Humana's Learning to Change With the Times

By now, Humana understands firsthand just how important the personal sales pitch can be.

"In order to sell Medicare Advantage, it has to be done face-to-face," McCallister allowed long before Medicare adopted its new rules. "It is not something you can do over the telephone or the Internet. It is not going to happen."

To be fair, Humana can still contact its current Medicare customers. With most of them still covered by PFFS plans, the company may initially focus on retaining those customers, rather than chasing after new ones, by switching them into network-based plans.

At that point, Humana would then face the ultimate test. If Democrats follow through on their threats to cut bonus payments for private Medicare plans, Humana will find itself operating on a much tighter budget than it does right now. Even so, the company fully expects to generate a solid profit on that business.

"We have a lot of headroom today between what we are paid and what we need to do," McCallister explained earlier this year. "I've said all along, whatever the rates are, whatever the yield is, we'll just adjust benefits and move on. We start with 5% as the profit, and we work around that."

To succeed, Humana must offer coverage that looks as attractive as Medicare, which allots 97% of its budget for patient care, while paying 10% to 15% less for the services its customers receive. In preparation, the company recently adopted a formal strategy that's designed to remove 15% of the costs associated with traditional Medicare. The company aims to select "efficient specialists" as its providers, for example, and use "medical cost management" tools, such as preauthorization for expensive imaging studies, that can eliminate wasteful spending.

Ultimately, Humana must become far more efficient than Medicare and most private operators to boot. As a rule, industry experts say, private health insurers can shave 5% to 10% off their medical costs by effectively managing patient care. Humana must slice off even more, however, in order to cover its overhead expenses and still generate the profit margin it desires.

To its credit, Humana has spent decades as a Medicare provider and enjoys a stronger track record in the business than most. When other health insurers dropped out of the old "Medicare+Choice" program a decade ago, for example, Humana stuck it out and ultimately stretched its government dollars enough to make the business work. Even after enjoying Medicare's recent generosity, the company feels confident that it can rise to the occasion once again.

"For there to be value here long-term, as part of the private sector's role in Medicare, we have to find ourselves in a place where we're really reducing actual medical spend and in an amount that covers the cost of having done so," McCallister explained during the company's latest quarterly conference call. "We are pretty comfortable that, based on everything we have done, that is quite doable" in the end.

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