Humana Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Unaudited. Amounts are U.S. dollars.
Business context
Humana operates Retail, Group and Specialty, and Healthcare Services segments. Medicare products generated approximately 83% of premiums and services revenue in the first nine months of 2021. On August 17, Humana acquired the remaining 60% of Kindred at Home (KAH), taking full ownership of the home health and hospice provider.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $20.697B | $20.075B | $62.010B | $58.093B |
| Operating income | $628M | $1.823B | $3.087B | $5.332B |
| Net income | $1.531B | $1.340B | $2.947B | $3.641B |
| Diluted EPS | $11.84 | $10.05 | $22.77 | $27.37 |
| Benefit ratio | 87.1% | 82.6% | 86.3% | 81.4% |
| Operating cost ratio | 12.6% | 13.0% | 10.9% | 12.2% |
Premium revenue was $19.885B in Q3, up 5.2%, and $59.987B for nine months, up 7.5%. Services revenue rose 84.9% in Q3 and 35.4% year to date, largely reflecting KAH. Q3 investment income was a $33M loss versus $714M of income a year earlier; nine-month investment income was $221M versus $940M. Humana attributed the decline mainly to changes in fair value of publicly traded equity securities.
Q3 net income increased despite sharply lower operating income, principally because of a $1.129B non-taxable gain on remeasurement of Humana’s previously held KAH investment. Nine-month net income and diluted EPS declined 19.1% and 16.8%, respectively. Reported comparisons also reflect equity-security valuation changes, KAH put/call option adjustments, KAH transaction and integration costs, and the $578M 2020 receipt of previously written-off commercial risk-corridor receivables.
The benefit ratio rose 450 basis points in Q3 and 490 basis points year to date. The filing cites COVID-related utilization and risk-adjustment effects, the end of the health-insurance industry fee (whose cost had been reflected in product pricing), competitive pressure in group Medicare Advantage and stand-alone PDP, and prior-year comparison effects. Favorable prior-period claims development partly offset these pressures. Lower administrative costs and operating efficiencies reduced the operating cost ratio; KAH and acquisition-related costs partly offset those improvements.
Segments and material changes
- Retail: Revenue grew 10.1% in Q3 and 10.2% year to date, while earnings fell 17.5% and 35.4%, respectively, amid higher benefit ratios. Individual Medicare Advantage membership grew 11.7%; state-based Medicaid and other membership grew 24.5%. Group Medicare Advantage and stand-alone PDP membership declined.
- Group and Specialty: Q3 segment loss narrowed to $28M from $160M; nine-month earnings declined to $186M from $232M. Fully insured commercial membership fell 13.7%.
- Healthcare Services: Earnings increased 49.8% in Q3 and 16.8% year to date, supported by KAH and operating performance. KAH contributed $374M of Q3 home-solutions revenue after acquisition.
Cash, debt and liquidity
For the first nine months, operating cash flow was $2.358B, down from $5.356B. Investing used $6.454B, including $3.959B for acquisitions and $945M in capital expenditures; financing provided $3.727B. Cash and equivalents ended the period at $4.304B, compared with $4.673B at year-end 2020. Management attributed weaker operating cash flow partly to working-capital effects, including claims and provider-support payments.
Total debt was approximately $12.261B at September 30 ($795M short-term and $11.466B long-term), versus $6.660B at December 31, 2020. New debt and assumed KAH borrowings funded the acquisition. Humana reported $4.0B of unused revolving-credit capacity and compliance with a 60% maximum debt-to-capitalization covenant; the measured ratio was 43%. Management said available cash, investments, operating cash flow, and borrowing capacity were adequate for requirements for at least the next 12 months. The company’s credit ratings were BBB+ from S&P and Baa3 from Moody’s.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described integrated care delivery, Medicare Advantage growth, and expansion of value-based provider relationships as strategic priorities; 68% of individual Medicare Advantage members were in value-based relationships, up from 66% a year earlier.
- Management warned that COVID-19 continues to disrupt utilization, costs, clinical initiatives, and Medicare risk-adjustment revenue. The transition to CMS encounter-data-based risk scores and potential changes to Medicare Advantage risk-adjustment audit methodology could materially affect results.
- Other material exposures include government contract renewals and payment rules, healthcare regulation, competitive and enrollment trends, investment-market and interest-rate risk, and litigation or regulatory investigations. The filing says potential losses beyond recorded accruals for specified legal matters cannot be estimated clearly and outcomes could be substantial.
- CMS had renewed all material Medicare contracts for 2022 and approved Humana’s product offerings. The TRICARE East contract was scheduled to expire December 31, 2022, subject to government renewal options.
- After quarter-end, on October 29, Humana entered a $2.0B term loan and repaid approximately $1.9B outstanding under the Gentiva credit agreement. KAH represented approximately 20% of consolidated assets at quarter-end, but was excluded from the company’s quarter-end evaluation of disclosure controls while integration work continued.
Key facts for investors to verify
- How much of reported earnings reflects the nonrecurring KAH remeasurement gain and other valuation, transaction, and comparison items.
- Whether medical utilization, benefit ratios, COVID-19 effects, and Medicare risk-adjustment revenue develop as expected.
- KAH integration, preliminary purchase-price allocation, operating contribution, and the effect of acquisition-related debt on leverage and interest expense.
- Cash-flow normalization, claims and provider-payment working capital, and continued compliance with debt covenants and insurance-subsidiary capital requirements.
- Developments in CMS risk-adjustment audits, litigation, and other regulatory matters for which potential losses may be material but are not presently estimable.