Humana Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; comparisons are with the same periods of 2022. Humana reports Insurance and CenterWell segments.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $26.423 billion | $22.799 billion | $79.912 billion | $70.431 billion |
| Operating income | $1.206 billion | $1.172 billion | $4.361 billion | $3.676 billion |
| Net income attributable to Humana | $832 million | $1.195 billion | $3.030 billion | $2.821 billion |
| Diluted EPS | $6.71 | $9.39 | $24.26 | $22.16 |
| Benefit ratio | 86.6% | 85.6% | 86.2% | 86.0% |
| Operating cost ratio | 12.5% | 13.5% | 11.8% | 13.0% |
Quarterly premiums revenue rose 16.9% to $25.099 billion, led by individual Medicare Advantage and state-based contract growth. Services revenue fell 12.3% to $1.016 billion, principally reflecting the 2022 Gentiva Hospice divestiture. Investment income increased to $308 million from $172 million. For the nine-month period, premiums increased 14.6%, while services revenue decreased 20.7% and investment income increased to $775 million from $222 million.
Q3 net income attributable to Humana fell 30.4% and diluted EPS fell 28.5%; nine-month net income rose 7.2% and diluted EPS rose 9.5%. The benefit ratio worsened year over year, reflecting higher Medicare Advantage utilization, benefit-design investment, and membership mix; favorable prior-period claims reserve development partly offset these pressures. The operating cost ratio improved, supported by scale and administrative efficiencies and the hospice divestiture.
By segment, Q3 Insurance operating income was $722 million versus $873 million a year earlier; nine-month Insurance operating income increased to $3.080 billion from $2.976 billion. CenterWell operating income was $400 million versus $300 million in Q3, and $1.017 billion versus $1.028 billion for nine months. CenterWell external services revenue declined largely because of Gentiva; intersegment revenue grew with pharmacy, primary care, and home-based care activity.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $11.115 billion, up from $9.714 billion. It included an early $7.1 billion receipt of October Medicare premiums because the payment date fell on a weekend; this also raised unearned revenue at quarter-end.
- Investing activities used $2.610 billion, compared with $6 million provided in 2022. Financing activities provided $1.582 billion. Cash and cash equivalents ended September at $15.148 billion, versus $5.061 billion at December 2022.
- At September 30, current investment securities were $15.145 billion. Total debt was approximately $11.728 billion: $2.245 billion short-term and $9.483 billion long-term. Commercial paper outstanding was $2.2 billion, at a weighted average rate of 5.58%.
- Humana reported no revolving-credit borrowings and about $3.982 billion of remaining capacity across its two revolving facilities. Debt-to-capitalization under the credit agreements was 41.1%, below the 60% covenant limit. Management said available cash, investments, operating cash flow, and financing sources should cover needs for at least the next 12 months.
- Benefits payable were $10.196 billion, including approximately $6.4 billion of incurred-but-not-reported claims. Investment securities had approximately $2.0 billion of gross unrealized losses, primarily attributed to higher market interest rates; approximately 98% of debt securities were investment grade.
Material changes, outlook and risks
- Humana is exiting Employer Group Commercial Medical Products, including fully insured, self-funded, and Federal Employee Health Benefit medical plans. The exit is expected to be phased over 18–24 months from the February 2023 announcement. Commercial fully insured membership was down 28.8% year over year.
- Individual Medicare Advantage membership grew 17.8% to 5.374 million; stand-alone Medicare Part D membership declined 19.1%. State-based contract membership increased 15.1%. Management cited elevated Medicare Advantage utilization trends continuing into Q3, including higher COVID-19 admissions without the offset of lower non-COVID care.
- Management described its integrated care model and Medicare Advantage growth as central to its long-term strategy. The filing does not provide a clear quantified full-year earnings guidance figure.
- Humana recorded $52 million of Q3 2023 value-creation initiative charges, primarily software and other asset impairments, and expects additional charges through the end of 2024. A $105 million nine-month accrual for anticipated litigation expenses also affected results. The prior-year comparison included a $240 million Gentiva Hospice sale gain and a lower effective tax rate associated with that transaction.
- CMS’s final Medicare Advantage risk-adjustment data validation (RADV) rule eliminates the Fee-for-Service Adjuster and provides for extrapolation of audit results beginning with payment year 2018. Humana challenged the rule in court, stating it believes the rule is unlawful; the company warned that the rule or related outcomes could materially adversely affect results, financial position, or cash flows.
- Other legal and regulatory exposures include a False Claims Act qui tam case concerning a Medicare Part D plan, ongoing scrutiny of risk-adjustment practices, and ordinary-course litigation and regulatory reviews. The filing says possible losses beyond recorded accruals cannot currently be estimated and outcomes could be material.
- Interest-rate risk remains relevant: the company estimated that a 1 percentage-point increase in rates would reduce the fair value of its securities by approximately $654 million. It also entered into swaps that convert interest exposure on portions of two senior-note issues from fixed to SOFR-based variable rates.
- The board declared a $0.885-per-share dividend payable in January 2024. The remaining share-repurchase authorization was $1.9 billion as of October 31, 2023. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether elevated Medicare Advantage utilization and the higher benefit ratio persist, and how they affect margins and claims reserves.
- CMS’s implementation of the RADV rule, the outcome of Humana’s legal challenge, and any resulting payment or reserve impacts.
- The timing and financial effects of the employer commercial exit, including membership, operating costs, and transition charges.
- How much operating cash flow reflects sustainable earnings versus timing of Medicare premium receipts, Part D subsidies, and other working-capital movements.
- Debt and interest costs, commercial-paper refinancing needs, and the sensitivity of investment values to market rates.
- The assumptions and potential exposure underlying the litigation accruals and other contingencies, which the filing says cannot be reliably quantified beyond recorded amounts.