Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: Humana is a health services company facilitating care delivery through HMOs and PPOs to approximately 5.9 million medical members. Operations are organized into two segments: Health Plan (large group commercial, Medicare, Medicaid, TRICARE) and Small Group (small group commercial, specialty benefits). The company operates in 49 states, D.C., and Puerto Rico, with significant exposure in Florida (approx. 20% of membership).
Key Financial Metrics
Revenue: Total premium revenues for 1999 were $9,959 million.
- Health Plan Segment: $6,827 million (68.6% of total).
- Small Group Segment: $3,132 million (31.4% of total).
Profitability and Losses:
- The company recorded a $118 million loss in 1999 related to the proposed sale of its workers' compensation, Medicare supplement, and North Florida Medicaid businesses.
- Parent company net loss for 1999 was $382 million, driven by a $369 million loss in equity in income of subsidiaries.
Cash Flow (Parent Company):
- Net cash provided by operating activities: $354 million.
- Net cash used in investing activities: ($202 million).
- Net cash used in financing activities: ($152 million).
Debt and Liquidity (Parent Company):
- Commercial paper outstanding: $686 million.
- Long-term debt: $93 million.
- Total current liabilities: $959 million.
- Capital and surplus in health insurance/HMO entities: $768 million (vs. minimum required of $569 million).
Material Changes and Transactions
Divestitures and Sales:
- Entered definitive agreements to sell workers' compensation, Medicare supplement, and North Florida Medicaid businesses for approximately $115 million in proceeds.
- Agreement reached to transfer 44,500 Medicare supplement policies to United Teachers Associates Insurance Company.
Acquisitions:
- Acquired Memorial Sisters of Charity Health Network (Houston) for approx. $50 million cash (Jan 2000).
- Acquired operations of 50 medical centers from FPA Medical Management for approx. $14 million cash (June 1999).
Membership and Market Changes:
- Exited 31 Medicare+Choice counties on Jan 1, 2000, affecting approx. 46,000 members due to lower reimbursement rates.
- Commercial HMO and PPO premium rates are expected to increase by 10-12% in 2000.
Guidance, Risks, and Contingencies
Management Commentary and Outlook:
- Management anticipates the government will exercise its option to renew the TRICARE contract for the year beginning July 1, 2000.
- Future premiums from HCFA (Medicare) will be impacted by new payment methods; the 2000 average statutory rate increase is approx. 2%.
- The company intends to offset lower HCFA reimbursement rates with member premiums and benefit changes.
Legal Proceedings and Contingencies:
- Securities Litigation: Six class action complaints filed regarding financial condition disclosures related to Columbia/HCA contract negotiations.
- Managed Care Litigation: Twelve purported class action complaints filed under RICO alleging concealment of coverage criteria and financial incentives.
- Chipps v. Humana: A jury awarded approx. $80 million (including $78.5 million punitive damages) in Jan 2000. Company has appealed; insurance coverage for punitive damages is disputed.
- Government Settlements: Reached agreement in principle on a $15 million settlement regarding Medicare premium overpayments (expected to be paid in 2000).
Risks:
- Significant reliance on government contracts (Medicare, Medicaid, TRICARE); termination of the Florida HCFA contract (covering 250,000 members) would have a material adverse effect.
- Regulatory changes in health care reform, including the Balanced Budget Refinement Act (BBRA) and HIPAA.
- Increased litigation and potential punitive damages not covered by insurance.
Investor Verification Checklist
- Goodwill Impairment: Verify the final accounting treatment of the $118 million loss and the proposed $400-$500 million charge mentioned in the Jan 3, 2000 8-K regarding goodwill and asset sales.
- Medicare Contract Renewal: Confirm the status of the HCFA contract renewal for the Florida market, which represents 15% of total premium revenues.
- Legal Exposure: Monitor the outcome of the Chipps appeal and the status of the RICO class action consolidations, specifically regarding insurance coverage for punitive damages.
- Capital Requirements: Assess the impact of potential Risk-Based Capital (RBC) formula adoption by states, which could require an additional $45 million capital infusion.
- Debt Covenants: Review compliance with debt covenants given the significant commercial paper balance ($686 million) and recent operating losses at the parent level.