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Humana cost management pays off

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Even if Humana Inc. hadn't celebrated its 50th anniversary in 2011, it would have been a memorable year for the company's leaders.

Michael McCallister, the Louisville, Ky.-based health insurer's chairman and CEO, said Humana made gains in annual revenue, income and enrollment last year—the greatest such gains among U.S.-based managed health care companies that report quarterly results (see chart, page 16).

Humana's $87.61 share price on the New York Stock Exchange at year-end also was a record for the health care insurer.

“Our 2011 results reflected strengths in key areas of strategic focus as well as unusually low commercial cost trends industrywide,” Mr. McCallister said in an email.

In the past five years, Humana has grown its annual revenue by 46.6%, to $36.83 billion in 2011 from $25.15 billion in 2007. Net income rose 70.1%, to $1.41 billion last year from $834 million in 2007, while its health plan enrollment—which contracted by 11.4% in 2010 from 2008, primarily in its retail medical segment—made significant strides last year toward recovering to levels it achieved before the recession hit.

“Humana has done extremely well,” said David Shove, an analyst at BMO Capital Markets in New York.

Much of Humana's success in recent years is attributable to its steadfast investment in individual and group Medicare Advantage programs, he said.

“They're very good at that business,” Mr. Shove said. “They've got great sales staff, and they're very adept at managing their costs.”

One way Humana has addressed cost management is by encouraging routine utilization among its Medicare Advantage members to prevent more expensive emergency claims in the long-term, he said.

Mr. McCallister said a greater number of retiring workers seem to prefer Medicare Advantage programs to traditional models.

“Seniors like the care coordination, the personal attention, the variety of choices and the provider accountability inherent in Medicare Advantage offerings,” Mr. McCallister said. “In Humana's case, very few of our Medicare Advantage members ever choose to return to traditional Medicare.”

Humana's Medicare Advantage stake dates to its 1987 acquisition of Miami-based health insurer International Medical Centers Inc. Ten years later, when many insurers were shedding such business in the wake of the Balanced Budget Act of 1997, Humana kept its Medicare programs.

“That positioned us nicely to act upon the opportunities associated with the (Medicare Prescription Drug, Improvement and Modernization Act of 2003), given our intensive knowledge of the business and our senior customers,” Mr. McCallister said. “The result has been substantial growth across the nation, increasing our Medicare membership from about 560,000 in 2005 to over 5 million today.”

Humana's Medicare Advantage accounted for more than 57% of the company's annual revenue in 2011, according to company reports.

Humana has forecast a relatively stable 2012. However, political and legal challenges to the Patient Protection and Affordable Care Act being could affect private Medicare programs in the years to follow. But Mr. McCallister said he believes Humana is adequately prepared for any regulatory turbulence that may arise.

“By quickly establishing appropriate processes in 2010, we have made good progress along a path that we believe will ensure a smooth ongoing transition for our members over the next few years,” he said.