Humana Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparative periods ended September 30, 2019. Financial statements are unaudited. Humana operates Retail, Group and Specialty, and Healthcare Services segments. Medicare products generated approximately 82% of premiums and services revenue in the first nine months.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $20.1 billion | $16.2 billion | $58.1 billion | $48.6 billion |
| Net income | $1.34 billion | $689 million | $3.64 billion | $2.20 billion |
| Diluted EPS | $10.05 | $5.14 | $27.37 | $16.24 |
| Benefit ratio | 82.6% | 85.0% | 81.4% | 85.2% |
| Operating cost ratio | 13.0% | 11.7% | 12.2% | 10.9% |
- Premium revenue was $18.9 billion in Q3 and $55.8 billion for the nine-month period. Growth reflected Medicare Advantage and Medicaid membership gains, higher per-member Medicare Advantage premiums, and the risk-corridor recovery.
- Q3 results included $643 million of investment gains, primarily from publicly traded equity holdings following IPOs, and a $578 million net recovery of previously written-off commercial risk-corridor receivables. Together with put/call valuation adjustments, these items contributed $1.228 billion to pretax income and $7.10 to diluted EPS in Q3. The comparable nine-month contribution was $1.158 billion and $6.71 per diluted share. Reported earnings therefore include material unusual items.
- Lower benefit ratios reflected deferred care during the pandemic and the risk-corridor recovery, partly offset by COVID-19 testing and treatment costs and pandemic relief. Utilization had rebounded to approximately 95% of historical baseline by quarter-end.
- The higher operating cost ratio reflected the reinstated 2020 health insurance industry fee, COVID-related administrative costs, and a $200 million first-half contribution to the Humana Foundation. The $1.2 billion industry fee was paid in September; the fee is scheduled for permanent repeal beginning in 2021.
- Segment results were mixed: Retail earnings were $553 million in Q3, down 13.5%, but $3.23 billion for nine months, up 64.6%. Group and Specialty recorded a $160 million Q3 loss versus $4 million of earnings a year earlier, while nine-month earnings rose to $232 million from $174 million. Healthcare Services earnings increased to $249 million in Q3 and $816 million for nine months.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $5.36 billion, compared with $4.77 billion in 2019. Investing activities used $3.01 billion, including the $709 million Enclara acquisition and $668 million of capital expenditures. Financing activities provided $1.59 billion. Cash increased $3.93 billion to $7.99 billion.
- At September 30, cash and cash equivalents were $7.99 billion; current investment securities were $12.74 billion and long-term investment securities were $1.11 billion. Benefits payable were $8.21 billion.
- Total debt was approximately $7.78 billion, comprising $1.72 billion short-term and $6.06 billion long-term. Debt increased from approximately $5.67 billion at year-end 2019, reflecting new notes and a $1 billion term loan. The company had $2.0 billion of unused revolving credit capacity and reported compliance with its 50% maximum debt-to-capitalization covenant, at 33%.
- Management said available cash, investments, operating cash flow, and borrowing capacity were adequate for operating and regulatory needs and other planned uses for at least the next 12 months. Parent-company cash and short-term investments were $2.4 billion.
Business changes, outlook and risks
- Individual Medicare Advantage membership grew 10.8% year over year to 3.94 million; state-based Medicaid membership grew 55.7% to 730,100. Stand-alone Part D membership fell 11.1% to 3.89 million. Fully insured commercial group membership declined 13.8%, with the filing citing economic disruption, unemployment, account losses and pricing discipline.
- COVID-19 care utilization rebounded during Q3. Management expected the remainder of 2020 performance to be further offset by higher utilization, COVID-19 costs and continued stakeholder support. The filing gives no specific full-year earnings guidance; the pandemic’s duration and financial effects were described as uncertain.
- CMS’s preliminary 2022 Medicare Advantage and Part D payment-rate proposal estimated a 2.82% average benchmark funding increase for the sector. Humana expected its preliminary impact to be generally in line with that estimate, subject notably to its Star Ratings. CMS had renewed all material Humana Medicare contracts for 2021 and approved its product offerings.
- Key exposures include COVID-19-related utilization, costs, premium collection and operational disruption; changes to Medicare payment and risk-adjustment rules; CMS risk-adjustment data validation audits and the transition to encounter-data-based risk scores; and legal and regulatory proceedings. The company disclosed a continuing DOJ information request concerning Medicare risk-adjustment practices, a False Claims Act qui tam case, and other regulatory reviews and litigation. Potential losses beyond recorded accruals could not be estimated clearly and could be material.
Important facts for investors to verify
- How much of reported earnings and EPS growth is attributable to the $643 million equity-security gain and $578 million net risk-corridor recovery, rather than recurring operations.
- Whether medical utilization and claims costs continue to rise as care returns toward historical levels, and how that affects benefit ratios and reserves.
- Whether Medicare Advantage membership growth, CMS payment updates and Star Ratings support future premiums and margins.
- The performance and integration of Enclara and the planned senior-focused primary care expansion, including the WCAS partnership.
- Developments in CMS risk-adjustment audits, related litigation and other regulatory matters, and any impact on payments or financial statements.
- Debt, liquidity and regulated-subsidiary capital needs as the company uses cash for operations, investment, dividends, acquisitions and other corporate purposes.