HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: Humana is a major health services company facilitating care through HMOs and PPOs for approximately 5.4 million medical members. Operations are divided into two segments: Health Plan (large group, Medicare, Medicaid, TRICARE) and Small Group (under 100 employees, specialty benefits).

Key Financial Metrics

Note: 1999 figures include significant one-time charges and gains. Adjusted 1999 medical expense ratio for 9 months is 84.8%.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 2.4% in Q3 2000 and 6.1% for the nine months ended Sept 30, 2000, driven primarily by higher premium yields (13.5% commercial, 5.5% Medicare in Q3) despite a 9.5% decline in total medical membership.
• Profitability: Net income rose 4.5% in Q3 and 85% for the nine-month period compared to 1999. However, 1999 results were depressed by a $90 million charge for premium deficiency and reserve strengthening. On an adjusted basis, 1999 earnings were higher.
• Cost Trends: The medical expense ratio improved to 84.2% in Q3 2000 from 85.0% in Q3 1999. This was driven by improved pharmacy cost trends (dropping from ~20% to ~6.7%) and the exit of high-cost non-core members, partially offset by higher Medicare utilization in exit counties.
• Liquidity: Cash and cash equivalents decreased from $978 million at year-end 1999 to $364 million at Sept 30, 2000, due to operating cash outflows, debt repayments, and share repurchases.

Outlook, Risks, and Management Commentary

• Strategic Shifts: Management is actively exiting non-core businesses, including 45 Medicare counties and 17 small group commercial markets, to focus on profitable core segments. Divestitures in 2000 included the Medicare supplement business and North Florida Medicaid business.
• Acquisitions: The company acquired Memorial Sisters of Charity Health Network (MSCHN) for $50 million and other smaller entities to support e-business and dental operations.
• Accounting Changes: Effective Jan 1, 2000, goodwill amortization was shortened from 40 to 20 years, increasing annual amortization expense by $25 million.
• Key Risks:
  • Legislative/Regulatory: Potential changes to Medicare reimbursement rates and support for managed care could materially impact results.
  • Contract Renewals: Medicare, Medicaid, and TRICARE contracts are subject to annual renewal; loss of these contracts would be material.
  • Legal Proceedings: Significant class action litigation is pending (Subscriber and Provider Track cases) regarding managed care practices. A $80 million jury verdict in a separate case is under appeal.
  • Capital Requirements: Potential adoption of Risk-Based Capital (RBC) formulas by states could require an estimated $80 million capital infusion into subsidiaries.

Investor Verification Checklist

• Membership Attrition: Verify the sustainability of revenue growth given the 9.5% decline in total medical membership and the aggressive exit strategy from non-core markets.
• Pharmacy Cost Trends: Confirm the durability of the improved pharmacy cost trends (approx. 6-7%) resulting from the three-tier benefit plan conversion.
• Legal Exposure: Monitor the status of the consolidated class action litigation in the Southern District of Florida and the appeal of the $80 million Chipps verdict.
• Regulatory Capital: Assess the impact of potential state-level Risk-Based Capital (RBC) requirements on liquidity and capital allocation.
• Adjusted Earnings: Compare reported earnings against adjusted figures to understand the true operational performance, as 1999 comparables were heavily impacted by one-time charges.