UnitedHealth Group Inc. (UNH), CIGNA Corporation (CI), Aetna Inc (AET): Did California Just Expose a Major Flaw in Obamacare?

Excited or not, the Patient Protection and Affordable Care Act, also known as Obamacare, is set to be fully implemented in just six months and one week. Targeted at revamping our entire health care system, it will mandate individuals to carry health insurance and require that health-benefit providers are spending at least 80% of premiums collected on health care for its members.

In addition, this new health reform aims to keep the inflationary costs of premiums reasonably low as health insurance exchanges that are being set up in each state should allow for competitive and transparent pricing. The idea here is that having more pricing visibility will allow consumers to make smarter choices when selecting their own health insurance. But, as California showed us yesterday, there could be a major flaw with that thesis.

Source: White House.

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With few states having unveiled detailed plans for their state-run insurance exchange, all eyes were focused on California, which offers quite the blend of individual and commercial customers, as well as a number of soon-to-be Medicaid participants under the PPACA’s Medicaid expansion. Yesterday, California unveiled the 13 contract winners who will be participating in its insurance exchange in the coming months. There were some very familiar on the list, including Kaiser Permanente, Blue Shield of California, Anthem Blue Cross — which is run by WellPoint, Inc. (NYSE:WLP), the nation’s second-largest health insurer — and Health Net, Inc. (NYSE:HNT), which collectively make up a big portion of California’s individual insurance market.

However, notably missing from the list were UnitedHealth Group Inc. (NYSE:UNH), CIGNA Corporation (NYSE:CI), and Aetna Inc (NYSE:AET), which all kindly bowed out of being included into California’s health insurance exchange.

When questioned about not wanting to take part in California’s insurance exchange, according to The Los Angeles Times, UnitedHealth Group Inc. (NYSE:UNH) commented, “We are simply taking the time to carefully evaluate and better understand how the exchanges will work to ensure we are best prepared to participate meaningfully in their development.” Similarly, a CIGNA Corporation (NYSE:CI) spokesman was quoted as saying, “We will continue to offer individual plans going forward [in five of 10 states], but we’ve decided not to participate in Covered California in 2014.”

On the surface this may not appear to be a big deal since UnitedHealth Group Inc. (NYSE:UNH), CIGNA Corporation (NYSE:CI), and Aetna Inc (NYSE:AET) combined for only 7% of the total health insurance market in 2011 according to research compiled by Citigroup Inc (NYSE:C), and are focused primarily on the commercial side of the business. But, the message that these three large insurers are sending California is much more important.