Earning Profits, Saving Lives

By Janice Castro

Humana offers proof that health is a sound investment

The sight of William Schroeder joking with his family last week was the best possible advertisement not just for the miracles of science but for Humana, the investor-owned medical conglomerate. In the fast-growing U.S. health care industry, investor-owned companies are challenging nonprofit organizations and community hospitals for a greater share of the nearly $1 billion-a-day business. Profitmaking companies now own or manage more than 20% of all U.S. hospitals, double the percentage of five years ago. Moreover, they are moving rapidly into affiliated areas such as health maintenance organizations, satellite clinics and surgical-equipment firms.

Humana (fiscal-year 1984 revenues: $2.6 billion) is the most aggressive of the companies that believe medicine is a calling for businessmen as well as doctors. But though it has 91 hospitals in 22 states and three foreign countries, Humana is not the largest hospital chain. Still bigger, for example, is Hospital Corp. of America (estimated 1984 revenues: $4.2 billion). Last year Humana had profits of $193 million, up from $41 million in 1979.

Two Louisville lawyers, David Jones and Wendell Cherry, started Humana in 1962 with one Kentucky nursing home and $1,000 of borrowed money. Their business strategy was to bring innovative management techniques to a field noted more for compassion than cost efficiency. Says Cherry: "When I started to talk with physicians about what we were doing--marketing to the customer--some didn't like the word customer."

Known as Heritage House of America at first, the company by 1968 had ten nursing homes and revenues of $4.8 million.

That year Jones and Cherry realized that hospitals were earning six times as much per patient as nursing homes because of Medicare and Medicaid reimbursements, so they built their first hospital. In 1968 the company made its first public stock offering at $8 a share.

In 1972 Humana sold its nursing homes, then numbering 41, for $ 14 million in order to concentrate on hospitals. Jones and Cherry at the time were buying a hospital a month, mostly from groups of doctors. Investor-owned hospitals were not a new phenomenon; doctors had been running them for decades. What was new was the idea of linking them in large chains.

Today Humana has general hospitals from Geneva to Anchorage. Though Jones, 52, and Cherry, 49, resist the notion that their chain was modeled on the McDonald's restaurant company, the two corporations are based on similar retail philosophies. Humana's guidelines: consistency, quality and high-volume, affordable care.

The company has used sales techniques, including advertising, promotion and market research, that are familiar to business, but that were often foreign to health care. Dr. William VonderHaar, a former director of Humana's health services division, was impressed by the chain's managers: "They are amazing to watch. If they open a facility in, say, Columbus, Ohio, they might initially plan to have 25 patients a day and after six months so many more. And they always come out within plus or minus two patients." Like Federal Express and AT&T, Humana stresses experience and reliability in its advertisements. In one television commercial for an insurance program that it markets, a salesman representing the competition tap-dances across a personnel manager's desk. Moral: while most health care programs offer a song and dance, Humana delivers.

Indeed, the company produced results last year when it took over management responsibilities for the money-losing University of Louisville medical school complex. Humana introduced a strategy to cut costs and still boost quality. A survey of staff physicians showed that lab tests were being ordered in triplicate because the doctors doubted the reliability of the results. In response, Humana upgraded lab equipment, increased staff training and established tough quality-control procedures. Doctors are now satisfied with single tests in most cases. The company also reduced hospital staff costs 17% by using flexible work schedules to adjust employees' hours for fluctuations in the number of patients. By the end of the first year, Humana showed earnings of $1.1 million on the complex. Under the provisions of its contract, the company gave $220,000 of its profits to the university.

Having earned a reputation for efficient management, Humana is striving to be a pacesetter in patient care. During the past two years, the firm has opened eleven Centers of Excellence, clinics that combine research, teaching and state-of-the-art treatment in different medical specialties. When Olympic Gold Medal Gymnast Mary Lou Retton suffered a knee problem just two months before the Los Angeles Games last summer, physicians at Humana's Richmond orthopedic center performed arthroscopic surgery to remove two small pieces of cartilage. Other centers focus on obstetrics and gynecology (Tampa), burn treatment (Augusta, Ga.) and diabetes (San Antonio).

Humana also aims to satisfy simpler medical needs. Since 1981 it has opened 80 neighborhood facilities under the name MedFirst. These small clinics perform procedures that do not demand hospitalization. Examples: fixing broken noses, wrapping sprained ankles, treating minor burns or lacerations. Patients like the centers because they are conveniently located on street corners and in shopping malls, and are open on weekends and in the evenings. By next September, there will be 120 more MedFirst offices.

Last year Humana launched an insurance plan for companies as a way of boosting business in its hospitals. Humana Care Plus guarantees employers that their medical costs will rise no faster than the Consumer Price Index for at least four years. Health care prices are currently rising more than twice as fast as the CPI. Employees enrolled in the insurance plan can use any hospital, but the deductibles they pay will be lowest if they choose a Humana facility. More than 200 companies and organizations have enrolled about 65,000 people in the program.

One difference between nonprofit hospitals and companies like Humana is that the large chains usually make better use of cost-cutting measures, including centralized billing and inventory controls. They can get the benefits of economies of scale by buying bandages and other supplies in huge volumes at discount prices. Profitmaking hospitals have no monopoly on cost-effective management, but they have more incentives. Says Humana Chairman Jones: "Making a profit is never an end. It's a requirement. Any hospital has the same opportunity we do."

Investor-owned corporations also have advantages in raising money. As medicine has become more capital intensive with the influx of expensive high-technology devices, hospital administrators have had to look for new sources of funding. Industry experts estimate that U.S. hospitals will spend about $163 billion on plant and equipment in the 1980s. Traditional types of revenue, such as philanthropy, tax-exempt bonds and public subsidies, are no longer enough. For-profit hospitals with good balance sheets, however, can raise money by selling stock.

Humana's heart program is an example of how a corporation can use its resources to develop a new field of medicine. Its Heart Institute had been open less than a year when the company decided in June to work on the mechanical heart. Institute Director Allan Lansing, an open-heart surgeon, had told Jones that Dr. William DeVries, who performed the first permanent artificial-heart implant, on Barney Clark at the University of Utah in 1982, might be willing to come to Louisville to pursue his research.

With Jones' support, Lansing courted DeVries as ardently as any coach ever wooed an All-Stars pitcher or a Super Bowl quarterback. Lansing said that DeVries would benefit from a substantial clinical practice and a first-rate surgical support team. To help convince DeVries, Humana flew him and his wife to Louisville. At a dinner on the porch of Lansing's home, Jones asked DeVries, "How many hearts do you need to find out if it works? Would ten be enough?" As a flabbergasted DeVries indicated that ten would be good, Jones added, "If ten's enough, we'll give you 100." That sealed the deal. The research physician's dream of having ample resources and a free hand had come true. Says Jones: "Dr. Lansing told us that Dr. DeVries was unhappy because he had to spend so much time fund raising. I told Dr. Lansing we could handle that problem easily."

The unprecedented offer, and DeVries' acceptance, shook the hospital community. Some medical researchers are merely envious, but others have a variety of reasons for concern. "There is a significant anti-Humana feeling out there," says Nolen Allen, former chairman of the University of Louisville hospital. "But it is not just Humana. Doctors sense that they are losing control of medical care and that hospital administrators and companies are taking over. At one time, the doctors were kings. That may not be true any more; they are becoming more like employees." Agrees VenderHaar: "It's the same fear the mom-and-pop grocery stores had when Krogers came to town. And I guess they were right."

Administrators of academic research programs are worried about a brain drain. If star doctors and grant winners like DeVries can be lured away by conglomerates, what will keep the younger researchers in the universities? Says Dr. Don E. Detmer, vice president of health sciences at the University of Utah: "There's no question that if a place like Humana goes after our programs, we can't compete." Academics also wonder if the willingness of corporations like Humana to invest in research will make it harder for schools to win public funding. They fear that state legislatures and federal agencies may become more reluctant to spend limited resources for projects that could be done by profitmaking companies.

Humana prepared for its first artificial implant with a promotion campaign as elaborate as one that General Motors might use for launching a new model. Before the Schroeder operation, Humana public relations specialists consulted with officials at the University of Utah on the press interest that might be expected. The company rented space for a press headquarters in the Commonwealth Convention Center in downtown Louisville and produced seven informational videotapes about the operation.

There is no question that Humana's financing will give the field of heart-implant research a major boost. Federal health care officials welcomed the company's plans. Said Carolyne Davis, chief of the Health Care Financing Administration, which directs the Medicare and Medicaid programs: "Given the country's limited health care dollars, it is important that we have medical research done in the private as well as the public sector."

Even so, some doctors believe that mixing the profit motive with the Hippocratic oath is a poor way to provide medical care. Dr. Arnold Relman, editor of the New England Journal of Medicine, criticizes companies like Humana, saying that they are "industrializing medical care" and are more interested in turning a profit than providing health services. Relman argues that the chains will eliminate necessary medical programs rather than take a loss on them.

Others, though, say that this position is, well, Hippo-critical. They point out that doctors, as some of the best-paid professionals in America, can hardly contend that they have not profited from medicine. Princeton Economist Uwe Reinhardt, who is participating in a study of for-profit health care, says that so far he has not seen much difference between the behavior of commercial and nonprofit hospitals. Says he: "Hiring big names is good business and good academics. It's one way to achieve a certain luster. DeVries and the artificial heart give Humana legitimacy in the medical world and put its name before prospective patients. Nonprofit institutions have always done this."

Relman believes that for-profit hospitals skim paying patients from the community, depriving other institutions of needed revenues and leaving the poor for the nonprofits to worry about.

There is some evidence to support this charge. Investor-owned hospital chains generally follow a policy of sending indigent patients to nearby community hospitals when possible. Humana Spokesman Robert Irvine points out that people who cannot pay are not turned away from the University of Louisville facility, but defends the right of the firm's other hospitals to refer indigents to nonprofit and community institutions. Says he: "We're paying money through our taxes to support those hospitals. Those being paid to do it should be the ones to handle it."

While doctors and hospital administrators debate the ethics and merits of for-profit medical care, Wall Street considers it a good investment. John Hilde-long, an analyst for Dillon, Read, calls Humana an "attractive long-term" stock.

Merrill Lynch is bullish on the whole medical field. Says one of its top stock market strategists: "The health business is bound to be good. People want good medical care, and there will always be a demand for the services that health care corporations provide." For Humana, that sounds like a prescription for continued healthy profits.

--By Janice Castro.

Reported by Teresa Barker/Louisville and Peter Stoler/New York

With reporting by Teresa Barker, Peter Stoler