The Definitive Blog

Will Humana’s Cost-Cutting Measures Make Up for Lost Merger?

In an effort to cut costs and reallocate funds for the coming year, the Humana Group announced its plan to lay off approximately 2,700 employees by the beginning of 2018. The private insurer announced that the layoffs are part of a larger plan to increase company productivity by investing in new programs. Despite reporting an 11 percent revenue decrease in Q3, Humana still plans to introduce new benefits.

Around 1,150 eligible employees accepted an early-retirement buyout offered by Humana in September. The deal targeted employees older than 55 who had worked at the company for a minimum of five years. Humana stated that it plans to lay off another 1,300 employees at the beginning of 2018—approximately 3 percent of its staff. The layoffs will reportedly save Humana hundreds of millions of dollars in annual salaries and benefits.

Humana’s Top 5 ACOs by Patient Population

ACO Name Patient Population ACO Start Date
John Muir Health ACO 200,000 2016 Q2
NewHealth Collaborative (Summa Health) 90,000 2015 Q1
Health4 ACO 41,000 2014 Q1
Holzer Health System ACO 10,000 2014 Q3
Iora Health ACO 9,000 2014 Q4

Fig 1 Data from Definitive Healthcare

According to its human resources department, Humana is encouraging employees whose jobs are being eliminated to apply for one of 428 open positions listed on its website. Employees who do not move into another position at the company will receive severance pay and outpatient services.

By making staff cuts, Humana will have funding for new programs as well as the expansion of existing programs. The payor announced in a statement that it planned to invest more in home-based healthcare, outpatient clinics, and the Medicare Advantage program. Medicare Advantage was an arguing point for Aetna during the Humana merger trial. The payor claimed that consumers would be given enough options for healthcare coverage due to the nature of the program—Medicare Advantage is managed by insurance companies, while traditional Medicare is managed by the government. The statement was dismissed by the judge.

Another incentive for Humana to cut down on employees is the return of a non-deductible health insurance fee (HIF), which will cost around $1 billion. The HIF was suspended under the Affordable Care Act (ACA) in 2017 for all insurers but will return in 2018. Insurance companies will have to pay a combined $14 billion toward this fee.

Humana first announced its employee buyout plan after its failed merger with Aetna in late January. Aetna’s acquisition of Humana would have cost a reported $34 billion but was blocked by the U.S. Department of Justice citing concerns that the merger would lead to higher healthcare costs and reduced market competition. Humana received a breakup fee of $1 billion after the deal was rejected. Similar antitrust concerns have surfaced around the potential merger between CVS Caremark and Aetna.

In January, payors Aetna, Humana, Anthem, and Cigna all cited the ACA as a catalyst for industry consolidation. The companies stated that these kinds of large-scale mergers would enable them to manage the costs of expanding healthcare coverage. The healthcare market has become increasingly unstable since January, with proposed cuts to healthcare coverage and other ACA measures coming from Congress.

Humana’s Top 5 ACOs by Number of Physicians

ACO Name # Physicians ACO Start Date
John Muir Health ACO 47,800 2016 Q2
MDX Hawaii ACO 3,700 2014 Q4
Norton Healthcare ACO 2,300 2010 Q2
Health4 ACO 2,300 2014 Q1
Mercy (MO) ACO 2,100 2014 Q4
HealthCare Partners Nevada ACO 2,010 2014 Q3
Tenet Healthcare ACO 1,800 2014 Q3
Aurora Healthcare ACO 1,500 2015 Q1
NewHealth Collaborative (Summa Health) 700 2015 Q1
Northwest Physicians Network ACO 500 2015 Q4

Fig 2 Data from Definitive Healthcare

It seems that expanded healthcare coverage and market instability are taking a toll on Humana in particular. The payor reported a 3 percent decrease in 3rd quarter revenue from 2016, but the payor saw an overall net income increase of nearly 11 percent. In the 3rd quarter of 2017, Humana earned a combined revenue of over $13 billion, with a net income of just under $500 million.

Additionally, Humana’s Senior Vice President and CFO Brian Kane revealed in an interview that he and fellow executives will be receiving an increase in total compensation from last year. In 2016, Kane received $4.8 million in compensation through salary, stock, and additional reimbursement. All increases in pay should be reported in spring 2018 as part of an annual proxy statement.

Humana opened 15 outpatient clinics in 2017, which will compete with retail clinics from corporations like CVS. Medicare Advantage has been another point of focus for private payors. Both Aetna and Anthem have invested in the program, each serving about 1.5 million people. Humana hopes to grow its Advantage membership by 150,000 to 180,000.

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