Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1998
Business Overview: Humana provides managed health care products (HMOs, PPOs) and administrative services to Commercial, Medicare, Medicaid, and TRICARE members. The company operates in 47 states, D.C., and Puerto Rico, with approximately 6.2 million medical members as of September 30, 1998.
Key Financial Metrics
| Metric ($ millions) | Q3 1998 | Q3 1997 | 9 Months 1998 | 9 Months 1997 |
|---|---|---|---|---|
| Total Revenues | 2,464 | 1,968 | 7,312 | 5,636 |
| Premium Revenues | 2,421 | 1,935 | 7,170 | 5,543 |
| Net Income (Loss) | (30) | 44 | 72 | 125 |
| EPS (Diluted) | (0.18) | 0.27 | 0.43 | 0.76 |
| Operating Cash Flow (9 Mo) | (251) | 65 | (251) | 65 |
| Cash & Equivalents (End Period) | 478 | 156 | 478 | 156 |
| Long-Term Debt | 907 | 889 | 907 | 889 |
| Medical Expense Ratio (Q3) | 85.9% | 82.5% | 84.1% (9 Mo) | 82.8% (9 Mo) |
Material Changes vs. Prior Period
- Net Loss in Q3 1998: The company reported a net loss of $30 million ($0.18 per share) for the quarter, compared to net income of $44 million in Q3 1997. This reversal was primarily driven by special charges of $132 million ($84 million after-tax) recognized following the termination of the merger with United HealthCare Corporation.
- Revenue Growth: Premium revenues increased 25% in Q3 and 29% for the nine-month period year-over-year. Growth was driven by the acquisitions of Physician Corporation of America (PCA) and ChoiceCare Corporation, as well as membership growth in Commercial and Medicare risk segments.
- Operating Cash Flow: Operating activities used $251 million in cash for the nine months ended September 30, 1998, compared to providing $65 million in the prior year. This usage was attributed to the timing of Medicare premium receipts, payments for PCA workers' compensation run-off business, and reinsurance tail coverage purchases.
- Debt Structure: The company repaid its revolving credit agreement balance in Q1 1998 and funded operations via a commercial paper program, resulting in $907 million in long-term debt at period end.
Guidance, Outlook, and Risks
- Strategic Shift: Following the merger termination, Humana is exiting certain unprofitable markets and discontinuing specific products. Management expects same-plan Commercial membership to grow at a low-to-mid single-digit rate and Medicare risk membership at a mid-to-high single-digit rate for the remainder of 1998.
- Year 2000 (Y2K) Compliance: The company estimates a minimum total cost of $24 million for Y2K remediation, with $12 million incurred through September 1998. Completion is targeted for the third quarter of 1999. Risks include potential disruptions from third-party systems (vendors, government agencies) that Humana cannot control.
- Regulatory Risks: Significant exposure exists regarding the renewal of Medicare risk contracts, Medicaid contracts (including Puerto Rico), and the TRICARE contract. Changes in federal reimbursement structures or legislative actions could materially adversely affect profitability.
- Legal Contingencies: A class action lawsuit (Forsyth v. Humana) regarding RICO and antitrust claims is pending before the U.S. Supreme Court, with oral arguments scheduled for November 30, 1998. Management does not currently expect a material adverse effect from pending litigation.
Investor Verification Checklist
- Special Charge Details: Verify the composition of the $132 million charge, specifically the $46 million provision for expected losses on insurance contracts and the $27 million related to physician practice management relationships.
- Merger Termination Impact: Assess the long-term strategic implications of the terminated United HealthCare merger and the specific markets/products being exited.
- Y2K Progress: Confirm the status of third-party vendor and government agency Y2K compliance, as Humana's operations depend on these external interfaces.
- Medicare Reimbursement: Monitor legislative developments regarding Medicare risk contract renewals and reimbursement rates, which are critical to the company's profitability.
- Cash Flow Sustainability: Review the timing of Medicare premium receipts and the impact of workers' compensation run-off payments on future liquidity.