Humana Case Essay

The purpose of this memo is to snap Humanas business model and its spin-off solution. We think Humanas problems were severe enough to implement restructuring architectural plans inside the caller-up. First of all, Humanas administrative cost ratio was 16.1% and medical loss ratio stood at 85.9% (increased from 84.4% in 1991). The stock price was declining from $34.5/share in May 1991 to $21.63 in May 1992. In addition, the entire infirmary fabrication is suffering losses in the long-term because of increases in operating costs, decreases in average hospital stays (occupancy rate declining to 47%, national average occupancy rate was 69%), and growing competition. The boundary line is diminishing and the PE ratio is lower in both industry averages. Spin-off is ideal since the hospital industry is shrinking and Humanas profit from hospital starting to decline. A decision made early leave behind still allow Humana a higher valuation on hospital business.The separate income statem ent is listed below. As presented, the after-tax net income of Humana Hospital and Health Plan are $314M and $ 41M. After we compare the asset sizes of comparable companies, we immovable that the PE ratio for the Hospital business should be 13.0x, equal to that of National Medical Enterprises, as they are finisher on the asset size. The PE ratio for Health Plan business should be 17.0x, equal to the average of united Healthcare and U.S. Healthcare, for the same reason. Thus, the value of these two businesses separate entrust be $4,087M and $694M. The Market value exploitation current PE ratio for the whole Humana Company is $3,550M. Therefore, a spin-off of these two segments (assuming tax rate is 36%) will create an extra value of approximately $1,231M. Humana should assign most of its debt to the hospital business and throttle sufficient cash in the health plan segment.According to the exhibits, the proportion of debt distributed to hospital and health plan is 51. Health Plan business could expand itself and enjoy further profit and growth, while the hospital business could start eliminating parts that are not profitable or carries much capacity. Kaiser has 6.5 million members and 7700 beds. This intend feeding more people into the hospitals and a higher occupancy ratio. Humana has 1.7 million members and 17829 beds, significantly less occupancy. both(prenominal) of the hospital and health plan industries enjoy higher PE valuation ratio than Humana as a company does, which indicates that this integrating strategy doesnt fulfill the fullest of their respective potential.There is no other option thats more sensible since they all have their respective flaws. New price structure compensates their margin to lot more services, yet their hospitals occupancy ratio will not increase and they will lose on the Medicare deals. Selling off hospitals may help gain profit and independence. However, it will be extremely undervalued (6.0x EBITDA ratio). Leverage buy out is not feasible either because Humanas marketable securities are occupied, thus no sufficient fund. Stock buyback will not help Humana to deal with hospital sections occupancy and profit qualification problem. Finally, the feasibility of ESOP remains uncertain, as it didnt measure whether employees have the ability to purchase and whether synergy has been compensated.