HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2000
Business Overview: Humana is a major health services company facilitating care through HMOs and PPOs. As of the reporting period, the company served approximately 5.9 million medical members across 49 states, D.C., and Puerto Rico. Operations are divided into two segments: Health Plan (large group, Medicare, Medicaid, military) and Small Group (under 100 employees, specialty benefits).

Key Financial Metrics

Note: Q1 1999 results included a $90 million additional medical expense charge and a $12 million gain on asset sale. Adjusted Q1 1999 Net Income was $33 million.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 7.5% to $2.61 billion, driven by higher premium yields (11.4% for commercial, 6.2% for Medicare HMO) despite a 6.5% decline in commercial membership.
• Profitability Turnaround: The company returned to profitability with $21 million in net income, compared to a $16 million loss in Q1 1999. The prior year loss was heavily influenced by a $50 million premium deficiency provision and $35 million in reserve strengthening.
• Expense Ratios: The medical expense ratio improved to 85.0% from an adjusted 84.3% in the prior year. The increase is attributed to higher utilization in five Medicare markets and the absence of a $5 million favorable adjustment in the prior year.
• Accounting Change: Effective Jan 1, 2000, goodwill amortization was shortened from 40 to 20 years, increasing annual amortization expense by $25 million.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects funds from operating cash flows and existing credit facilities to meet liquidity needs. Planned capital spending for the remainder of 2000 is estimated at $100 million to $110 million, primarily for technology initiatives. The company reported no Year 2000 system outages.

Unusual Items and Transactions

• Divestitures: Completed the sale of its run-off workers' compensation business on March 31, 2000, receiving $125 million in proceeds. An estimated $118 million loss related to these sales was recorded in 1999.
• Acquisitions: Acquired Memorial Sisters of Charity Health Network (MSCHN) for ~$50 million and Wisconsin National Life Insurance Company for ~$12 million.

Risks and Contingencies

• Regulatory Capital: Potential adoption of Risk-Based Capital (RBC) formulas by states could require an additional $62 million in capital funding for subsidiaries.
• Medicare Policy: Legislative proposals regarding Medicare managed care support and reimbursement rates create uncertainty.
• Litigation:
  • Securities Litigation: Six class action complaints filed regarding alleged false statements concerning the Columbia/HCA contract negotiations.
  • Managed Care Litigation: Consolidated class actions alleging concealment of financial incentives and claim denial criteria. Plaintiffs seek damages under RICO and ERISA.
  • Provider Litigation: Claims regarding improper payment and "downcoding" of provider claims.

Investor Verification Checklist

• Membership Trends: Verify the sustainability of premium yield increases given the 6.5% decline in commercial membership.
• Medicare Cost Trends: Monitor medical cost trends in the five specific Medicare markets cited as having higher-than-expected utilization.
• Regulatory Capital Requirements: Track state adoption of RBC formulas to assess potential capital infusion needs beyond the estimated $62 million.
• Litigation Exposure: Review the status of the consolidated securities and managed care class actions for potential material financial impact.
• Goodwill Amortization: Confirm the impact of the 20-year amortization change on future earnings per share.