Humana Inc. 2009 Q3 Form 10-Q Summary
Business context and reporting period
Humana filed an unaudited quarterly report for the three and nine months ended September 30, 2009. It operates Government (Medicare, military and Medicaid) and Commercial (employer, individual and specialty) segments. At quarter-end it reported approximately 10.3 million medical members and 7.3 million specialty-product members.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $7,716.8 | $7,148.2 | $23,327.4 | $21,458.7 |
| Operating income | $495.6 | $302.2 | $1,282.7 | $785.4 |
| Net income | $301.5 | $183.0 | $789.0 | $473.1 |
| Diluted EPS | $1.78 | $1.09 | $4.67 | $2.79 |
| Consolidated benefit ratio | 82.1% | 83.1% | 83.1% | 84.9% |
| Consolidated SG&A expense ratio | 13.7% | 13.7% | 13.5% | 13.4% |
- Q3 revenue increased 8.0% and net income increased 64.8%; nine-month revenue increased 8.7% and net income increased 66.8% year over year.
- Nine-month Government segment pretax income rose 101.8% to $1,045.3 million. Commercial segment pretax income fell 26.2% to $157.8 million; it recorded a $5.2 million pretax loss in Q3 versus $11.2 million pretax income a year earlier.
- Government benefit ratios improved, mainly reflecting lower Medicare stand-alone prescription drug plan claims after Humana reset pricing and benefits. Commercial’s Q3 benefit ratio worsened to 82.7% from 80.2%; management cited higher utilization, economic conditions, and H1N1.
- Prior-year results included significant investment losses: $108.3 million pretax in Q3 2008, including other-than-temporary impairments. There were no material other-than-temporary impairments in the 2009 quarter or nine-month period.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,147.5 million, compared with $685.7 million in 2008. Investing cash use was $1,470.2 million and financing cash use was $195.7 million. Cash and cash equivalents declined $518.4 million from year-end 2008 to $1,452.0 million.
- Cash, cash equivalents and investment securities totaled approximately $8.7 billion at September 30. Total assets were $14.2 billion; stockholders’ equity was $5.5 billion.
- Long-term debt was $1,680.4 million, down from $1,937.0 million at December 31, 2008, following repayment of $250 million borrowed for the Cariten acquisition. No credit-agreement borrowings were outstanding; approximately $996.5 million remained available under the $1.0 billion revolving facility.
- Management said available cash, investments, operating cash flow and borrowing capacity were adequate for foreseeable operating, regulatory and capital needs. Nine-month capital expenditures were $122.1 million; full-year 2009 capital expenditures were expected to be approximately $175 million.
Material changes, outlook and risks
- Medicare Advantage membership increased 10.7% year over year to 1.515 million; Medicare Advantage premiums rose 21.5% for the nine-month period. Stand-alone PDP membership fell 36.5% to 1.960 million as the company realigned plan pricing and benefits; related premiums declined 29.3% year over year for the nine months.
- Commercial medical membership declined 3.6% year over year to 3.427 million, amid recession-driven attrition and the loss of two large ASO accounts. Management expected Commercial medical membership to decline by approximately 200,000 for full-year 2009 versus December 31, 2008.
- Management reported that final 2010 Medicare Advantage rates implied an industry decrease of 4% to 5%; it said its 2010 products and cost-reduction, care-coordination and disease-management initiatives were intended to address the lower rates. Success was not assured.
- Medicare contracts were renewed for 2010. CMS audits of Medicare Advantage risk-adjustment coding could lead to retroactive payment adjustments; Humana could not estimate the financial impact and warned that certain audit methods could materially harm results, financial position and cash flow.
- Humana was not awarded the next-generation TRICARE South contract, which represented $2.6 billion, or 11.3%, of nine-month premiums and ASO fees. The GAO upheld Humana’s protest on October 28, 2009, but the Department of Defense’s response and the contract’s ultimate disposition remained uncertain. Management expected the current contract option to extend through September 30, 2010; it was assessing potential military-business impairment, exit costs and asset sales. The related $49.8 million goodwill was not impaired at quarter-end.
- Federal health reform proposals and proposed CMS changes to Medicare Advantage and Part D could affect costs, payments and profitability; their final form and impact were uncertain. Other stated risks included medical-cost estimation, competition, regulatory changes, credit-rating downgrades and investment-market volatility. A 1% interest-rate increase was estimated to reduce investment fair value by approximately $305 million.
- Unusual items and contingencies: Q3 included approximately $12 million of previously deferred Green Ribbon Health revenue. The OIG issued subpoenas seeking records related to Medicare Part D and Humana’s mail-order pharmacy. A shareholder derivative case and provider litigation remained pending; federal securities and ERISA class actions had been dismissed with prejudice, with appeal periods expired. The company also disclosed a potential registration issue involving shares bought through employee retirement plans and said it was assessing any response.
Important facts for investors to verify
- Whether GAO recommendations change the TRICARE South award, contract duration, or expected military-business economics.
- The results and potential financial effect of CMS Medicare Advantage audits, including any retroactive adjustments.
- Whether Commercial membership attrition, utilization and higher SG&A costs continue, and whether the stated full-year membership expectation is met.
- How 2010 Medicare rates, proposed regulation and health reform affect plan pricing, benefits, enrollment and margins.
- Investment portfolio valuations and impairment exposure, along with the status and possible consequences of the OIG inquiry, pending litigation and retirement-plan share registration matter.