HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1997
Business Overview: Humana provides managed health care products through HMOs and PPOs, serving Commercial, Medicare risk, CHAMPUS (Department of Defense), and Medicare supplement markets. The company also offers administrative services and specialty products.

Key Financial Metrics

Liquidity: Net cash provided by operating activities was $15 million for the six months ended June 30, 1997, a significant decrease from $186 million in the prior year period, primarily due to timing differences in operating assets and liabilities. The company holds $1,261 million in marketable securities.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 14% in Q2 and 15% for the six months compared to 1996. Growth was driven by the CHAMPUS contract renewal, premium rate increases (Commercial +3.5%, Medicare risk +4.5%), and Medicare risk membership growth.
• Profitability Turnaround: The company returned to profitability ($42M net income in Q2) compared to a $95M loss in Q2 1996. The prior year loss was heavily impacted by $200 million in special charges (restructuring and loss reserves).
• Membership Trends: Same-store Commercial membership declined (down 5,500 in Q2) due to disciplined pricing and market exits. Conversely, Same-store Medicare risk membership increased significantly (up 15,400 in Q2).
• Debt Reduction: Long-term debt decreased from $225 million at year-end 1996 to $3 million at June 30, 1997, following the repayment of credit revolver and commercial paper.

Outlook, Risks, and Unusual Items

Guidance and Outlook

• Membership: Management expects Commercial membership to decline approximately 5% for 1997, while Medicare risk membership is expected to increase approximately 20%.
• Premium Rates: Commercial rates expected to rise 3.5-4%; Medicare risk rates expected to rise 4-5% for the full year.
• Costs: Administrative cost ratios are expected to improve in the second half of 1997 as membership grows and workforce reduction initiatives take effect.

Acquisitions and Dispositions

• Acquisitions: Agreements signed to acquire Physician Corporation of America (PCA) for ~$400 million and ChoiceCare Corporation for ~$250 million. Total consideration ~$650 million, funded by cash and a new $1.5 billion credit facility.
• Dispositions: Sold Washington, D.C. health plan and Alabama operations (excluding small group/CHAMPUS), reducing membership by ~141,000. Agreement signed to sell California HMO to HealthMax.

Risks and Contingencies

• Legislative Risk: The Balanced Budget Act of 1997 modifies Medicare reimbursement rates; management cannot predict the financial impact.
• Contract Renewals: Significant revenue depends on the annual renewal of Medicare risk contracts and the CHAMPUS contract with the Department of Defense.
• Regulatory Approvals: Pending acquisitions (PCA, ChoiceCare) and the California HMO sale are subject to regulatory approval.

Investor Verification Checklist

• Acquisition Closing: Verify the closing dates and regulatory approval status for the PCA and ChoiceCare acquisitions.
• Medicare Legislation Impact: Monitor the specific financial impact of the Balanced Budget Act of 1997 on reimbursement rates.
• Commercial Membership: Track the extent of Commercial membership decline against the projected 5% reduction for 1997.
• Medical Cost Trends: Review future quarters for the sustainability of the 82.3% medical loss ratio, particularly regarding costs in new Medicare markets.
• Debt Facility: Confirm the finalization of the new $1.5 billion revolving credit agreement.