Humana Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars; financial figures below are generally in millions unless stated otherwise.
Business context
Humana operates three reportable segments: Retail, Group and Specialty, and Healthcare Services. Its business is concentrated in Medicare and other government-sponsored health programs; the filing says approximately 83% of 2020 premiums and services revenue came from federal government contracts. At year-end, Humana had approximately 16.8 million medical members and about 5 million specialty-product members. Individual Medicare Advantage was the largest business, with 3.96 million members.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenue | $77,155 | $64,888 | Up 18.9% |
| Operating income | $4,986 | $3,192 | Up 56.2% |
| Net income | $3,367 | $2,707 | Up 24.4% |
| Diluted earnings per share | $25.31 | $20.10 | Up $5.21 |
| Benefits expense | $61,628 | $53,857 | Up 14.4% |
| Benefit ratio | 83.1% | 85.6% | Improved 250 basis points |
| Operating cost ratio | 13.2% | 11.5% | Worsened 170 basis points |
| Operating cash flow | $5,639 | $5,284 | Up $355 |
Revenue growth was led by Medicare Advantage and state-based contracts. Retail segment earnings rose to $3,017 from $2,235; Healthcare Services earnings increased to $944 from $789. Group and Specialty shifted from $28 of earnings to a $143 loss, reflecting higher operating costs and declining commercial membership. Retail’s benefit ratio improved, while higher administrative expenses—including the reinstated health-insurance industry fee, pandemic-related costs, strategic investment, and community support—raised operating costs.
Reported 2020 results included material items: a $745 gain from changes in fair value of publicly traded equity securities, $578 received on previously written-off commercial risk-corridor receivables, and a $103 net expense from put/call valuation adjustments. Together these added $1,220 to pretax income and $7.07 to diluted EPS, according to the filing. Results also reflected lower non-COVID utilization, COVID-19 treatment costs, and $313 of favorable prior-year medical-claim reserve development.
At December 31, cash and cash equivalents were $4,673, investment securities were $13,766, and total debt was approximately $6,660 ($600 short-term and $6,060 long-term), versus $5,666 at year-end 2019. Total assets were $34,969 and stockholders’ equity was $13,728. The company generated $5,639 in operating cash flow and used $3,065 in investing activities and $1,955 in financing activities. It repurchased $1,820 of shares and paid $323 in dividends during 2020. Management stated available cash, investments, operating cash flow, and financing capacity were adequate for operating and other expected needs for at least 12 months. The $2.0 billion revolving credit facility was undrawn at year-end; commercial paper outstanding was $600.
Material changes and outlook
- Individual Medicare Advantage membership grew 10.5% to 3.96 million; Medicaid membership grew 64.7% to 772,400, partly because Humana assumed full financial risk for its Kentucky contract beginning in 2020.
- Stand-alone Medicare PDP membership declined 11.4% to 3.87 million. Fully insured commercial group membership declined 14.4% to 777,400; Group and Specialty ASO membership fell 4.6%.
- Humana acquired hospice-pharmacy provider Enclara for approximately $709 million net of cash acquired. A partnership with Welsh, Carson, Anderson & Stowe opened 20 senior-focused primary-care centers in 2020.
- For 2021, management anticipated individual Medicare Advantage net membership growth of 425,000–475,000, Group Medicare Advantage membership decline of about 50,000, and stand-alone PDP membership decline of about 300,000.
- Humana reported that the 2022 Medicare Advantage rate notice was expected to produce a 3.7% non-ESRD rate increase, excluding EGWP funding changes. The filing also cites a 5.0% ESRD rate increase, with its stated year reference not fully clear.
Management commentary, risks and contingencies
COVID-19 sharply disrupted care utilization. Non-COVID utilization fell in spring 2020, recovered to about 95% of historical levels by late October, then declined again as COVID-19 admissions rose; Medicare Advantage non-COVID utilization was about 15% below normal at year-end. Management expected elevated COVID-19 admissions and depressed non-COVID utilization to continue into early 2021, with utilization trends potentially normalizing during 2021. Management cautioned that the timing, vaccine effectiveness, deferred-care rebound, and resulting medical costs and risk-adjustment revenues remained uncertain.
Key risks include medical-cost and reserve-estimation uncertainty; dependence on Medicare, CMS and other government contracts; Medicare Star ratings and risk-adjustment coding; regulatory changes and audits; cybersecurity and data privacy; provider relationships and care-delivery execution; competition; and litigation. CMS was transitioning Medicare Advantage risk-score calculations from RAPS to encounter data, with the EDS share increasing to 75% in 2021 and full transition planned for 2022. CMS RADV audits and potential changes to audit extrapolation methodology could affect payments. The filing describes ongoing government inquiries and lawsuits, including risk-adjustment and False Claims Act matters; it says outcomes cannot be predicted and excess loss ranges could not be estimated. The auditor identified IBNR valuation and goodwill impairment assessments for provider and clinical reporting units as critical audit matters. The financial statements received an unmodified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth came from recurring operations versus the $1,220 pretax contribution from identified fair-value and risk-corridor items.
- Whether 2021 medical utilization, COVID-19 costs, reserve development, and Medicare risk-adjustment revenues followed management’s expectations.
- Actual Medicare Advantage membership growth, PDP attrition, Group and Specialty profitability, and the reported Medicare rate outlook.
- Developments in CMS risk-adjustment data transition and RADV audits, including any financial or operational consequences.
- Debt and liquidity after the $1.75 billion December 2020 accelerated share repurchase, including its final settlement and the use of capital for repurchases versus investment.
- The government-contract revenue concentration: the filing cites approximately 83% from federal contracts in several places, while a risk discussion cites approximately 88% for government health programs broadly.