Humana Inc. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual report, not a standalone fourth-quarter earnings report.
Business context
Humana is a health insurer and healthcare services company organized into Insurance and CenterWell segments in December 2022; prior segment results were recast. At year-end, it served approximately 17.1 million medical members and 5.2 million specialty members. Medicare is central to the business: Medicare products generated about 81% of premiums revenue, and approximately 82% of total premiums and services revenue came from federal contracts. The filing also describes approximately 88% of revenue as coming from federal and state government programs.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $92.9 billion | $83.1 billion |
| Income from operations | $3.8 billion | $3.1 billion |
| Net income | $2.8 billion | $2.9 billion |
| Diluted EPS | $22.08 | $22.67 |
| Operating cash flow | $4.6 billion | $2.3 billion |
- Revenue increased 11.8%, primarily on Medicare Advantage and state-contract growth, higher per-member premiums, and consolidation of Kindred at Home. Net income declined 4.5%; year-over-year comparisons were affected by acquisition, divestiture, investment valuation, and restructuring items.
- The benefit ratio improved to 86.3% from 86.7%, helped by higher individual Medicare Advantage premiums and lower inpatient utilization, partly offset by lower favorable reserve development. Favorable prior-year claims reserve development was $415 million, versus $825 million in 2021.
- The operating cost ratio rose to 13.7% from 12.2%, reflecting Kindred at Home consolidation, value-creation charges, and higher Medicare marketing spending.
- Insurance segment operating income increased 25% to $3.0 billion. CenterWell operating income increased 38% to $1.3 billion; external services revenue rose 78% to $3.9 billion.
- Cash and cash equivalents were $5.1 billion at year-end, up from $3.4 billion. Capital expenditures were $1.1 billion; operating cash flow less capital expenditures was approximately $3.5 billion.
- Year-end debt was approximately $11.1 billion, comprising $2.1 billion short-term and $9.0 billion long-term debt, down from approximately $12.5 billion in 2021. The company reported $2.4 billion of unused capacity under its five-year revolver and $1.5 billion under its 364-day revolver. Management said available resources were adequate for at least 12 months.
- Investment securities totaled $14.3 billion. Rising interest rates contributed to $1.7 billion of gross unrealized losses on debt securities; the company reported no material credit allowances and did not expect to have to sell the securities before recovery.
Material changes and unusual items
- Humana sold a 60% interest in Kindred at Home Hospice in August 2022 for approximately $2.7 billion in net proceeds, including $1.9 billion of debt repayments, and recorded a $237 million pretax gain. It retained a 40% minority interest.
- Value-creation and workforce-optimization initiatives generated $473 million of 2022 operating-cost charges, including $248 million of asset impairments and $116 million of severance costs.
- Share repurchases were $2.1 billion in 2022; cash dividends were $392 million. The board authorized a new repurchase program of up to $3 billion in February 2023.
- Other significant comparisons include the $1.1 billion gain on remeasurement of Humana’s prior Kindred at Home investment recognized in 2021 and differing fair-value changes in publicly traded equity securities.
Outlook, commentary and risks
- For 2023, management anticipated individual Medicare Advantage net membership growth of at least 625,000; group Medicare Advantage declines of about 60,000; stand-alone PDP declines of about 800,000; state-contract growth of 25,000 to 100,000; and group commercial medical declines of about 300,000. The filing text provided here does not give a clear 2023 EPS or revenue forecast.
- CMS’s preliminary 2024 Medicare Advantage and Part D notice estimated an average 2.27% reduction in industry benchmark funding. Humana expected an impact broadly in line with CMS’s estimate on comparable factors, while continuing to assess plan-specific effects, including risk-model changes and normalization.
- A material regulatory uncertainty is CMS’s January 2023 final rule eliminating the Medicare Advantage fee-for-service adjuster in risk-adjustment validation audits and providing for extrapolated audit results beginning with payment year 2018. Humana disputes aspects of the rule and says its effects could materially harm results, financial position, or cash flows.
- Key risks include dependence on government programs and CMS contracts, medical-cost and claims-reserve estimation, accurate risk-adjustment coding and documentation, Medicare Star Ratings, regulatory and legal actions, competition, cybersecurity, provider and labor availability, and investment-market volatility. The filing notes pending investigations and litigation; outcomes and potential losses for specified matters could not be estimated clearly.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. IBNR valuation and goodwill impairment assessments for Home Solutions and Provider were identified as critical audit matters.
Important facts for investors to verify
- How 2023 and 2024 Medicare Advantage membership growth translates into margins, especially amid the CMS rate and risk-model changes.
- Potential financial exposure, timing, and compliance obligations from RADV audits and other risk-adjustment reviews.
- Underlying claims trends and reserve adequacy, including the sustainability of favorable prior-period reserve development.
- CenterWell’s growth, operating margins, labor costs, and the performance of the retained hospice interest.
- Debt maturities, borrowing costs, investment-portfolio losses, and cash available at the parent company after regulatory restrictions and capital returns.