HUM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2001 for Humana Inc., a major health services company offering HMO, PPO, and ASO products. During this quarter, Humana implemented a management realignment to focus on a consumer-centric strategy, redefining its business segments into Commercial (employer groups) and Government (Medicare+Choice, Medicaid, TRICARE). The company continues to exit non-core markets and products to improve profitability.

Key Financial Metrics

Liquidity: The company holds $570 million in cash and cash equivalents. It maintains a $1.0 billion revolving credit agreement with $510 million outstanding and $80 million in commercial paper. Statutory capital and surplus for regulated subsidiaries totaled approximately $914 million, exceeding minimum requirements of $604 million.

Material Changes vs. Prior Period

• Revenue Decline: Premium revenues decreased 7.6% to $2.4 billion, driven by membership reductions from exiting non-core markets (including 45 Medicare counties and specific Medicaid regions) partially offset by higher premium yields.
• Profitability Improvement: Net income increased 29% to $27 million. Income before taxes rose to $42 million from $27 million.
• Expense Ratios: The medical expense ratio improved to 83.2% (from 85.0%) due to lower cost trends in exited markets and benefit reductions in Medicare+Choice. Conversely, the SG&A ratio increased to 14.5% (from 13.5%) due to infrastructure spending and a lower member-to-employee ratio.
• Cash Flow: Net cash used in operating activities was $69 million, compared to $70 million in the prior year. This usage was impacted by run-off claims payments ($55 million) and pay-downs of claims inventories ($51 million).

Outlook, Risks, and Contingencies

Guidance and Outlook

• Membership: Fully insured medical membership is expected to grow in the latter half of 2001, approaching 2.5 million by year-end. Medicare membership is expected to remain relatively constant.
• Cost Trends: Medicare cost trends are projected to be in the 3-5% range for the remainder of 2001. Commercial fully insured medical cost trends were 9-10% in Q1.
• Capital Spending: Planned capital spending for 2001 is approximately $130 million, focused on technology and administrative facilities.

Risks and Contingencies

• Legal Proceedings:
  • Chipps Case: A $80 million jury verdict (approx. $78.5 million punitive) is under appeal. Insurers have preliminarily indicated no coverage for punitive damages.
  • Class Actions: The company faces "Subscriber Track" and "Provider Track" class action lawsuits alleging RICO and ERISA violations. The company intends to defend vigorously.
  • Government Investigations: The Florida Attorney General has initiated an investigation into business practices.
• Regulatory Environment: Potential legislative changes to Medicare reimbursement, the "Patient Bill of Rights" (PBOR) legislation, and HIPAA compliance requirements pose risks to profitability and operations.
• Contract Renewals: Uncertainty exists regarding the renewal of the Puerto Rico Medicaid contract and potential changes to federal Medicare support.

Investor Verification Checklist

• Verify the status and potential financial impact of the Chipps v. Humana appeal, specifically regarding the $78.5 million punitive damages award.
• Monitor the outcome of the Managed Care Industry Class Action Litigation (Subscriber and Provider Track cases) and the Florida Attorney General investigation.
• Assess the impact of legislative proposals on Medicare reimbursement rates and the "Patient Bill of Rights" on future liability exposure.
• Confirm the execution of the TRICARE acquisition from Anthem Alliance (agreed at $45 million) and its integration timeline.
• Review the company's ability to maintain statutory capital requirements as Risk-Based Capital (RBC) rules are phased in by states.