Humana Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results compared with Q1 2022. Humana operates through Insurance and CenterWell segments. Medicare products represented approximately 84% of premiums and services revenue.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $26.742 billion | $23.970 billion | Up 11.6% |
| Net income attributable to Humana | $1.239 billion | $930 million | Up 33.1% |
| Diluted EPS | $9.87 | $7.29 | Up $2.58 |
| Income from operations | $1.719 billion | $1.289 billion | Up 33.4% |
| Benefit ratio | 85.5% | 86.4% | Down 0.9 percentage points |
| Operating cost ratio | 11.2% | 12.0% | Down 0.8 percentage points |
- Premium revenue rose 12.5% to $25.550 billion, primarily on individual Medicare Advantage and state-based contract growth and higher individual MA premiums. Services revenue fell 21.0% to $999 million, principally due to the 2022 Gentiva Hospice divestiture. Investment income increased to $193 million from $3 million.
- Benefits expense increased 11.4% to $21.858 billion, less than premium growth. The benefit ratio improved with higher MA premium yield, lower COVID-19 inpatient utilization and greater favorable prior-year claims development. Favorable development was $522 million versus $360 million a year earlier, reducing the ratio by approximately 200 versus 160 basis points.
- Operating cash flow was $6.687 billion, compared with $302 million. The 2023 amount was significantly boosted by a $6.6 billion early Medicare premium remittance for April, received in March because the scheduled payment date fell on a weekend; the receipt also raised unearned revenue. Investing cash flow was negative $1.292 billion and financing cash flow was positive $3.279 billion.
- At March 31, cash and equivalents were $13.735 billion; total investment securities were $15.303 billion. Total debt was approximately $11.610 billion: $1.867 billion short-term and $9.743 billion long-term. Revolving credit availability was $2.4 billion under the five-year facility and $1.5 billion under the 364-day facility; no amounts were borrowed. Debt-to-capitalization under the credit agreements was 41.1%, within the 60% covenant.
- Management said cash, investments, operating cash flow and available financing were adequate for operating and regulatory needs and other expected uses for at least the next 12 months. State-regulated subsidiaries had $11.3 billion statutory capital and surplus against $8.4 billion of minimum requirements; approximately $1.8 billion of 2023 ordinary dividends could be paid to the parent without prior approval, subject to applicable requirements.
Material changes and segment performance
- Insurance segment operating income increased 33.2% to $1.327 billion. Individual MA membership grew 13.5% to 5.153 million; Medicaid and other membership grew 35.8% to 1.372 million. Stand-alone PDP membership fell 18.0%, group MA fell 9.1%, and commercial fully insured membership fell 16.3%.
- CenterWell operating income declined 10.8% to $330 million. External services revenue fell 28.6%, primarily because of Gentiva Hospice’s divestiture; its operating cost ratio rose to 91.6% from 90.5%, reflecting business mix, investment in home services and nursing labor pressures.
- Humana announced a phased exit from Employer Group Commercial Medical Products, including fully insured, self-funded and Federal Employee Health Benefit medical plans and related programs. The exit is expected to take 18–24 months; other health plan offerings are not materially affected.
- The company realigned reporting into Insurance and CenterWell in December 2022; prior-period segment information was recast. In 2022, it recorded $473 million of value-creation initiative charges, but reported no related recurring charges in Q1 2023.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management emphasized investment in Medicare Advantage and healthcare services, and its integrated care delivery strategy. About 68% of individual MA members were in value-based relationships at March 31, versus 67% a year earlier.
- CMS’s final Medicare Advantage Risk Adjustment Data Validation rule eliminates the Fee-for-Service Adjuster and anticipates extrapolated audit results beginning with payment year 2018, while leaving sampling and audit methods unspecified. Humana is evaluating legal options and compliance obligations and warns that the rule or related actions could materially affect results, financial position or cash flows.
- Other risks include government contract renewals and changes to Medicare, Medicaid and prescription drug programs; risk-coding and data-submission reviews; regulatory scrutiny and litigation, including a False Claims Act case concerning the Basic PDP plan. The company could not estimate possible losses beyond recorded accruals for the described matters.
- At March 31, the investment portfolio had $1.5 billion of gross unrealized losses, primarily attributed to higher interest rates; approximately 98% of debt securities were investment grade. Humana did not intend to sell securities in unrealized-loss positions and recorded no material credit allowances, but future fair-value declines, sales or credit allowances remain possible. A 1% rate increase was estimated to reduce securities’ fair value by approximately $656 million.
- Q1 results included favorable prior-period claims development and changes in valuation of minority-investment put/call options, transaction and integration costs, and publicly traded equity securities. The filing’s combined listed adjustments had a $0.11 negative diluted-EPS effect in 2023, versus a $0.64 positive effect in 2022. The 2023 effective tax rate was 22.5%, versus 23.5%, partly due to a non-taxable gain.
- Humana issued $1.25 billion of senior notes in March and used net proceeds to repay a $500 million term loan, with remaining proceeds available for general corporate purposes. It repurchased $67 million of shares in Q1 and had $2.8 billion remaining under its repurchase authorization as of April 25. The board declared a quarterly dividend of $0.885 per share payable in April and declared the same amount for July.
Investor verification priorities
- Assess how much of Q1 earnings improvement depends on favorable claims reserve development and how utilization and benefit costs trend in later quarters.
- Reconcile the $6.687 billion operating cash flow with the timing-related $6.6 billion Medicare remittance and monitor subsequent cash conversion and unearned revenue.
- Track implementation and potential financial exposure from the final RADV rule, including audit methods, extrapolation and any legal developments.
- Monitor the Employer Group Commercial exit timeline and costs, MA membership and profitability, and CenterWell margins after the hospice divestiture.
- Review debt maturities, interest costs, investment portfolio valuation and credit risk, as well as regulatory limits on subsidiary cash transfers and dividends.