Humana Inc. 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Humana is a U.S. health and well-being company with Retail, Group, and Healthcare Services segments and approximately 14.2 million medical members and 7.2 million specialty members at year-end. Government contracts generated approximately 73% of premiums and services revenue; Medicare products accounted for approximately 72%.
Financial performance and position
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total revenue | $54.3 billion | $48.5 billion | Up 11.9% |
| Premiums revenue | $52.4 billion | $46.0 billion | Up 14.0% |
| Net income | $1.276 billion | $1.147 billion | Up 11.2% |
| Diluted EPS | $8.44 | $7.36 | Up 14.7%; includes Concentra-sale gain |
| Income from operations | $2.347 billion | $2.362 billion | Down 0.6% |
| Benefit ratio | 84.5% | 83.0% | Higher ratio indicates greater benefits cost relative to premiums |
| Operating cost ratio | 13.6% | 15.9% | Improved 2.3 percentage points |
| Operating cash flow | $868 million | $1.618 billion | Down; reflects working-capital timing, pharmacy growth, and prior-year membership growth effects |
| Cash and investments | $11.681 billion | $11.482 billion | Year-end balance |
| Long-term debt | $3.821 billion | $3.825 billion | Additionally, $299 million of commercial paper was outstanding at year-end |
Fourth-quarter 2015 revenue was $13.361 billion, pretax income was $246 million, net income was $101 million, and diluted EPS was $0.67, compared with fourth-quarter 2014 net income of $145 million and diluted EPS of $0.94. Fourth-quarter 2015 results included a $176 million pretax premium deficiency reserve for 2016 individual commercial medical policies.
Year-end total assets were $24.705 billion, liabilities $14.359 billion, and stockholders’ equity $10.346 billion. Humana had a $1.0 billion revolving credit facility with $999 million of remaining capacity and no borrowings under it at year-end; it reported compliance with credit covenants. Capital expenditures were $523 million. The filing states that available resources were expected to meet operating, regulatory, investment, and debt needs for at least the next 12 months.
Material changes and segment performance
- Retail premiums and services revenue rose 16.0% to $45.814 billion, while pretax income fell 30.5% to $930 million. The benefit ratio worsened to 86.7%, reflecting higher-than-priced Medicare Advantage and individual commercial medical costs, a $176 million reserve, and less favorable prior-year claims development. Individual Medicare Advantage membership grew 13.4%; stand-alone Part D membership grew 14.1%.
- Group revenue increased 0.7% to $7.267 billion and pretax income rose 70.9% to $258 million, primarily from lower operating costs. Group medical membership declined 8.6%, including a 35.6% decline in ASO membership; the benefit ratio increased to 80.2%.
- Healthcare Services pretax income increased 32.9% to $981 million, supported by pharmacy and home-based services growth, scale and efficiency improvements, and higher Medicare membership. The June 2015 sale of Concentra reduced reported services revenue.
- Consolidated operating costs declined 4.2% to $7.318 billion. Investment income rose 25.7% to $474 million, primarily from higher realized investment gains. The 2015 Concentra sale generated approximately $1.055 billion in cash proceeds and a $270 million pretax gain.
Outlook, risks, and unusual items
- Aetna merger: The July 2015 agreement provides for $125 cash and 0.8375 Aetna shares per Humana share; the transaction was valued at approximately $37 billion including assumed debt. Both companies’ shareholders approved relevant proposals, but regulatory approvals and other closing conditions remained outstanding. Humana expected closing in the second half of 2016. The agreement restricts certain business actions, caps quarterly dividends at $0.29 per share, and suspends share repurchases. The fixed exchange ratio means the stock component’s value can fluctuate.
- 2016 outlook: Management anticipated individual Medicare Advantage membership growth of 100,000–120,000 and stand-alone PDP growth of 300,000–330,000; Group Medicare Advantage membership was expected to decline 120,000–125,000, and individual commercial medical membership (excluding Medicare Supplement) was expected to decline 200,000–300,000. Management estimated a 2016 effective tax rate of 49%–51%, excluding merger transaction costs, and approximately 1.0% average 2016 Medicare Advantage funding increases, with geographic variation.
- Individual commercial medical: Higher-than-expected morbidity, adverse enrollment and claims experience, and retention of high-utilizing members led to the $176 million 2016 coverage-year reserve. The reserve includes an estimated $340 million benefit from risk-corridor provisions. Humana said 2016 results would largely reflect wind-down of noncompliant plans and indirect costs for compliant plans, and it was evaluating participation for 2017.
- Health reform and cash collection: The non-deductible health insurer fee was $867 million in 2015, versus $562 million in 2014, and Humana expected a higher amount in 2016. Legislation suspended the fee for 2017. Net receivables under commercial risk adjustment, reinsurance, and risk corridors were approximately $982 million at year-end; the 2014 risk-corridor interim settlement paid only 12.6% of receivables for that coverage year. Timing and ultimate recovery remain relevant uncertainties.
- Regulatory and legal exposure: Medicare Advantage risk-adjustment data validation audits covered two contracts for 2011 and five selected contracts for 2012; estimated accruals were not material, but the company said the ultimate effect could not be determined pending CMS guidance. The filing also describes government information requests and qui tam litigation concerning risk-adjustment practices, other legal and regulatory matters, and merger-related shareholder litigation. Outcomes and potential losses were not clearly quantifiable.
- Other risks: Results are sensitive to medical-cost trends, claims-reserve estimates, Medicare and Medicaid funding and rules, cybersecurity and data integrity, provider contracting, and long-term-care reserve assumptions. Long-term debt ratings were BBB+ from S&P and Baa3 from Moody’s. The closed long-term-care block remained exposed to adverse experience; the filing estimated hypothetical reserve increases of up to $400 million, net of reinsurance, under adverse assumptions, while noting that such revisions were not then considered appropriate.
Important facts for investors to verify
- Progress and conditions for the Aetna merger, including antitrust and state regulatory approvals, any required remedies, and the effect of delay or failure to close.
- Actual 2016 claims experience and profitability of individual commercial medical plans compared with the $176 million reserve and the estimated $340 million risk-corridor benefit.
- CMS settlement and audit developments, particularly risk-adjustment audits and collection of commercial 3Rs receivables and Part D subsidies.
- Whether forecast 2016 membership changes, Medicare funding, and the expected tax rate are borne out by subsequent results.
- Claims-reserve development, operating cash flow, regulated-subsidiary capital needs, and the planned $450 million first-quarter 2016 capital contribution.
- Material developments in the government investigations, qui tam cases, merger litigation, and long-term-care reserve assumptions.