Humana Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; the supplied filing does not provide a standalone fourth-quarter results summary. Amounts are in U.S. dollars unless stated otherwise.
Business context
Humana operates Retail, Group and Specialty, and Healthcare Services segments, combining health insurance with pharmacy, provider, and home-based care. At year-end, it served approximately 17.1 million medical members and 5.3 million specialty members. Approximately 83% of 2021 premiums and services revenue came from federal-government contracts; individual Medicare Advantage contracts in Florida accounted for 15% of consolidated revenue.
On August 17, 2021, Humana acquired the remaining 60% of Kindred at Home (KAH), bringing its ownership to 100%. The transaction had an enterprise value of $8.2 billion and a net purchase price of approximately $5.8 billion. Remeasuring its existing investment generated a $1.1 billion gain.
Financial results and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $83.1 billion | $77.2 billion | +7.7% |
| Premiums revenue | $79.8 billion | $74.2 billion | +7.6% |
| Services revenue | $3.1 billion | $1.8 billion | +68.3% |
| Income from operations | $3.1 billion | $5.0 billion | −36.9% |
| Net income | $2.9 billion | $3.4 billion | −12.9% |
| Diluted EPS | $22.67 | $25.31 | −10.4% |
| Benefit ratio | 86.7% | 83.1% | +3.6 percentage points |
| Operating cost ratio | 12.2% | 13.2% | −1.0 percentage point |
| Operating cash flow | $2.3 billion | $5.6 billion | −$3.4 billion |
- Segment earnings: Retail $1.94 billion, down 35.8%; Group and Specialty $149 million, versus a $143 million loss; Healthcare Services $1.33 billion, up 40.8%. Healthcare Services benefited from KAH consolidation and provider-business growth.
- Balance sheet: Cash and cash equivalents were $3.4 billion, down from $4.7 billion. Investment securities totaled $14.0 billion. Total debt was approximately $12.5 billion ($2.0 billion current and $10.5 billion long-term), up from $6.7 billion at year-end 2020.
- Funding and liquidity: Humana reported $2.3 billion in operating cash flow and $6.6 billion of net cash used in investing activities, including $4.2 billion for acquisitions. It had $3.9 billion of unused capacity under its revolving credit facilities, excluding incremental uncommitted capacity, and stated resources were adequate for at least the next 12 months.
- Capital returns: Humana paid $354 million in dividends and repurchased $79 million of shares in 2021. A $3 billion repurchase authorization remained in place.
Material changes and unusual items
- Revenue growth primarily reflected individual Medicare Advantage and state-based contract membership growth, higher Medicare Advantage premiums, and KAH consolidation. Individual Medicare Advantage membership rose 11.3% to 4.41 million; Medicaid membership rose 21.7% to 940,100.
- Earnings comparisons were materially affected by unusual investment and transaction items. FY2021 included the $1.129 billion KAH remeasurement gain, $597 million of negative put/call valuation adjustments, $128 million of KAH transaction and integration costs, and a $341 million decline in publicly traded equity-security fair values. FY2020 included $745 million of equity-security gains and $578 million from receipt of previously written-off commercial risk-corridor receivables.
- Benefits expense rose 12.3%, faster than premiums, and the benefit ratio increased 3.6 points. COVID-19-related utilization disruption in 2020 affected 2021 medical costs and Medicare risk-adjustment revenue; comparisons also reflected prior-year pandemic relief and favorable 2021 reserve development of $825 million.
- The operating cost ratio improved partly because the non-deductible health insurance industry fee ended in 2021 and COVID-related administrative costs declined. The effective tax rate fell to 14.2% from 28.0%, reflecting the non-taxable KAH gain and fee repeal.
Outlook, commentary, and risks
- Management anticipated 2022 individual Medicare Advantage net membership growth of approximately 150,000–200,000; relatively flat Group Medicare Advantage membership; a 125,000-member decline in standalone PDP; and a 50,000–100,000 decline in state-based contracts, assuming the public health emergency ended in April 2022. Group commercial medical membership was expected to decline approximately 125,000–165,000.
- CMS’s February 2022 preliminary 2023 Medicare Advantage and Part D Advance Notice estimated a sector-wide 4.48% average increase in benchmark funding. Humana’s preliminary analysis anticipated a change generally in line with that estimate; rates remained subject to finalization.
- Humana said it was pursuing cost savings, productivity improvements, and value acceleration to fund Medicare Advantage growth and further Healthcare Services investment in 2023; it anticipated possible charges in 2022. The filing does not provide a clear full-year 2022 earnings or EPS guidance figure.
- Key risks include dependence on government programs and CMS policy/payment decisions; Medicare risk-adjustment data and audit exposure, including the transition to EDS-only risk scoring in 2022; medical-cost and claims-reserve estimation uncertainty; COVID-19 effects; competitive pricing and membership trends; cybersecurity and data privacy; and acquisition integration and goodwill valuation.
- CMS was conducting risk-adjustment data validation audits of certain Humana Medicare Advantage contracts. The company also disclosed a Department of Justice information request concerning Medicare risk-adjustment practices and a False Claims Act qui tam matter; it could not predict outcomes or estimate possible losses beyond recorded accruals. The TRICARE East contract was scheduled to expire December 31, 2022 unless extended.
Important facts for investors to verify
- How much of reported earnings reflects recurring operations versus KAH valuation, investment-market, and other unusual items.
- Whether medical utilization, Medicare risk-adjustment revenue, and reserve development normalize, and whether the $825 million favorable prior-year reserve development is repeatable.
- KAH integration, cash generation, debt reduction, and the potential strategic ownership alternatives for its hospice business.
- Final CMS payment policies and rates, EDS implementation, RADV audit outcomes, and the status and potential exposure of disclosed legal and regulatory matters.
- Actual 2022 membership, benefit-ratio, and cost-savings performance versus management’s stated expectations, alongside refinancing and liquidity needs.