HUM

Business Context and Reporting Period

Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: Humana is a major health benefits company operating in two primary segments: Commercial (employer groups and individuals) and Government (Medicare+Choice, Medicaid, and TRICARE). As of June 30, 2003, the company served approximately 6.6 million medical members and 1.6 million specialty members.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 7.1% year-over-year, driven primarily by a 13.4% increase in Commercial segment premiums due to higher premium yields (13-15% range) and modest membership growth.
• Profitability: Net income rose 9.1% to $100.5 million. This improvement was aided by a $15.2 million pre-tax gain from the sale of a venture capital investment, partially offset by a $30.8 million non-cash restructuring charge.
• Cash Flow Improvement: Operating cash flow turned positive ($53.3 million) compared to a significant outflow ($183.9 million) in the prior year, largely due to improved earnings and better collections of TRICARE receivables.
• Membership Trends: Commercial medical membership grew 2.5% to 3.02 million. Government membership remained flat (-0.1%), with a decline in Medicare+Choice members (-8.4%) offset by growth in TRICARE and Medicaid.
• Restructuring: The company recorded a $30.8 million restructuring charge in the first half of 2003, primarily related to long-lived asset impairments ($30.8 million) associated with the consolidation of customer service centers.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Commercial Segment: Management expects Commercial fully insured and ASO medical membership to grow 2-3% for the full year 2003. Premium yields are expected to remain in the 13-15% range. The SG&A expense ratio is projected to decline in the second half of the year to a full-year range of 16.3% to 16.5%.
• Government Segment: Medicare+Choice membership is expected to fall to between 310,000 and 320,000 by year-end. Premium yields for this segment are expected to remain in the 4-6% range. The Government SG&A ratio is expected to remain near 13.2% for the full year.
• Capital Expenditures: Total capital expenditures for 2003 are projected to be approximately $95 million, focused on technology initiatives and administrative facilities.

Risks and Contingencies

• Government Contract Uncertainty: Significant uncertainty exists regarding the renewal of TRICARE contracts under the new "T-Nex" program. The company has bid for the South region as a prime contractor and the North region as a subcontractor, with awards expected by late August 2003. Loss of these contracts would have a material adverse effect.
• Medicare+Choice Legislation: Pending legislative proposals to add a prescription drug benefit to Medicare and stabilize funding create uncertainty regarding future reimbursement rates and program structure.
• Legal Proceedings: The company is involved in significant litigation, including a settled securities class action ($10.2 million) and ongoing managed care industry class actions (provider track) with a trial date set for June 30, 2004. Antitrust suits in Ohio and Kentucky regarding physician reimbursement rates are also pending.
• Regulatory Compliance: The company faces ongoing scrutiny regarding claims payment practices and utilization management, subject to fines and sanctions. Compliance with HIPAA regulations requires significant system enhancements.

Investor Verification Checklist

• TRICARE Contract Awards: Verify the outcome of the T-Nex bidding process (South and North regions) expected in late August 2003, as this impacts a significant portion of Government segment revenue.
• Restructuring Progress: Monitor the completion of the customer service center consolidation and the actual cash outflows for severance versus the estimated $22.7 million remaining liability.
• Medicare+Choice Membership: Track membership attrition rates to ensure they align with the guidance of 310,000–320,000 members by year-end.
• Legal Settlements: Review the status of the $10.2 million PCA securities litigation settlement and the potential exposure from the ongoing managed care provider class action.
• Medical Expense Ratios: Verify that the Commercial segment maintains its improved MER (82.2% for the six months) despite the shift toward large-group membership, which typically carries higher medical costs.