Humana Inc. — Q2 2019 Form 10-Q
Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2019, compared with the same 2018 periods. Humana operates Retail, Group and Specialty, and Healthcare Services segments. Medicare products represented approximately 82% of premiums and services revenue in the first half of 2019.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $16.245 billion | $14.259 billion | $32.352 billion | $28.538 billion |
| Operating income | $1.115 billion | $862 million | $1.962 billion | $1.622 billion |
| Net income | $940 million | $193 million | $1.506 billion | $684 million |
| Diluted EPS | $6.94 | $1.39 | $11.10 | $4.93 |
| Benefit ratio | 84.4% | 84.1% | 85.3% | 84.3% |
| Operating cost ratio | 10.6% | 12.5% | 10.5% | 12.4% |
| Operating cash flow | Not presented quarterly | $2.330 billion | $3.561 billion |
- Premium revenue was $15.776 billion in Q2 and $31.427 billion for the first half, up 15.0% and 14.2%, respectively. Growth was primarily driven by Medicare Advantage membership and higher per-member premiums.
- Benefits expense was $13.318 billion in Q2 and $26.811 billion for the first half. The benefit ratio increased year over year, partly reflecting the 2019 suspension of the health insurance industry fee—which was incorporated into product pricing—and less favorable prior-period claims development.
- Cash and equivalents were $4.778 billion at June 30, 2019, versus $2.343 billion at year-end 2018. Current assets were $20.160 billion and current liabilities $11.539 billion.
- Debt totaled approximately $5.726 billion: $1.349 billion short-term and $4.377 billion long-term. Humana had $2.0 billion of unused capacity under its revolving credit facility and reported 32.5% debt-to-capitalization under the agreement, below its 50% covenant limit.
Material changes and segment performance
- Net income rose sharply against Q2 2018, which included a $790 million loss on the sale of KMG. The 2019 comparison also benefited from suspension of the health insurance industry fee and improved Retail and Healthcare Services results. Q2 2018 included a $430 million deferred tax benefit related to the KMG sale; first-half effective tax rates were 24.3% in 2019 and 5.8% in 2018.
- Retail segment earnings increased to $856 million in Q2 from $493 million; first-half earnings rose to $1.321 billion from $760 million. Individual Medicare Advantage membership grew 15.1% to 3.485 million, while stand-alone prescription drug plan membership fell 12.1% to 4.401 million.
- Group and Specialty earnings declined to $5 million in Q2 from $80 million and to $170 million for the first half from $291 million. Higher benefit ratios, including unfavorable prior-period claims development, and lower military-services earnings contributed to the decline.
- Healthcare Services earnings increased to $224 million in Q2 from $206 million and to $399 million for the first half from $379 million, supported by Kindred at Home, pharmacy, and provider-services results.
- First-half operating cash flow was lower than in 2018, partly because 2018 included early receipt of $3.3 billion in Medicare premium remittances. Humana said 2019 cash flow benefited from timing of risk-adjustment collections, higher earnings, and working-capital changes.
Outlook, risks and unusual items
- Management said available cash, investments, operating cash flow, and borrowing capacity were adequate for operating and regulatory needs, investments, debt repayment, and share repurchases for at least the next 12 months. The filing provides no specific full-year earnings guidance.
- All material CMS Medicare contracts had been renewed for 2020, but product offerings remained subject to CMS approval in Q3 2019. The phase-in of CMS encounter-data risk adjustment and proposed RADV audit rules could materially affect results; Humana challenged the proposed approach and noted ongoing litigation and regulatory uncertainty.
- The company disclosed a Department of Justice information request concerning Medicare risk-adjustment practices, a False Claims Act qui tam action, and other investigations and litigation. Outcomes and potential losses beyond recorded accruals were not estimable; adverse outcomes could be material.
- Humana had a lawsuit seeking approximately $611 million of unpaid federal risk-corridor payments, but had recorded neither revenue nor a receivable and stated there was no assurance of recovery.
- The health insurance industry fee was suspended for 2019 under then-current law and scheduled to resume in 2020. Changes in health-care regulation, Medicare payment methodology, or contract terms could adversely affect results.
- After quarter-end, the board authorized a new $3 billion share-repurchase program through June 30, 2022; on July 31, Humana announced its intent to conduct a $1 billion accelerated repurchase. Other income included fair-value changes in Kindred at Home put and call options.
Important facts for investors to verify
- Whether Medicare Advantage growth and favorable medical-cost experience persist, and how claims development affects the benefit ratio.
- The effect of CMS risk-adjustment data transition, RADV audit methodology, and related investigations or litigation, including any future estimate of exposure.
- Whether the health insurance industry fee resumes in 2020 and its impact on expenses, taxes, pricing, and margins.
- The sustainability and timing of operating cash flow, including Medicare remittances and working-capital movements.
- Execution and funding of the announced share repurchases alongside debt maturities and regulatory capital requirements.