HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1995
Business Overview: Humana provides managed health care products through HMOs and PPOs, serving Commercial, Medicare risk, and Medicare supplement markets. The company integrates management with health care delivery through provider networks.

Key Financial Metrics

Debt & Liquidity: As of September 30, 1995, total liabilities were $988 million. The company maintains a $600 million revolving credit line. Cash and cash equivalents increased significantly to $622 million from $272 million at year-end 1994.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 18.4% year-over-year for both the quarter and the nine-month period, driven by same-store Commercial membership gains, a 4.6% increase in Medicare risk premium rates, and acquisitions (CareNetwork, Inc.).
• Membership Trends: Commercial membership grew 3.5% in Q3 and 16.5% for the nine months. Medicare risk membership increased, while Medicare supplement membership declined.
• Expense Ratios: The medical loss ratio increased slightly in Q3 (82.6% vs 81.3%) due to higher non-hospital and outpatient service costs in Commercial products. However, the nine-month ratio improved slightly (81.8% vs 81.9%). Administrative cost ratios improved in both periods due to revenue growth and cost controls.
• Unusual Items: The nine-month 1994 results included a favorable $29 million tax dispute settlement and an $18 million non-operational asset write-down. Excluding these, 1995 net income growth was stronger.

Guidance, Outlook, and Risks

• Acquisitions: On October 11, 1995, Humana completed the acquisition of EMPHESYS Financial Group, Inc. for approximately $650 million (funded by cash and $250 million in new borrowings). EMPHESYS adds 1.3 million medical members. Management expects EMPHESYS to be accretive to Q4 1995 net income and EPS.
• Future Membership: Management anticipates same-store Commercial membership gains of 19-20% and Medicare risk gains of 7% for the full year 1995. Commercial premium rates are expected to continue decreasing at approximately 2.0%.
• Cost Outlook: With the inclusion of EMPHESYS, the combined medical loss ratio is expected to be lower than Humana's standalone ratio, while the administrative cost ratio is expected to be higher.
• Risks & Contingencies:
  • Medicare Contracts: Contracts with HCFA are renewed annually. Legislative changes reducing payments or increasing benefits without corresponding payment increases could materially adversely affect the company.
  • Accreditation: The South Florida health plan was denied NCQA accreditation in 1994; management expects no material effect on operations.
  • Regulatory: Subsidiary dividend payments are restricted by state equity requirements.

Investor Verification Checklist

• EMPHESYS Integration: Verify the actual financial impact and accretion of the EMPHESYS acquisition in Q4 1995 results, specifically regarding the projected medical loss ratio improvement.
• Commercial Rate Trends: Monitor the continuation of the 2.0% reduction in Commercial premium rates and its effect on future revenue growth.
• Medical Cost Utilization: Track the trend of non-hospital and outpatient service costs in Commercial products, which drove the Q3 medical loss ratio increase.
• Debt Servicing: Confirm the repayment schedule for the $250 million in new borrowings and the $57 million in assumed debt from EMPHESYS.
• Medicare Policy Changes: Assess potential legislative impacts on Medicare risk contracts and the 9% average rate increase projected for 1996.