Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 1997
Business Overview: Humana provides managed health care products through HMOs and PPOs, serving Commercial, Medicare, Medicaid, and CHAMPUS markets. The company also offers administrative services and specialty products.
Key Financial Metrics
| Metric (in millions) | Q3 1997 | Q3 1996 | 9 Months 1997 | 9 Months 1996 |
|---|---|---|---|---|
| Total Revenues | $1,968 | $1,784 | $5,636 | $4,977 |
| Premium Revenues | $1,935 | $1,756 | $5,543 | $4,894 |
| Net Income | $44 | $32 | $125 | $(10) |
| Earnings Per Share | $0.27 | $0.20 | $0.76 | $(0.06) |
| Medical Loss Ratio | 82.5% | 83.1% | 82.4% | 82.6% |
| Admin Cost Ratio | 15.5% | 15.6% | 15.7% | 15.2% |
| Cash from Operations (9mo) | $65 | $271 | ||
| Long-Term Debt | ||||
| Commercial Paper Outstanding | $616 (as of Sept 30, 1997) |
Material Changes vs. Prior Period
- Revenue Growth: Premium revenues increased 10% in Q3 and 13% for the nine months, driven by the acquisition of Physician Corporation of America (PCA), premium rate increases (Commercial +5.2%, Medicare +4.2% in Q3), and the CHAMPUS contract.
- Profitability: Net income for the nine months turned from a $10 million loss in 1996 to a $125 million profit in 1997. This improvement is significantly aided by the absence of the $200 million special charges recognized in Q2 1996.
- Membership: Total medical members reached 5.9 million. Same-plan Commercial membership declined due to pricing discipline and market exits, while Medicare risk membership grew 20% year-to-date. The PCA acquisition added approximately 1.1 million members.
- Cost Ratios: The medical loss ratio improved slightly to 82.5% in Q3 due to favorable physician cost trends and hospital utilization, partially offset by higher costs in new Medicare markets. Administrative costs rose slightly to 15.7% for the nine months due to investments in core processes.
Guidance, Outlook, and Risks
- Acquisitions: Humana acquired PCA ($411M) in September and ChoiceCare ($250M) in October 1997. It also acquired Health Direct ($23M) in February. These deals were funded via commercial paper.
- Dispositions: Sold Washington, D.C. health plan and Alabama operations, reducing membership by ~141,000. Sold California HMO and Lexington Hospital in October 1997.
- Outlook: Management expects same-plan Commercial membership to be down ~3% for 1997 but Medicare risk membership to increase ~20%. Premium rates for Commercial and Medicare are expected to rise 4-5% for the full year.
- Liquidity: Entered a $1.5 billion revolving credit agreement in August 1997. Commercial paper borrowings totaled $616 million. Management believes existing capital and credit facilities are sufficient for operations and future acquisitions.
- Risks:
- Government Contracts: Renewal of Medicare risk, CHAMPUS, and Medicaid contracts is critical. Legislative changes (e.g., Balanced Budget Act of 1997) could impact reimbursement rates.
- Legal: Pending class action lawsuit (Forsyth/Cade) regarding Nevada coinsurance calculations; trial scheduled for February 1998. Management does not expect a material adverse effect.
- Integration: Risks associated with integrating large acquisitions like PCA and ChoiceCare.
Investor Verification Checklist
- Acquisition Impact: Verify the integration progress and financial contribution of the PCA and ChoiceCare acquisitions post-closing.
- Government Contract Renewals: Monitor the status of Medicare, CHAMPUS, and Medicaid contract renewals and potential legislative impacts on reimbursement.
- Medical Cost Trends: Track medical loss ratios in new Medicare markets, which currently show higher-than-anticipated costs.
- Debt Structure: Confirm the classification and refinancing status of the $616 million commercial paper program.
- Legal Contingencies: Review updates on the Nevada class action lawsuit and potential liability exposure.