HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: Humana is a major health benefits company operating in two primary segments: Commercial (employer groups and individuals) and Government (MedicareAdvantage, TRICARE, and Medicaid). As of June 30, 2004, the company served approximately 6.9 million medical insurance members and 1.7 million specialty product members.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 12.7% year-over-year, driven by the April 1, 2004 acquisition of Ochsner Health Plan, higher per-member premiums, and increased TRICARE base contract prices.
• Profitability: Net income rose 47.9% to $148.6 million. This growth was primarily driven by the Government segment, which saw pretax earnings increase 111.2% to $149.1 million. The Commercial segment pretax earnings declined 6.2% to $76.0 million due to a competitive pricing environment and a large account with deteriorating medical cost experience.
• Expense Ratios: The Medical Expense Ratio (MER) increased slightly to 84.4% from 83.7%. Conversely, the SG&A expense ratio improved to 14.4% from 15.5%, aided by operational efficiencies and the absence of the $17.2 million asset impairment charge recorded in the prior year.
• Cash Position: Cash and cash equivalents decreased significantly by $727.8 million to $203.6 million. This decline was due to the purchase of investment securities ($578.2 million net reinvestment), the Ochsner acquisition ($68.7 million), and the timing of TRICARE receivable collections.

Guidance, Outlook, and Risks

• Membership Outlook: Management expects Commercial medical membership (fully insured and ASO) to reach between 3.3 million and 3.35 million by year-end. MedicareAdvantage membership is projected to grow to between 370,000 and 390,000 by December 31, 2004.
• Premium Trends: Fully insured commercial per-member premiums are expected to increase 6.5% to 8.5% for the full year. MedicareAdvantage per-member premiums are expected to increase 9% to 11%.
• Expense Guidance: Commercial SG&A expense ratio is expected to range from 16% to 17% for 2004. Government SG&A expense ratio is expected to range from 11% to 12%. Capital expenditures for 2004 are projected to be between $100 million and $110 million.
• Key Risks:
  • Government Contract Transitions: The company is transitioning TRICARE contracts, losing 1.1 million members from Regions 2 and 5 while gaining 1.0 million from Region 6. This transition may cause revenue fluctuations in the third and fourth quarters.
  • Medical Cost Trends: Rising medical costs and competitive pricing pressure could erode margins if premiums do not keep pace with claims trends.
  • Legal Proceedings: The company is a defendant in the In re Managed Care Litigation class action lawsuit regarding provider payments and "downcoding," with a trial date set for March 15, 2005. Outcomes remain uncertain.
  • Regulatory Changes: Changes in MedicareAdvantage reimbursement rates or Medicaid contracts could materially impact financial results.

Investor Verification Checklist

• Ochsner Acquisition Integration: Verify the financial performance of the newly acquired Ochsner Health Plan and the impact of the $45 million contingent payment due in Q3 2004.
• TRICARE Transition Impact: Monitor the net membership change and revenue stability as the company transitions out of Regions 2 and 5 and into the new South Region contract.
• Commercial Segment Margins: Assess the sustainability of the Commercial segment's margins given the reported deterioration in a large account and the competitive pricing environment.
• Liquidity Management: Review the significant drawdown in cash reserves ($727.8 million decrease) and the company's reliance on credit facilities and commercial paper programs for liquidity.
• Legal Exposure: Track developments in the In re Managed Care Litigation and potential financial exposure from the class action settlement or trial.