Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Humana is a major health benefits company offering coordinated health insurance coverage through traditional and Internet-based plans for employer groups, government-sponsored programs, and individuals. As of September 30, 2002, the company served approximately 6.6 million medical insurance members and 2.2 million specialty product members. Operations are divided into two segments: Commercial (employer groups and individuals) and Government (Medicare+Choice, Medicaid, and TRICARE).
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 |
|---|---|---|
| Total Revenues | $2,841,627 | $8,406,149 |
| Net Income | $52,331 | $144,460 |
| Diluted EPS | $0.31 | $0.86 |
| Cash and Cash Equivalents (Sep 30, 2002) | $375,736 | |
| Total Debt (Sep 30, 2002) | $599,061 | |
| Medical Expense Ratio | 83.6% | 83.7% |
| SG&A Expense Ratio | 15.2% | 15.4% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8.8% for the quarter and 11.0% for the nine-month period compared to 2001. Premium revenues rose 8.3% (quarter) and 10.1% (nine months), driven by strong commercial premium yields and significant growth in TRICARE premiums.
- Profitability: Net income increased 72.5% for the quarter and 76.0% for the nine-month period. This improvement is largely attributed to the cessation of goodwill amortization under FAS 142 (adopted Jan 1, 2002), which removed approximately $14.0 million in quarterly and $41.1 million in nine-month expenses present in 2001.
- Membership Trends: Total medical membership grew 3.2% to 6.63 million.
- Commercial: Fully insured membership declined slightly (0.4%), while Administrative Services Only (ASO) membership grew 14.0%.
- Government: Medicare+Choice membership declined 14.1% due to strategic exits and attrition. Conversely, TRICARE membership increased 2.5% and TRICARE ASO increased 10.2%.
- Cash Flow: Operating cash flows were negative ($101.3 million) for the nine months ended Sep 30, 2002, compared to positive ($59.8 million) in 2001. Management notes that normalized operating cash flows (adjusting for timing of Medicare+Choice receipts) were $115.3 million, an increase of $49.7 million year-over-year. The reported negative cash flow was primarily due to a $231.0 million increase in receivables, largely related to TRICARE change orders.
Guidance, Outlook, and Risks
- Outlook: Management expects fully insured commercial premium yields to remain in the 12-14% range for the full year 2002. For 2003, they anticipate premium yields of 13-15% and a 4-5% increase in Commercial medical membership.
- TRICARE Contracts: The company is negotiating to extend TRICARE contracts expiring in 2003 and intends to bid for the new T-Nex (TRICARE Next Generation) program. While they believe the size of the business will not materially change if awarded one prime contract, the outcome remains uncertain.
- Legal Proceedings: Humana is involved in significant litigation, including:
- Managed Care Class Actions: Consolidated cases involving subscriber and provider tracks alleging RICO violations and breach of fiduciary duty. A global class of medical doctors was certified in September 2002, with a trial date set for May 2003.
- Securities Litigation: Ongoing class action regarding the 1997 acquisition of Physician Corporation of America (PCA).
- Government Audits: Ongoing investigations by Florida and Texas Attorneys General and a Corporate Integrity Agreement with the Office of Inspector General.
- Regulatory Risks: The company faces risks from potential legislative changes to Medicare+Choice reimbursement rates, HIPAA compliance costs, and state-level regulations regarding claims payment timeliness and provider compensation.
Investor Verification Checklist
- TRICARE Receivables: Verify the collectability of the $233.3 million in TRICARE receivables related to change orders and bid price adjustments, which drove the increase in total receivables.
- Goodwill Accounting: Confirm the impact of FAS 142 adoption on year-over-year earnings comparisons, as 2001 results included significant goodwill amortization expenses not present in 2002.
- Medicare+Choice Exposure: Assess the financial impact of the 14.1% decline in Medicare+Choice membership and the potential effects of legislative proposals to revise reimbursement rates.
- Legal Reserves: Review the adequacy of reserves for the "In re Managed Care Litigation" and PCA securities litigation, given the certification of a global class of doctors and the denial of summary judgment in the PCA case.
- Commercial Mix: Monitor the shift toward large group commercial membership, which has a higher medical expense ratio, and its effect on future profitability.