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PPACA setback has Humana attempting a Georgia turnaround

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(Bloomberg) — The Patient Protection and Affordable Care Act (PPACA) has been great business for U.S. health insurers. Just not everywhere.

Georgia is Humana Inc.’s second-biggest market for insurance policies sold under the health law, and the home of what may be its biggest misstep. The company is now attempting a turnaround as it tries to make its strategy of selling coverage directly to consumers a success.

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If it can’t, it will quit the state. “We have to make a return,” Humana Chief Executive Officer Bruce Broussard said in an interview. “We can’t have one business being subsidized by another business.”

Humana’s Georgia struggle shows the challenges health insurers face entering unfamiliar markets. President Barack Obama’s 2010 health-care law will provide an estimated $19 billion in subsidies and helped about 12 million people buy coverage for this year. As insurers have raced to capture those customers, some are doing well, and others have overreached.

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Humana (NYSE:HUM), which touts its skills at selling health insurance directly to individuals, ran into trouble in Georgia after charging too little for plans it sold on the state’s new marketplace. Customers came running.

Unfortunately, more of them were sicker than Humana expected. Flooded with patients, Humana let them see doctors who aren’t in its networks. That’s expensive — health insurers make deals with doctors and hospitals to add them to their networks, negotiating lower prices in return for business.

The out-of-network generosity cost the insurer. Humana’s stock declined 7.2 percent on April 29 after the insurer reported first-quarter profit that fell short of estimates amid increased spending on medical claims. It blamed some of its troubles on Georgia. Despite that, Humana’s stock is up 24 percent this year.

Back in network

Months later, it’s ending the out-of-network flexibility, Broussard said.

“We didn’t have the capacity, to be honest with you, to be able to bring them back in,” he said. “Starting in July we will begin to start not allowing” the out-of-network visits.

Humana’s experience differs from its large rivals, according to Steve Halper, an analyst at FBR & Co. UnitedHealth Group Inc. (NYSE:UNH) and Aetna Inc. (NYSE:AET) have taken a more cautious approach to the exchanges, while Anthem Inc. has done well selling coverage on them.

“From time to time, payers are going to have isolated problems where they simply missed, and that’s what happened in Georgia,” Halper said. Still, for Humana, the insurance-exchange business has gone from being a source of strength to a question mark in investors’ minds, he said.

Exchange strategy

“It begs the question about the whole exchange strategy,” Halper said. If Humana withdraws from states like Georgia, “then you’ve wasted all your time and effort in building a business that goes away.”

Humana isn’t entirely alone. Iowa insurance startup CoOportunity Health has already failed, and a report from Standard & Poor’s earlier this year found that many other new insurers were struggling with cash flow.

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For patients, Humana’s decision highlights the limited choice of doctors typically offered by plans on the health law exchanges, said Donald J. Palmisano, Jr., executive director of the Medical Association of Georgia.

“It impacts who the physicians can refer to and it impacts access to physicians,” he said.

PPACA includes several payment systems designed to help insurers that take on customers who prove to be more costly. Those funds will help cover some of Humana’s costs, the insurer has said. Humana, the fifth-largest U.S. health insurer by market value, gets most of its revenue from sales of private Medicare policies.

Georgia growth

Humana counted about 254,000 Obamacare members in Georgia as of March 31. About 479,095 people were covered by policies purchased in Georgia’s insurance marketplace as of April 15, according to the state regulator.

Humana’s solution for next year? Higher prices and, hopefully, more profitable customers. The insurer is adjusting its 2016 premiums in the state to account for the sicker population, Chief Financial Officer Brian Kane told investors at a May 12 conference held by Bank of America Corp.’s Merrill Lynch.

“We’re very mindful of the morbidity of that state and we think we’ve captured that in our pricing, and we’ll see,” he said. “If we have a problem again next year, I think we’ll be having a different discussion about our willingness to participate in the 2017 program.”