HUMANA INC annual report, FY2017

Humana Inc. 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017; the filing was submitted February 16, 2018. Humana is a U.S. health and well-being company focused primarily on Medicare. At year-end it reported approximately 14.0 million medical members and 7.0 million specialty members. Federal government contracts generated approximately 79% of premiums and services revenue.

Financial performance

Metric	2017	2016
Total revenue	$53.767 billion	$54.379 billion
Income before taxes	$4.020 billion	$1.552 billion
Net income	$2.448 billion	$614 million
Diluted EPS	$16.81	$4.07
Benefit ratio	83.0%	84.9%
Operating cost ratio	12.3%	13.3%
Cash flow from operations	$4.051 billion	$1.936 billion

Premiums declined 1.2% to $52.380 billion, principally because Individual Commercial membership and revenue contracted; services revenue rose 1.3% to $982 million. Investment income increased to $405 million.
Year-end cash and cash equivalents were $4.042 billion; cash and investments totaled $16.344 billion. Total debt was approximately $4.920 billion, including $150 million of short-term borrowings and $4.770 billion of long-term debt. Stockholders’ equity was $9.842 billion.
Operating cash flow benefited from the Aetna termination payment, higher earnings and working-capital timing. Investing activities used $2.941 billion and financing activities used $945 million. The company spent $3.050 billion on share repurchases under authorizations and paid $220 million in dividends.

Changes and unusual items

Net income rose substantially, but the comparison is dominated by the Aetna merger termination: Humana received a $1 billion breakup fee in February 2017 and recorded a net gain of $936 million after related costs. The 2017 result also benefited from the 2017 suspension of the health insurance industry fee and from prior-year reserve development.
The benefit ratio improved partly because 2016 included a $505 million long-term-care reserve strengthening. Humana recorded favorable prior-year medical claims reserve development of $483 million in 2017, versus $582 million in 2016.
The operating cost ratio benefited from the 2017 suspension of the health insurer fee and efficiencies. The fee resumed in 2018; its 2016 cost was $916 million and it is nondeductible for tax purposes.
The effective tax rate was 39.1%, down from 60.5% in 2016. The 2017 provision included an estimated $133 million impact from tax reform, including deferred-tax remeasurement. Humana expected a 2018 effective tax rate of approximately 32.5%–33.5%.
Fourth-quarter 2017 revenue was $13.189 billion, pretax income $490 million and net income $184 million, compared with fourth-quarter 2016 revenue of $12.878 billion, a pretax loss of $486 million and a net loss of $401 million. The 2016 quarter included the long-term-care reserve charge and commercial risk-corridor receivable write-off.

Segments, outlook and management commentary

Retail pretax income increased 17.0% to $1.978 billion, supported by Medicare Advantage. Retail medical membership grew 5.2% to 9.206 million. Humana forecast 2018 individual Medicare Advantage net growth of 180,000–200,000 and group Medicare Advantage growth of 65,000–70,000; standalone PDP membership was expected to decline by 280,000–320,000.
Group and Specialty pretax income increased 19.8% to $412 million. Healthcare Services pretax income fell 11.8% to $967 million, partly due to changes to chronic-care programs and lower provider-service Medicare rates.
Individual Commercial pretax income was $193 million versus a 2016 pretax loss of $869 million. Humana exited its remaining individual commercial medical business effective January 1, 2018.
Management described integrated care delivery and value-based provider relationships as central to its strategy. Approximately 66.5% of individual Medicare Advantage members were in value-based relationships at year-end, compared with 64.0% a year earlier.
CMS’s preliminary 2019 notice estimated an average sector Medicare Advantage benchmark funding increase of 1.84%; Humana expected its preliminary impact to be relatively in line with CMS’s estimate, excluding the proposed employer-group policy effect. Final rates were not yet available.
Humana said available cash, investments, operating cash flow, and borrowing capacity should fund operating and regulatory needs, acquisitions, capital spending, debt service and repurchases for at least 12 months. It had no borrowings under its $2 billion revolving credit agreement and reported $2 billion of remaining capacity; its commercial paper program had $150 million outstanding at year-end.

Risks, contingencies and transactions

Results are highly exposed to government policy, Medicare reimbursement and risk-adjustment rules, CMS contract renewals, and concentration in Medicare and federal business. Florida individual Medicare Advantage contracts alone represented approximately 15% of total premiums and services revenue.
CMS audits and risk-data validation, including audits of Humana contracts for 2011–2013, may result in payment adjustments. The company said the eventual impact could not be determined. Other material risks include claims-cost estimation, medical utilization and inflation, competition, provider relationships, cybersecurity and privacy, litigation, and changes to health-care regulation.
Humana sued the U.S. government in November 2017 seeking approximately $611 million in unpaid commercial risk-corridor payments for 2014–2016. No receivable or revenue was recorded for the claim, and recovery was uncertain. The company had written off $583 million of risk-corridor receivables in 2016.
The closed long-term-care block had approximately $2.3 billion in future policy benefits payable. Humana reported no 2017 premium deficiency, but estimated adverse assumption changes could increase reserves and benefit expense by up to $250 million, net of reinsurance. It agreed to sell KMG, which holds the closed block, and expected an approximately $365 million net loss on the sale; closing was subject to regulatory approval and expected by third-quarter 2018.
Humana agreed to acquire a 40% minority interest in Kindred at Home for approximately $800 million, with closing anticipated in summer 2018 subject to approvals. The agreement includes sponsor put and Humana call options based on EBITDA multiples, creating potential future capital commitments.
Humana recorded $148 million of workforce-reduction and early-retirement charges affecting approximately 3,600 associates. It also recorded a $54 million assessment related to the liquidation of Penn Treaty.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported disclosure controls and internal controls as effective.

Key facts for investors to verify

How much of 2017 earnings and cash flow is attributable to the one-time Aetna breakup fee, fee suspension, reserve development and other unusual items.
Actual 2018 Medicare Advantage and PDP enrollment, margins, CMS funding and risk-adjustment audit outcomes.
Progress, final economics and cash impact of the KMG sale and Kindred at Home investment, including the KMG expected loss and Kindred option terms.
Potential recovery from the $611 million risk-corridor lawsuit and any additional exposure from government investigations or audits.
Long-term-care reserve adequacy, claims duration, interest-rate assumptions and the company’s ability to obtain approved premium increases.
Cash deployment under the share-repurchase authorization, debt levels and the availability of regulated-subsidiary dividends to the parent company.