Just days after Congress passed the massive 2003 Medicare Part D drug law, Vice-President for Senior Products Steve Bruckner and other top staffers at Louisville-based insurer Humana Inc. (HUM ) began planning. They decided on an aggressive push for a share of the trillion dollars or so Congress would be showering on the program over the next decade.
Their idea: offer dirt-cheap drug plans to grab millions of seniors. Then use the benefit as a stepping stone to a potentially richer market -- Medicare managed-care plans, which cover doctor and hospital bills as well as drugs. "Forty-two million people were presented with a new opportunity to be enrolled in the drug program," says Bruckner. "We said, 'That's only going to happen once."'
Bruckner calls it an "enroll-and-migrate strategy." To boost enrollments, Humana is paying its sales staff commissions that are twice as generous for health-and-drug plans than for drug-only policies. "Humana sees a big first-mover advantage," says CIBC World Market Corp. analyst Carl McDonald. "They're saying, 'Let's get them into a [drug plan] at a modest margin or even no margin in Year One, then try to convert them to a [managed-care plan].' "
The move is critical for Humana. With 7 million customers, it lags far behind 25 million-member UnitedHealth Group Inc. (UNH ) and 27 million-member WellPoint Inc (WLP ). And the industry may face lean times as growth in employer-based health care slows and a new cycle of price competition squeezes profits.
So far, Humana has signed up more than 1.1 million customers for its drug-only plan since November. Over the past year it has enrolled 273,000 new seniors in HMO-type plans. By the end of 2006, Humana expects as many as 2.2 million in its drug-only plans and up to 1.1 million in managed care.
One key is a marketing deal with Wal-Mart Stores Inc. (WMT ) But the centerpiece is aggressive pricing. In most states, Humana's drug premiums are below $10 a month, far less than the $32 average. According to health consultants Lewin Group, a retail drug bill of $2,000 cost just $766 under Humana's Standard Plan, vs. an average of $1,420 through other insurers.
Humana is even going after low-income seniors. Washington is aiding that strategy by boosting payments for high-cost patients, protecting insurers against big losses. In addition, by automatically assigning poor seniors to low-cost plans such as Humana's, the feds are eliminating insurers' marketing costs.
While Humana hopes more customers will boost its leverage in price negotiations with drugmakers, its strategy could slash pretax returns on the pharmacy plans to 2%, half that of its rivals, estimates CIBC's McDonald. That's one reason why Bruckner's eye is on managed care. Such plans may help Humana get more control over costs by pushing patients to buy cheaper generic drugs. The strategy is also tied to generous government subsidies. To encourage seniors to shift to managed care, Washington is paying HMOs an average bonus 10% for each patient. "When [the government] waves enough money at them, they are going to get in," says Paul B. Ginsburg, president of the Center for Studying Health System Change, a Washington (D.C.) research center.
Still, Humana's dive into Medicare is risky. In the face of long-term deficits, Washington could scale back those subsidies. That happened in both the '80s and '90s, when government attempts to push managed care floundered and plans quit the business. And Humana's early enrollment pales next to the 4 million seniors who have joined UnitedHealth, largely thanks to a branding deal with AARP.
Humana execs still think it is worth the risk. They are convinced that aggressive pricing today will lead to a profitable new market in the years to come.
By Howard Gleckman