Humana Inc.

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Humana Inc.

The Humana Building
500 West Main Street
Louisville, Kentucky 40202
U.S.A.
(502) 580-1000
Fax: (502) 580-1441

Public Company
Incorporated: 1961 as Heritage House of America Inc.
Employees: 55,100
Sales: $4.09 billion
Stock Exchange: New York

One of the largest health-care companies in the world, Humana commands attention in a fast-changing industry. The company is noted for its combination of conservative and innovative strategies: growing selectively while other hospital chains were exploding, championing artificial-heart research, buying the nation’s second-largest health-care chain while Humana itself was third, and linking its hospitals with a health insurance plan in an effort to beat the low-occupancy rates plaguing the industry in the wake of government cost-containment measures. This last move, implemented in early 1984, threatened the company’s stability through persistent losses. With higher premiums and a new marketing strategy, however, Humana’s health was greatly improved by late 1989, and it embarked on the new decade with its strengths intact.

In 1961 two lawyers in Louisville, Kentucky, built a nursing home, pledging $1,000 apiece together with four friends. Wendell Cherry and David Jones—co-founders of that first home, Heritage House—were soon approached with other offers to buy and build nursing homes. Expansion was rapid in the first seven years, and the two men added facilities in Kentucky, Virginia, and Connecticut. With the establishment of Medicare and Medicaid in the mid-1960s, the industry grew quickly. Slightly ahead of the pack in what was to become the most rapidly expanding sector of the nation’s economy, Jones and Cherry reincorporated their venture in 1961 and sold stock seven years to finance further growth. Exten-dicare, as the group was known, grew to more than 40 facilities, becoming the nation’s largest nursing home company.

As Medicare spawned a nursing home glut and stocks suffered, Extendicare experimented with alternatives. There was a brief and unfortunate diversification into mobile home parks between 1969 and 1971, which the company quickly unloaded. Extendicare acquired its first hospital in late 1968, realizing it could apply the same business practices it had developed for operating nursing homes. Within two years, the company had acquired nine more hospitals. The hospitals proved so successful that Extendicare divested all of its nursing homes in 1972.

With a focus now entirely on hospitals, the company’s name was changed to Humana. Some of the features that distinguished Humana from other hospital chains early on were its nonconforming management decisions, the refusal to overpay in buying hospitals, the refusal to manage hospitals it did not own, and rigid cost-control measures well-enforced through the company’s centralized management. These methods have been much discussed: first because they seemed remarkable in the industry; later because of complaints by some physicians about overcontrol. For example, Humana’s efforts to insure reimbursement include the insistence on a specific payment-plan agreement before patients are discharged.

The cost controls eventually became one of Humana’s greatest assets. Between 1975 and 1980, Humana, grew quickly and achieved economies of scale, like other hospital chains, by making bulk purchases of supplies and equipment. Unlike some competitors, however, Humana remained very centralized, operating all patient-billing and data-collection out of its home office in Louisville. Freed from the distraction of managing hospitals it did not own—also unlike most competitors—Humana concentrated on strict productivity and profitability goals.

As the nation’s third-largest hospital-management chain in 1978, Humana committed a bold act: it acquired the number-two chain, American Medicorp. This purchase doubled Humana’s size and stretched its debt. Having used leveraged debt with confidence for some time during its expansion, Humana was now faced with a debt that one company official claimed was “nearly 90% of capital.”

Co-founders Jones and Cherry, chairman and president, respectively, remained untroubled because 45% of hospital revenues were coming from government-guaranteed Medicare and Medicaid. The two men also saw the hospital business as recession resistant, even though Humana suffered from low-occupancy rates at some of its facilities during these years.

Meanwhile, Humana unloaded unprofitable hospitals. While the health-care industry was burgeoning into the second-largest industry in the United States, Humana alone was honing its cost controls: between its own growth and government-subsidized medical care, the industry in general had not yet felt the need for cost efficiency.

To build its medical reputation, Humana established a Centers for Excellence program in 1982 for the purpose of specialty care. This included centers for neuroscience, diabetes, spinal injuries, and artificial-heart research and surgery. The artificial-heart projects which were undertaken partly for the publicity they generated, helped push Humana’s name into public view. In 1982, Humana had 90 hospitals, primarily in the sunbelt states. Humana also leases and operates the University of Louisville’s teaching hospital, where Jefferson County, Kentucky, citizens without the ability to pay for hospital care receive inpatient treatment for no charge—state, city, and county governments pay.

During the following years the health-care industry’s overexpansion and the government and private insurers’ cost-containment efforts began to clash. Here, Humana’s tradition of tight cost controls helped, but the industry reeled from severe changes: industry wide hospital occupancy rates dropped below 50% from a high of 80% just three years earlier. From the onset of federal policies in 1983, with private insurers following suit, the industry changed drastically.

Early in 1984, Humana launched Humana Health Care plans, to offer insurance plans with attractively low premiums and punitive deductibles for patients who used rival hospitals. Competitors soon imitated this vertical integration. Humana banked on a 70% referral rate from its insurance business, thus insuring a healthy occupancy rate for its hospitals. Two years into the venture, however, Humana discovered its plan was seriously flawed.

The premiums had been underpriced, missing costs by at least 20%. It was assumed policyholders would use Humana hospitals, but in 1986, as losses began to mount, it was found that only 46% of Humana’s Care Plus group-plan members were using its facilities. The deductibles offered to lure users to their hospitals were not sufficient; independent physicians could recommend any hospital to their patients, and did. Since policyholders were not restricted in their choice of physician, there was no guarantee that they would be referred to Humana facilities by independents. In fact, by this time, a rancor had developed between medical professionals and the business forces behind the cost wars. Humana had incurred further animosity because of its strict business policies. Jones himself contended that in 1986 doctor resentment had resulted not only in patients being steered to other hospitals, but also in strategies to bypass Humana’s deductibles for use of other facilities. Doctors would, for instance, claim that a standard admission was an emergency.

Humana addressed these problems by campaigning to change doctors’ perceptions of the company, and preventing the use of outside hospitals by enforcing stricter procedures. These procedures included requiring doctors to speak with a health-plan nurse and to accept the Humana hospital recommended for use. Refusal to follow this process would prevent reimbursement. Humana also trimmed back the number of policies it offered and avoided cities where the company was not a dominant presence.

In 1987, with founders Jones and Cherry still at the helm, Humana worked to right its insurance plans. Net income had plunged nearly 75% between 1985 and 1986. Humana adjusted its insurance plans and underwent restructuring. It closed clinics and purchased some health-maintenance organizations. That same year, Medicare ceased its practice of prepayment and started requiring bills before all reimbursements. This meant a significant slowing of cash flow for Humana. It was followed by further government cost-reimbursement strictures that directly affected Humana. Public pressure to contain the cost of health care was growing.

By 1988, Humana had greatly reduced losses caused by its insurance operations and seemed intent on recovery. By 1989, after five years of losses, Humana’s health-plan division made $4 million, its first operating profit. Raising premiums up to 25%, reducing its markets from 50 to 17, operating only where it had a strong hospital presence, and insuring that patients are sent to its hospitals, Humana began to rebound by the end of the 1980s. Continuing to move counter to the industry, in 1990, while competitors increased their debt loads through leveraged buyouts, Humana’s debt to capital ratio reached an all-time low of 37%.

In October 1990 Humana announced that it had agreed to-acquire Chicago-based Michael Reese Health Plan Inc. and Michael Reese Hospital and Medical Center. At the time of the agreement, Michael Reese was one of the largest private academic medical centers in the United States. Michael Reese Health Plan had 240,000 members; Humana had five times as many members.

Humana has remained one of the top three hospital-management chains since the mid-1970s, outlasting the growth explosion and severe restructuring of the health-care industry during that period. It faced the 1990s with a record of firm, centralized management and tough cost controls.

Principal Subsidiaries

Humana Health Plan of Alabama, Inc.; Humana Medical Corporation; Humana Alaska Realty, Inc.; Humana Health Plan of Alaska, Inc.; Humana of Arizona, Inc.; Humana Health Plan of Arkansas, Inc.; Hunting-ton Intercommunity Hospital; Humsoch, Inc.; West Anaheim Community Hospital; West Hills Hospital; Westminster Community Hospital; Health Care Indemnity, Inc.; Humana of Aurora, Inc.; American Medicorp Development Co.; Brent-wood Hospital, Inc.; Doctors Hospital of Augusta, Inc.; Edison Homes-Southeast, Inc.; Extendicare Properties, Inc.; Group Health Insurance, Inc.; HAC Inc.; H.H.U.K., Inc.; Healthcare Technology Assessment Corporation; Humana Health Institutes, Inc.; Hospital Alaska, Inc.; Humana Hospital Corporation, Inc.; Humana Mobile Nurses Corps., Inc.; Humdeco, Inc.; Medical Specialties, Inc.; PMM, Inc.; Primary Medical Management, Inc.; Suburban Medical Center at Hoffman Estates, Inc.; Sun Bay Medical Office Building, Inc.; Community Hospital of the Palm Beaches, Inc.; Community Hospitals of Humana Inc.; Humana Health Plan of Florida, Inc.; Humana Health Insurance Company of Florida, Inc.; Humana Medical Plan, Inc.; Humana of Florida, Inc.; Humhosco, Inc.; Gwinnett Community Hospital, Inc.; Humana Health Plan of Georgia, Inc.; Humana of Illinois, Inc.; Humana of Kansas, Inc.; A.C. Medical, Inc.; GSD, Inc.; Humana Broadway Corp.; Humana Care Plan, Inc.; Humana Health Plan, Inc.; Humana International Holdings, Inc.; Humana Medical Plan of Kentucky, Inc.; Southwest Jefferson Community Hospital, Inc.; Humana Health Plan of Louisiana, Inc.; Humana Louisiana, Inc.; WGH, Inc.; Humana Health Plan of Maryland, Inc.; Humana Health Plan of Michigan, Inc.; Humana of Mississippi, Inc.; Humana Insurance Company; Humana Health Insurance of Nevada, Inc.; National Care Services Corp. of Nevada; Sunrise Hospital; Humana Health Plan of North Carolina, Inc.; Humana Health Plan of Ohio, Inc.; Humana Health Plan of Pennsylvania, Inc.; Humana Health Plan of South Carolina, Inc.; Humana of Tennessee, Inc.; Beaumont Hospital, Inc.; Humana Health Plan of Texas, Inc.; Humana Hospital of Baytown, Inc.; Humana of Texas, Inc.; Humana PPO, Inc.; MGH Medical, Inc.; General Hospitals of Humana, Inc.; Humana Health Plan of Utah, Inc.; Chicago Medical School Hospital, Inc.; Humana Virginia Hospital Corporation; Humedicenters, Inc.; ACH, Inc.; Humana of West Virginia, Inc.; Insurance Resources Company, Ltd. (Bermuda); The Wellington Private Hospital Limited (U.K.); Societe Anonyme de l’Exploitation de l’Hopital de la Tour (Switzerland).