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As noted in the case, Kaiser Permanente has employed an integrated strategy of owning both hospitals and health plans for many years, some would argue with apparent great success. This suggests that Humana’s problems are not the fault of its integrated strategy per se, and that breaking apart the hospital and health plan segments may not enhance shareholder value in the long run. Do you agree or disagree?
I am not agree. Though Kaiser Permanente has employed an integrated strategy of owning both hospitals and health plans, it seems have the same strategy with Humana. But if you compare the strategy of two company, you will find there are distinctly differences. Unlike Humana, Kaiser Permanente largely employed its own physicians, and its hospital largely treated only enrollees in its health plans. But the situation of Humana is more complicated. The connection and dependence between hospital and health plans is much stronger than Humana. The hospital segment of KP is more like a assistant part for its health plans instead of an independent business section. All in all because the difference of the strategy, you can’t say that Humana’s problems are not the fault of its integrated strategy.
. Do any of the other options considered by management represent a more sensible solution to Humana’s problems than the spinoff?
1) This method will not change the company’s structure. The unoptimistic prospect of hospital industry will keep influence the whole financial performance of Humana. So the market still cannot reflect the true value of its health plans.
2) As the first approach, issue the target stocks will not influence the operation of both section. Though it may provide some information for each section separately. Besides that, targeted stock will make shareholders confuse. As the statistics shows, the use of targeted stock is not a good way.
3) This approach may separate the influence between hospital and health plans at some extent. But it still not change the structure of the firm. If the prospect of hospital is bleak, the rest of the hospitals will still have problems.
4) The primary goal of the restructuring is to achieve long-term growth of the company instead of solve the conflict with the physicians. Hospital operating margin had fallen to historical low level. If the company continue lower the price of medical service, it will only make things worse.
5) From the data given, we find out that the total proceeds Humana can get from the sale of hospital is 6 times of the hospital’s EBITDA, which is $904*6=$5424. Humana has to pay Medicare recapture of $584 million and tax, the tax rate is about 36%, which calculate from the data from previous three years. ($5424-$584)*(1-0.35)=$3097.6 million. Compare to the value of hospital section.
6) Going private is not a sensible approach for the long term growth of the company. Private company doesn’t have financing advantage. Moreover, Humana was required to keep a large percent of their assets in form of safe marketable securities, therefore it is hard for Humana to go private.
7) Stock buyback can give a sign to market that the stock of Humana is undervalued. This approach will rise stock price in short-term. But for long-term, if the hospital part continuous work bad, making the financial performance cannot meet the expectation of investors, it may bring bad outcome.
8) This solution try to break the connection between the hospital and health plan segment and pursue the profit from the high-margin private pay patient. But the private pay patient is only a small fraction. Also, Humana health plans account for only 11% of the hospital revenues. Therefore allow the health plan enrollees to seek treatment in non-Humana hospital will not make much difference to the long term development of Humana. Diversification may bring additional risk to lose focus of core business. If the new lines of business is connected with the medical service industry, it probably still be influenced by the heavy regulation of government.
9) ESOP is a good way to motivate employees to work harder and consider more for the whole company. This solution will solve some of the conflict between the company and its physicians. But the main problem Humana facing is not the inefficiency of employees, but the prospect of the hospital industry. The passion cannot solve the fundamental problem.
5. Assuming they are going to proceed with a spinoff, should management consider doing a carve-out transaction first? Why or why not? If Humana decide to proceed with a spinoff, management should consider doing a carve-out transaction first. My statement is based on following reasons. First, up to 20% of carve-out will not influence the following tax free spin-off. Also this transaction will be tax free if the new stock is issued by subsidiary. Humana can get some cash. Secondly, the company will isolate a portion of the hospital section but still remain control of it. Humana can test the water and see how market will react. It will be a good prepare to the following spin-off.