Obamacare fix puts insurers in a tough spot

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President Barack Obama's administrative fix for health insurance cancellations that have angered millions of Americans seems simple enough—allow insurers to extend their plans for another year. But for the insurance industry, reversing cancellations this far along is anything but simple.

"It is unclear how, as a practical matter, the changes proposed today by the President can be put into effect," said Jim Donelon, the president of the National Association of Insurance Commissioners in a statement. "Changing the rules through administrative action at this late date creates uncertainty and may not address the underlying issues."

Over the past month, insurers have sent nearly 5 million cancellation notices for plans on the individual and small- business market that did not meet the new Obamacare standards. The administrative fix will allow those plans to be extended for another year, despite not meeting benefit requirements under the Affordable Care Act.

But the fix is voluntary, putting the onus for renewing the plans on individual insurers and state regulators to approve the policies. The problem lies in trying to set new prices and approvals for the canceled plans that expire on Dec. 31, under an extremely compressed time frame.

(Read more: Obama: We fumbled the rollout of health-care law)

"We support efforts to allow people to keep what they have," said an Aetna spokesperson in a statement. "However, we will need cooperation and expedited approval from state regulators to remove the barriers that would make it difficult to make this change in such a short period of time."

"State regulators will need to allow us to update our policies and secure appropriate rates so we can get these plans back in the market," the spokesperson said.

For coverage starting on Jan. 1, insurance customers need to enroll in a plan and pay their premium by Dec.15. Insurance industry consultant Robert Laszewski, of Health Policy and Strategy Associates, said it's near impossible for insurers to complete these steps in just one month.

"This means that the insurance companies have 32 days to reprogram their computer systems for policies, rates and eligibility, send notices to the policyholders and then enter those decisions back into their systems without creating massive billing, claim payment and provider eligibility list mistakes," he said.

(Read more: Obamacare enrollment numbers worse than feared)

Stan Hupfeld, former CEO of Integris Health, Oklahoma's largest health system, agreed. Obama's new fix "is possible, but the logistics of doing it with just a few days left in the policy year are extremely difficult. We've put [insurance companies] in an untenable situation. This is sort of a Hail Mary pass—in the end, [the fix] shifts the blame and makes [the insurance companies] the culprits," he said.

Can insuers implement fix?

Hupfeld then compared the situation to the debt ceiling argument.

"Let's do it for a year—and let's be back here again a year from now, making the exact same argument. It makes absolutely no sense."

Beyond the administrative burden, Citi analyst Carl McDonald said the change presents a risk of building a less healthy and less profitable pool of insurance buyers on the state exchanges.

"The people in the individual pool today are presumably healthier than the uninsured, so if consumers choose to take advantage of this offer and renew their individual policy, it could cause the exchange risk pool to deteriorate," he wrote in a research note to clients.

(Read more: Larry Summers: Obamacare already better than expected)

McDonald said renewing the canceled plans should not impact revenues, but the potential deterioration of the exchange market will pose a risk for insurers WellPoint, Humana and Health Net, which have all pursued an aggressive exchange strategy for 2014.

The potential for fewer healthy people on the exchanges will have a negative impact on the overall insurance market, said Karen Ignagni, president and CEO of industry trade group America's Health Insurance Plans.

"Changing the rules after health plans have already met the requirements of the law could destabilize the market and result in higher premiums for consumers," she said in a statement. "Additional steps must be taken to stabilize the marketplace and mitigate the adverse impact on consumers."

Meanwhile, Howard Dean voiced a slightly more optimistic tone.

"I believe that when Obamacare is in effect, people really are going to be satisfied and happy with it—I do," the former governor of Vermont said. "It wasn't my idea of how to do this but it can work, could work and should work."

—By Bertha Coombs. Follow her on Twitter: @berthacoombs