Vertical and Horizontal Integration in The Case of Humana and Vertical Integration

A nursing home was established by four friends by contributing some money in 1961. They then expanded into 40 facilities. At that time (in late 1960) this agency was known as Extendicare Inc. (later known as Humana). During this time, in United States, Extendicare Inc. was the greatest nursing home facility. This can be seen as the horizontal integration of Humana. Then, as Medicare was enacted, they bifurcated into hospital business. So they possessed ten hospitals by 1970. Their hospital business was very successful so in 1972, they stripped off their nursing homes. After this the company’s name was changed in 1974 to Humana.

In United States, Humana became the biggest hospital company by early 1980s because of their strong cost containment, concentration that led them to accomplish increased production by lower costs per unit to gain more profits. Humana started to provide health insurance plan since it realized that having its own insurance would be aiding in cumulating 70 percent of referrals. Jumping into insurance business when Humana was having its hospital business can be viewed as vertical integration. Clashes arose between Humana’s hospitals, insurance branches and medical staff members and Humana was also unsuccessful to allure more than 46 percent referrals.

During late 1980s and early 1990s, Humana’s net income was sinking which led to reorganization of Humana’s hospital and insurance business; more than $2 billion were collected in revenues by managed care plans of Humana making it the earn better profit than others. So Humana’s hospital facilities were dilated into another company. The problems that led to this are: inconsistent economic objectives of insurance agency and hospital business, transfer pricing, relationship of Humana with its physicians, physicians that were not included in Humana’s insurance panel and costs. According to Business Dictionary (2017), transfer pricing is: “price charged for a transaction of goods and services between two divisions of an organization. ”. Transfer pricing for Humana’s hospitals was more than the market prices for its competitor hospitals. So non-Humana hospitals got referrals from Humana’s insurance company because non-Humana hospitals charged the insurance agency less than Humana.

To prevent the problem of transfer pricing, strategy is the crucial. Managers’ Analytical Plan (MAP) has been developed by Robert Eccles to help tackle transfer pricing depending on the organizational type and location of organization and the direction where the organization intends to move. In a large vertically integrated organization like Humana, transfer pricing is not a good option. Humana should have offered the at discounted prices than their competitors. Humana did not employ doctors directly rather, its HMOs were organized around IPA- model.

So the doctors were not very keen about referring patients to Humana when they did not get the reimbursements or they got lower reimbursements than their expectation, they referred patients to other HMO to which they had participated. Instead of organizing its staff around IPA model, Humana should have employed its own physicians so this problem can be avoided easily. Another problem was the inconsistent mission of insurance agency and the hospital. While doctors want to make use of all the possible resources to ensure their patients’ well-being and their own welfare, the insurance company would earn only by reducing the amount of services of their clients.