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UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form
10-K
þ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal
year ended December 31, 1999
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition
period from
to
Commission File
Number 1-5975
HUMANA
INC.
(Exact Name of
registrant as specified in its charter)
| Delaware |
|
61-0647538 |
| (State of
incorporation) |
|
(I.R.S.
Employer |
| |
|
Identification
Number) |
| 500 West Main
Street |
|
|
| Louisville,
Kentucky |
|
40202 |
| (Address of
principal executive offices) |
|
(Zip
Code) |
Registrant’s
telephone number, including area code: 502-580-1000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
|
|
Name of each
exchange on which registered
|
Common Stock,
$0.16 2
/3 par value
|
|
New York Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ
No ¨
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant
’s knowledge, in the Registrant’s definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of
voting stock held by non-affiliates of the Registrant as of March 1, 2000
was $1,145,376,612 calculated using the average price on such date of $7.25.
The number of shares outstanding of the Registrant’s Common Stock as of
March 1, 2000 was 167,752,710.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of Part II and Part IV
incorporate herein by reference the Registrant’s 1999 Annual Report to
Stockholders; Part III incorporates herein by reference portions of the
Registrant’s Proxy Statement filed pursuant to Regulation 14A covering
the Annual Meeting of Stockholders scheduled to be held May 18,
2000.
HUMANA
INC.
INDEX TO ANNUAL
REPORT ON FORM 10-K
For the Year Ended
December 31, 1999
PART
I
General
Humana Inc. is a Delaware
corporation organized in 1961. Its principal executive offices are located
at 500 West Main Street, Louisville, Kentucky 40202 and its telephone number
at that address is (502) 580-1000. As used herein, the terms the
“Company” or “Humana” include Humana Inc. and its
subsidiaries. This Annual Report on Form 10-K contains both historical and
forward-looking information. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. There can be no assurance that anticipated future results will be
achieved because actual results may differ materially from those projected
in the forward-looking statements. Readers are cautioned that a number of
factors, which are described herein, could adversely affect the Company
’s ability to obtain these results. These include the effects of either
federal or state health care reform or other legislation, including the
Patients’ Bill of Rights Act, any changes in the Medicare
reimbursement system, the ability of health care providers (including
physician practice management companies) to comply with current contract
terms, renewal of the Company’s Medicare contracts with the federal
government, renewal of the Company’s contract with the federal
government to administer the TRICARE program and renewal of the Company
’s Medicaid contracts with various state governments and the Health
Insurance Administration in Puerto Rico. Such factors also include the
effects of other general business conditions, including but not limited to,
the success of the Company’s improvement initiatives including its
electronic business strategies, premium rate and yield changes,
retrospective premium adjustments relating to federal government contracts,
changes in commercial and Medicare HMO membership, medical and pharmacy cost
trends, compliance with debt covenants, changes in the Company’s debt
rating and its ability to borrow under its commercial paper program,
operating subsidiary capital requirements, competition, general economic
conditions and the retention of key employees. In addition, the Company and
the managed care industry as a whole are experiencing increased litigation,
including alleged class action suits challenging various managed care
practices and suits seeking significant punitive damages awards. (See
Legal Proceedings section for a description of the Company’s
significant litigation.) Past financial performance is not necessarily a
reliable indicator of future performance and investors should not use
historical performance to anticipate results or future period
trends.
Since 1983, the Company has been a
health services company that facilitates the delivery of health care
services through networks of providers to its approximately 5.9 million
medical members. The Company’s products are marketed primarily through
health maintenance organizations (“HMOs”) and preferred provider
organizations (“PPOs”) that encourage or require the use of
contracted providers. HMOs and PPOs control health care costs by various
means, including pre-admission approval for hospital inpatient services,
pre-authorization of outpatient surgical procedures and risk-sharing
arrangements with providers. These providers may share medical cost risk or
have incentives to deliver quality medical services in a cost-effective
manner. The Company also offers various specialty products to employers,
including dental, group life and workers’ compensation, and
administrative services (“ASO”) to those who self-insure their
employee health plans. The Company has entered into a definitive agreement
to sell its workers’ compensation business. In total, the Company
’s products are licensed in 49 states, the District of Columbia and
Puerto Rico, with approximately 20 percent of its membership in the state of
Florida.
Acquisitions and
Dispositions
Between December 30, 1999 and
February 4, 2000, the Company entered into definitive agreements to sell its
workers’ compensation, Medicare supplement and North Florida Medicaid
businesses for proceeds of approximately $115 million. The Company recorded
a $118 million loss in 1999 related to these sale transactions.
On January 31, 2000, the Company
acquired the Memorial Sisters of Charity Health Network (“MSCHN”),
a Houston based health plan for approximately $50 million in
cash.
On June 1, 1999, the Company
reached an agreement with FPA Medical Management, Inc. (“FPA”), FPA
’s lenders and a federal bankruptcy court under which the Company
acquired the operations of 50 medical centers from FPA for approximately $14
million in cash. The Company has subsequently reached agreements with 14
provider groups to assume operating responsibility for 38 of the 50 acquired
FPA medical centers under long-term provider agreements with the
Company.
On October 17, 1997, the Company
acquired ChoiceCare Corporation (“ChoiceCare”) for approximately
$250 million in cash. The purchase was funded with borrowings under the
Company’s commercial paper program. ChoiceCare provided health services
products to members in the Greater Cincinnati, Ohio, area.
On September 8, 1997, the Company
acquired Physician Corporation of America (“PCA”) for total
consideration of $411 million in cash, consisting primarily of $7 per share
for PCA’s outstanding common stock and the assumption of $121 million
in debt. The purchase was funded with borrowings under the Company’s
commercial paper program. PCA provided comprehensive health services through
its HMOs in Florida, Texas and Puerto Rico. In addition, PCA provided workers
’ compensation third-party administrative management services. Prior to
November 1996, PCA also was a direct writer of workers’ compensation
insurance in Florida. Long-term medical and other expenses payable in the
accompanying Consolidated Balance Sheets includes the long-term portion of
workers’ compensation liabilities related to this business.
On February 28, 1997, the Company
acquired Health Direct, Inc. (“Health Direct”) from Advocate
Health Care for approximately $23 million in cash.
Business
Segments
During 1999, the Company realigned
its organization to achieve greater accountability in its lines of business.
As a result of this realignment, the Company organized into two business
units: the Health Plan segment and the Small Group segment. The Health Plan
segment includes the Company’s large group commercial (100 employees
and over), Medicare, Medicaid, ASO, workers’ compensation and military
or TRICARE business. The Company has entered into a definitive agreement to
sell its workers’ compensation business. The Small Group segment
includes small group commercial (under 100 employees) and specialty benefit
lines, including dental, life and short-term disability. Results of each
segment are measured based upon results of operations before income taxes.
The Company allocates administrative expenses, interest income and interest
expense, but no assets, to the segments. Members served by the two segments
generally utilize the same medical provider networks, enabling the Company
to obtain more favorable contract terms with providers. As a result, the
profitability of each segment is somewhat interdependent. In addition,
premium revenue pricing to large group commercial employers has historically
been more competitive than that to small group commercial employers,
resulting in less favorable underwriting margins for the large group
commercial line of business. Costs to distribute and administer products to
small group commercial employers are higher compared to large group
commercial employers resulting in small group’s higher administrative
expense ratio.
The following table presents the
Company’s segment membership and premium revenues by product for the
year ended December 31, 1999:
| (Dollars in
millions) |
|
Ending
Medical
Membership
|
|
Ending
Specialty
Membership
|
|
Premium
Revenues
|
|
Percent of
Total
Premium
Revenues
|
| Health
Plan: |
|
Large group
commercial |
|
1,420,500 |
|
|
|
$2,348 |
|
23.6 |
% |
|
Medicare HMO |
|
488,500 |
|
|
|
2,920 |
|
29.3 |
|
|
Medicaid |
|
616,600 |
|
|
|
603 |
|
6.1 |
|
|
TRICARE |
|
1,058,000 |
|
29,800 |
|
866 |
|
8.7 |
|
|
ASO, workers’ compensation
and Medicare supplement |
|
692,500 |
|
447,100 |
|
90 |
|
0.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total Health Plan |
|
4,276,100 |
|
476,900 |
|
6,827 |
|
68.6 |
|
| |
|
|
|
|
|
|
|
|
|
| Small
Group: |
|
Small group
commercial |
|
1,663,100 |
|
|
|
2,882 |
|
28.9 |
|
|
Specialty |
|
|
|
2,484,400 |
|
250 |
|
2.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total Small Group |
|
1,663,100 |
|
2,484,400 |
|
3,132 |
|
31.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total |
|
5,939,200 |
|
2,961,300 |
|
$9,959 |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
Large and Small
Group Commercial HMO and PPO Products
An HMO facilitates the delivery of
prepaid health care services to its members through a network of independent
primary care physicians, specialty physicians and other health care
providers who contract with the HMO to furnish such services. Primary care
physicians generally include internists, family practitioners and
pediatricians. Generally, access to specialty physicians and other health
care providers must be approved by the member’s primary care physician.
These other health care providers include, among others, hospitals, nursing
homes, home health agencies, pharmacies, mental health and substance abuse
centers, diagnostic centers, optometrists, outpatient surgery centers,
dentists, urgent care centers and durable medical equipment suppliers.
Because access to these specialty physicians and other health care providers
must generally be approved by the primary care physician, the HMO product is
the most restrictive form of managed care.
As of March 1, 2000, the Company
owned and operated 13 licensed and active HMOs, which contracted with
approximately 62,600 physicians (including approximately 21,100 primary care
physicians) and approximately 940 hospitals. In addition, the Company had
approximately 5,100 contracts with other health care providers to provide
services to HMO members.
An HMO member, typically through
the member’s employer, pays a monthly fee which generally covers, with
minimal co-payments, health care services received from or approved by the
member’s primary care physician. For the year ended December 31, 1999,
commercial HMO premium revenues totaled approximately $2.2 billion or 23
percent of the Company’s total premium revenues. Approximately $234
million of the Company’s commercial HMO premium revenues for the year
ended December 31, 1999 were derived from contracts with the United States
Office of Personnel Management (“OPM”), under which the Company
facilitates the delivery of health care services through the Federal
Employee Health Benefit Plan (“FEHBP”) to approximately 135,200
federal civilian employees and their dependents. Pursuant to these
contracts, payments made by OPM may be retrospectively adjusted downward by
OPM if an audit discloses that a comparable product was offered by the
Company to a similar size subscriber group at a lower premium rate than that
offered to OPM. Management believes that any retrospective adjustments as a
result of OPM audits will not have a material impact on the Company’s
financial position, results of operations or cash flows.
PPO products include many elements
of managed health care. PPOs are also similar to traditional health
insurance because they provide a member with the freedom to choose a
physician or other health care provider. In a PPO, the member is encouraged,
through financial incentives, to use participating health care providers
which have contracted with the PPO to provide services at favorable rates.
In the event a member chooses not to use a participating health care
provider, the member may be required to pay a greater portion of the provider
’s fees.
As of March 1, 2000, approximately
397,000 physicians and approximately 3,400 hospitals contracted directly
with the Company to provide services to PPO members (including the
ChoiceCare Network described below). The Company also had approximately
5,000 contracts (including certain contracts which also service the Company
’s HMOs) with other providers to provide services to PPO members. In
addition, the Company had access to 24 leased provider networks throughout
the country. During 1999, the Company assumed the operational control of a
previously leased provider network. This new provider network called the
ChoiceCare Network added approximately 330,000 physicians and other
providers as well as 2,500 hospitals to the Company’s PPO
networks.
For the year ended December 31,
1999, commercial PPO premium revenues totaled approximately $3.0 billion or
30 percent of the Company’s total premium revenues.
The Company expects that 2000
commercial HMO and PPO premium rates will increase by approximately 10 to 12
percent. Over the last five years, changes in the Company’s commercial
HMO and PPO premium rates have ranged between an approximate two percent
decrease for the year ended December 31, 1995, to an approximate six percent
increase for the year ended December 31, 1999, with an average increase of
approximately three percent.
Medicare
Products
Medicare is a federal program that
provides persons age 65 and over and some disabled persons certain hospital
and medical insurance benefits, which include hospitalization benefits for
up to 90 days per incident of illness plus a lifetime reserve aggregating 60
days. Each Medicare-eligible individual is entitled to receive inpatient
hospital care (“Part A”) without the payment of any premium, but
is required to pay a premium to the federal government, which is adjusted
annually, to be eligible for physician care and other services (“Part B
”).
Even though participating in both
Part A and Part B of the traditional Medicare program, beneficiaries are
still required to pay certain deductible and coinsurance amounts. They may,
if they choose, supplement their Medicare coverage by purchasing Medicare
supplement policies which pay these deductibles and coinsurance amounts.
Many of these policies also cover other services (such as prescription
drugs) which are not included in Medicare coverage.
Humana contracts with the federal
government’s Health Care Financing Administration (“HCFA”)
under the Medicare+Choice (“M+C”) program, to facilitate the
delivery of medical benefits in exchange for a fixed monthly payment per
member for Medicare-eligible individuals residing in the geographic areas in
which its HMOs operate. Individuals who elect to participate in these
Medicare programs are relieved of the obligation to pay some or all of the
deductible or coinsurance amounts but are generally required to use
exclusively the services provided by the HMO and are required to pay a Part
B premium to the Medicare program. Generally, the enrollee pays the HMO a
premium only in cases where the HMO provides additional benefits and where
competitive market conditions permit. At December 31, 1999, approximately
48,000 members in six markets were paying premiums, which totaled
approximately $30 million for the year ended December 31, 1999. In January
2000, the Company instituted member premiums in additional markets to offset
the effect of lower HCFA reimbursement rates. During 2000, approximately
229,000 Medicare HMO members in ten markets, or approximately one-half of
the Company’s entire Medicare HMO membership, will be paying premiums
totaling approximately $73 million.
A Medicare HMO product involves
a contract between an HMO and HCFA pursuant to which HCFA makes a fixed
monthly payment to the HMO on behalf of each Medicare-eligible individual
who chooses to enroll for coverage in the HMO. Membership may be terminated
by the member at any time during the month. The fixed monthly payment is
determined by formula established by federal law.
As of March 1, 2000, the Company
facilitates the delivery of Medicare HMO services under eight contracts with
HCFA in nine states. HCFA contracts covered approximately 488,500 Medicare
HMO members for which the Company received premium revenues of approximately
$2.9 billion or 29 percent of the Company’s total premium revenues for
1999. At December 31, 1999, one such HCFA contract covered approximately
250,000 members in Florida and accounted for premium revenues of
approximately $1.5 billion, which represented 51 percent of the Company
’s HCFA premium revenues or 15 percent of the Company’s total
premium revenues for the year ended December 31, 1999. HCFA contracts are
renewed for a one-year term each January 1 unless terminated 90 days prior
thereto. Management believes termination of the HCFA contract covering the
members in Florida would have a material adverse effect on the Company
’s financial position, results of operations or cash flows.
Future premiums from HCFA will be
impacted by new payment methods being developed by HCFA as more fully
discussed in the Health Care Reform—National section. The Company
’s 2000 average rate of statutory increase under the HCFA contracts is
approximately two percent. Over the last five years, annual increases have
ranged from as low as the January 1999 increase of two percent to as high as
nine percent in January 1996, with an average of approximately five percent.
On January 1, 2000, the Company exited 31 counties affecting approximately
46,000 members resulting, in part, from lower HCFA reimbursement rates. The
Company intends to offset the effect of lower HCFA reimbursement rates with
the introduction of member premiums, benefit changes and pursue expansion
opportunities only in markets that meet the Company’s long-term growth
strategies.
The loss of the Company’s
HCFA contracts or significant changes in the Medicare HMO program as a
result of legislative action, including reductions in payments or increases
in benefits without corresponding increases in payments, would have a
material adverse effect on the Company’s financial position, results of
operations or cash flows.
On December 30, 1999, the Company
reached agreement, subject to regulatory approvals, to transfer
substantially all of the Company’s 44,500 Medicare supplement policies
to United Teachers Associates Insurance Company. These policies paid for
hospital deductibles, co-payments and coinsurance for which an individual
enrolled in the traditional Medicare program is responsible. For the year
ended December 31, 1999, Medicare supplement premium revenues totaled
approximately $60 million or 1 percent of the Company’s total premium
revenues.
Medicaid
Product
Medicaid is a federal program that
is state-operated to facilitate the delivery of health care services to
low-income residents. Each state which chooses to do so develops, through a
state specific regulatory agency, a Medicaid managed care initiative which
must be approved by HCFA. HCFA requires that Medicaid managed care plans
meet federal standards and cost no more than the amount that would have been
spent on a comparable fee-for-service basis. States currently use either a
formal proposal process reviewing many bidders or award individual contracts
to qualified bidders, which apply for entry to the program. In either case,
the contractual relationship with the state is generally for a one-year
period. Management believes that the risks associated with participation in
a state Medicaid managed care program are similar to the risks associated
with the Medicare HMO product discussed previously. In both instances, the
Company receives a fixed monthly payment from a government agency for which
it is required to facilitate the delivery of managed health care services to
enrolled members. Due to the increased emphasis on state health care reform
and budgetary constraints, more states are utilizing a managed care product
in their Medicaid programs.
In 1999, the Company renewed a
two-year contract with the Health Insurance Administration of Puerto Rico to
facilitate the delivery of health care to Medicaid-eligible individuals. On
February 4, 2000, the Company entered into a definitive agreement, subject
to regulatory approvals, to sell its North Florida Medicaid business
covering approximately 94,000 Medicaid members to Well Care HMO, Inc. For
the year ended December 31, 1999, premium revenues from the Company’s
Medicaid products totaled approximately $603 million or 6 percent of the
Company’s total premium revenues. At December 31, 1999, the Company had
approximately 410,400 and 206,200 Medicaid members in the Commonwealth of
Puerto Rico and in four states, respectively.
TRICARE
In 1993, the Company established
Humana Military Healthcare Services, Inc. (a wholly owned subsidiary of the
Company), to enter into contracts to facilitate the delivery of managed care
services to the dependents of active duty military personnel and retired
military personnel and their dependents. In November 1995, the United States
Department of Defense awarded the Company its first TRICARE contract
covering approximately 1.1 million eligible beneficiaries in Florida,
Georgia, South Carolina, Mississippi, Alabama, Tennessee and Eastern
Louisiana.
On July 1, 1996, the Company began
facilitating the delivery of managed health care services to these
approximate 1.1 million eligible beneficiaries under a potential five-year
contract (a one-year contract renewable annually for one additional year).
The government exercised its option to renew the contract for the year
beginning July 1, 1999. The Company anticipates the government exercising
its option for the year beginning July 1, 2000 which will be the fifth year
of the five-year contract period. The Company is in discussion with the
government concerning two additional one-year renewal periods, however, the
Company is unable to predict if such an extension will be granted. The
Company has subcontracted with third parties to provide certain
administration and specialty services under the contract. Three health
benefit options are available to TRICARE beneficiaries. In addition to a
traditional indemnity option, participants may enroll in an HMO-like plan
with a point-of-service option or take advantage of reduced co-payments by
using a network of preferred providers. TRICARE premium revenues were
approximately $866 million or 9 percent of the Company’s total premium
revenues for the year ended December 31, 1999.
The Company will actively seek
opportunities to facilitate the delivery of managed care services to
beneficiaries of federal and state programs, including other TRICARE
contracts.
Other Related
Products
The Company offers various
specialty products to employers, including dental, group life and workers
’ compensation, and administrative services (“ASO”) to those
who self-insure their employee health plans. The Company has entered into a
definitive agreement to sell its workers’ compensation business.
Specialty and ASO membership at December 31, 1999 totaled approximately 3.0
million members and 648,100 members, respectively. Specialty product premium
revenues were approximately $277 million or 3 percent of the Company’s
total premiums for the year ended December 31, 1999.
Provider
Arrangements
In certain situations, the Company
’s HMOs contract with individual or groups of primary care physicians,
generally for an actuarially determined, fixed, per-member-per-month fee
referred to as a “capitation” payment. Under these arrangements,
physicians are paid a fixed amount to provide services to their members.
These contracts typically obligate primary care physicians to provide or
make referrals to specialty physicians and other providers for the provision
of all covered managed health care services to HMO members. The capitation
payment does not vary with the nature or extent of services to the member
and is generally designed to shift a portion of the HMOs financial risk to
the primary care physician. The degree to which the Company uses capitation
arrangements varies by provider.
The Company also contracts with
medical specialists and other providers to which a primary care physician
may refer a member. The contracts with specialists may be capitation
arrangements or may provide
for payment on a fee-for-service basis based on negotiated fees. Typically,
payments by the Company to these specialists and other providers reduce the
ultimate payment that otherwise would be made to primary care physicians.
The Company’s HMOs also have arrangements under which physicians can
earn bonuses when certain target goals relating to quality and cost
effectiveness in the provision of patient care are met. The Company’s
contracts with capitated physicians generally provide for stop-loss coverage
so that a physician’s financial risk for any single member is limited
to a certain amount on an annual basis.
The focal point for cost control
in the Company’s HMOs is the primary care physician who, under
contract, provides services and controls utilization of appropriate services
by directing or approving hospitalization and referrals to specialists and
other providers. In addition, the Company’s Hospital Inpatient
Management System (“HIMS”) controls costs by allowing specially
trained physicians to manage the entire range of medical care while an HMO
member is in the hospital, and coordinate the member’s discharge and
care after discharge. Cost control is further achieved by directly
negotiating provider discounts. Cost control in the Company’s PPOs is
achieved primarily by establishing a cost-effective network of participating
health care providers and providing incentives for members to use such
providers. These providers are generally paid on a negotiated
fee-for-service basis. With respect to both HMO and PPO products, cost
control is further achieved through the use of a utilization review system
designed to allow only necessary hospital admissions, lengths of stay and
necessary or appropriate medical procedures. The Company’s HMOs and
PPOs generally contract for hospital services under per-diem arrangements
for inpatient hospital services and discounted fee-for-service arrangements
for outpatient services. During the year ended December 31, 1999,
approximately 41 percent of the Company’s total medical costs were for
services provided to its members in hospitals or related
facilities.
The Company has certain
risk-sharing contracts whereby providers also assume a specified level of
risk for covered managed care services to its members. Under these
risk-sharing arrangements, referred to as global capitation contracts,
providers are paid a monthly capitation payment per covered member to assume
risk for all managed care services including professional and institutional
(i.e. hospital) costs. The capitation payments are based on a specified
percentage of premiums (typically 78 to 88 percent). The Company continually
monitors the financial viability and/or effectiveness of these risk-sharing
arrangements. At December 31, 1999, approximately 30 percent and 45 percent
of the Company’s commercial and Medicare HMO membership, respectively,
were under some form of risk-sharing arrangement deemed financially viable
and/or effective. Under all of its arrangements, the Company remains
financially responsible for the provision of covered medical services if its
contractors fail to perform their obligations under the
contract.
The Company continually contracts
and seeks to renew contracts with providers at rates designed to ensure
adequate profitability. To the extent the Company is unable to obtain such
rates, its financial position, results of operations and cash flows could be
adversely impacted.
The Company continues to implement
several disease management programs in various markets. Under these
arrangements, the Company provides financial incentives for contractors to
provide the full range of care to members with respect to a particular high
risk or chronic disease in a quality, cost-effective manner. These programs
include congestive heart failure, prenatal and premature infant care, asthma
related illness, end stage renal disease, diabetes and breast cancer
screening.
Quality
Assessment
The Company’s quality
assessment program under its managed care products consists of several
internal programs such as those that credential providers, and those
designed to meet the standards of audits by federal and state agencies and
external accreditation standards. The Company also offers quality and
outcome measurement and improvement programs such as the Health Plan
Employer Data Information Sets or HEDIS.
Physicians participating in the
Company’s HMO networks must satisfy specific criteria, including
licensing, hospital admission privileges, patient access, office standards,
after-hours coverage and many other factors. Participating hospitals must
also meet accreditation criteria established by HCFA and/or the Joint
Commission on Accreditation of Healthcare Organizations (“JCAHO
”).
Participating physicians are
recredentialed regularly. Recredentialing of primary care physicians (
“PCP”) covers many aspects of patient care such as an analysis of
member grievances filed with the Company, the transfer and termination rate
of members from a physician practice, analysis of utilization patterns, and
member surveys. Committees, each composed of a peer group of physicians,
review participating PCPs being considered for credentialing and
recredentialing.
The Company pursues accreditation
for certain of its HMO plans from JCAHO, the National Committee for Quality
Assurance (“NCQA”) and the American Accreditation Healthcare
Commission/URAC (“AAHC/URAC”). Accreditation or external review by
an approved organization is mandatory in the states of Florida and Kansas
for licensure as an HMO.
JCAHO performs reviews of
standards for rights, responsibilities and ethics, continuum of care,
education and communication, health promotion and disease prevention,
management of human resource information and improving network performance.
Humana Medical Plan, Inc. in Ft. Walton Beach, Florida received a three-year
accreditation from JCAHO in 1998.
NCQA performs reviews for quality
improvement, credentialing, utilization management, preventative health
member rights and responsibilities and medical records. As of January 31,
2000, eight of Humana’s markets have received commendable accreditation
status from NCQA for all HMO product lines. Humana Medical Plan, Inc. in
Central Florida (which includes Daytona Beach and Orlando), Humana Medical
Plan, Inc. in North Florida (Jacksonville), Humana Medical Plan, Inc. in
South Florida, Humana Medical Plan, Inc. in Tampa Bay, Florida, Humana
Health Plan, Inc. in Chicago, Illinois, Humana Health Plan, Inc. and Humana
Kansas City, Inc. in Kansas City, Missouri, Humana Health Plan, Inc. in
Louisville, Kentucky and Humana Health Plan of Ohio, Inc. d/b/a ChoiceCare
in Cincinnati, Ohio.
AAHC/URAC performs reviews of
standards for confidentiality, staff qualifications and credentials, program
qualifications, quality improvement programs, accessibility and on site
review procedures, information requirements, utilization review procedures
and appeals. AAHC/URAC accreditation was received for all Humana HMO markets
which have utilization management functions performed in the Green Bay,
Wisconsin or Louisville, Kentucky service centers.
The Company’s
Year 2000 Disclosure Statement
The Company commenced its
assessment of Year 2000 exposures in early 1996. In December 1998, the
Company was 100 percent complete with the remediation of its core business
systems and by December 1999 had remediated 100 percent of its business
application systems. As of December 31, 1999, the Company had completed all
Year 2000 initiatives.
To date, the Company has
experienced no outages or problems related to the Year 2000 date rollover.
All business systems are functioning normally and the Company has not
experienced any disruptions in service with third party organizations with
which it interacts related to the century change.
The Company’s application
systems are largely developed and maintained in-house by a staff of 400
application programmers who are versed in the utilization of
state-of-the-art technology. All application systems are fully integrated
and automatically pass data through various system processes. The Company
’s primary data center and the majority of its programming and support
staff are located at the Company’s corporate offices in Louisville,
Kentucky. In order to create the necessary internal focus surrounding the
Year 2000 issue, the Company established a centralized Year 2000 Program
Management Office (“PMO”) which is charged with overall
coordination of enterprise wide Year 2000 initiatives and regular progress
reporting to the Company’s senior management.
The Year 2000 project is currently
estimated to have a minimum total cost of approximately $30 million of which
approximately $10 million was spent during 1999. Year 2000 expenses
represented less than ten
percent of the Information Systems budget during 1999. Year 2000 costs are
expensed as incurred and funded with cash flows from operations. The Company
does not expect to incur significant Year 2000 project costs in the year
2000.
The extent and magnitude of the
Year 2000 project, as it will affect the Company for some period after
January 1, 2000, is difficult to predict or quantify. In order to mitigate
these risks, the Company developed business continuity and contingency plans
which were finalized in the second quarter of 1999. These plans would be
enacted if Year 2000 problems were to occur within the Company, or if third
party constituents have failures due to the millennium change. Contingency
plans were developed for six major functional areas encompassing 22
operational subdivisions that require contingency plan development. The six
major functional areas are: providers, service centers, suppliers and
vendors, customers and brokers, banking and finance and legal
services.
While the Company presently
believes that the timely completion of its Year 2000 project limited the
exposure, so that the Year 2000 issue has not posed material operational
problems, the Company recognizes that it does not control third party
constituents. If these third party organizations have failures related to
the Year 2000 century change and/or fail to properly implement appropriate
contingency plans, Year 2000 failures may result. These failures could
potentially have a material adverse impact on the Company’s financial
position, results of operations and cash flows.
Sales and
Marketing
Individuals become members of the
Company’s commercial HMOs and PPOs through their employer or other
groups which typically offer employees or members a selection of managed
health care products, pay for all or part of the premiums and make payroll
deductions for any premiums payable by the employees. The Company attempts
to become an employer’s or group’s exclusive source of managed
health care benefits by offering HMO and PPO products that facilitate the
delivery of cost-effective quality care consistent with the needs and
expectations of the employees or members.
The Company uses various methods
to market its commercial, Medicare HMO and Medicaid products, including
television, radio, the Internet, telemarketing and mailings. At December 31,
1999, the Company used approximately 40,300 licensed independent brokers and
agents and approximately 510 licensed employees to sell the Company’s
commercial products. Many of the Company’s employer group customers are
represented by insurance brokers and consultants who assist these groups in
the design and purchase of health care products. The Company generally pays
brokers a commission based on premiums, with commissions varying by market
and premium volume.
At December 31, 1999, the Company
used approximately 950 employed sales representatives, who are each paid a
salary and/or per member commission, to market the Company’s Medicare
HMO and Medicaid products. The Company also used approximately 370
telemarketing representatives who assisted in the marketing of Medicare HMO
and Medicaid products by making appointments for sales representatives with
prospective members.
The following table lists the
Company’s medical membership at December 31, 1999, by market and
product:
MEDICAL
MEMBERSHIP
(In
thousands)
| |
|
Commercial
|
|
Medicaid
|
|
Medicare
HMO
|
|
Medicare
Supplement
|
|
ASO
|
|
TRICARE
|
|
Total
|
|
Percent
of
Total
|
| |
|
HMO
|
|
PPO
|
| Florida |
|
219.3 |
|
151.7 |
|
138.6 |
|
250.5 |
|
4.0 |
|
7.3 |
|
404.8 |
|
1,176.2 |
|
19.8 |
% |
| Texas |
|
258.1 |
|
319.4 |
|
29.3 |
|
68.9 |
|
3.8 |
|
11.2 |
|
|
|
690.7 |
|
11.6 |
|
| Illinois |
|
294.0 |
|
239.7 |
|
15.2 |
|
82.6 |
|
|
|
89.4 |
|
|
|
720.9 |
|
12.1 |
|
| Puerto
Rico |
|
20.8 |
|
33.4 |
|
410.4 |
|
|
|
|
|
|
|
|
|
464.6 |
|
7.8 |
|
| Wisconsin |
|
110.4 |
|
66.6 |
|
23.1 |
|
3.3 |
|
|
|
310.6 |
|
|
|
514.0 |
|
8.7 |
|
| Kentucky |
|
99.4 |
|
177.3 |
|
|
|
19.8 |
|
22.9 |
|
55.2 |
|
|
|
374.6 |
|
6.3 |
|
| Georgia |
|
9.1 |
|
88.9 |
|
|
|
|
|
3.0 |
|
2.9 |
|
252.9 |
|
356.8 |
|
6.0 |
|
| Ohio |
|
206.1 |
|
104.4 |
|
|
|
11.2 |
|
|
|
50.2 |
|
|
|
371.9 |
|
6.3 |
|
| Missouri/Kansas |
|
75.3 |
|
37.3 |
|
|
|
24.3 |
|
4.5 |
|
14.6 |
|
|
|
156.0 |
|
2.6 |
|
| Indiana |
|
16.1 |
|
94.3 |
|
|
|
3.5 |
|
1.1 |
|
33.8 |
|
|
|
148.8 |
|
2.5 |
|
| South
Carolina |
|
|
|
16.4 |
|
|
|
|
|
|
|
0.4 |
|
129.6 |
|
146.4 |
|
2.5 |
|
| Tennessee |
|
|
|
55.9 |
|
|
|
|
|
|
|
18.3 |
|
70.9 |
|
145.1 |
|
2.4 |
|
| Colorado |
|
|
|
147.4 |
|
|
|
|
|
0.9 |
|
0.2 |
|
|
|
148.5 |
|
2.5 |
|
| Other |
|
|
|
242.3 |
|
|
|
24.4 |
|
4.3 |
|
53.9 |
|
199.8 |
|
524.7 |
|
8.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
1,308.6 |
|
1,775.0 |
|
616.6 |
|
488.5 |
|
44.5 |
|
648.0 |
|
1,058.0 |
|
5,939.2 |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
Management
Through the use of internally
developed underwriting criteria, the Company determines the risk it is
willing to assume and the amount of premium to charge for its commercial
products. In most instances, employer and other groups must meet the Company
’s underwriting standards in order to qualify to contract with the
Company for coverage. Small group reform laws in some states have imposed
regulations which provide for guaranteed issue of certain health insurance
products and prescribe certain limitations on the variation in rates charged
based upon assessment of health conditions.
Underwriting techniques are not
employed in connection with Medicare HMO products because HCFA regulations
require the Company to accept all eligible Medicare applicants regardless of
their health or prior medical history. The Company also is not permitted to
employ underwriting criteria for the Medicaid product but rather follows
HCFA and state requirements. In addition, with respect to the TRICARE
contract, no underwriting techniques are employed because the Company must
accept all eligible beneficiaries who choose to participate.
Competition
The managed health care industry
is highly competitive and contracts for the sale of commercial products are
generally bid or renewed annually. The Company’s competitors vary by
local market and include other publicly traded managed care companies,
national insurance companies and other HMOs and PPOs, including HMOs and
PPOs owned by Blue Cross/Blue Shield plans. Many of the Company’s
competitors have more membership and/or greater financial resources than the
Company’s health plans in those markets. The Company’s ability to
sell its products and to retain customers is or may be influenced by such
factors as benefits, pricing, contract terms, number and quality of
participating physicians and other managed health care providers,
utilization review, claims processing, administrative efficiency,
relationships with agents, quality of customer service and accreditation
results.
Government
Regulation
Government regulation of health
care products and services is a changing area of law that varies from
jurisdiction to jurisdiction. Regulatory agencies generally have broad
discretion to issue regulations and interpret and enforce laws and rules.
Changes in applicable laws and regulations are continually being considered,
and the interpretation of existing laws and rules also may change
periodically. These regulatory revisions could affect the Company’s
operations and financial results. Als