Did United Health Really Lose Money On The ACA Exchanges Last Year?

Bottom line: United Health's Revenue increased by $27 billion last year and their profits increased by $200 million, yet they complain that they're losing money.

Last fall, United Health Group announced they would be pulling out of many of the ACA exchanges because they were losing money on their Obamacare plans. This news was important, but also rather strange. It's important because Obamacare's promise of insurance for (nearly) everyone requires the cooperation of private insurance companies like United Health Group.

But it's strange because the ACA was actually designed to make these plans profitable. The ACA requires only that policies sold on their exchanges comply with a minimum standard in the benefits they offered. Also, that the policy's premiums must reflect the average risk (chance of getting sick) of everyone who signed up for these policies in each state. Those would appear to be reasonable expectations for any type of insurance.

Now, an insurance company shouldn't be required to sell insurance that isn't profitable for them. Still we should ask, what could have gone so wrong for United Health Group? Size wouldn't seem to be a problem. United Health Group is is by far the largest health insurance company in the US, so their economies of scale and raw bargaining power are the best in the industry. So why can't they break even while other insurance companies have done OK?

Presumably the answer to this question can be found in United Health's finances. As a publicly traded company they are required to file extensive financial statements with the SEC and provide financial reports to their stockholders. We should expect that their financial report from last year will provide the insight we need to understand why they chose to pull out of the ACA.

Let's start by looking for a specific reference to ACA exchanges in their filing. They've said publicly that these policies are a money loser. So in their 113-page financial statement to the SEC and their shareholders we expect that they'll give a detailed explanation as to why they're so unprofitable. And here is their explanation (page 41):

"UnitedHealthcare's operating earnings for the year ended December 31, 2015 decreased as the combined individual exchange-compliant losses and premium deficiency reserves totaling $815 million more than offset strong growth across the business, improved medical cost management and increased productivity."

Hmm. Well that's about as informative as Alan Greenspan's testimony in front of Congress usually was. It seems they aren't going to give any specific information on why they lost money on the exchanges. So we'll reconstruct what we can from the other information they provide.

First, the big picture: According to their financial report, United Health Group's total revenue was just over $157 billion last year (page 38). That's roughly $27 billion more than they made in 2014, so revenue doesn't seem to be the problem. Their profit last year (net earnings) was $5.8 billion after taxes -- about $200 million more than their net earnings in 2014. So United Health Group's total revenue increased by 20% last year and their profits increased about 3%. It's hard to complain about rising profits, but were ACA policies keeping them from doing better?

To investigate that, we'll look at expenses. Again on page 38, you'll see that their medical costs went from $93.6 billion in 2014 to nearly $104 billion in 2015. What's strange, though, is that their medical loss ratio (the ratio of medical costs to premium revenues) barely changed. It was 81.7% in 2015, 81.2% in 2014 and 81.8% in 2013. That's about as constant as a loss ratio could ever get for an insurance company.

Since we're digging this deep, we should stop and talk about the medical loss ratio. Basically, it measures how much premium money goes to health care, as opposed to, say, profit for the insurance company. Federal law now requires that health insurance companies keep their medical loss ratio above a certain level. This minimum loss ratio insures that customers are purchasing medical services rather than, say, bonuses for the company executives. And that level is at least 80% and, in some cases 85%, which is suspiciously close to the 81.7% that UHG reports.

So it's not just that UHG was doing very well while it offered policies on the ACA exchanges -- it's that they were doing almost exactly as well as they were doing in previous years. In fact, they couldn't do much better without violating the law.

So what have we learned about United Health's problems with Obamacare? From them, very nearly nothing. This leaves us to make a couple observations ourselves. First, insurances companies have been almost uniformly hostile to any sort of government role in health care going back to long before even Medicare, and continuing to the present day. So if they had hard evidence against the ACA, you'd expect them to put it front and center, but we haven't seen any.

Second, company executives and spokesman don't appear to be required to tell the truth, except in their official financial statements. So it's interesting that their claim to be losing money on ACA exchanges appears to be contradicted by their financial filings. Clearly they want to convict this new government nuisance of ruining their business, but they provide neither hard evidence nor sworn testimony. Imagine a prosecutor who's entire case in a trial is "I never liked this guy,'' and then offers no other witnesses or evidence.

I'm not saying that I know United Health didn't lose money on these policies -- only that the evidence they provide seems to contradict that statement. And you'd think they'd provide something more if they wish to oppose a federal policy. We know that financial statements and CEOs have, at times, been very misleading in the past. Is it too much to ask for financial proof to verify statements that make national headlines?