Bad news for most Aetna Inc (NYSE:AET) customers that purchased their health insurance policies through one of the Affordable Care Act’s state-level exchanges: The insurer is probably ending your coverage in the foreseeable future.

Specifically, the 15 states where Aetna currently offers health insurance through an “Obamacare” exchange will be culled to only four states by the end of next year.

[ad#Google Adsense 336×280-IA]The reason?

No surprise here — the business of providing ACA coverage is painfully unprofitable.

The number of high-risk and high-cost individuals granted guaranteed coverage under ACA’s rules are costing Aetna more than it’s collecting in premiums from that pool of payers.

Last quarter, a usually profitable Aetna reported a $200 million loss.

The sad/pathetic part of the story?

Generally speaking, a company’s abdication of a revenue-bearing market would usually be met with jeers, and a stock’s plunge. AET shares haven’t budged, though. Shareholders are more than well aware the Obamacare market isn’t a good business to be in.

The end of the the Affordable Care Act as we know it may be nigh.

It’s Not Just Aetna

If the story seems strangely familiar, it may be because peer and rival insurer UnitedHealth Group Inc (NYSE:UNH) announced in April it was also going to cease offering health insurance through most (though not all) Obamacare exchanges. In May, Humana Inc (NYSE:HUM) confirmed it would be leaving several states’ exchanges. Anthem Inc (NYSE:ANTM) — which has been optimistic about the upside of the Affordable Care Act — warned last month that it was expecting to book losses stemming from its ACA business.

Meanwhile, most health insurance co-ops (an alternative structure to an exchange) are failing. As of June, thirteen of the 26 co-ops created in response to the ACA are effectively insolvent. Many of the remaining ones are deep in the red, with no reason to expect a fiscal turnaround.

The common thread isn’t tough to see, nor is the core problem tough to believe: Consumers with pre-existing health issues and people considered “high risk” to health insurers have lived up to those concerning expectations. That is, even the premiums paid by healthy people who rarely if ever use their health insurance are still not enough to offset the costs incurred by a small but very costly subset of the pool of insured individuals.

It’s not a judgment call or an opinion. It’s math, and it’s going to get worse before it gets better. Indeed — and this isn’t hyperbole merely for effect — the ACA may not survive.

Risk Adjustment

One of the critical but often overlooked tenets of the Affordable Care Act was the establishment of what’s called the risk-adjustment program. In short, the risk-adjustment program mandates that any insurer that participates in an exchange pay into a pool to help less profitable insurers in the exchange remain solvent. (That’s yet another kind of subsidy put in place by the ACA.)

Problem: With fewer and fewer health insurers participating in exchanges, the amount of funding available in the risk-adjustment program’s pool will dry up quickly. The few carriers left on exchanges — and in many cases there is only one — will either have to sink or swim on their own, making sure they collect more in premiums than they dish out in the form of covered care.

Few of them have been forced to do this on their own, up until now. Many insurers might find it’s a tough business to be in on your own, as those consumers with costly pre-existing conditions will now all be funneled to just one or two providers.

Once that reality starts to set in, that’s when things will really get ugly. Better for Aetna to cut bait now than be sucked deeper into a money pit.

Bottom Line for Obamacare

Despite what some may be thinking of me at this point, this isn’t about politics. While I was never a fan of the Affordable Care Act’s design, there’s no denying the societal value of insurance coverage for all.

Rather, this is about the perils of big government programs based on a flawed premise. The flawed premise here is simply that for-profit insurers like Aetna, Humana and UnitedHealth would be willing to participate in a program with strict coverage requirements, or be able to shrug off the losses created by being involved in that program.

The insurers have made their choice: They’ve chosen not to be a charity. Now that they have, it’s likely the remaining carriers will also be forced out of the business, making the Obamacare exchanges nothing more than an empty shell.

It’s the right reason to recall some words of wisdom spoken by Ronald Reagan back in 1981:

“In this present crisis, government is not the solution to our problem; government is the problem.”

In that light, people (taxpayers and the average middle-class citizen) hoping Obamacare fails may actually get their wish sooner than they imagined.

It’s not a dig on the idea of some sort of national healthcare system that covers everyone. It’s not even really a dig on the wealthier helping out those in need. It is to say, however, that of all the ways to put a universal coverage plan in place, the 2000-page Affordable Care Act was the worst way to do it.

Its collapse can’t be surprising, though better now than later.

— James Brumley

[ad#IPM-article]

Source: Investor Place

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.