Obama puts insurers in tough spot

101198690-187897234_240x160President Obama’s administrative fix for health insurance cancellations which have angered millions of Americans seems simple enough – allow insurers to extend plans for another year. But for the insurance industry reversing cancellations now 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 Commissioner 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 five million cancellation notices for plans on the individual and small business market that did not meet new Obamacare standards. The Obama 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 renewed policies. The problem is trying to set new prices and approvals for the cancelled plans that expire on December 31st under an extremely compressed time frame.

“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.”

(Read more: Beyond Glitches, Insurers Eye Obamacare Opportunity)

“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 Aetna spokesperson said.

For coverage starting on January 1st, insurance customers need to enroll in a plan and pay their premium by December 15th. Insurance industry consultant Robert Laszewski, of Health Policy and Strategy Associates, says it’s near impossible for insurers to do that 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,” he said, “and then enter those decisions back into their systems without creating massive billing, claim payment, and provider eligibility list mistakes.”

(Read more: Delaying Obamacare mandate may mean higher rates: Actuaries)

Beyond the administrative burden, Citi analyst Carl McDonald, the change represents a risk of 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.

McDonald said renewing the cancelled plans should not impact revenues, but the potential deterioration of the exchange market will pose 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 the industry trade group America’s Health Insurance Plans (AHIP).

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

—By CNBC’s Bertha Coombs. Follow her on Twitter @coombscnbc.

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