WSJ Editorial: UnitedHealth’s ObamaCare Reckoning

UnitedHealth’s ObamaCare Reckoning

Insurers are learning that the law was a Faustian bargain.

Updated Nov. 22, 2015 9:06 p.m. ET


Health insurance stocks took a nasty tumble last week, and maybe the markets are realizing that ObamaCare isn’t performing as well as the political class pretends. Sooner or later, reality tends to assert itself—for President Obama’s domestic legacy no less than his foreign policy.

The immediate cause of the selloff was UnitedHealth Group’s shock $425 million downgrade to its earnings forecast for 2015, almost entirely driven by losses on the Affordable Care Act exchanges. UnitedHealth is the largest U.S. insurer by enrollment, and the company is warning it may withdraw from ObamaCare in 2017. The insurer has already suspended advertising for its ObamaCare coverage and stopped paying commissions to insurance brokers for signing people up. It literally doesn’t want consumers to buy its products.

On a UnitedHealth call Thursday with Wall Street analysts, Josh Raskin of Barclaysasked, “Simply, how long are you willing to lose money in exchanges?” and then followed up, “Are you willing to lose money again in 2017, Steve?” UnitedHealth CEO Stephen Hemsley replied: “No, we cannot sustain these losses. We can’t really subsidize a marketplace that doesn’t appear at the moment to be sustaining itself,” adding that “we saw no indication of anything actually improving.”

UnitedHealth reported one problem after another: An expensive risk pool that lacks the younger and healthier consumers who are supposed to buy overpriced plans to cross-subsidize everyone else. Enrollment growth continues to lag. People join the exchanges before they incur large medical expenses—insurers are required under ObamaCare to cover anyone who applies—and then drop out after they receive care. The collapse of the ObamaCare co-ops is recoiling through the market.

UnitedHealth sat out the first year of ObamaCare but then did a big-bang expansion for 2015-2016, offering coverage on 24 of the 34 federal exchanges, and it now covers some 540,000 people. Morgan Stanleyestimates UnitedHealth’s average premium increase for 2016 was 9%, so the company was rationally raising prices to offset rising costs. It still thinks it will lose money.

The reason the UnitedHealth disclosure jolted investors is that other insurers are almost certainly experiencing the same problems. Companies accountable to shareholders are not charities, and for all the new regulatory control that ObamaCare imposed on the industry, the government can’t force them to do business. (Not yet, anyway.) But the law is ever more obviously the Faustian bargain that we predicted and that insurers should have known better than to accept when they lobbied for the bill in 2009.

None of this means ObamaCare is rapidly “collapsing under its own weight,” as some Republican like to imagine. The entitlement will continue to trundle along, especially as it becomes ever more a vast Medicaid expansion. Commercial insurers are being displaced by Medicaid managed-care HMOs, with their ultra-narrow physician networks and closed drug formularies.

Then again, this trend is itself another symptom of decline. While liberals can continue to insist all is well, businesses don’t enjoy the same political luxury.

The Push for Black Teen Adoption

The Push for Black Teen Adoption

DISB Re-accredited by the National Association of Insurance Commissioners

For Immediate Release
Nov. 23, 2015
Contact: Kate Hartig, (202) 442-7753

DISB Re-accredited by the National Association of Insurance Commissioners
This certification represents a continuation of excellence in the District’s insurance regulation

Washington, D.C. – The District of Columbia Department of Insurance, Securities and Banking (DISB) received accreditation for another five years by the National Association of Insurance Commissioners (NAIC) on Nov. 18. DISB has been accredited since 1995.

“The NAIC accreditation demonstrates that DISB continues to meet national standards for regulating insurance companies operating in the District,” said Commissioner Stephen C. Taylor. “It is a credit to the hard work of DISB’s staff to ensure we maintain this important regulatory certification for the protection of District of Columbia residents.”

The purpose of NAIC’s Accreditation Program is to develop and maintain national regulatory standards for insurance company solvency. To achieve accreditation, DISB had to demonstrate adherence to legal, financial and organizational standards as determined by a committee of its state regulatory peers.

The NAIC Financial Regulatory Standards and Accreditation Committee voted to approve DISB’s accreditation during the NAIC Fall Annual Meeting last week in National Harbor, Maryland.

DISB monitors the solvency of insurance companies and captive insurance companies operating in the District.

To read more about NAIC’s Accreditation Program, follow this link.

Major insurer may leave ObamaCare

Major insurer may leave ObamaCare

By Sarah Ferris, The Hill – 11/19/15 11:23 AM EST

One of the country’s largest health insurers warned Thursday that it may leave the ObamaCare exchanges within two years, delivering a shock announcement that could ripple through the marketplace.

At a shareholder meeting Thursday, UnitedHealthcare cast doubt on its ability to carry plans on the healthcare law’s exchanges beyond 2016, offering a more grim financial outlook than it had previously expected.

“In recent weeks, growth expectations for individual exchange participation have tempered industrywide," said Stephen Hemsley, the company’s CEO.

"Co-operatives have failed, and market data has signaled higher risks and more difficulties while our own claims experience has deteriorated, so we are taking this proactive step,” he said.

The company’s statement said it will be “evaluating the viability of the insurance exchange product segment and will determine during the first half of 2016 to what extent it can continue to serve the public exchange markets in 2017.”

It also projected that its fourth-quarter revenue will be $425 million less than expected — amounting to 26 cents in earnings per share.

The company also announced it has “pulled back” on marketing plans for 2016.

Hemsley’s mention of the ObamaCare co-operatives, or co-ops, refers to the half-dozen startup insurers that have collapsed in the past few weeks.

Opponents of the healthcare law have seized on the closure of the co-op insurers, which were intended to increase competition, and highlighted the troubles in hearings on Capitol Hill.

Fewer than half of the original 23 co-ops are still running, and only a handful are on solid financial footing.

mayor’s newsletter — standing with Paris

November 19, 2015 | Volume 1, Issue 41

Dear Washingtonians,

Like all Americans, I was devastated by last Friday’s atrocious attacks in Paris. Washington stands with our sister city, and our thoughts and prayers are with the victims, their families and their community.

When Paris Mayor Anne Hidalgo visited our city in February, she came to see me at the John A. Wilson Building. We talked about the importance of promoting tolerance and inclusion in diverse cities like ours. And this June, we met again and shared a stage with Montreal Mayor Denis Coderre and mayors from around the world, where we discussed how residents from diverse backgrounds can live and thrive together in communities across the globe. We stood together then, and we stand together now.

If you would like to send a message to those affected by the attacks, you can sign the French Embassy’s condolence book.

As always, here at home we are focused on the safety and security of our city. I want to stress that there is no credible threat to the District at this time.

My team and I are working closely with our regional and federal partners to adjust the District’s security response, as needed. I have spoken directly with U.S. Secretary of Homeland Security Jeh Johnson, met with U.S. Attorney General Loretta Lynch and have worked with Metropolitan Police Department Chief Cathy Lanier to remain in constant communication with our regional safety partners. In addition, out of an abundance of caution, we have deployed additional law enforcement resources across the city — some of which are visible, while others are not.

I want to remind everyone: if you see something, say something. Please call 911 immediately if you notice any suspicious or criminal activity.

In the meantime, we’ll continue to pray for Paris.


Muriel Bowser

With Mayor Hidalgo in February (left) and at the French Embassy in DC, earlier this week (right)

The Price of Price Optimization in Insurance

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The Price of Price Optimization in Insurance

The use of price optimization in insurance pricing is drawing increased attention and could be the next big industry battle.

Or it could not be.

Consumer groups and a growing contingent of states are labeling the practice as unfairly discriminatory and restricting it. Insurers say there is confusion over exactly what price optimization is and claim that these same watchdogs have for years approved elements of what some are now calling price optimization.

Meanwhile, agents are acting like they hope the whole controversy will just fade away and they may get their wish.

While a full definition is hard to come by, price optimization generally refers to an insurer’s practice of varying rates based on non-risk-related factors. Price optimization involves analysis and incorporation of data not related to expected cost for risk characteristics — that is, it involves factors not related to expected loss and expense experience. Such data may include the prior year changes in premium and whether policyholders renewed subsequent to such change.

The exact number or identity of insurers using price optimization is unclear; however, nearly half (45 percent) of large insurance companies and 26 percent of all insurance companies in North America currently optimize prices, according to a 2013 survey by Earnix, a software provider of price optimization products to the insurance industry.

Regulators in 11 states (California, Delaware, Florida, Indiana, Maine, Maryland, Ohio, Pennsylvania, Rhode Island, Vermont and Washington) and the District of Columbia have issued bulletins prohibiting or restricting the use of price optimization in personal lines ratemaking.

A task force of casualty actuaries of the National Association of Insurance Commissioners (NAIC) has taken on the issue as well. In October, it issued an updated price optimization white paper that provides background research, identifies potential benefits and drawbacks of its use in personal lines, and presents options for state regulatory responses.

What Is Price Optimization?

Price optimization is not a new concept — it has been used in the retail and travel industries for years. But there is no widely accepted method and definition of it in the insurance industry.

Some refer to price optimization as relying on predictive modeling and “big data” while others refer to price optimization to mean using information about consumers’ price sensitivity as a rating factor.

For insurers, this definition uncertainty is the problem.

That “lack of consensus” has led regulators to question some pricing techniques that have been used by insurers for decades, according to Robert Hartwig, president of the Insurance Information Institute, in testimony at the National Conference of Insurance Legislators in July.

“The lack of consensus definition has clearly sewn confusion and led states to question substantively different pricing techniques, some of which regulators had approved for decades, potentially leading to unintended and adverse consequences for consumers,” Hartwig said.

“The use of judgment in ratemaking is universally recognized and accepted by regulators and falls within the scope of the actuarial standards of practice,” he said.

Hartwig contends that PO is consistent with actuarial principles, which recognize that business considerations are part of ratemaking and the indicated rate for an insurance product and the market price are different in most circumstances.

Quoting the Casualty Actuarial Society’s (CAS) statement of principles, Hartwig added, “By interacting with professionals from various fields including underwriting, marketing, law, claims, and finance, the actuary has a key role in the ratemaking process.”

Hartwig cited young drivers as an example of where judgment enters into in ratemaking.

“As high as rates are on newly-licensed drivers, those rates would be higher still if companies did not exercise judgment and instead took the full rate indication for this class of driver,” he said. “Regulators have never objected to this pricing behavior, which strays from strict adherence to indicated rates but reflects market realities.”

Florida has its own definition. In its bulletin from May 2015, the Florida Office of Insurance Regulation defined price optimization as: “a process for modifying the insurance premium — that would otherwise be charged to an insured or class of insureds — in order to maximize insurer retention, profitability, written premium, market share, or any combination of these while remaining within real world constraints.”

In general, price optimization uses the economic concept of “price elasticity of demand,” which is a measure of the responsiveness of the quantity of a good or service purchased to a change in its price. Advocates of price optimization have pointed to such non-risk-related items as cross-selling opportunities, consumer retention, and conversion rates as potential benefits of the process.

However, according to Florida and other states opposing the practice, “it is possible for an insurer to use price optimization or price elasticity of demand for the purpose of price discrimination, which is when the insurer charges different prices for the same product to different market segments with reduced regard for expected losses and expenses.”

When it is used in this way, price optimization results in rates that are unfairly discriminatory in violation of Florida law, Florida’s regulators say.

Regulators complain that price discrimination can give a bargain to one consumer over another with the same risk.

For example: Consumer A and consumer B are both women of the same age residing in the same state, with similar driving records, credit history, and other factors. Both A and B have bought auto insurance from the same carrier and pay the same premium. But now A is discovered by the carrier to be browsing multiple insurer websites looking for a better deal on her car insurance, prompting the insurer to gives her a 10 percent discount. B is not browsing for a better deal online and gets no such offer.

This difference in treatment is potentially unfair, regulators say.

“We’ve got no problem with an insurer modeling its expected costs related to a particular policyholder on traditional factors like driving history, and then pricing the risk accordingly,” said Lee Barclay, senior actuary at state of Washington’s Office of the Insurance Commissioner, in a May 2015 article on, titled “Price Optimization or Price Discrimination? Regulators Weigh In.”

“But this is modeling a consumer’s behavior insofar as their likelihood of renewing with an insurer,” Barclay added. “When you are modeling things other than the risk that will be transferred from the policyholder to the insurer, we have concerns.”

Voodoo Pricing

Consumers whose premiums change for no apparent reason often turn to their agents for an explanation.

But thus far, the nation’s largest association of independent agents and brokers has remained quiet on the issue of price optimization, although it is keeping its eye on it.

When price optimization results in a policy discount that’s good news from an agency standpoint, but when somebody’s auto insurance takes a premium hike, that makes an agents role more difficult, says Bill Wilson, director of the Virtual University at the Big “I” (Independent Insurance Agents & Brokers of America).

“If somebody has a $200 jump in their premium, they ask the agent why. If they know it’s pricing optimization, how do you tell somebody, ‘Well, the insurance company is going to charge you as much as they possibly can before you move your business,’” Wilson said. “That makes it so tough for an agent.”

He is concerned about the effect on consumer trust in the industry.

“With the disdain that so many consumers have for the industry, I think a lot of them will suspect price optimization is some kind of voodoo pricing system,” Wilson said.

Wilson says data-driven tools in insurance pricing are interesting, but also scary. “Particularly when you’re trying to explain this to consumers that don’t really understand the industry to begin with, and are at best, highly suspicious of what we do, and how we do it.”

Wilson also has concern over the reliability and the accuracy of the data, stemming from his own personal experience. “I’ve had two personal experiences where I’ve had homeowners’ rate hikes that were attributable to credit scoring. Both of them were in error,” he said.

Wilson’s expertise in insurance led him to “pick up on” the mistake and get it fixed. “One was a $1,000 homeowners’ increase, because they had used the wrong credit data. They used it for a different Wilson couple,” he said. The other mistake resulted in a $700 rate increase that also turned out to be a mistake.

Wilson admits that at some point the Big “I” may have to take an official stance on the use of price optimization with independent agency carriers. That is if the issue continues to remain an issue.

Price optimization may end up being a “non-issue if, universally, regulators don’t permit it,” he said. Right now the Big “I” continues to take a “look and see” approach to price optimization.

Wilson says the Big “I” plans to offer a webinar on predictive modeling, data analytics, price optimization, and other issues affecting the pricing structure of various types of insurance in February 2016.

For now, the Big “I’”s Wilson says agents understand the value of data to make risks more predictable, and that helps control the pricing. He hopes the focus will continue to be on risk-based underwriting rather than optimizing prices on non-risk-based factors.

“As long as they don’t factor too much [price optimization] into the rate, it is risk-based,” he said hopefully.

The Big “I” may not be ready to take a position but others are.

According to Frederick Fisher, J.D., of Fisher Consulting Group Inc. in El Segundo, Calif., price optimization is all about how insurers can get more money out of their insureds but they may come to regret going down its path.

“The concept of price optimization is going to get a lot of people in a lot of hot water and, possibly, even give rise to significant underwriting losses, especially in such a competitive environment,” Fisher said, who consults on loss control, provides expert witness work, litigation strategies, and coverage management and review for policyholders.

In his view, insurers do not need price optimization to turn a profit.

Insurance company profitability “still boils down to what’s going to cause the losses, what’s the probability of that taking place, and finally can we set forth a pricing mechanism that’s going to make sense and leave us with a profit,” Fisher said. “What you want to do is stay within the actuarial model. As long as you’re staying within the actuarial model, I’ve never known anybody that didn’t make money … It all goes back to assessing the risk, which price optimization does not.”

In Fisher’s view, price optimization may not be around for long.

“It’s very clear that the departments of insurance are not going to allow price optimization — simply because you think you can get more money here versus more money there — without that being associated with some change in hazard risk,” he said.

Even with varying state definitions of what price optimization is (or is not), Fisher says there’s one thing that’s in common with them all — and that is that pricing optimization has nothing to do with the risk.

“I don’t know that a reinsurer is going to be too crazy about a price optimization, when there’s no hazard justification behind it,” he said.

Wells is editor-in-chief of Insurance Journal magazine, where a version of this article originally appeared.

What Muriel Bowser has at stake in next year’s D.C. Council elections

What Muriel Bowser has at stake in next year’s D.C. Council elections

By Colbert I. King Opinion writer November 13

Her name won’t be on the ballot next year, but Mayor Muriel E. Bowser (D) has more riding on the 2016 D.C. elections than anyone else in the city.

Bowser has high stakes in four key council candidates: Vincent B. Orange (D-At Large), Brandon T. Todd (D-Ward 4), Yvette M. Alexander (D-Ward 7) and LaRuby May (D-Ward 8). If the mayor is to keep control of the city’s direction, these members must hold on to their seats. Otherwise, the political advantage shifts to a less-reliable majority. At this stage, odds are against all four of them winning. Chances are even that two will cross the finish line first. Only one can be called an odds-on favorite.

Colbert I. “Colby” King writes a column — sometimes about D.C., sometimes about politics — on that runs on Saturdays. In 2003, he won the Pulitzer Prize for Commentary. King joined the Post’s editorial board in 1990 and served as deputy editorial page editor from 2000 to 2007.

Bowser starts with two disadvantages. There’s not a thoroughbred in her stable. And she’s no longer in a position to fuel her horses with loads of energizing cash because the means of doing so, an independent political action committee called FreshPAC, is being shut down in response to withering criticism heard across the city.

Bowser doesn’t have much of a choice about the candidates she’s backing. Each Democratic incumbent on her slate is a proven ally and a sure-fire council vote when she needs it. She has no real options.

That wasn’t the case with FreshPAC. The mayor knew it was in the works. She was aware that it was out to raise $1 million to reelect supportive council members while targeting those who won’t get with the mayor’s program.

She appeared at fundraisers for FreshPAC. She defended its existence when it came under attack from council members, clean government groups and the media.

Bowser wittingly decided to get behind the creation of a richly funded political vehicle launched to reward friends and punish enemies, in the finest tradition of Boss Tweed and Tammany Hall.

That is likely to be an issue that will bleed into next year, and in ways that Bowser and her political crew never expected.

Inquiring minds want to know whether Bowser’s change of heart on the $6.4 billion Pepco-Exelon merger — from nay to yea — had anything to do with Pepco coming up with $25 million to help her administration build a new stadium for the city’s Major League Soccer team, D.C. United. Opponents of the deal have asked the D.C. Board of Ethics and Government Accountability to look into Pepco’s sponsorship agreement with the city.

This inquiring mind also wants to know whether FreshPAC approached Pepco or Exelon for contributions during Bowser’s merger discussions with the utilities. I’m not the only inquisitive journalist.

Tom Sherwood, of WRC (Channel 4), beat me to it.

In response to Sherwood’s e-mail queries to Pepco regarding FreshPAC solicitations — which he granted me permission to use — Myra Oppel, Pepco’s vice president for communication, wrote that Pepco had not contributed to FreshPAC. Sherwood followed up by asking, “Was Pepco asked to make a contribution?” Oppel responded, “We have no further comment beyond our statement.”

Sherwood also asked FreshPAC whether it solicited contributions from Pepco or Exelon. On Oct. 20, he received this from Thorn Pozen, FreshPAC counsel: “We want to be as open as possible. Although I may not always be able to report on all internal conversations, requests, and/or discussions, including if such conversations have taken place, we’ll always report contributions in full compliance with the spirit and letter of the law. Here there were no contributions.”

Hardly a denial.

Any interest, D.C. inspector general, D.C. attorney general or D.C. ethics board? Or does the U.S. attorney have to do the job for the city?

Just asking.

Those questions linger as Bowser goes into the election year accompanied by her stable of incumbents.

No telling what impact the demise of FreshPAC will have on the candidacies of Orange and Alexander. They both need money, honey. FreshPAC would likely have been a chief source, especially since Jeffrey E. Thompson , the wealthy self-made (or is that D.C. government-made?) businessman who pleaded guilty to financing illicit off-the-books campaign schemes, is, well, out of service.

Orange and Alexander face a possible opponent in former mayor Vincent C. Gray (D). Their prospects of beating Gray are grim. Orange tried in the April 1 Democratic mayoral primary; although Gray lost, he outpolled Orange 31,613 to 1,946. Orange should hardly be itching for a rematch.

Alexander shouldn’t be hankering for a race with Gray, either. She’s sitting in the Ward 7 seat that Gray gave up to become council chairman. It’s his for the asking.

Odds are even that Todd retains his seat. But it will be done on the strength of his work on the council and strong constituent service that covers Ward 4 like a blanket.

May, in contrast, is not an odds-on favorite in Ward 8, because Bowser isn’t one there, either.

So 2016 is shaping up as Bowser’s year to win or lose, and her chances aren’t looking so good.


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