Humana Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results. Humana provides health and supplemental benefits through Government and Commercial segments; approximately 73% of 2009 premiums and administrative-services fees came from federal government contracts.
Financial results and position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $30.96 billion | $28.95 billion | +7.0% |
| Premium revenue | $29.93 billion | $28.06 billion | +6.6% |
| Operating income | $1.71 billion | $1.07 billion | +59.1% |
| Income before taxes | $1.60 billion | $992.8 million | +61.3% |
| Net income | $1.04 billion | $647.2 million | +60.6% |
| Diluted EPS | $6.15 | $3.83 | +60.6% |
| Operating cash flow | $1.42 billion | $982.3 million | +$439.3 million |
- Fourth quarter: Revenue was $7.63 billion, pretax income $398.7 million, net income $250.7 million, and diluted EPS $1.48; in Q4 2008, the respective figures were $7.49 billion, $261.0 million, $174.1 million, and $1.03.
- Margins and expenses: Consolidated benefit ratio improved to 82.8% from 84.5%; the SG&A expense ratio edged up to 13.8% from 13.7%. Government benefit ratio improved to 83.5% from 85.9%, while Commercial rose to 80.6% from 80.3%.
- Segment performance: Government pretax income increased 90.7% to $1.50 billion, chiefly on lower Medicare stand-alone prescription drug claims. Commercial pretax income fell 49.8% to $104.2 million amid recession-related membership losses, higher utilization, and increased SG&A costs.
- Membership: Medical membership declined 11.0% to 10.28 million. Medicare Advantage membership increased 5.1% to 1.51 million, but stand-alone Medicare drug-plan membership fell 37.1% to 1.93 million. Commercial medical membership fell 5.8% to 3.41 million; specialty membership increased 7.3% to 7.20 million.
- Liquidity and debt: Cash and investments totaled $9.11 billion, up from $7.19 billion; cash and cash equivalents alone fell to $1.61 billion from $1.97 billion. Long-term debt was $1.68 billion, down from $1.94 billion. No borrowings were outstanding under the $1.0 billion revolver, leaving $996.5 million available after letters of credit. Operating cash flow was below investing cash outflow of $1.86 billion.
- Capital and investment portfolio: Stockholders’ equity rose to $5.78 billion from $4.46 billion. The investment portfolio had a $71.4 million net unrealized gain, versus a $229.9 million net unrealized loss in 2008; gross unrealized losses declined to $78.4 million from $313.0 million.
Material changes and unusual items
- Earnings rebounded from 2008, principally because Medicare stand-alone PDP claims were substantially lower. The company had reduced and repriced PDP offerings to better match its claims experience, contributing to sharply lower membership and premium revenue in that line.
- 2008 investment income included $103.1 million of other-than-temporary impairment charges, including losses tied to Lehman Brothers. In 2009, Humana recorded net realized investment gains of $19.5 million and no material other-than-temporary impairments.
- 2009 tax expense included a $16.8 million benefit from resolving uncertain tax positions following IRS audit settlements. The effective tax rate was 35.1%.
- Prior-year medical claims estimates developed favorably by $252.8 million in 2009. Benefits payable were $3.22 billion at year-end, including $1.90 billion of incurred-but-not-reported claims.
Outlook, risks, and contingencies
- 2010 outlook: Management expected Medicare Advantage membership to grow by 240,000–260,000, PDP membership to decline by 50,000–100,000, and Commercial medical membership to decline by 160,000–180,000. It expected the consolidated SG&A ratio to fall to 13.0%–13.5%, a tax rate of approximately 36.0%, and capital expenditures of approximately $200 million.
- Medicare transition and policy: From 2011, many PFFS plans must establish adequate provider networks. Humana expected more than 95% of its PFFS members to have the choice to remain in a Humana plan, but said this was not assured. Proposed federal health reforms could reduce Medicare Advantage payments and add insurer taxes or other requirements; their ultimate effects were uncertain at filing.
- CMS audits and settlements: Several Medicare Advantage contracts were selected for risk-adjustment audits. Humana said the potential impact was not estimable and warned that certain retroactive, contract-wide adjustments could materially harm results. The year-end Medicare Part D risk-corridor balance was a net payable of $144.6 million.
- TRICARE: The South Region contract represented about $3.4 billion of 2009 premiums and ASO fees. The government intended to exercise extensions through March 31, 2011, while Humana’s protest of the next-generation award had been upheld by the GAO and the agency planned corrective action. The final contract outcome remained uncertain; potential goodwill impairment and exit costs were under review.
- Other exposures: The filing cites medical-cost and reserve-estimation risk, recession-related Commercial attrition, government-program concentration, regulatory and competitive pressures, litigation, and investment-market risk. The HHS Inspector General subpoenaed Humana and its pharmacy subsidiary for records concerning Medicare Part D and Right SourceRx. The filing states that litigation and investigations could have a material adverse effect, but does not provide a clear quantified loss estimate.
- State-regulated subsidiaries held $3.6 billion of statutory capital and surplus, $1.2 billion above applicable minimums; transfers to the parent remain subject to regulatory restrictions. Management stated that available resources were adequate for foreseeable needs. The independent auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether CMS Medicare Advantage audit findings, methodologies, or extrapolated payment adjustments create a material repayment or revenue risk.
- Final outcomes and economics for the TRICARE South Region contract, including any impact on the $49.8 million of related goodwill.
- Whether the expected 2010 membership trends and SG&A-ratio improvement were achieved, particularly amid continued Commercial attrition.
- Development of benefits payable and the $144.6 million Medicare Part D risk-corridor payable as claims and CMS settlements are finalized.
- Effects of enacted health-care legislation, changing government reimbursement rates, and regulatory requirements on Humana’s government-heavy revenue mix.
- Resolution of the HHS OIG inquiry and material litigation or regulatory matters, including provider claims and the shareholder derivative action.