Humana Inc. 2014 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Humana is a U.S. health and well-being company operating Retail, Employer Group, Healthcare Services, and other businesses. At year-end, it served approximately 13.8 million medical members and 7.7 million specialty-product members. Medicare products generated approximately 72% of 2014 premiums and services revenue. The filing reports 73% of revenue from federal-government contracts; a separate risk disclosure states approximately 76% from government health programs, including federal and state programs.
Key financial results
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $48.5 billion | $41.3 billion | +17.4% |
| Operating income | $2.362 billion | $2.061 billion | +14.6% |
| Net income | $1.147 billion | $1.231 billion | -6.8% |
| Diluted EPS | $7.36 | $7.73 | -4.8% |
| Operating cash flow | $1.618 billion | $1.716 billion | -5.7% |
| Benefit ratio | 83.0% | 83.9% | Improved 0.9 percentage points |
| Operating cost ratio | 15.9% | 15.5% | Worsened 0.4 percentage points |
Revenue growth was driven principally by Medicare Advantage, Medicare Part D, individual commercial, and state-based Medicaid membership. Net income fell despite higher operating income, largely because the non-deductible health insurance industry fee raised the effective tax rate to 47.2% from 35.9%. 2014 also included a $37 million pretax debt-extinguishment loss; 2013 included $243 million of long-term-care reserve strengthening and a favorable Department of Defense contract-claims settlement.
Fourth-quarter 2014 revenue was $12.328 billion, pretax income $287 million, net income $145 million, and diluted EPS $0.94. Fourth-quarter 2013 revenue was $10.187 billion, with a pretax loss of $49 million, net loss of $30 million, and diluted loss per share of $0.19; the quarter included the long-term-care reserve charge.
Balance sheet, liquidity, and capital
At December 31, 2014, cash and cash equivalents were $1.935 billion, total cash and investments were $11.482 billion, total assets were $23.466 billion, debt was $3.825 billion, benefits payable were $4.475 billion, and stockholders’ equity was $9.646 billion. Debt increased from $2.600 billion in 2013 following a $1.75 billion senior-note issuance and redemption of $500 million of 6.45% notes. The company reported $996 million of available capacity under its $1.0 billion revolving credit facility, no revolver borrowings, and no commercial-paper borrowings at year-end. It stated that available resources were adequate for at least the next 12 months.
Operating cash flow was $1.618 billion, while investing and financing activities used $63 million and $758 million, respectively. The company repurchased shares for $872 million in cash (including the initial settlement of an accelerated repurchase) and paid $172 million in dividends. The net receivable under commercial risk-adjustment, risk-corridor, and reinsurance programs was approximately $679 million, expected to settle in 2015. Medicare Part D subsidy and discount receivables also rose; the net receivable was $1.658 billion at year-end.
Material changes and segment performance
- Retail revenue increased 24.9% to $33.993 billion, but pretax income declined 14.4% to $1.098 billion. Individual Medicare Advantage membership rose 18.2%, standalone Part D membership 21.9%, individual commercial membership 91.3%, and state-based Medicaid membership 249.1%. Higher exchange and state-contract investment and Hepatitis C drug costs weighed on results.
- Employer Group revenue increased 8.9% to $12.297 billion, while pretax income declined 10.3% to $314 million. Higher utilization, including Hepatitis C drug costs, and transitional non-reform-compliant policy changes pressured results. ASO membership fell 5.0%.
- Healthcare Services pretax income increased 41.8% to $739 million, attributed mainly to improved operating-cost performance and growth supporting Medicare members. Pharmacy scripts for Retail and Employer Group members rose 20% to approximately 329 million.
- Other Businesses recorded $78 million of pretax income versus a $193 million pretax loss in 2013, when results included the long-term-care reserve charge and other items.
- Favorable prior-year medical claims reserve development was $518 million in 2014, compared with $474 million in 2013. Benefits payable increased by $582 million year over year, including higher incurred-but-not-reported claims reserves.
Outlook, commentary, risks, and unusual items
- Management estimated 2015 Medicare Advantage funding reductions of approximately 2%, citing payment-rate changes, quality bonuses, coding and funding formula changes, and the health insurance industry fee. It said products had been designed to remain competitive; this is not a company earnings forecast.
- January 1, 2015 individual Medicare Advantage membership increased approximately 257,000, or 10.5%, from year-end 2014. Standalone Part D membership, excluding LI-NET, increased approximately 230,500, or 5.8%.
- Management expected group ASO membership to decline by approximately 400,000 to 425,000 on January 1, 2015, principally due to the loss of several large accounts. Expected 2015 capital expenditures were $575 million to $625 million, excluding acquisitions.
- The health insurance industry fee increased 41% for the industry as a whole in 2015; Humana expected a comparable increase absent changes in market share. The company paid $562 million for the 2014 fee.
- Key risks include dependence on government programs and CMS contracts, Medicare Advantage rate and risk-adjustment changes, coding and audit exposure, medical-cost and reserve-estimation uncertainty, exchange adverse selection and settlement timing, regulatory changes, provider relationships, cybersecurity and data protection, and litigation or investigations.
- CMS had selected certain Medicare Advantage contracts for 2011 risk-adjustment data validation audits. Humana’s internal estimated settlements for 2011–2014 were not material, but it said the ultimate impact was unclear pending CMS guidance. The company also disclosed Department of Justice information requests concerning Medicare risk-adjustment practices and related matters; outcomes and potential losses could not be estimated clearly.
- The closed block of approximately 32,700 long-term-care policies remained under review for strategic alternatives. Management said a divestiture could result in a material loss; adverse actuarial assumption changes could increase reserves and expense by up to $300 million net of reinsurance, and a divestiture loss could exceed that amount.
- There is no explicit full-year 2015 earnings guidance in the provided filing text. The filing states that 2015 Medicare contracts and product offerings had been approved and material CMS contracts renewed.
Most important facts for investors to verify
- Whether the $679 million commercial risk-program receivable and elevated Part D subsidy receivables were collected and settled as expected in 2015.
- Actual medical-cost trends, claims reserve development, and the sustainability of the $518 million favorable prior-year reserve development.
- Effects of 2015 Medicare funding changes and the higher health insurance industry fee on pricing, membership, and segment profitability.
- Developments in CMS risk-adjustment audits and the Department of Justice information requests, including any quantified exposure or required changes in practice.
- Long-term-care block assumptions, any further reserve actions, and the outcome and potential cost of strategic alternatives.
- Execution of projected membership trends, especially the anticipated ASO account losses, and planned capital spending.