February 18, 2010

Call it preemptive, inevitable, cynical or reluctant, but this week's announcement by Louisville, Ky.-based Humana Inc. that it will reduce its workforce on by approximately 1,400 positions (five percent) over the course of 2010 is also a reflection of reality.Multiple realities, actually, including the prospect of some kind of U.S. healthcare reform, the continuing escalation of healthcare costs, the ability of technology and IT services to enable automation and reduce costs, changing demographics, and continued high unemployment.

According to the press release issued on February 17 by Humana, 2,500 position reductions will be balanced with 1,100 additional jobs in areas of growth such as medical-cost containment capabilities, pharmacy management, and specialty products. The reduction will come primarily from attrition, process efficiencies, outsourcing, and position eliminations, Humana said.

According to Michael B. McCallister, Humana's president and CEO, the staff cuts and realignment are all about "positioning Humana for future growth." In the press release McCallister said, "This regrettable but necessary reduction in our workforce is a direct result of Humana's need to align the size of our company with that of our membership. We are committed to managing this aspect of our realignment with the utmost care and sensitivity."

While emphasizing that the reduction in force would not have an impact on customer service, in the press release the company stated that "[The] reduction -- part of an ongoing administrative-cost-saving initiative at Humana -- is intended to help the company create a more efficient, agile infrastructure while also providing the resources required to invest in new growth opportunities."

In a separate press release, Aite Group senior analyst Kunal Pandya pointed out that these cuts and additions may be part of a strategy to prepare the company for future changes brought on by healthcare reform. According to Kunal, "Despite the cuts, the creation of new positions in areas it see as growing speaks to the edge that Humana has in government-based programs. While healthcare reform has taken a backseat, the realignment of jobs related to medical cost containment, pharmacy management and specialty products reveals that the healthcare industry as a whole is leaning towards establishing better prevention and wellness tools, and improving quality of care for consumers. Aite Group believes that when healthcare reform is enacted, early movers in focusing on elements that will be proposed by healthcare reform, like Humana, will find themselves positioned to benefit in the long-term."

Clearly, Humana is trying to position itself for whatever the future might bring, in terms of regulation, competition and demographic changes. The "cautionary statement" text -- typically mind-numbing boilerplate -- that closed the February 17 press release illustrated this. For example:

"Humana's business activities are subject to substantial government regulation. New laws or regulations, or changes in existing laws or regulations or their manner of application, could increase the company's cost of doing business and could materially affect its business, profitability and financial condition. In addition, as a government contractor, the company is exposed to additional risks that could adversely affect its business or its willingness to participate in government health care programs."

Also:

"If Humana does not design and price its products properly and competitively, if the premiums Humana charges are insufficient to cover the cost of health care services delivered to its members, or if its estimates of benefits expenses are inadequate, Humana's profitability may be materially adversely affected. Humana estimates the costs of its benefit expense payments, and designs and prices its products accordingly, using actuarial methods and assumptions based upon, among other relevant factors, claim payment patterns, medical cost inflation, and historical developments such as claim inventory levels and claim receipt patterns. These estimates, however, involve extensive judgment, and have considerable inherent variability because they are extremely sensitive to changes in payment patterns and medical cost trends."

And:

"If Humana fails to properly maintain the integrity of its data, to strategically implement new information systems, or to protect Humana's proprietary rights to its systems, the company's business may be materially adversely affected ... Any failure to manage administrative costs may hamper Humana's profitability."

ABOUT THE AUTHOR
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & ...