UnitedHealth Group will significantly shrink the business it conducts through health insurance exchanges next year, the company said Tuesday, in a move that could hurt competition on the new marketplaces.

Minnetonka-based United said last fall that it was reviewing the business due to financial losses on policies sold through the government-run exchanges, which were launched for 2014 under the federal health law. Since then, several regional and national insurers also have announced losses due to high medical expenses for those covered by exchange policies.

On Tuesday, UnitedHealth Group chief executive Stephen Hemsley said the insurer would remain in just “a handful” of the 34 states where it competes on exchanges.

“It’s the first large insurer to withdraw on a widespread basis,” said Cynthia Cox of the Kaiser Family Foundation. But noting UnitedHealth Group’s relatively small presence on the exchanges thus far, Cox added: “It will have a minimal impact on premiums.”

More than a dozen states and the federal government launched health-insurance exchanges for 2014 under the federal Affordable Care Act, which requires almost all Americans to have health insurance or pay a tax penalty. Individuals and families can purchase nongroup coverage through the online marketplaces, in many cases with federal tax credits.

Stephen Parente, a professor of health care finance at the University of Minnesota, said UnitedHealth’s pullback is not that surprising, given that the insurer’s bread-and-butter is selling policies to employer groups.

“If the nonprofit insurers start to pull out of the exchanges in a major way, then there is something major to worry about for the long-term viability of the exchanges,” Parente said.

UnitedHealthcare, which is the Minnetonka-based company’s health insurance division, does not sell policies on Minnesota’s MNsure health-insurance exchange. The Minnesota exchange saw a significant change in its lineup of carriers when Golden Valley-based PreferredOne opted to drop out of MNsure for 2015 after sustaining losses.

In Iowa and Wisconsin, UnitedHealthcare competes on the federal government’s HealthCare.gov exchange. But insurance regulators in those states on Tuesday said information isn’t yet available about 2017 options.

Over the years, UnitedHealthcare has been a relatively small player in the individual insurance market, and the company made only a small bet on the exchanges in 2014. The company’s presence grew significantly for 2015, and the insurer last fall announced plans to compete in 2016 for the exchange business in 34 states.

But in November, UnitedHealthcare abruptly changed direction, saying it would pull back marketing for exchange products due to mounting losses.

On Tuesday, UnitedHealthcare said its enrollment through the exchanges grew by about 300,000 people in the first quarter to roughly 795,000 subscribers. That’s about 6 percent of the 12.7 million people who have signed up for coverage through the exchanges this year.

“As with any new market, we expect changes and adjustments in the early years with issuers both entering and exiting states,” said Benjamin Wakana, a spokesman for the U.S. Department of Health and Human Services, in a statement. “The number of issuers per state has grown year-over-year.”

Competition is important on the exchanges for providing consumer choice and also to control premium prices.

On Monday, the Kaiser Foundation published a report suggesting that the effect of a UnitedHealthcare withdrawal nationally would be modest, because the company’s products usually aren’t among the lowest-priced options.

But the report also noted: “If United were to exit from all areas where it currently participates and not be replaced by a new entrant, the effect on insurer competition could be significant in some markets — particularly in rural areas and southern states.”

David Wichmann, the chief financial officer at UnitedHealth Group, said Tuesday that first-quarter results prompted UnitedHealth Group to increase its projection for 2016 losses in the exchange business by $125 million, to a total of $650 million. Last year, UnitedHealth Group lost $475 million on the exchanges.

“Next year, we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017,” Hemsley said in a conference call with investors on Tuesday.

In a Tuesday research note to investors, analyst Sarah James of Wedbush Securities said the “risk mix” for exchange enrollees at UnitedHealthcare is higher for 2016 than last year. But she added: “Not enough data is available to know if this is a company-specific or marketwide event.”

Word about the exchange business came Tuesday as part of a first quarterly data release in which UnitedHealth raised financial guidance for 2016 after beating analyst expectations for earnings.

For the first quarter, United posted $1.61 billion in net earnings — up about 14 percent over the same period last year — on $44.5 billion in revenue. Adjusted earnings came in at $1.81 a share, better than the $1.72 result that was the average forecast of analysts surveyed by Thomson Reuters.

Membership in the company’s U.S. health insurance plans grew to 43.6 million people at the end of March from 42.3 million people at the end of 2015.

 

Twitter: @chrissnowbeck