Obamacare and Oscar

After an epic political battle, the Affordable Care Act, commonly known as Obamacare, became law in 2010. It is the most significant healthcare legislation passed in a generation. The law is intended to lower the cost of insurance, increase the number of insured people, and make it illegal for insurance companies to drop people for so-called “pre-existing conditions.”

Although ~20 million people have been covered under the law, Obamacare is in trouble. By next year, several of the largest insurance providers — Aetna, UnitedHealth, and Humana — will stop offering plans in most markets. Traditional insurers are not the only ones struggling under Obamacare.

Oscar, the high-profile healthcare startup, has raised more than $700 million from top Silicon Valley investors, including Google Ventures and Peter Thiel’s Founders Fund. Oscar started in the New York City, a market with a lot of entrepreneurs, freelancers, and other young creatives, to explicitly capture the flood of Obamacare enrollees (a highly regulated market).

Oscar’s future looked bright. By 2016, it had expanded to markets in New Jersey, Texas, and California. Earlier this year, it raised a $400 million round at a $2.7 billion valuation.

But all is not well. Under heavy losses, Oscar will withdraw from two of its markets, New Jersey and Dallas, next year. Oscar’s CEO told Bloomberg:

“The individual market isn’t working as intended and there are weaknesses in the way it’s been set up,” Chief Executive Officer Mario Schlosser said in an interview. “We want to focus on the markets we understand well, we want to focus on the markets where we have our own model in place.

The individual healthcare market is different than the enterprise healthcare market. The working economic theory behind the individual Obamacare market is that a large number of healthy, young people need to subsidize less-healthy, older people.

But getting healthy young people — primarily those who do not get healthcare through their employers — to proactively purchase healthcare is not easy. And without the right balance of healthy-to-sick people, Obamacare math does not work.

The U.S. healthcare market is $2.8 trillion — and growing. But, right now, its main players are struggling.