Humana Inc.: Managing in a Changing Industry Harvard Case Solution & Analysis

why did Humana's integrated strategy fail?

The integrated strategy of Humana worked well in the start, but it is analyzed that it has problems specially related to the hospital segment of the firm. The decision to integrate was to achieve the long term goals by allocating and utilizing the resources and to achieve sustainable advantages.

In Humana the long term prospects of the two industries had gone increasingly divergent, the future prospects of HMOs and PPOs were bright, however the other long term goals of the hospital industry were depressing.

Even though the revenue was growing rapidly, but due to the high growth in HMOs and PPOs, the administrative cost of the company increased heavily and became a financial strain on the company.Moreover,Medical loss ratio also increased up to 85.9%, which means 14.1% of premium profit for Humana. As a result, bringing down the Medical loss ratio became difficult due to the pressure from physicians who were against the company’s policy of cutting the cost, although Humana charged higher for insurance plans than other hospitals but it had little impact due to the consolidated profits and cash flows of these two sectors.

The hospital industry suffered heavily, as the rising costs of health care weren’t able to match the reimbursement rates for Medicare and Medicaid even though the expected growth of targeted customers was expected to increase. In the already suffering industry of hospitals, the cut in expenditures on Medicare and Medicaid had more devastating effect on the hospital industry and almost 60% hospitals in the U.S operated at a loss and further cutting expenditures. The advantage of growth in Medicare customers to recoup the losses was also at stake.

The decline in average hospital remained due to the change in trend with more advanced techniques introduced, such as the growth of outpatient surgery centers and home infusion companies and the increase in the operating cost also affected the Hospital industry.Moreover,constant pressure was applied by the insurance providers to shorten the hospital stays.

Another reason of the failure of Strategic integration was that the priorities of Humana health plan segments were not in line with the Hospital industry as only 27% days of patients of health plan were associated with the Humana hospital industry while 73% days were utilized by non-Humana hospitals, even when the average occupancy rate of Humana hospitals were constantly decreasing. The reason for one third patients days was associated with non-Humana hospitals can be due to the change in trends and lack of innovation in the Humana hospitals.

Question 2

Why do you think a spin off might add value for shareholders?

The spin-off is a process through which two segments of one company split to make another company, where the parent company distributes the new shares to its own shareholders in the company, which allows shareholders and future investors to properly value the each company.

The management can effectively focus on the business and create strategies that are beneficial for the segment and create value through performing independently.

 Through spin off, both Health Plan and Hospital industry would be able to concentrate on their own business.This would create the business models accordingly and can pay attention to the goals that it wants to achieve.

Spin off will help both companies to pursue the goals without working in the interest of other business and building a business model that will help them in long term.

Humana Inc. Managing in a Changing Industry Case Solution

In Humana, spin off will help both companies to recognize their own costs, and the result of each other activity will not affect the overall outcome of the company, such asif the growth for Hospital industry is not as rapid as in Health plan. The high overheads of Health plan will not affect the cost outcomes of Hospital industry, which will help shareholders to recognize the true value of the companies.

Good operations of Health plan will not be undermined by the shareholders due to the poor outcomes of Hospital industry, which will help to increase the value of Health plan industry and high cost of Health plan will not affect Hospital industry.As a result, this will show a truer picture of the operations of Humana Hospitals.

Question 3

How would you go about quantifying the value added by a spin off?

            The value of spin off could be easily quantified by first calculating the value of the corporation as a whole and then calculating the value of the hospital and the healthcare segments separately and adding them. After that a comparison could be made between the two values in order to see whether extra value is being created or shattered as a result of spin off. By looking at the excel spreadsheet, it could be seen that the value of the individual businesses combined would be greater than the value of the corporation as a whole...................

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