HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 1998
Business Overview: Humana provides managed health care products through HMOs and PPOs, serving Commercial, Medicare, Medicaid, and TRICARE markets. The company operates in 47 states, D.C., and Puerto Rico, with approximately 6.2 million medical members as of June 30, 1998.

Key Financial Metrics

Liquidity: Operating activities used $424 million in cash for the six months ended June 30, 1998, compared to providing $15 million in the prior year. This usage was driven by timing of premium receipts, medical claim payments, and acquisition-related obligations. The company maintains a $1.5 billion revolving credit facility (no outstanding balance) and $922 million in commercial paper borrowings.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 33% in Q2 and 32% for the six months, primarily driven by the 1997 acquisitions of Physician Corporation of America (PCA) and ChoiceCare Corporation, which contributed $418 million and $841 million in premiums respectively for the quarter and six-month periods.
• Profitability: Net income rose 24% in Q2 and 26% for the six months. This was fueled by membership growth, increased commercial premium yields (net 4.6% increase), and improved administrative cost ratios.
• Cost Trends: The medical expense ratio increased slightly due to the acquisitions and system-wide pharmacy cost increases. However, the administrative cost ratio improved due to staffing rationalization and acquisition synergies.
• Membership: Total medical membership exceeded 6.2 million. Same-plan Commercial membership increased by 25,500 in Q2, reversing a decline in the prior year. Medicare risk membership grew by 8,600 in Q2.

Guidance, Outlook, and Risks

• Merger Termination: On August 10, 1998, Humana and United HealthCare mutually terminated their merger agreement. Humana is conducting a strategic evaluation of its markets and product offerings, which may result in a charge in the third quarter of 1998. Management does not expect this to have a material adverse effect on financial position.
• Regulatory Risks: Significant risks include the renewal of Medicare risk contracts, Medicaid contracts (including a Puerto Rico contract expiring March 1999), and the TRICARE contract. Legislative changes to federal reimbursement structures remain unpredictable.
• Year 2000 Issue: The company anticipates incremental costs of approximately $15 million in 1998 and $3 million in 1999 to address Year 2000 computer system issues, with modifications planned for completion by December 31, 1998.
• Outlook: Management expects same-plan Commercial membership to grow at a low to mid-single-digit rate in 1998, while Medicare risk membership is expected to increase approximately 10%. Commercial premium yields are expected to increase approximately 5% for the remainder of 1998.

Investor Verification Checklist

• Merger Termination Impact: Verify the outcome of the strategic evaluation and confirm if a third-quarter charge is recorded as anticipated.
• Regulatory Contract Renewals: Monitor the status of Medicare risk, Medicaid, and TRICARE contract renewals and any legislative changes affecting reimbursement rates.
• Pharmacy Cost Trends: Assess the sustainability of medical expense ratios given the noted system-wide increases in pharmacy costs and utilization.
• Year 2000 Compliance: Confirm the completion of system modifications and actual costs incurred versus the $15 million estimate.
• Liquidity Management: Review the company's ability to manage cash flow timing differences, particularly regarding Medicare and TRICARE premium receipts.