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Can Obamacare Be Saved?

Supporters of the Affordable Care Act celebrate as the opinion for health care is reported outside of the Supreme Court in Washington,Thursday June 25, 2015. Photograph by Al Drago — CQ Roll Call via Getty Images

On August 15th, Aetna (AET) announced that it would reduce by 80 percent its participation in the Obama administration’s public exchanges for health insurance policies in 2017, citing significant financial losses. The move came just a few weeks after the Department of Justice (DOJ) blocked a planned merger between Aetna and Humana (HUM), two of the largest health insurers in the United States.

The 838,000 consumers who were insured by Aetna exchange plans in 2016 will be forced to select other public exchange plans or purchase individual insurance outside of the exchanges. When consumers switch insurers, they also risk having to switch provider networks, disrupting patient-physician relationships.

“According to Kaiser, health insurance premiums for the average plan are expected to rise by 9 percent in 2017”

These consumers will still have the option of purchasing an Aetna plan outside of the exchanges. However, practically speaking, it is unlikely that many of them will be able to afford those plans without the federal government subsidies they received through the exchanges. Around 85 percent of consumers buying insurance through the exchanges receive these subsidies.

Though Aetna’s move is not consumer friendly, it does make financial sense–at least for the time being. According to CEO Mark Bertolini, Aetna sustained more than $430 million in pre-tax losses since January 2014 in the individual health insurance market. And Aetna is hardly the only insurer to sustain such losses. In 2014, the health insurance industry’s aggregate pre-tax margin in the individual market was –5.2 percent, amounting to an overall loss of $2.7 billion.

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A Shrinking Pool of Providers

Though Aetna is currently enduring a healthy dose of criticism for its move, it’s not the first insurance company to pull out of the exchanges. The largest health insurer in the US, UnitedHealth Group (UNH), never really embraced the exchanges in the first place and has also suspended the sale of many of its plans on the exchanges for 2017.

In 2015, there was an average of 6.9 plans to choose from in each state. This fell to 6.5 in 2016, and even before Aetna’s decision, the Kaiser Family Foundation projected that this would drop to 5.8 per state in 2017.

The issue is that healthy individuals tend to sign up for cheaper individual plans, while those who are sicker tend to select the pricier plans with better coverage. Unfortunately, there aren’t enough healthy individuals selecting the pricier plans, meaning that premiums are rising. According to Kaiser, health insurance premiums for the average plan are expected to rise by 9 percent in 2017.

Aetna’s decision prompted commentary from both sides of the political spectrum. Republicans see it as proof that the public exchanges simply won’t work, while it has galvanized some Democrats to double down on calls for a single-payer system. Few national politicians are working to uncover why the public exchanges aren’t working for either insurers or consumers.

While it’s difficult, the question everyone should be working to answer is: How can the system produce an adequate level of choice for consumers and financial stability for insurers?

Consolidation in the health insurance industry is not the answer. While Aetna’s bargaining power with ever-more consolidated provider organizations would have improved if it were allowed to join forces with Humana, there’s little evidence that this would lead to improved quality or prices for consumers. Such mergers reduce competition in the insurance market, ultimately dampening much-needed innovation.

What’s more, there’s no requirement or expectation that any savings from synergies generated from the merger would be passed onto consumers. The DOJ was right to object to the merger.

But before we declare the exchanges a failure, a 2016 McKinsey Company report suggests that the exchange market is still very much in flux. It shows that 30 percent of insurers on the exchange (which were covering 40 percent of lives) made profits in 2014. The profitable insurers tended to have narrower provider networks and broader care management strategies.

Many more, however, still need to hone unique strategies for the public exchanges that can both improve short-term financial performance and ensure long-term sustainability. The McKinsey authors noted that “to succeed, many carriers may have to develop a fundamentally different business model—the commercial segment model is not viable for the public exchanges.”

Read More: 6 Reasons Why Obama Is Wrong About Obamacare

Ingredients for Success

From consumers: Consumers need to learn how to make smarter choices when it comes to their own health decisions. Just as people are expected to learn personal finance (e.g., how to budget for large purchases, like a house or a car, and to save for retirement), there has to be some expectation that people will budget for their own medical care.

This will require more education as it is not something most health care consumers had to do in the past. Consumers need to think beyond just the monthly cost of their premiums and consider the trade-offs involved in their decisions, especially the risks and constraints of high deductibles and narrow network plans.

From insurers: Insurers need to better understand what their customers want, how they make choices, and how to design and market their insurance products appropriately. Insurers who have struggled in the individual market should look at how the successful insurers have structured their product offerings.

Operating on the public exchanges is very different from operating in the commercial employer market. Commercial employers buy health insurance for pools of employees–sometimes thousands of them. The decision-makers are often skilled human resource specialists who can estimate risk, compare prices and optimize their insurance decisions appropriately.

The B2C market is very different from the B2B market. Yes, competing is hard work and made even harder when a company is entering a new market where the customers don’t yet understand how to make educated purchases.

Insurers can better educate consumers on how to make these difficult decisions and position products more appropriately. But, first, they themselves must become truly consumer-centric.

Read More: Mylan CEO Blamed Obamacare for EpiPen Sticker Shock

From government: The federal government also needs to step in and provide safety measures for insurers who take on riskier consumers. Many insurers complain with some legitimacy that the government has not lived up to the loss protection guarantees for participating insurers that were incorporated into the Affordable Care Act.

What’s more, the government needs to help consumers make better decisions. In most states, there are health insurance navigators to help consumers select the plan that makes the most sense for them. These resources need to be more available and better advertised and their professionalism needs to be increased through tighter accreditation.

Obamacare has resulted in 20 million more Americans being covered by health insurance. Causing these consumers further disruption by scrapping the public exchanges would be unfair and unproductive to public health.

Read More: The Government Says Obamacare Will Be Just Fine

John A. Quelch is the Charles Edward Wilson Professor of Business Administration at Harvard Business School. He also holds a joint appointment at Harvard T.H. Chan School of Public Health as Professor in Health Policy and Management. Emily Boudreau is a research associate at Harvard Business School.

This article was originally published on Harvard Business School Working Knowledge.