Regardless of one’s political views, recall that the Affordable Care Act (ACA) passed in early 2010 was a draft House bill approved in late 2009 as a basis for reconciliation with an expected Senate bill. The law was amended only slightly in 2010, and its regulatory and operating deficiencies have become apparent with the troubled launch last month of the federal and state health insurance exchanges, a topic we will address next week.

Addressing the uproar over cancelled individual health insurance policies that do not offer minimum coverage levels required under ACA, President Obama ruled late last week that health insurers may, but are not required to, renew these policies through 2014 if insurers notify enrollees of the benefits and protections the new law offers that the policies do not and of the policies available on the health insurance exchanges with better coverage and potential subsidies. The cancelled policies are about 5% of all health insurance enrollment.

The ruling does not appear to address ACA’s fundamental problems: that many people are required to purchase more health insurance coverage than they want or need and that coverage can be quite expensive for non-subsidized individuals. Aside from questions about the ruling’s legal basis, reinstating cancelled policies for an additional year creates huge technical and administrative burdens for state insurance regulators and for-profit and not-for-profit health insurers. Since the policies were not being renewed due to ACA non-compliance, insurers hadn’t negotiated with network health providers nor submitted the policies to state regulators for approval. Insurers had not calculated 2014 premium rates, which will require significant actuarial revisions. Perhaps most significantly, the decision has negative implications for the federal and state healthcare insurance exchange risk pools. That is, if healthier enrollees can renew their individual policies for less than the cost of comparable unsubsidized exchange policies, the new exchange risk pools will deteriorate, regardless of how regulators adjust them. In response, insurers will likely seek a delay in the health insurance premium tax and modifications to the risk adjustment mechanisms.

Almost every publicly-traded health insurance company derives less than 5% of revenue and earnings from individual policies, but the combination of slow initial public exchange enrollment and the reactivation of cancelled policies suggests that these insurers face risks through which they must manage to maintain and expand their exchange and non-exchange offerings and meet stock market expectations for their financial results and future growth. One can look to past instances of operating and financial challenges that the industry has faced, but the magnitude of implementing ACA is without precedent. Still, analysis can reveal companies whose stocks overly discount ACA worries without consideration for their revenue and profit mixes and how the companies can make lemonade out of lemons.

Disclosure

The views expressed are as of 11/18/13, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.

This material may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

© Columbia Management

www.columbiamanagement.com

Read more commentaries by Columbia Management