Aetna Leaving California Individual Insurance Marketplace

Insurance Company Aetna Inc. will stop selling health insurance to individual consumers in California at the end of the year, withdrawing as the federal health law is expected to reshape the market in 2014.

The pullout is likely to draw attention as California has become a focus of national debate over the law’s impact. Supporters, including President Barack Obama, who highlighted the state in a recent speech, argue that it has shown the success of the health overhaul in encouraging competition and pushing down prices.

Insurance-industry experts say similar moves by other carriers in other states may emerge in coming months, as companies with limited market share decide to avoid the uncertainty tied to the law’s changes.

Aetna said it currently has about 49,000 individual policyholders in California. In 2011, when it had substantially bigger membership, it was the fourth-biggest service in the state’s consumer market, with about 5.2% of the plans sold that year, according to a report from Citigroup Inc. C -2.13%

Aetna isn’t one of the 13 insurer services participating in the state’s new consumer insurance marketplace set to launch this fall under the federal law. Like several other major national carriers, it has said it would join only a limited number of these exchanges. A carrier can still offer consumer plans without being in the exchange.

Aetna said it will continue selling health insurance in California to employers and Medicare beneficiaries, as well as dental and life-insurance products. The insurer said it is “fully committed to serving the needs of our 1.5 million members in the state.” A company spokeswoman declined to comment about the reasons for Aetna’s individual-business withdrawal.

People who currently have Aetna individual health service coverage will have to find plans with other carriers by year-end. That might be easier because of the federal health law’s requirements that insurers no longer decline coverage or set premiums based on people’s health history, but still, “it’s going to be confusing” for Aetna policyholders, said Ken Fasola, chief executive of HealthMarkets Inc., parent of insurance agency Insphere Insurance Solutions. His firm plans to send written notice to affected clients, then follow up with calls and, if wanted, visits.

The individual insurance market in general is a small business for Aetna, producing just 4% of its revenue in 2011, according to Citigroup. The California individual business was profitable for Aetna in 2011, said Carl McDonald, a Citigroup analyst, but “it’s not that big of a deal to walk away from it, because it’s so small.”

Insurers with only a small presence in a state’s individual market may not wish to maintain it amid the shifts tied to the law, though rather than withdrawing completely, some might simply tone down their marketing and other efforts to win new business. “It’s the effect of the change,” which creates uncertainty for carriers, said Raj Bal, a former insurance-industry executive who is now a consultant.

The health law is expected to expand the individual insurance service business, but the new coverage rules will also mean major changes. Also, in the new exchanges, consumers are expected to focus closely on costs, particularly monthly premiums. Insurers may find it tough to compete if they don’t have scale in a particular market, partly because they can’t match the prices that competitors win from health-care providers.

The Obama administration has highlighted its expectation that the new health-insurance marketplaces will generally boast strong competition, with around 90% of consumers buying their own plans living in states where there would be products from at least five insurers.

But in at least some places, the offerings will be limited. In Washington state, for instance, nine insurers bid to sell plans in the individual market but only one carrier, Kaiser Permanente, bid to sell a small-business plan through the exchange in some counties, forcing Washington officials to cancel plans to run a full small-business exchange for the first year.

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