Humana Inc. 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. Humana is a health insurer and healthcare services company, with Retail, Employer Group, Healthcare Services, and Other Businesses operations. At year-end it served approximately 12.0 million medical members and 7.8 million specialty members. Medicare products generated approximately 74% of consolidated premiums and services revenue; federal government contracts generated approximately 75%.
Financial and operating results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $41.313 billion | $39.126 billion | +5.6% |
| Premiums | $38.829 billion | $37.009 billion | +4.9% |
| Services revenue | $2.109 billion | $1.726 billion | +22.2% |
| Operating income | $2.061 billion | $2.016 billion | +2.2% |
| Income before tax | $1.921 billion | $1.911 billion | +0.5% |
| Net income | $1.231 billion | $1.222 billion | +0.7% |
| Diluted EPS | $7.73 | $7.47 | +3.5% |
| Benefit ratio | 83.9% | 83.7% | +0.2 percentage points |
| Operating cost ratio | 15.5% | 15.1% | +0.4 percentage points |
| Operating cash flow | $1.716 billion | $1.923 billion | −10.8% |
Fourth quarter: Revenue was $10.187 billion versus $9.557 billion in Q4 2012. Humana recorded a pretax loss of $49 million, net loss of $30 million, and diluted loss per share of $0.19, compared with Q4 2012 pretax income of $282 million, net income of $192 million, and diluted EPS of $1.19. The 2013 quarter included a $243 million pretax charge for strengthening reserves on the closed block of long-term care policies ($154 million after tax, or $0.99 per diluted share).
Balance sheet and liquidity: At year-end, cash and investments were $10.938 billion, total assets $20.735 billion, total debt $2.600 billion, and stockholders’ equity $9.316 billion. Cash and cash equivalents were $1.138 billion. Humana had no borrowings under its $1.0 billion revolving credit facility and reported $995 million of available capacity; it was in compliance with covenants, with a 1.0:1 leverage ratio against a maximum of 3.0:1. The company reported $7.818 billion in contractual obligations, including debt, interest, leases, purchase obligations, and future policy benefits.
Material changes versus 2012
- Retail premiums rose 8.8% and pretax income rose 10.5% to $1.283 billion, supported by Medicare Advantage and Part D membership growth. Retail medical membership increased 8.5%.
- Employer Group revenue rose 7.4% and pretax income rose 16.2% to $322 million. Group Medicare Advantage membership growth contributed; commercial ASO and specialty membership declined.
- Healthcare Services pretax income increased 18.6% to $549 million, with growth in provider, home-based, and pharmacy services, partly reflecting acquisitions.
- Other Businesses recorded a $193 million pretax loss versus an $18 million loss in 2012. The 2013 loss included the long-term care reserve charge and the effect of ending Puerto Rico Medicaid contracts.
- Operating cash flow decreased by $207 million. Humana cited marketing and distribution spending, investment in exchanges and new state-based contracts, and Medicare Part D risk-corridor settlements, including $158 million for the 2011 contract year.
- Favorable prior-period medical claims reserve development increased to $474 million from $257 million, supporting reported results. Share repurchases also helped lift EPS relative to net income growth.
Outlook, commentary, and risks
- Management expected 2014 operating cash flow to decline from 2013, partly because commercial risk-adjustment, risk-corridor, and reinsurance receivables generated in 2014 were expected to be collected in 2015; the receivable could be material to 2014 cash flow.
- Humana expected to pay $525 million to $575 million in 2014 for the nondeductible health insurance industry fee and forecast a 2014 effective tax rate of approximately 45% to 47%, compared with 35.9% in 2013. Management intended to offset the fee’s operating impact through pretax income improvement, but gave no assurance it could.
- Based on preliminary CMS inputs, the company estimated 2015 Medicare Advantage rate reductions of 6% to 7%. It cited possible responses including clinical investment, cost efficiencies, benefit changes, or market exits. The preliminary CMS rate announcement was expected February 21, 2014.
- Humana anticipated a slightly lower earnings run rate in the first half of 2014 from administrative spending supporting state-based contracts. It expected 2014 capital expenditures of approximately $525 million to $575 million, excluding acquisitions.
- Exchange applications exceeded 200,000 through January 31, 2014, but enrollment, member acuity, adverse selection, website functionality, and the effectiveness and timing of risk-mitigation programs remained uncertain. Management warned that retaining some noncompliant plans could worsen the risk pool in compliant exchange plans.
- CMS had selected one Medicare Advantage contract for a 2011 risk-adjustment data validation audit. The company’s estimate of settlements for 2011–2013 based on internal audits was not material, but final impact was uncertain pending CMS benchmark data and guidance.
- Humana described substantial exposure to government policy and contract changes, particularly Medicare payment and quality-rating rules, risk-adjustment coding, sequestration, and healthcare reform. Providers disputed Humana’s right to pass sequestration-related Medicare reductions through to them; arbitration or litigation could result.
- The closed long-term care block remained a key reserve risk: approximately 33,300 policies were in force, with $1.4 billion in related future policy benefits payable. The 2013 reserve strengthening followed deteriorating assumptions, including increased longevity and home-health utilization. Humana estimated that reasonably likely adverse assumption changes could require about $100 million of additional after-reinsurance expense.
- Other risks include medical cost and claims-reserve estimation, competition and pricing, provider solvency under risk arrangements, cybersecurity and systems execution, regulatory investigations and litigation, and limits on dividends from regulated subsidiaries. The filing states that possible losses beyond accrued amounts for legal and regulatory matters could not be estimated clearly.
Important facts for investors to verify
- Whether the Q4 long-term care reserve charge is isolated or signals further deterioration in claims, longevity, or investment-return assumptions.
- How much of 2013 earnings benefited from favorable prior-period medical claims reserve development, and whether such reserve releases recur.
- Final 2015 Medicare Advantage rates, Humana’s Star Ratings and quality-bonus eligibility, and the resulting effects on benefits, enrollment, and margins.
- Actual 2014 health insurance industry fee, effective tax rate, subsidiary dividend capacity, and operating cash flow after delayed exchange risk-program collections.
- Exchange enrollment that converts to paid coverage, the medical-cost profile of new members, and the realized effect of risk adjustment, corridors, and reinsurance.
- Results and potential financial impact of the CMS risk-adjustment audit, provider disputes related to sequestration, and other legal or regulatory matters.
- Whether Medicare and Florida concentration, together with lower-margin state Medicaid and dual-eligible growth, changes Humana’s risk profile or segment margins.