Humana Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Comparisons are with the same 2022 periods unless otherwise noted. Amounts are in U.S. dollars.
Business context
Humana operates its Insurance and CenterWell segments. Medicare represented approximately 83% of premiums and services revenue for the first half of 2023. The company is exiting Employer Group Commercial Medical Products over an expected 18–24 months from its February 2023 announcement. The segment structure was realigned in December 2022, and prior-year segment data was recast.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total revenue | $26.75 billion | $23.66 billion | $53.49 billion | $47.63 billion |
| Net income | $956 million | $697 million | $2.19 billion | $1.63 billion |
| Diluted EPS | $7.66 | $5.48 | $17.54 | $12.77 |
| Income from operations | $1.44 billion | $1.22 billion | $3.16 billion | $2.50 billion |
| Benefit ratio | 86.3% | 85.8% | 85.9% | 86.1% |
| Operating cost ratio | 11.8% | 13.4% | 11.5% | 12.7% |
Premium revenue grew 14.5% in Q2 and 13.5% in H1, primarily on individual Medicare Advantage and state-based contract membership growth and higher individual Medicare Advantage premiums. Individual Medicare Advantage membership rose 15.7% year over year to 5.27 million. Services revenue fell 27.5% in Q2 and 24.3% in H1, principally reflecting the August 2022 sale of a 60% interest in Gentiva Hospice.
Benefits expense increased 15.2% in Q2 and 13.3% in H1. The quarterly benefit ratio worsened 50 basis points, reflecting higher Medicare Advantage utilization, benefit design investments, and new-member mix, partly offset by higher premium yield and favorable prior-period claims development. The H1 ratio improved 20 basis points. Favorable prior-period claims reserve development was $232 million in Q2 and $754 million in H1 2023, compared with $37 million and $397 million in the respective 2022 periods.
Operating costs were nearly flat in H1, while the consolidated operating cost ratio improved. Humana attributes the ratio improvement mainly to the Gentiva divestiture, Medicare Advantage scale efficiencies, and productivity initiatives; the Q2 2023 period also included a $90 million accrual for anticipated litigation expenses. CenterWell operating income declined 19.8% in Q2 and 15.2% in H1, partly due to the Gentiva sale, a shift toward higher-cost value-based home services, and continued investment in its home business. Insurance segment operating income declined 6.9% in Q2 but increased 12.1% in H1.
Cash flow, balance sheet, and debt
H1 operating cash flow was $9.86 billion, versus $1.26 billion in H1 2022. The increase is not purely earnings-driven: Q2 included an early $7.0 billion Medicare premium remittance for July and a $2.2 billion CMS mid-year settlement that arrived in June rather than July as in 2022. Investing cash outflow was $2.03 billion and financing cash inflow was $3.32 billion. Capital expenditures were $487 million.
At June 30, cash and cash equivalents were $16.21 billion, compared with $5.06 billion at year-end 2022; current investment securities were $15.25 billion. Total debt was approximately $11.74 billion, including $2.02 billion current and $9.72 billion long-term, versus approximately $11.13 billion at year-end. Commercial paper outstanding was $847 million at a 5.53% weighted average annual rate. Humana reported no revolver borrowings and approximately $3.9 billion of available capacity across its revolving facilities. Its debt-to-capitalization ratio under the credit agreements was 41%, within the 60% covenant limit.
Total assets were $56.46 billion and total equity was $16.89 billion at June 30, 2023. Management stated that cash, investments, operating cash flow, and financing capacity were adequate for operating and regulatory needs and other planned uses for at least the next 12 months. State-regulated subsidiaries had $11.9 billion of statutory capital and surplus, against $8.8 billion of aggregate minimum requirements, based on their latest filed statements as of March 31, 2023.
Outlook, management commentary, risks, and unusual items
- The filing does not provide a clear numerical earnings or revenue forecast. Management describes its integrated care model and Medicare Advantage and healthcare-services investment as supporting long-term growth.
- CMS’s 2023 Medicare Advantage risk-adjustment audit rule eliminates the Fee-for-Service Adjuster and anticipates extrapolated audit results from payment year 2018 onward. Humana disputes the approach and says it is assessing legal options and compliance obligations; the rule or related audits could materially affect results, financial position, or cash flows.
- Humana disclosed a pending qui tam case alleging issues with actuarial equivalence in a Medicare Part D plan, for which it has accrued certain anticipated expenses. It also described ongoing regulatory reviews and other litigation; potential losses beyond recorded accruals could not be estimated clearly.
- Medical utilization trends, member mix, favorable reserve development, Medicare risk-adjustment coding and documentation, government program changes, and the Employer Group Commercial exit are material operating considerations. The company noted that utilization and quarterly cash-flow patterns remain subject to seasonality and disruption.
- Q2 and H1 comparisons include nonrecurring and valuation items. Q2 2023 included a $90 million litigation accrual; Q2 2022 included $203 million of productivity initiative charges. Other adjustments included investment and put/call valuation changes and transaction and integration costs. Q2 diluted EPS was $7.66 as reported; the company’s table lists $0.91 per share in aggregate effects from the specified adjustments, net of tax.
- The investment portfolio had $1.6 billion of gross unrealized losses, primarily attributed to higher market interest rates; approximately 98% of debt securities were investment grade. Management said it did not intend to sell securities in unrealized-loss positions, but future declines or sales could result in realized losses or credit allowances. A 1 percentage-point increase in interest rates was estimated to reduce portfolio fair value by approximately $675 million.
Most important facts for investors to verify
- Whether Medicare Advantage utilization and benefit ratios stabilize, and how much earnings continue to benefit from favorable prior-period claims development.
- How much of H1 operating cash flow is timing-related, including the early premium remittance and CMS settlement, versus recurring cash generation.
- Potential financial exposure and developments from CMS RADV audits, risk-adjustment compliance reviews, and the disclosed litigation matters.
- Whether CenterWell can improve margins as its service mix and value-based home-care operations expand, and how the Employer Group Commercial exit affects costs and results.
- Debt refinancing, interest expense, investment portfolio fair-value exposure, and continued availability of liquidity and regulatory capital.