Humana Inc. History

Address:

The Humana Building
500 West Main Street
Louisville, Kentucky 40202
U.S.A.

Telephone: (502) 580-1000
Fax: (502) 580-3424

Public Company
Incorporated: 1961 as Heritage House of America Inc.
Employees: 19,500
Sales: $8.04 billion (1997)
Stock Exchanges: New York
Ticker Symbol: HUM
SICs: 6321 Accident & Health Insurance; 6324 Hospital & Medical Service Plans; 8741 Management Services

Company History:

One of the largest publicly traded managed healthcare companies in the United States, Humana Inc. has about 6.2 million people enrolled in its health plans, which are available in 16 states and Puerto Rico. Nearly 45 percent of these customers are in Florida, Illinois, and Texas. Principally offering health maintenance organization (HMO) and preferred provider organization (PPO) plans, Humana also offers Medicare- and Medicaid-related health insurance products; provides managed healthcare services under a contract with the U.S. Department of Defense; and offers such specialty and administrative services as dental plans, group life insurance, and worker's compensation. In late May 1998 Humana agreed to merge with United HealthCare Corporation to create the largest managed-care company in the United States in terms of plan participants (the merged entity would operate under the United HealthCare name).

Began with Nursing Homes in the 1960s

In 1961 two lawyers in Louisville, Kentucky, built a nursing home, pledging $1,000 apiece together with four friends. Wendell Cherry and David Jones--cofounders 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 for seven years to finance further growth. Extendicare Inc., 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.

Hospitals Became Focus in the 1970s

With a focus now entirely on hospitals, the company's name was changed to Humana Inc. in January 1974. 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 became 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 ensure reimbursement included the insistence on a specific payment-plan agreement before patients were 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.

Doubled Size Through 1978 Acquisition of American Medicorp

As the nation's third largest hospital-management chain in 1978, Humana committed a bold act: it acquired the number two chain, American Medicorp, Inc. 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."

Cofounders Jones and Cherry, chairman and president, respectively, remained untroubled because 45 percent 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 healthcare 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 leased and operated the University of Louisville's teaching hospital, where Jefferson County, Kentucky, citizens without the ability to pay for hospital care received inpatient treatment for no charge--state, city, and county governments covered the costs.

During the following years the healthcare 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 percent from a high of 80 percent just three years earlier. From the onset of federal policies in 1983, with private insurers following suit, the industry changed drastically.

Began to Offer Health Plans in 1984

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 percent referral rate from its managed healthcare business, thus ensuring 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 percent. It was assumed policyholders would use Humana hospitals, but in 1986, as losses began to mount, it was found that only 46 percent 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. (This type of tightly managed plan would become typical of HMO plans of the 1990s.) 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 percent between 1985 and 1986. Humana adjusted its insurance plans and underwent restructuring. It closed clinics and purchased several HMOs. 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 healthcare 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 percent, reducing its markets from 50 to 17, operating only where it had a strong hospital presence, and ensuring that patients were sent to its hospitals, Humana began to rebound by the end of the 1980s. Humana, continuing to move counter to the industry while competitors increased their debt loads through leveraged buyouts, saw its debt to capital ratio reach an all-time low of 37 percent in 1990.

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. In 1991 cofounder Cherry died.

Spun Off Its Hospitals in 1993

By the early 1990s Humana's healthcare plans&mdash′imarily managed care plans (HMOs and PPOs)--had grown into a $2 billion business with 1.7 million plan participants. Although dogged by a series of charges--overcharging patients for services, using misleading sales tactics, seeking improper Medicare expense reimbursements--that brought ongoing negative publicity, the company's health plan division was much healthier than the hospital side. With its hospitals continuing to post declining profits because of industry-wide cost-containment efforts and falling admissions of full-paying patients (those not covered through government-sponsored plans), Humana decided in 1993 to stake its future on managed healthcare plans. In March of that year, the company spun off the hospital division--including 76 Humana hospitals (most of the company's total)--into a new and separate company called Galen Health Care, Inc. Within six months of the spinoff, Galen merged with Columbia Hospital Corp. (later known as Columbia/HCA after a merger with Hospital Corp. of America).

Humana emerged with $685 million in cash and long-term debt of only $21 million (Galen took on most of Humana's pre-spinoff debt). The company thus went on a spending spree. In 1994 Humana spent $180 million to acquire Group Health Association, a 125,000-member HMO in Washington, D.C., and CareNetwork, an HMO in Milwaukee. The company in October 1995 acquired EMPHESYS Financial Group, Inc. for $650 million. Green Bay, Wisconsin-based EMPHESYS was a leading provider of health insurance in the small group market, with 1.3 million members, and the tenth largest commercial group health insurer. Thus by the end of 1995 Humana had boosted its overall plan membership to 3.8 million and its revenues to $4.7 billion.

By mid-1996, however, it appeared that Humana had grown too fast. Amid skyrocketing costs, Humana was forced to abandon 13 unprofitable markets. The largest of these was Washington, D.C., and the company sold Group Health Association to Kaiser Permanente in January 1997; in only two years of ownership, Humana had suffered losses of $100 million attempting to turn around the money-losing Group Health HMO. Also sold was Humana's 30,000-member health plan in Alabama. As part of this restructuring, Humana recorded a $200 million pretax charge for the second quarter of 1996, leading to net income for the year of only $12 million, compared to $190 million for the previous year. Also, Jones, still serving as company chairman and CEO, forced out longtime president Wayne T. Smith and CFO W. Roger Drury. Gregory H. Wolf--who had been senior vice-president of sales and marketing and had come to Humana from EMPHESYS, where he had been president and COO&mdashøok over as president of Humana in September 1996. He added the CEO title as well in December 1997, with Jones remaining chairman.

Wolf set about resurrecting Humana's image by improving relations with both doctors and patients. He abandoned the use of gag clauses in HMO contracts with doctors, clauses that forbade doctors from discussing the financial arrangements or patient-care policies of the HMO. On the patient side, Humana targeted improvements in basic customer service--answering phone calls faster, mailing out identification cards more quickly, and expediting claims handling.

Humana made two significant acquisitions in late 1997. In September the company acquired Physician Corporation of America (PCA) for $290 million in cash and the assumption of $121 million in debt. PCA had a total of 1.1 million members in its HMOs, with 324,000 in Florida alone where Humana already had 1.1 million members. Humana also gained large plans in Texas and Puerto Rico. In October 1997 Humana bought ChoiceCare Corporation for about $250 million in cash. ChoiceCare managed the largest HMO in the Cincinnati area, which had about 250,000 members.

Meanwhile, Humana continued to restructure its operations by shedding additional noncore operations. During 1997 the company sold its last remaining hospital and its pharmacy benefits management subsidiary. In August 1997 Humana announced it would sell its HMO in California. By early 1998 it had committed to selling all of its Humana health centers. After enjoying an acquisitions-aided increase in revenues to $8.04 billion and a rebound in net income to $173 million in 1997, Humana thus was positioned in mid-1998 as a 6.2-million member group with the number one or number two position in 14 of the major markets in which it operated.

Then, on May 28, 1998, Humana and Minneapolis-based United HealthCare Corporation announced that they intended to merge, creating through a $5.4 billion stock swap what would be the largest managed healthcare company in the United States, with 10.4 million full-paying HMO and PPO members (and overall membership of more than 19 million), exceeding the nine million of Kaiser Permanente. The merged entity would operate under the United HealthCare name in 48 states and Puerto Rico and have annual revenues of about $28 billion. It thus appeared that the history of the acquisitive Humana would itself end through this megamerger.

Principal Subsidiaries: ALABAMA: Humana Health Plan of Alabama, Inc.; QuestCare, Inc. CALIFORNIA: Centerstone Insurance and Financial Services. DELAWARE: EMPHESYS Financial Group, Inc.; Health Value Management, Inc.; Humana Compensation Management Source, Inc.; Humana HealthChicago, Inc.; Humana Military Healthcare Services, Inc.; Humrealty, Inc.; Medstep, Inc.; Physician Corporation of America. FLORIDA: Delray Beach Health Management Associates, Inc.; Family Health Plan Administrators, Inc.; Health Inclusive Plan of Florida, Inc.; Humana Health Care Plans-Davie, Inc.; Humana Health Care Plans-Palm Springs, Inc.; Humana Health Care Plans-Rolling Hills, Inc.; Humana Health Care Plans-South Pembroke Pines, Inc.; Humana Health Care Plans-West Palm Beach, Inc.; Humana Internal Medicine Associates, Inc.; Humana Internal Medicine Associates of the Palm Beaches, Inc.; Humana Health Insurance Company of Florida, Inc.; Humana Medical Plan, Inc.; Humana Workers' Compensation Services, Inc.; Lakeside Medical Center Management, Inc.; PCA Family Health Plan, Inc.; PCA Health Plans of Florida, Inc.; PCA Life Insurance Company; PCA Options, Inc.; PCA Property & Casualty Insurance Co. GEORGIA: Humana Employers Health Plan of Georgia, Inc.; Humana Health Plan of Georgia, Inc. ILLINOIS: Health Direct, Inc.; Humana Health Direct Insurance, Inc.; Humana HealthChicago Insurance Company; The Dental Concern, Ltd. KENTUCKY: ChoiceCare Medical Group, Inc.; HMPK, INC.; HPLAN, INC.; Humana Broadway Corp.; Humana Health Plan, Inc.; Humco, Inc.; The Dental Concern, Inc.; The Dental Concern Insurance Company. LOUISIANA: Humana Health Plan of Louisiana, Inc.; Humana Workers' Compensation Services of Louisiana, Inc. MISSOURI: Humana Kansas City, Inc.; Humana Insurance Company; Humana/Med-Pay, Inc. NEVADA: Humana Health Insurance of Nevada, Inc. OHIO: ChoiceCare Corporation; ChoiceCare Health Plans, Inc.; Humana Health Plan of Ohio, Inc. OKLAHOMA: Commonwealth Management, Inc. PUERTO RICO: PCA Health Plans of Puerto Rico, Inc.; PCA Insurance Group of Puerto Rico, Inc. TEXAS: Humana HMO Texas, Inc.; Humana Health Plan of Texas, Inc.; PCA Health Plans of Texas, Inc.; PCA Life Insurance Company of Texas, Inc.; PCA Provider Organization, Inc. UTAH: Humana Health Plan of Utah, Inc. VERMONT: Managed Care Indemnity, Inc. WASHINGTON: Humana Health Plan of Washington, Inc. WISCONSIN: CareNetwork, Inc.; EMPHESYS Wisconsin Insurance Company; Employers Health Insurance Company; Humana Wisconsin Health Organization Insurance Corporation; Independent Care, Inc.; Network EPO, Inc.; Wisconsin Employers Group, Inc. BERMUDA: Hallmark Re Ltd.

Humana Inc. History

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