Humana May Be Wearing Too Many Hats

Humana Inc. wanted to have all the bases covered. Back in 1984, the hospital operator launched a strategy to take on the role of health-insurance provider as well. The plan: Humana the insurer would provide Humana the hospital company with a steady flow of patients for its beds. During the past few years, the integrated strategy worked well. Humana sold health coverage to some 1.7 million people, even as its hospital business prospered.

Lately, though, something has gone wrong. On May 20, for the third quarter in a row, the Louisville-based company warned Wall Street that profits won't meet expectations. For the quarter ended May 31, Humana announced, profits might be off by as much as 25% from the year-ago quarter, when it earned $101 million on revenues of $1.6 billion.

PROFIT DROP. Humana's biggest problem lies on the hospital side of its operations. After all, hospital margins have been under pressure for years, as government reimbursement schemes have tightened, and cost-cutting managed-care plans have proliferated. But this year, it isn't just slowing growth that Humana has to worry about. Profits are actually falling. In the first half of fiscal 1992, Humana's hospital operating income fell 6% from the first half of 1991, to $294 million. Revenues during the period, however, rose 9%, to $2.07 billion.

Partly behind the profit drop, Humana says, is a decline in admissions among full-paying patients--privately insured customers who make up for the lower rates paid by those on publicly funded and other discounted health plans. In part, the higher-margin patients were frightened off by a flood of negative news reports in 1991, which accused Humana of overcharging for services. The charges led Representative John D. Dingell (D-Mich.) to hold hearings on the topic. Humana consistently maintained that its billings were quite competitive.

Also at fault, Humana says, is the nation's sluggish economy. But the company concedes that it's not quite sure what has caused its business to tail off and says it has launched a market-research study asking doctors, patients, employers, and others why key volume indicators are dropping.

Tougher competition for insurance clients has complicated the earnings picture by making it more difficult for Humana to keep adding to its enrollment. But some outsiders think that there's a basic conflict in the company's strategy of integrating hospital care with the health-insurance business. Humana's need to exert tight control over its insurance payments has rubbed doctors the wrong way, analysts say. To retaliate, doctors are referring their patients to other hospitals, leaving Humana to fill its beds with more patients covered by lower-paying health insurance. "Humana is stuck with an increasingly discounted base," says Margo L. Vignola, a Salomon Brothers Inc. analyst.

Humana's integration strategy has left it vulnerable to problems such competitors as Nashville-based Hospital Corp. of America don't face, analysts say. Health care stocks in general have been sickly, but investors are clearly worried about the turn of events at Humana. Since peaking in late January above 29, the stock is now trading around 21. "This is the bed Humana made," Vignola says, "and now they're lying in it."

STILL THE BOSS. The problems have put Humana co-founder and Chairman David A. Jones on the spot, just as three of six executive vice-presidents, including Chief Financial Officer and Director William C. Ballard Jr., announced early retirements. Their April resignations follow the death last year of Humana co-founder Wendell Cherry. Director John W. Landrum says none of the retirements will have a negative impact on the company, and analysts and company insiders point out that key operating management remains in place. Jones "was always the one who ran the show," Landrum says. "He's always had his thumb on everything and continues to."

Making matters more awkward, though, the earnings problems and the management upheaval come just as Jones was looking to spend more time in Washington. Beginning next January, he takes over as chairman of the Healthcare Leadership Council, a potent coalition of about 50 health care industry CEOs. The lobbying group's agenda: to fight against a Canadian-style national health insurance plan and to push for private-market solutions. In a statement, Jones has told employees that this "will in no way detract from my primary duty as Humana's CEO." And with some 3 million shares of stock, he's hardly likely to walk away from the company and its problems.

To deal with its woes, Humana says it will put together a plan once the market-research study is done. Selling some of the company's hospitals may be an option. But if Chairman Jones is going to wield a scalpel on the vertical integration strategy, he hasn't given any sign. Says director Landrum: "We need to hold steady in the boat." In any case, Jones now has considerably more on his mind than how to reform health care in America.

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