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E-volutionizing health insurance: technology is driving Humana's success as a health-plan leader and serving as a backbone in its approach to consumer-centric health care.

Humana Inc.'s company motto, "Guidance when yon need it most," is the foundation of its customer-centric approach to health care. Combining the company's efforts to engage consumers in their own care with a strong information technology system is placing the company on the map as a recognized technological leader in its field.

The 42-year-old company's unusual transformation from a nursing home operator to America's largest hospital company to its current business of providing health insurance and related-specialty products has involved many changes along the way. But the plunge into the new era of technology has changed the face of the company and is helping engage its customers at every step.

Dawn of a New Company

Humana began in 1961 when two young Kentucky lawyers formed a partnership and started a new venture in nursing homes. With the help of four friends, David A. Jones and Wendell Cherry each invested $1,000 and countless hours to achieve their vision of operating a nursing home called Heritage House. In 1968, the company, then called Extendicare, included seven nursing homes. After an initial public offering to generate money for further expansion, the friends also acquired their first hospital, Medical Center Hospital in Huntsville, Ala. In 1974, Extendicare became Humana Inc. to reflect its new direction and to "project more truly the philosophy of the company, to stand out distinctively and to provide an identity with non-limiting connotations," said Jones, who continues as chairman of the company after retiring as chief executive officer in 1997.

In the late '70s, Humana became the world's largest hospital company through a series of acquisitions and rapid growth. It then owned more than 80 hospitals in the United States and abroad. One of its innovations was a new emergency room design, which ensured that critical-care patient, would see a health-care professional--not an admitting clerk--within 60 seconds of arrival.

In 1982, Humana created its Centers of Excellence program, designating hospitals that offered unsurpassed specialty care within each center's, geographic region. In 1983, during a time of much change in the industry due to cost constraints and other pressures, the company created a family of flexible health insurance products, called Humana Care Plus, which led the company on its way into the budding health maintenance organization industry.

Despite growth of the hospital and insurance industries during the late '80s, Humana saw the need to separate its two divisions. In 1993, Humana spun off its hospital operation into a new company called Galen Health Care Inc., which later merged with Columbia/HCA. "The company has reinvented itself several times as conditions change and opportunities arise," said Jones.

Engaging Consumers

The impetus for the company's management realignment to consumerism--reflected in its redefined commercial and government business segments--came about because Humana believed it needed to challenge industry conventions at every turn, said Dr. Jack Lord, chief innovation officer for the company. "We believe we are disruptive forces that need to be unleashed in the industry, truly engaging consumers and providing real value for people who use the health-care system."

Upon laying out a new strategic direction for the company in 2000, President and CEO Michael McCallister and his team soon realized that the one thing the industry hadn't centered on relative to trying to bring a new rational mindset to the industry was consumers themselves. "Instead, the industry was focusing on everything else except consumers," said McCallister. "Yet, it was clear that consumers are powerful ..., and we built our strategy around the idea that if we can get consumers engaged, informed and empowered, it ultimately can be the road to helping solve employers' cost problems."

Today, the company continues to look at ensuring choices so people can be sovereign in the health-care system. While there's no silver bullet to consumer engagement, McCallister and his team believe an important contributor is transparency, or allowing consumers to know such facts as what medications are available, what costs they mw face and how hospitals work. "We wanted to get rid of the black box that obscures a lot of things in the system,' said Lord.

"We talk a lot about celebrating diversity among people, and yet we were selling a Model T product--where you could have any color you wanted as long as it was black--like one flavor of HMO or PPO," said Lord. Humana fundamentally believes that benefits need to reflect the values, preferences and needs of individuals and their families, he added. "People have different needs related to their medical care and how they think about health care."

Humana's introduction of its SmartSuite and SmartSelect products is an example of its approach to consumerism. SmartSuite, the company's full-replacement health coverage and consumer-choice plan option, offers a broad array of health-plan selections with appropriate levels of cost sharing that allows employees to choose a plan that meets their health and budget needs. SmartSelect allows employees to decide how to spend their health-care dollars based on their preference for lower premiums/higher cost at point of service or higher premiums/lower cost at point of service.


Humana's new business model is relying heavily on information technology as the tool to put much needed information in consumers' hands.

"It would be very difficult to execute our consumer strategy if it weren't for the information technology backbone in the company we've built at Humana;' said McCallister.

Over the past several years, the company has put together a number of technology initiatives to achieve administrative efficiencies while enhancing its value with its customers. One such initiative is the Health Plan Wizard, an online plan selection tool to help members evaluate trade-offs between possible expenditures, such as copayments and monthly premium amounts, by asking questions about health-care needs and financial status. Consumers are asked such questions as how often they visit a physician and if they would be willing to use generic drugs. The software then builds several health plans with varying combinations of benefit levels and areas of coverage.

Other technology solutions include, a secure personal home page that allows members to consolidate information, set preferences and drive health-benefit transactions through one location; and Plan-Professor, an ongoing employee communication program that includes newsletters, direct mail pieces and Web content for employers to use in educating employees to become active participants in their health-benefits decisions.

"We're changing and revolutionizing health care, and technology will get us there," said Bruce Goodman, chief service and information officer.

Technology is also helping address members' prescription-related questions and project pharmacy costs through Humana's Web-based Rx Calculator. "Within about 24 hours, we know when a member has filled a prescription, And if other drug options are available at a lower copay, we are able to get messages to them via secured e-mail, mail or through automated systems about those alternative offerings," said Goodman. The service is paying off in a big way. About 20% of members have changed their prescriptions to lower-cost drugs as a result of logging online.

Growth of Humana's Web site is gaining much momentum, with more than 7.5 million hits to the home page, u,u,, each year. In addition, online pharmacy tools receive about 3 million annual hits, the online physician finder receives about 2 million hits, and there are nearly 4 million provider offices logons annually to the site to conduct eligibility and benefit checks. "The site is moving the needle hi terms of making people better consumers," said Goodman.

In addition to the Web, Humana also relies heavily on voice recognition technologies as a new model of consumer engagement. For example, the company is using the technology to remind members about annual exams and screenings, such as mammography and flu shots. "About 60% of callers stay on the line during the call, which defies what anyone would expect they would get from use of robotic-type technology," said Goodman.

In 1999, Humana's e-business strategy began to provide Web capabilities for self service to its stakeholders, said Goodman. Today, about 60% of interactions with members and provider officers are done via self service, compared with only about 20% two years ago. "This is a clear example of how we cut our administrative costs and allowed providers to get timely response," Goodman said.

In the development and implementation of new technologies, Humana relies heavily on outside partners to bring best-of-breed technology platforms, rather than trying to build it all internally. The company's information technology spend is a significant portion of its total annual $100 million in capital costs.

McCallister believes Humana's IT push around applications and the ability to have a different value proposition makes it unique in the industry--an industry that's been relatively slow to adopt technology. Humana currently offers portals to agents/brokers employers, members and providers. In addition, technology has made claims processing a more efficient, stream lined process. "We have one of the lowest--if not the lowest--inventories of claims among competitors in our industry. We don't believe in sitting on the money but rather that providers should be paid correctly, quickly ant electronically," McCallister said.

Humana's technology push is paying off in a big way. The company received numerous accolades over the past several years for its technology advances, including Information Week and eWEEK Fast Track 500 recognition of the company for its leadership in and commitment to e-business solutions. In August 2003, Humana received the prestigious CIO 100 award from CIO magazine.

A New Wave

Another way the company is engaging consumers in their care is through the recent introduction of its consumer-choice health plans.

Upon laying the foundation for a consumer-centric approach to health benefit decision-making, McCallister and his team looked close to home and confronted a 19.2% spike in the company's health-care benefits costs for its own 5,000 Louisville, Ky.-based employees anticipated in the 20012002 plan year. "I knew that managed care was no longer the solution to controlling rising health-care costs," said McCallister.

At that time, employers and providers were in an uproar said Jeffrey Bringardner, vice president of commercial sales. "Mike felt the trends weren't going to subside and we needed to do something different to get members engaged, and until members acted like consumers in the same way they buy a home or a car, they wouldn't make any fundamental changes." Humana then radically changed its approach in its products processes and technology to support its consumer-directed vision.

Consumer-directed health plans use health savings accounts in which employees receive a certain amount of money from their employers to spend on health care. Individuals make decisions on how they want to spend their health-care dollars, including how much to budget for coinsurance and out-of-pocket expenses, which allows them to better understand what services are really necessary.

But what makes Humana's plans different from its competition? "We believe in choice," said Bringardner. The SmartSuite products have an underlying premise that one size doesn't fit all, he added. In addition, they support using appropriate employer contribution strategies and providing education and tools to engage employees, he said. Today, more than 100 employer groups have purchased the SmartSuite product, serving more than 158,000 employees.

In July 2003, a survey of consumer-directed health plans by Forrester Research ranked Humana first in the emerging consumer space, based on the growth and effectiveness of its SmartSuite product. The aggregate annualized claims trend for Humana's initial customer groups with mature claims data is approximately 5%, about half of the overall healthcare inflation rate.

Technology has a large hand in the success of Humana's consumer-choice health plans. In addition to the Plan Wizard, for example, employees with flexible spending accounts and/or health reimbursement arrangements can use Humana's stored value card, which is used for health-plan identification and payment when visiting a provider or filling a prescription. "We refer to this process as 'choose and use.' where consumers are being educated and engaged in the process through various e-health tools on, in addition to the Personal Nurse program, predictive modeling and disease management programs,"' Lord said.

Serving the Military

In addition to its more than 3 million commercial members, Humana's consumer engagement is reaching out to military beneficiaries and their families.

About 42% of Humana's medical membership is made up of the men and women who serve the country In 1995, Humana Military Healthcare Services, a wholly-owned subsidiary of Humana Inc., was founded to focus exclusively on military health-care initiatives.

Humana Military Healthcare Services was awarded its first TRICARE contract in 1996 and now covers nearly 3 million TRICARE beneficiaries, primarily in the Southeast and Midwest. TRICARE is the Department of Defense's worldwide health-care program for retired uniformed service members and the families of those on active duty. Participants can select from one of three plans: TRICARE Prime, an HMO-like product; TRICARE Standard, a fee-for-service option; and TRICARE Extra, a plan similar to a civilian type PPO program.

"TRICARE has been an important part of our company and its success," said David Baker, president and CEO of Humana Military Healthcare Service and a retired member of the U.S. Air Force. He believes Humana's work with the program is a win-win situation for providers, beneficiaries and the company. "It provides a very fair return to the company and our shareholders, and the presence has allowed us to strengthen relationships with providers who have worked with Humana in the past and now again through the program."

For many of Humana Military Healthcare Services' management team and senior field leaders, who, like Baker, have long-time military experience, the background and training received from years of active duty have helped create a deeper understanding and appreciation of TRICARE members' needs. Baker also believes this experience makes the company unique among its competitors.

The Defense Department recently restructured the TRICARE territories from 12 regions into three in an attempt to standardize the program across the country. Under the next generation of contracts, certain services, such as Medicare dual-eligible claims processing, currently performed as an integrated part of the TRICARE program, have been carved out to create stand-alone national contracts. "The Department wanted to simplify the oversight of TRICARE contractors, so they reorganized the program into three regions," said Baker. "This realignment is intended to improve the portability of the program, to lower administrative costs and to consolidate efforts so that contractors can focus even more sharply on providing high-quality, accessible health care and superior customer service."

In August 2003, the Department of Defense awarded Humana a five-year contract to administer health care in the Southern region, which will serve about 2.76 million beneficiaries in Alabama, Arkansas, Florida. Georgia, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee and Texas, in addition to Guam. Puerto Rico and the Virgin Islands. Healthcare delivery in the new South region is expected to begin in August 2004.

Financially Secure

Humana's financial success is another feather in its cap.

Much of its recent earnings growth comes from steady increases in its commercial sector. Growth of the commercial line helped the company's stock jump 53% for the 2003 second quarter, reaching a four-year high. Not only did the company beat analysts expectations, it raised its profit outlook for the rest of the year. Analyst Stephen A. O'Neil of Hilliard Lyons recently told The Courier-Journal of Louisville that Humana's earnings recovery of the past few years has been impressive and he expects the company to continue what it's been doing--"raising rates to the extent the market will allow; controlling costs, and using technology to further cut costs."

McCallister attributes much of the company's success in its commercial sector to its pricing and a leveling off of costs. "We turned our Financial performance around in 2000-2001, and then started to grow" our commercial business." He added that it's difficult for companies to organically grow a health-benefits business because of the highly competitive industry environment. "That's another reason why we think having a different strategy is key to success." McCallister anticipates continued growth ha the sector going forward.

Looking at the company's overall financial strategy, McCallister said it will continue working to balance its source of revenue and earnings between its commercial and government sectors. The recent passage of Medicare reform legislation is expect ed to provide further opportunities for the company's historically strong Medicare+Choice business. In addition, he said the TRICARE program will remain a strong contributor for the company. "The basic strategy of the company relative to its financial performance is around how do we grow ant prosper in the commercial space while maintaining success of our government business," McCallister said.

Christian Miles, an A.M. Best Co. analyst, also sees continued growth for the company. "Humana's done well recently with its new strategic focus and financial turnaround, and I believe it will continue to improve its balance sheet, in addition to posting modest earnings, membership and margin improvements in the coming year," By 2001, Humana had completed a two-year process of divesting products and exiting markets that either lacked the prospect for long-term profitability or no longer fit its strategic focus, according to an A.M. Best report. As a result of its financial and strategic turnaround, Humana has continued to generate favorable consolidated earnings since 2000, grow commercial membership and earnings recently, maintain adequate capitalization as its regulated entities and improve the holding company's cash balance.

Along with continued financial growth, the company has been faced with some employment cuts over the past several years. "It's a mixed bag in terms of how you think about it," said McCallister. "We brought our employment down significantly over the past several years on the back of a lot of productivity gains." In December 2002, Humana announced it would eliminate about 17% of its work force by closing three customer-service call centers in Jacksonville, Fla.; San Antonio; and Madison, Wis., and by consolidating much of the work in Louisville "This was a direct result of a lot of electronic investments because we're getting better at claims administration, so a lot of self-service is developing and that takes down call volumes. "The good news is that the company generally has enough turnover in those positions, so it doesn't usually have to go through major disruptions to its employee base, he added.

The Road Ahead

Members of the Humana management team are excited about what they say are many "limitless possibilities" that lie ahead for the company.

The company is well situated and poised for growth, said Chairman Jones. "We believe we are truly in the vanguard. When everyone else sees what we're doing is successful, it will be copied and improved and we'll have to continue to leapfrog each other". He said the company will constantly continue to build additional layers onto its success. "There's nothing in the world being done that can't be done better, so we have to be constantly alert and vigilant, and if our strategy turns out to be out of focus in any way, then we have to make corrections and come back to something that adds value for customers so they will stay with us."

McCallister envisions an even larger company within the next five to 10 years. "We laid out a strategy to solve employers' cost problems better than others. We need to outperform the competition, and we believe our consumer strategy is a way to achieve that goal." In addition, he believes that as Humana's databases continue to mature, the company will develop intellectual property relative to how consumers behave and make choices, in addition to what decision points they use.

In addition, technology will remain central to Humana's core strategy. "We will continue to look at new applications and developments to reach consumers and engage them every step of the way in their health-care decision making," said McCallister.

The future of health care will increasingly be up to individuals themselves, said Goodman. "Our goal is to meet the puck where it's going, and determine how can we use technology to empower consumers to stay healthier, not overspend on medical care, and, when they do get sick, how to guide them through the medical system and help them understand what's available to them."

Humana Inc.

Headquarters: Louisville, Ky.

President and Chief Executive Office: Michael B. McCallister

Established: In 1961 by David A. Jones and Wendell Cherry, who recruited four friends, And started a nursing home called Heritage House.

Number of members: 6.6 million, primarily in 18 states and Puerto Rico

Number of employees: 13,000

Financials: $9.1 billion in total revenues; $4.7 Billion in total assets; $163 million in net Income; $1.8 billion in stockholders' equity, all for the nine months ending Sept. 30, 2003.

Stock symbol: HUM (NYSE)

Major products: Health products, including Consumer-driven health plans, health maintenance Organizations, preferred provider organizations and administrative-service-only products; specialty products, including dental, life and disability insurance, and products for the government sector, including Medicare+Choice plans and TRICARE for military Family members and retirees.

Web site:
Humana Inc.

Total Assets
($ Thousands)

1998 $5,496,000
1999 $4,900,000
2000 $4,167,000
2001 $4,403,638
2002 $4,600,030

Note: Table made from bar graph.

Total Shareholders' Equity
($ Thousands)

1998 $1,688,000
1999 $1,268,000
2000 $1,360,000
2001 $1,507,949
2002 $1,606,474

Note: Table made from bar graph.

Total Premiums Earned
($ Thousands)

1998 $9,597,000
1999 $9,959,000
2000 $10,395,000
2001 $9,938,961
2002 $10,930,397

Note: Table made from bar graph.

Medical Expense Ratio

1998 83.8
1999 85.7
2000 84.5
2001 83.3
2002 83.6

Note: Table made from line graph.

Expense Ratio

1998 13.58
1999 13.58
2000 13.72
2001 15.16
2002 15.44

Note: Table made from line graph.

Note: All dollar amounts according to Generally Accepted
Accounting Principles

Source: A.M. Best Co. data
COPYRIGHT 2004 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Health
Comment:E-volutionizing health insurance: technology is driving Humana's success as a health-plan leader and serving as a backbone in its approach to consumer-centric health care.(Health)
Author:Chordas, Lori
Publication:Best's Review
Article Type:Company Profile
Geographic Code:1USA
Date:Jan 1, 2004
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