Humana Gets Reprieve from Pentagon but not from the Market

When Humana Inc. (HUM) won an appeal in November to remain the HMO for the Southern Region of TRICARE, the military's health plan for service members and their families, it seemed like a shot in the arm--or at least the bottom line-- for the Louisville, KY based corporation.
Humana won the original $1 billion a year contract in 2003. But last year, the Defense Department switched to United Health Group (UNH). Humana protested the award on the ground that its proposal was cheaper. As a result, Humana's contract was extended until July 2010 while the government decides the final outcome. Based on the Government Accountability Office(GAO) ruling, the options are to conduct a new competition; stay with Humana; or restore the contract to United Health.
Despite this temporary reprieve, Humana is in a rough patch. With declining enrollment in many of its plans, it is planning to let 1,400 employees go and to eliminate 1,100 positions through attrition. Many of these will be from their Louisville headquarters.

TRICARE has been a growing business as the number of military, their families and retirees increases. The long-term medical costs of the wars in Iraq and Afghanistan for the Veterans Administration (VA) and DoD are going to be quite high. In the 2011 budget, the Defense Department plans to spend $50.7 billion on health care, and the Congressional Budget Office thinks that the Pentagon may be underestimating costs over the next ten years. This adds up to work for companies like Humana.

If Humana loses the TRICARE contract, short-term revenue will take a big hit at a time when the lack of clarity about health reform legislation is making it hard to plan for the future.

Under the House and Senate bills, people in TRICARE would not have to leave it for another plan, but the government could change how it is set up and administered. Like all insurance plans, TRICARE does not always receive rave reviews from soldiers and their families and it worries them that there could be major changes in store.

Humana does have a chance of keeping the contract, but it must plan as if it won't have the work in the future. More layoffs and restructuring seems inevitable.

Photo: American Red Cross