Business context and reporting period
Humana Inc. is a health and well-being company with Retail, Group and Specialty, and Healthcare Services segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Medicare products represented approximately 83% of premiums and services revenue for the first six months.
Financial performance and position
Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $19,083 | $16,245 | $38,018 | $32,352 |
| Operating income | $2,435 | $1,115 | $3,509 | $1,962 |
| Net income | $1,828 | $940 | $2,301 | $1,506 |
| Diluted EPS | $13.75 | $6.94 | $17.31 | $11.10 |
| Benefit ratio | 76.4% | 84.4% | 80.7% | 85.3% |
| Operating cost ratio | 12.4% | 10.6% | 11.8% | 10.5% |
| Effective tax rate | 30.0% | 24.2% | 31.0% | 24.3% |
| Operating cash flow | Not provided by quarter in this filing | $3,541 | $2,330 |
- Premium revenue increased 17.6% in Q2 and 17.5% year to date, mainly on Medicare Advantage and state-based contract membership growth and higher Medicare Advantage premiums. Q2 services revenue rose 26.8%, partly reflecting the Enclara acquisition.
- The lower benefit ratios largely reflected deferred non-essential care during COVID-19, partly offset by testing and treatment costs and pandemic relief measures. They should not be assumed to represent normalized claims experience.
- At June 30, cash and cash equivalents were $7.163 billion and current investment securities were $12.836 billion. Current assets were $27.868 billion versus current liabilities of $16.455 billion.
- Short-term debt was $1.724 billion and long-term debt $6.058 billion, totaling $7.782 billion. The company had $2.0 billion of available capacity under its revolving credit agreement and reported compliance with its debt-to-capitalization covenant.
- Six-month cash flows: operating activities provided $3.541 billion; investing activities used $2.862 billion; financing activities provided $2.430 billion. Cash increased $3.109 billion from year-end 2019.
Material changes versus prior period
- Q2 revenue rose 17.5%, operating income more than doubled, and net income increased 94.5%; six-month net income rose 52.8%. Results benefited substantially from reduced care utilization during the pandemic.
- Q2 Retail segment earnings increased to $1.989 billion from $856 million; Group and Specialty earnings were $287 million versus $5 million; Healthcare Services earnings were $317 million versus $224 million.
- Individual Medicare Advantage membership grew 11.3% to 3.877 million; state-based Medicaid membership increased 48.2% to 689,200. Stand-alone Medicare PDP membership declined 11.6% to 3.888 million. Fully insured commercial group membership fell 12.9% to 820,800.
- Operating costs rose 38.2% in Q2, reflecting the reinstated health insurance industry fee, a $200 million Humana Foundation contribution, and COVID-related costs, partly offset by productivity and scale efficiencies. The company expects to pay approximately $1.2 billion for the 2020 industry fee in September; the fee is not deductible and is repealed beginning in 2021.
- Debt increased from $5.666 billion at December 31, 2019 to $7.782 billion at June 30, 2020, following a $1 billion term-loan draw and issuance of $1.1 billion of senior notes in March.
Outlook, management commentary, risks and unusual items
- Management expects the favorable second-quarter impact from deferred care to be offset during the remainder of 2020 as utilization normalizes, alongside the financial effects of continuing pandemic relief. The filing provides no specific numerical earnings guidance.
- Management said hospital admissions and utilization were significantly depressed in April, recovered through May and June, and remained modestly below historical levels at quarter-end. The duration of COVID-19, future utilization, testing and treatment costs, and the course of restrictions remain uncertain.
- COVID-19 measures included waiving certain Medicare Advantage cost sharing for the remainder of 2020, testing and outreach programs, provider support, and a $200 million Foundation contribution. Management cited possible effects on claims, premium collections, investments, operations, staffing, cybersecurity and liquidity.
- Humana’s Medicare contracts for 2021 were renewed, but 2021 product offerings remained subject to CMS approval in the third quarter of 2020. Risk-adjustment data audits and the transition from RAPS to encounter-data-based risk scoring could affect payments; CMS methodology and overpayment matters remain contested.
- On July 7, 2020, after quarter-end, the Court of Federal Claims entered a $609 million judgment for Humana on risk-corridor claims. The company was pursuing payment but had not recorded revenue or a receivable at June 30; payment timing remained uncertain.
- Other material uncertainties include a DOJ information request concerning Medicare risk-adjustment practices, a False Claims Act qui tam case, regulatory reviews, and other litigation. The company said possible losses beyond recorded accruals could not be estimated for the described matters and outcomes could be material.
- The quarter’s earnings comparison was affected by fair-value adjustments to Kindred at Home put/call options: these increased Q2 earnings by $227 million in 2020 versus $174 million in 2019. For the six-month comparison, the adjustment reduced 2020 earnings by $70 million but increased 2019 earnings by $135 million.
- The company acquired Enclara for approximately $709 million, net of cash acquired, and entered a partnership expected to open about 50 senior-focused primary-care centers over three years. The Enclara purchase-price allocation was preliminary.
Important facts for investors to verify
- How claims utilization and benefit ratios evolve as deferred care resumes, and whether additional pandemic costs or relief efforts affect margins.
- The timing and amount of the $609 million risk-corridor judgment payment, which was not recognized in the June 30 statements.
- CMS approval of 2021 products and developments in risk-adjustment audits, data requirements and related litigation or regulation.
- Cash generation and working-capital movements: six-month operating cash flow benefited from timing effects, including delayed estimated tax payments and provider-related benefit-payable accruals.
- Debt and liquidity following the 2020 borrowing, including the planned $1.2 billion industry-fee payment and the company’s access to regulated-subsidiary cash.
- Whether the preliminary Enclara valuation, acquisition integration and primary-care partnership produce expected operating results.