Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: Humana is a health services company facilitating care delivery through HMOs and PPOs to approximately 6.0 million medical members. The company operates in 48 states, D.C., and Puerto Rico. In Q3 1999, the company realigned its structure into two segments: Health Plan (large group, Medicare, Medicaid, TRICARE) and Small Group (under 100 employees, specialty benefits).
Key Financial Metrics
| Metric (in millions) | Q3 1999 | Q3 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Total Revenues | $2,557 | $2,464 | $7,539 | $7,312 |
| Premium Revenues | $2,527 | $2,421 | $7,416 | $7,170 |
| Net Income (Loss) | $22 | $(30) | $34 | $72 |
| Diluted EPS | $0.13 | $(0.18) | $0.20 | $0.43 |
| Operating Cash Flow (9mo) | $(232) | $(251) | — | — |
| Cash & Equivalents | $482 | — | — | — |
| Long-Term Debt | $667 | — | — | — |
| Medical Expense Ratio | 85.0% | 85.9% | 86.0% | 84.1% |
| Admin Expense Ratio | 14.6% | 15.8% | 14.6% | 15.3% |
Note: Q3 1998 reported results included significant one-time charges ($34M asset write-downs, $46M premium deficiency, $27M provider costs). Adjusted Q3 1998 income before taxes was $85M.
Material Changes vs. Prior Period
- Profitability: Net income for Q3 1999 was $22 million compared to a net loss of $30 million in Q3 1998. However, on an adjusted basis excluding one-time 1998 charges, income before taxes declined from $85 million in Q3 1998 to $34 million in Q3 1999.
- Revenue Growth: Premium revenues increased 4.4% in Q3 1999 due to higher premium yields (6.7% commercial, 4.0% Medicare), partially offset by a commercial membership decline of 104,600.
- Cost Trends: The medical expense ratio increased to 85.0% in Q3 1999 from 82.9% (adjusted) in Q3 1998. This was driven by medical cost trends (7.7% large group, 5.0% Medicare) exceeding premium yield increases.
- Segment Performance: The Health Plan segment earned $41 million before taxes in Q3 1999 (down from $77 million adjusted in 1998). The Small Group segment reported a loss of $7 million in Q3 1999, compared to $8 million income in Q3 1998.
- Liquidity: Cash and cash equivalents decreased from $913 million at year-end 1998 to $482 million at September 30, 1999, primarily due to operating cash usage and investing activities.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Initiatives
Management attributes earnings declines to higher medical cost trends. Five initiatives are underway to mitigate costs: pricing adjustments, market rationalization, large group business rehabilitation, provider re-contracting, and cost management. Many initiatives are scheduled to take effect January 1, 2000, upon contract renewals.
Unusual Items
- Premium Deficiencies: A $50 million provision was recorded in Q1 1999 due to ineffective provider risk-sharing and the Columbia/HCA agreement impact.
- Reserve Strengthening: A $35 million charge was recorded in Q1 1999 for prior period adverse claims development.
- Acquisition: Acquired 50 medical centers from FPA Medical Management for ~$20 million in June 1999.
- 1998 Charges: Q3 1998 included $34 million in charges related to the termination of the UnitedHealth merger and exiting five markets.
Risks and Contingencies
- Government Contracts: Medicare, Medicaid, and TRICARE contracts are subject to renewal and legislative changes. Loss of these contracts or payment reductions would have a material adverse effect.
- Legal Proceedings: Pending securities litigation regarding financial disclosures and a class action (Price v. Humana) alleging concealed cost-based criteria for claim denials. Management believes allegations are without merit.
- Year 2000: Remediation is 99% complete with a projected total cost of $27.5 million. Risks remain regarding third-party vendor readiness.
- Capital Requirements: Potential adoption of Risk-Based Capital (RBC) formulas by states could require an additional $30 million capital infusion into subsidiaries.
Investor Verification Checklist
- Medical Cost Trends: Verify if the 7.7% large group and 5.0% Medicare cost trends are sustainable or if they will be curbed by the Jan 2000 rate increases.
- Membership Attrition: Monitor commercial membership levels, which declined by 104,600 in Q3 1999 due to pricing actions.
- Government Contract Renewals: Confirm the status of Medicare HMO and TRICARE contract renewals and any legislative changes to reimbursement rates.
- Legal Exposure: Track the status of the Price v. Humana class action and securities litigation regarding Columbia/HCA disclosures.
- Liquidity Position: Assess the impact of the $431 million decrease in cash over nine months and the company's ability to meet the $1.5 billion credit facility covenants.