Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Humana is a health services company facilitating care delivery through HMOs and PPOs to approximately 6.1 million medical members. Operations are reported in three segments: Commercial, Public Sector (Medicare/Medicaid), and TRICARE.
Key Financial Metrics
| Metric (in millions) | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Total Revenues | $2,505 | $2,446 | $4,982 | $4,848 |
| Premium Revenues | $2,461 | $2,397 | $4,889 | $4,749 |
| Net Income | $28 | $52 | $12 | $102 |
| Diluted EPS | $0.17 | $0.31 | $0.07 | $0.61 |
| Medical Expense Ratio | 85.1% | 83.3% | 86.5% | 83.8% |
| Administrative Cost Ratio | 14.6% | 15.0% | 14.6% | 15.2% |
| Cash & Equivalents | $542 | $492 | $542 | $492 |
| Short-term Debt | $75 | $250 | $75 | $250 |
| Long-term Debt | $643 | $573 | $643 | $573 |
Note: Commercial paper borrowings of $718 million are classified as long-term debt based on management's intent to refinance.
Material Changes vs. Prior Period
- Profitability Decline: Net income for the six months ended June 30, 1999, dropped to $12 million from $102 million in the prior year. This decline is primarily attributed to medical cost trends exceeding premium yield increases and a significant one-time charge in Q1 1999.
- Q1 1999 Special Items: The first quarter included a $90 million additional medical claims expense (after-tax impact: $57 million). This comprised a $50 million premium deficiency provision, $35 million to strengthen medical claims payable, and a $5 million payment to Columbia/HCA. Conversely, a $12 million gain on the sale of a tangible asset was recorded in Q1.
- Expense Ratios: The medical expense ratio increased 180 basis points in Q2 1999 compared to Q2 1998. The increase was driven by higher inpatient, outpatient, and pharmacy costs in the Commercial segment and ineffective risk-sharing arrangements in the Public Sector.
- Membership Trends: Fully insured commercial membership declined by approximately 87,500 members in the first six months of 1999 due to pricing discipline. Medicare HMO membership also declined due to the closure of underperforming Florida markets.
- Acquisition: Humana acquired 50 medical centers from FPA Medical Management, Inc. for approximately $20 million effective June 1, 1999.
Guidance, Outlook, and Risks
- Market Exits and Reductions: Humana notified regulators of its intent to exit 31 Medicare counties (affecting ~46,000 members) and 41,000 Commercial Florida individual members. Management anticipates a reduction of approximately 300,000 members in 2000 due to market exits, product discontinuances, and premium increases.
- Contract Renewals: Medicare HMO contracts are renewed annually. Legislative proposals regarding Medicare reimbursement rates pose a risk. The TRICARE contract is renewable on July 1, 2000.
- Legal Proceedings: Five class action lawsuits were filed in June 1999 alleging false statements regarding financial condition and Columbia/HCA negotiations. A separate RICO/antitrust case regarding Nevada coinsurance calculations is scheduled for trial in October 1999, though a settlement agreement has been submitted for court approval.
- Year 2000 (Y2K) Readiness: The company estimates total Y2K project costs at $26.7 million, with $23.9 million incurred to date. Remediation of core business systems is 100% complete, with 98% of business applications remediated as of June 30, 1999.
- Liquidity: The company maintains a $1.5 billion revolving credit facility and a commercial paper program. Management believes existing resources are sufficient to meet future liquidity needs.
Investor Verification Checklist
- Medical Cost Trends: Verify the sustainability of the 10% commercial cost trend and the effectiveness of new provider re-contracting initiatives.
- Membership Attrition: Monitor the actual rate of member loss in 2000 against the projected 300,000 reduction and the impact on premium revenue.
- Legal Exposure: Track the status of the five new class action suits and the final court approval of the Nevada RICO settlement.
- Y2K Contingency: Confirm the successful implementation of business continuity plans and the readiness of third-party vendors (government agencies, providers) by year-end 1999.
- Debt Covenants: Ensure continued compliance with interest coverage and leverage ratios under the $1.5 billion credit agreement, especially given the decline in net income.