Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 1997
Business Overview: Humana is a managed health care provider offering HMO, PPO, Medicare risk, Medicare supplement, Medicaid, and TRICARE products. As of December 31, 1997, the Company served approximately 6.2 million total members across 47 states, the District of Columbia, and Puerto Rico. The Company operates 18 HMOs and contracts with approximately 73,500 physicians and 1,100 hospitals.
Key Financial Metrics
Revenue Breakdown (Premium Revenues for 1997):
- Commercial HMO: Approximately $1.8 billion (23% of total).
- Commercial PPO: Approximately $2.3 billion (29% of total).
- Medicare Risk: Approximately $2.4 billion (31% of total).
- TRICARE: Approximately $764 million (10% of total).
- Medicaid: Approximately $224 million (3% of total).
- Specialty Products: Approximately $230 million (3% of total).
- Medicare Supplement: Approximately $79 million (1% of total).
Parent Company Financials (Schedule I):
- Net Income (1997): $173 million (compared to $12 million in 1996).
- Total Assets (Parent): $2,651 million.
- Long-term Debt (Parent): $889 million.
- Operating Cash Flow (Parent): $191 million.
Market Data (as of Feb 27, 1998):
- Shares Outstanding: 165,210,259.
- Market Value of Non-Affiliate Stock: $3.94 billion.
- Stock Price: $25.47.
Material Changes and Acquisitions
The 1997 fiscal year was characterized by significant strategic acquisitions funded primarily through commercial paper borrowings:
- Physician Corporation of America (PCA): Acquired September 8, 1997, for $411 million. Added approximately 1.1 million medical members in Florida, Texas, and Puerto Rico.
- ChoiceCare Corporation: Acquired October 17, 1997, for approximately $250 million. Added approximately 250,000 members in the Greater Cincinnati area.
- Health Direct, Inc.: Acquired February 28, 1997, for $23 million. Added approximately 50,000 members in Chicago.
Divestitures: The Company sold its Washington, D.C. health plan, Alabama operations (excluding small group and TRICARE), and The Lexington Hospital. Management stated these sales did not have a material impact on financial position.
Debt Position: Parent company long-term debt increased significantly from $222 million in 1996 to $889 million in 1997, reflecting the financing of the PCA and ChoiceCare acquisitions.
Outlook, Risks, and Management Commentary
Guidance and Outlook:
- Commercial Rates: Expected to increase approximately 4% to 5% in 1998.
- Medicare Risk Rates: 1998 average statutory increase expected to approximate 2%.
- Medicaid Growth: Premium revenues anticipated to rise to approximately 6% of total 1998 premiums.
Key Risks and Contingencies:
- Government Contract Renewals: Significant revenue concentration exists in the Florida Medicare risk contract (approx. 19% of total premiums). Termination would have a material adverse effect. TRICARE and Medicaid contracts are also subject to renewal risks.
- Legislative Changes: The Balanced Budget Act of 1997 alters Medicare reimbursement methodologies. A 0.4% assessment on premiums (approx. $12-$14 million) was effective January 1, 1998.
- Legal Proceedings: A pending Supreme Court petition regarding a RICO claim (Mary Forsyth v. Humana) involves potential damages of approximately $1.6 million plus interest. Consolidated securities litigation regarding PCA is pending; management believes allegations are without merit.
- Year 2000 Issue: Estimated incremental costs of $12 to $15 million to modify computer systems, with completion targeted for December 31, 1998.
Investor Verification Checklist
- Verify the renewal status and terms of the Florida Medicare risk contract, which represents 62% of HCFA revenues.
- Confirm the integration progress and financial performance of the PCA and ChoiceCare acquisitions.
- Monitor the impact of the Balanced Budget Act of 1997 on Medicare reimbursement rates and the 0.4% premium assessment.
- Review the status of the pending Supreme Court petition in the Forsyth class action lawsuit.
- Assess the Company's ability to meet the 4-5% commercial rate increase target in a competitive market.
- Track the execution of Year 2000 system modifications and associated costs.