthing as it applies to one state it’s departing, Pennsylvania. In both 2014 and 2015, they show, Aetna turned a profit on its ACA exchange business in that state— $6.4 million on $60 million in premiums in 2014, net of claims and administrative expenses, and $13.6 million profit on $71.4 million in premiums in 2015. The figures come from Aetna’s rate filings with the state, in which the company also says it expects to record a profit of 3.9% there in 2017.
How does the profitability of its Pennsylvania business square with Aetna’s assertion that it can’t afford to continue serving customers in the state? It doesn’t. Nor is there an obvious explanation for why, if it was picking and choosing which states to abandon, it would include one where it’s in the black. As Mayhew says, “Something stinks worse than a wrestling team’s locker room after two-a-days.”
We’ve mentioned before that the government isn’t entirely powerless to goad big insurers like Aetna into greater participation in the ACA exchanges. Among other things, the companies make money hand over fist by serving Medicaid expansions in many states and in Medicare managed-care plans. Why not tie their access to those lucrative markets to sticking with the exchanges until they’re finally stabilized?
Bertolini implicitly tied Aetna’s participation in Obamacare to a green light from the government on the Humana merger. But two can play that game.
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10:27 a.m.: This post has been updated with material about Aetna’s experience in Pennsylvania.