Humana

In 1961 two lawyers in Louisville, Kentucky, built a nursing home, pledging $1,000 apiece together with four friends. Wendell Cherry and David Jones--cofounders of that first home, Heritage House--were soon approached with other offers to buy and build nursing homes. Expansion was rapid in the first seven years, and the two men added facilities in Kentucky, Virginia, and Connecticut. With the establishment of Medicare and Medicaid in the mid-1960s, the industry grew quickly. Slightly ahead of the pack in what was to become the most rapidly expanding sector of the nation's economy, Jones and Cherry reincorporated their venture in 1961 and sold stock for seven years to finance further growth. Extendicare Inc., as the group was known, grew to more than 40 facilities, becoming the nation's largest nursing home company. As Medicare spawned a nursing home glut and stocks suffered, Extendicare experimented with alternatives. There was a brief and unfortunate diversification into mobile home parks between 1969 and 1971, which the company quickly unloaded. Extendicare acquired its first hospital in late 1968, realizing it could apply the same business practices it had developed for operating nursing homes. Within two years, the company had acquired nine more hospitals. The hospitals proved so successful that Extendicare divested all of its nursing homes in 1972. With a focus now entirely on hospitals, the company's name was changed to Humana Inc. in January 1974. Some of the features that distinguished Humana from other hospital chains early on were its nonconforming management decisions, the refusal to overpay in buying hospitals, the refusal to manage hospitals it did not own, and rigid cost-control measures well-enforced through the company's centralized management. These methods became much discussed: first because they seemed remarkable in the industry; later because of complaints by some physicians about overcontrol. For example, Humana's efforts to ensure reimbursement included the insistence on a specific payment-plan agreement before patients were discharged. The cost controls eventually became one of Humana's greatest assets. Between 1975 and 1980, Humana grew quickly and achieved economies of scale, like other hospital chains, by making bulk purchases of supplies and equipment. Unlike some competitors, however, Humana remained very centralized, operating all patient-billing and data-collection out of its home office in Louisville. Freed from the distraction of managing hospitals it did not own--also unlike most competitors--Humana concentrated on strict productivity and profitability goals. As the nation's third largest hospital-management chain in 1978, Humana committed a bold act: it acquired the number two chain, American Medicorp, Inc. This purchase doubled Humana's size and stretched its debt. Having used leveraged debt with confidence for some time during its expansion, Humana was now faced with a debt that one company official claimed was "nearly 90% of capital." Cofounders Jones and Cherry, chairman and president, respectively, remained untroubled because 45 percent of hospital revenues were coming from government-guaranteed Medicare and Medicaid. The two men also saw the hospital business as recession resistant, even though Humana suffered from low-occupancy rates at some of its facilities during these years. Meanwhile, Humana unloaded unprofitable hospitals. While the healthcare industry was burgeoning into the second largest industry in the United States, Humana alone was honing its cost controls: between its own growth and government-subsidized medical care, the industry in general had not yet felt the need for cost efficiency. During the following years the healthcare industry's overexpansion and the government and private insurers' cost-containment efforts began to clash. Here, Humana's tradition of tight cost controls helped, but the industry reeled from severe changes: industry-wide hospital occupancy