Health insurance giant Anthem Blue Cross is spurning California’s new insurance market for small businesses, a potential setback in the state’s rollout of the federal healthcare law. Anthem, a unit of WellPoint Inc., is California’s largest insurer for small employers. The Los Angeles Times reports that the company’s surprising move raised concerns about the state’s ability to offer competitive rates and attract businesses to its new Covered California exchange that opens Jan. 1. Friday’s disclosure made Anthem the first big insurer in California to publicly pass on the small-business pool. Some other big names, such as UnitedHealth Group Inc. and Aetna Inc., have already opted out of California’s larger exchange for individual consumers. Anthem’s decision in California underscored that the small-business exchanges are the most susceptible to a lack of interest among insurers.

The state’s largest for-profit health insurer isn’t abandoning the small employer market, which is limited to firms with 50 or fewer workers. It said it would keep selling coverage to small companies outside the exchange, and it also remains one of 13 health insurers that will offer policies to individuals in Covered California.

Anthem led California with 31% of the small-employer market in 2011, according to the most recent Citigroup data. Kaiser Permanente was a close second with a 28% share, followed by Blue Shield of California with 18% of small firms. Both Kaiser and Blue Shield are expected to participate in the small-group exchange. Nonetheless, Anthem’s move caught many observers off guard. “That’s really surprising and not a good thing for the exchange,” said Micah Weinberg, a senior policy advisor at the Bay Area Council, an employer-backed San Francisco group. “Anthem is a very major player in the small-group market and you want a broad range of insurers, particularly the most compelling brand names.”

Covered California sought to downplay any potential fallout on rates and employer choice, likening Anthem’s departure to one airline pulling out of a highly competitive market. “We don’t think it will have a huge impact,” said exchange spokesman Dana Howard. “There are other companies that are just as big. This will be a competitive market.” Employers will learn more early next month when Covered California announces the health insurers and their proposed rates for the small-business exchange. In the first few years, the state estimates up to 200,000 small-business workers and family members may get coverage through the state’s market.

One concern for health insurers selling in exchanges is that too many customers with big medical bills pick a certain company and it absorbs a higher share of the medical costs among that population. “The reality is that risk is not spread equally in an exchange,” said Bruce Jugan, an insurance agent in Montebello and president of Benefitscafe.com, which sells health insurance to individuals and businesses. “If SHOP can offer comparable plans with lower rates then they will get a lot of business, even without Anthem Blue Cross participating,” Jugan added.

Anthem has come under fire from regulators recently over rate hikes for small businesses. Last month, California Insurance Commissioner Dave Jones asked the exchange to bar Anthem from its small-group market because of what he viewed as unreasonable premium increases. “I think Anthem withdrew because they felt they would be excluded or at a minimum they didn’t want to face additional debate” over their rate hikes, Jones said Friday. Covered California had said it would consider the commissioner’s request alongside other factors. Anthem said the recommendation by Jones had no bearing on its decision to drop out.