Aetna’s departure won’t doom California’s individual insurance market

The closer we get to full implementation of the 2010 healthcare law, the more visible its effects become. The latest example is Aetna’s decision to drop out of the market for individual health insurance policies in California, which will force almost 70,000 people in the state to find a new insurer.

Critics of the law will probably characterize this development as yet more proof of the hollowness of President Obama’s promise that “if you like your healthcare plan, you can keep your healthcare plan.” As Aetna’s move shows, that assertion went too far. The Patient Protection and Affordable Care Act (a.k.a. Obamacare) exempted existing health plans from the new minimum standards for coverage, but it didn’t shield those plans or the companies behind them from other reforms that make the insurance business riskier and less profitable.

In particular, the law stops insurers from chasing profits by excluding risky applicants and charging ailing people more than healthy ones. Instead, they have to take all comers, and the risks have to be spread broadly across their customer base. Meanwhile, they have to spend 80% of the premiums dollars they collect from individual customers on health benefits, which puts a tight cap on their profit margins.

The law tries to balance the scales by requiring nearly every adult American to obtain coverage -- with the help of billions of dollars’ worth of subsidies for lower- and moderate-income households -- and offering help for insurers that wind up with a disproportionate share of the costliest customers. But no one knows how well these and other new provisions will work when they take effect in January. Insurers are particularly worried that many younger, healthier people will decide to go without insurance and just pay the (comparatively small) tax penalty.

That’s the glass-half-empty view. On the other hand, Aetna’s move wasn’t too surprising. The company, which served about 7% of the Californians with individual policies in December, had already decided to take a wait-and-see approach to most of the new state insurance exchanges, which are markets where people can shop for coverage. That suggests Aetna would rather not be on the bleeding edge of Obamacare, but would rather let its competitors work out the kinks.

The trade-off is that other companies will have the chance to establish their brands and win consumer loyalty in the new market while Aetna’s off the field. That includes the state’s three biggest players in the individual market.

Having one less source of coverage is a loss for consumers, that’s true. Yet Californians will still have nine other well-established insurers offering individual policies after Aetna pulls the plug. That number will actually grow to 13 insurers this year, as more insurers step up to compete through the state’s exchange, Covered California (albeit not necessarily in every region).

In fact, according to a new report by the Robert Wood Johnson Foundation, the 2010 law is bringing insurers into the individual market, not driving them out. In the 10 states where data was available, the study found, four expect no change in the number of insurers, and six expect increases.

There will certainly be rough times ahead. The success of the law hinges on the ability of insurers and exchanges to persuade people to comply with the individual mandate, as well as the ability of the industry as a whole to hold down costs. There have been encouraging signs on the latter front, but the former remains to be seen. The worst-case scenario -- that millions of sickly uninsured people sign up for coverage while the healthier uninsured stay on the sidelines, causing premiums to spiral upward -- remains a real possibility.

But Aetna’s departure isn’t a sign that the system is collapsing. Instead, it’s one company’s decision to sacrifice one of its smaller revenue streams until the uncertainties fade and the worst-case scenario is ruled out.

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