HUM

Business Context and Reporting Period

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

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Premium revenues increased 17% in Q2 and 18% year-to-date, driven by same-store Commercial membership gains, a 5% increase in Medicare risk rates, and acquisitions (CareNetwork, Inc. and Group Health Association).
• Membership Trends: Commercial membership grew 3% in Q2 (54,700 members) and 12% year-to-date (191,000 members). Medicare risk membership increased slightly, while Medicare supplement membership declined as anticipated.
• Profitability: Reported net income for Q2 1995 ($45M) was lower than Q2 1994 ($54M). However, Q2 1994 included a $29M favorable tax settlement and an $18M nonoperational asset write-down. Excluding these nonrecurring items, adjusted net income increased from $37M in Q2 1994 to $45M in Q2 1995.
• Cost Trends: The medical loss ratio increased slightly in Q2 (82.1% vs 81.9%) due to higher non-hospital and outpatient costs in expansion markets. Year-to-date, the ratio improved to 81.3% due to decreased hospital utilization.
• Liquidity: Cash and cash equivalents rose from $272M at year-end 1994 to $447M at June 30, 1995. Operating cash flow for the six months ended June 30, 1995, was $197M, compared to $132M in the prior year.

Guidance, Outlook, and Risks

• Membership Outlook: Management anticipates combined same-store Commercial and Medicare risk membership gains of 15% to 20% for the full year 1995.
• Premium Rates: Commercial premium rates are expected to remain down 1% to 2% compared to 1994 levels for the remainder of the year.
• Cost Outlook: Increased non-hospital and outpatient service costs experienced in Q2 are expected to continue through the remainder of 1995. Administrative cost ratios are expected to decline due to membership growth.
• Medicare Risk Rates: The projected national average rate increase for 1996 under Medicare risk contracts is 10.1%, though final rates and geographic adjustments are pending announcement in September 1995.
• Regulatory Contingencies: The South Florida health plan was denied NCQA accreditation in 1994 but has restored compliance with HCFA requirements. The company expects no material effect from these issues.
• Acquisition: On August 9, 1995, Humana agreed to acquire EMPHESYS Financial Group, Inc. for approximately $650 million in cash. The transaction is expected to close in the fall of 1995, subject to regulatory approval.

Investor Verification Checklist

• Adjusted Earnings: Verify the impact of the 1994 nonrecurring tax settlement ($29M) and asset write-down ($18M) on year-over-year profitability comparisons.
• Medical Loss Ratio Trend: Monitor the continuation of increased non-hospital and outpatient costs in expansion markets, which drove the Q2 loss ratio increase.
• EMPHESYS Acquisition: Confirm the completion of the $650 million acquisition and the funding sources (bank borrowings, cash, securities sales).
• Medicare Rate Finalization: Track the final 1996 Medicare risk rate increase announcement in September 1995, as geographic adjustments could materially affect revenue.
• Commercial Rate Pressure: Validate the management forecast of continued 1-2% commercial premium rate declines for the remainder of 1995.