Humana Inc. Won Attention by Turning Losing Louisville Hospital Into Winner

When health officials talk of “turning a university hospital around,” the conversation often turns to the University of Louisville Hospital.

The hospital, now called Humana Hospital University, was about $8 million in debt in 1983. A year later, it made a $1-million profit. This is how it happened:

Like UCI Medical Center, the hospital at the University of Louisville early in the 1980s was overloaded with indigent patients and saddled with the stigma of being “the old county hospital.”

The State of Kentucky in the late 1970s began building a $70-million structure to replace the old University of Louisville Hospital. But there was fear in 1982 that the opening of the new building would be delayed because of the old hospital’s increasing debts. Despite staff layoffs and attempts to reduce the load of poor patients, the University of Louisville hospital was $5 million in debt and was assuming a new $3-million loan in 1982.

President’s Worst Worry

The University of Louisville’s new president, Donald Swain, found that the hospital situation was his worst financial worry and he said its solution was his “highest priority.” Swain decided to seek a private company to take over the hospital.

Louisville is the corporate headquarters of Humana Inc. Humana formed a special subsidiary to negotiate a lease that would satisfy the city, county, state and university, while still taking care of the heavy load of poor patients.

The University of Louisville was operating at the time what had formerly been Louisville General Hospital, the city’s and county’s rundown facility in downtown Louisville. More than 90% of the old hospital’s patients were indigents unable to pay their bills.

Health industry observers wondered why Humana--or anyone else--would be interested in taking over what seemed to be a losing proposition.

Contract Offered

But Humana President David Jones, a Louisville resident, said he saw the university situation as a challenge. In 1983, Humana offered, and the university and other governmental agencies accepted, a lease contract that specified:

- Humana would lease the university hospital for $6.5 million per year for four years, with renewal lease rights at $6 million a year thereafter.

- Humana would guarantee care for all city-county indigents, as well as a large number of poor from outside Louisville-Jefferson County, in exchange for a commitment from city, county and state governments to provide annually $19 million for indigent care. The agreement called for the city to give $2 million a year to the fund; the county, $2.7 million, and the state, $14.3 million. Humana agreed to pay for indigent costs that exceeded the governmental yearly grant.

- Humana would assume the complete financial risk of operating the new facility. It said that if it made any profit, 20% of the annual pre-tax profits would go to the University of Louisville.

- The University of Louisville School of Medicine would remain in charge of the teaching and research at the new hospital. Also, Humana would be required to give the teaching program a $4-million grant by the fifth year, and the interest on the $4 million each year before that.

Agreement Called Miracle

Kentucky Gov. John Y. Brown Jr., who had made a fortune as chairman of Kentucky Fried Chicken, said at lease-signing ceremonies in January, 1983, that the agreement “in a way is a miracle.” But the question remained: Would it work?

Within 16 months, the answer was in: The new arrangement was working to governmental and university satisfaction. And the hospital was making money.

By the end of its first fiscal year last summer, the new Humana Hospital University went from red ink to a pre-tax profit of $1,026,000, and the University of Louisville School of Medicine was given $532,000 of the profits.

Moreover, the care of poor patients in Louisville-Jefferson County did not diminish. In its annual report last year, the hospital said that it cared for 11% more poor patients its first year than the publicly owned hospital had the previous year.

The percentage of privately insured patients at the new university hospital is slowly increasing. Before being taken over by Humana, the old hospital had less than 10% privately insured patients. In its first fiscal year, Humana reported an increase of privately insured patients to 20% of the hospital’s total. The other patients by category were: indigent not eligible for federal Medicaid or Medicare, 35%; Medicaid patients, 23%, and Medicare patients (patients over 65), 22%.

Showed a Profit

With an 80% public-financed patient load, Humana Hospital University in its first fiscal year was at face value worse off than the UCI Medical Center, which had 70% of its patients in this category. But the Louisville hospital nonetheless managed to show a profit.

The increase in privately insured patients at the University of Louisville hospital was partially attributed to the opening of the new hospital building. But the university also took a hard line against its medical faculty referring patients elsewhere.

Under its new rules, the University of Louisville requires its medical faculty to “refer patients only to hospitals that have affiliation agreements with the university.”

In addition to increasing the number of patients able to pay, hospital officials cite better management, a slightly reduced staff and extensive use of computers as reasons that the hospital is now making a profit.