Humana

Question 1

Humana’s Health care business mostly relied on commercial HMO and PPO products (57%), which yielded higher margins compared to its Medicare risk plans (39%). Judging by the numbers for the health care business alone, Humana seemed to be doing a good job as the total enrollment in Human’s health plans was growing much faster than the industry, at a rate of 42% (1991) and 26% (1990) compared to an industry average of 5% and 7% respectively. Secondly it has been stated that pretax profits increased 125% and 100% each in the past two years, which looks very positive.

However on the contrary, there were signs that Humana’s high growth was placing the company under increased financial restraint as not only its costs ratio of 16.1% was deemed too excessive, but also its medical loss ratio of 85.9% was higher than all of its competitors (average of 80.4%). Whilst this gives room for improvement and more profitability, the biggest problem was Humana’s conflict with its physicians. As the business became more competitive, disputes over costs strained their relationship and physicians started to lose trust and were concerned that their patients would not get the treatment they deserved at Humana hospitals, which generally charged higher rates to other insurance plans. This in turn increased the pressure on the hospital business itself.

In terms of its Hospital business, the industry outlook is not as bright as above, with declining occupancy rates (69%) and declining funds available for treatment from the US Medicare Program. Humana’s occupancy rates stood at 47%, more than 20% below the national average of 69% and operating margins at historic lows of 15% (which, however is still high compared to other industries). Secondly, private pay patients fess from 53% to 21%, which did not make the situation any better as Humana was only able to cover 27% if its total patient days and 11% of its total revenue from their own health plans (great dependence on other...