The Humana Flap Could Make All Hospitals Feel Sick

Few can fault the business results of Humana Inc. On Oct. 15, the Louisville-based hospital giant reported yet another record year (charts). And after an initial stumble, it has defied the odds by building a major, profitable health insurance arm to round up patients to feed into its hospitals. Says analyst Kenneth S. Abramowitz of Sanford C. Bernstein & Co: "It's a great company in a tough business."

But is Humana making too much money at the expense of its patients and policyholders? That's the question that has been bobbing around Capitol Hill these days. On Oct. 17, Representative John D. Dingell (D-Mich.) summoned Humana Chairman David A. Jones to hearings to defend what appear to be particularly aggressive billing practices. The move comes atop flaps in Nevada, Florida, and Kentucky over various aspects of Humana's pricing and marketing practices. And it's all adding fuel to a growing debate in Congress over how hospitals in general allocate costs and charge for services.

HORRIFIC MARKUPS. Jones was called by Dingell's House Energy & Commerce Committee after charges of Humana bill padding were aired by ABC's Prime Time Live news show. Armed with price lists from Humana's 77 U. S. hospitals, Dingell's investigators ticked off horrific markups: saline solutions costing 81~ per liter charged to patients at $44.90; crutches that cost Humana $8.05 and were billed at $103.65. Said Dingell: "The now-famous $640 Pentagon toilet seat pales in the face of some of these hospital charges."

Jones had ready answers. Most customers, he said, do not pay inflated prices since their health insurers--whether they are covered by medicare or a private plan--are able to negotiate healthy discounts with hospitals. To make up the difference--and to cover the care of indigent patients and others who pay little, if anything--hospitals routinely shift costs to customers who pay full rates. Moreover, Jones said, markups also include allocated overhead costs. In any event, Humana is merely following standard hospital practice, he concluded.

Some experts agree, saying that focusing on pricing of services alone distorts the picture. "I think we need to calculate the returns hospitals are making rather than individual prices," says Frank A. Sloan, a Vanderbilt University economist.

One thing's certain: Humana is highly profitable. While the company's hospital margins have slipped from 21% to 17% since 1987, they still are above average. Overall, earnings have grown at a steady 18% compound annual clip over the past four years. Humana's 20% average return on equity over that period leads the lucrative health-care industry in general by several percentage points.

NO STRANGER. Whether the Dingell hearings will have any real impact on Humana's business is unclear. But a source close to the Energy & Commerce Committee says Dingell plans to expand his probe. Meantime, both the General Accounting Office and the Inspector General of the Health & Human Services Dept. are looking into hospital pricing practices industrywide. The question: Are hospital pricing systems that cross-subsidize costs fair to the consumer? Theoretically, Congress could seek to regulate those systems.

Humana is no stranger to controversy. It had to make changes in its pricing or marketing practices in Florida and Nevada in response to pressure from state officials. And down home in Kentucky, the company and its pricing have become "the favorite topic," as one state senator puts it. Indeed, the pricing flap has cost it some of its clout with the legislature. Senator Dan Seum, a Louisville Democrat who co-sponsored a bill favorable to Humana last year, now wonders if the company should be subject to price controls of some kind.

Humana may emerge from the current controversy with little permanent damage. Wall Street has bid its stock down 23% to about 26 since the end of July. But analysts say that's due more to general concerns about the future environment for hospitals than to any controversy over Humana's pricing practices. Nevertheless, as the leading for-profit hospital chain -- and a company that's not bashful about flexing its muscles -- Humana is going to be a tempting target for state and federal legislators concerned about rising health care costs.

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