Humana Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Humana operates Retail, Group and Specialty, and Healthcare Services businesses, with Medicare plans the largest source of premiums.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $23.970 billion | $20.668 billion; up 16.0% |
| Net income | $930 million | $828 million; up 12.3% |
| Diluted EPS | $7.29 | $6.39; up 14.1% |
| Operating income | $1.289 billion | $1.223 billion |
| Benefit ratio | 86.4% | 85.9%; up 0.5 percentage point |
| Operating cost ratio | 12.0% | 9.7%; up 2.3 percentage points |
| Operating cash flow | $302 million | $(837) million |
| Cash and cash equivalents | $4.864 billion at March 31 | $3.394 billion at December 31, 2021 |
| Total debt | $12.975 billion | $12.494 billion at December 31, 2021 |
Premiums rose 12.8% to $22.703 billion, led by Medicare Advantage and state-based contract growth. Services revenue increased to $1.264 billion from $466 million, principally reflecting Kindred at Home (KAH), consolidated after Humana acquired its remaining interest in August 2021. Investment income fell to $3 million from $78 million, largely due to publicly traded equity-security fair-value changes. Cash flow from operations improved year over year; investing activities used $648 million and financing activities provided $1.816 billion. The financing inflow included $2.475 billion of net receipts from Medicare Part D contract deposits and a $744 million net senior-note issuance. The company reported $4.0 billion of unused revolving-credit capacity, subject to facility terms.
Benefits expense increased 13.5% to $19.625 billion. Favorable prior-period claims reserve development was $360 million, versus $555 million a year earlier, contributing to the higher benefit ratio. Operating costs rose 43.8% to $2.886 billion; management attributed the higher consolidated cost ratio mainly to KAH’s higher operating-cost profile. The effective tax rate was 23.5%, compared with 22.0%.
Material changes and segment results
- Retail: Earnings were $784 million, down 1.3%. Revenue increased 14.6% to $21.308 billion. Individual Medicare Advantage membership grew 5.8% to 4.54 million; Medicaid and other state-based membership increased 20.4% to 1.01 million. The segment benefit ratio rose to 88.0% from 87.7%.
- Group and Specialty: Earnings fell 24.1% to $132 million and revenue declined 7.4% to $1.596 billion. Fully insured commercial medical membership decreased 13.4%; the operating cost ratio increased to 25.7% from 22.9%.
- Healthcare Services: Earnings increased 65.8% to $446 million, primarily reflecting KAH consolidation and growth in pharmacy and provider businesses. External services revenue increased to $1.063 billion from $271 million.
Share repurchases totaled $1.024 billion in the quarter, including settlement of a $1 billion accelerated share repurchase agreement. Humana issued $750 million of 3.700% senior notes due 2029. Stockholders’ equity declined to $15.342 billion from $16.103 billion, including the effect of unrealized investment losses and repurchases.
Outlook, commentary, and risks
- Humana reported lower overall healthcare utilization than anticipated in Q1 2022: reduced COVID-19 utilization after the Omicron wave outpaced the recovery in non-COVID care. The filing cautions that pandemic-related utilization patterns may continue to disrupt earnings and cash flows.
- CMS’s 2023 Medicare Advantage rate notice was expected by Humana to produce a 4.6% rate increase for non-ESRD business, excluding Employer Group Waiver Plan funding changes, and a 6.8% increase for ESRD beneficiaries. These are rate expectations, not company earnings guidance.
- On April 21, 2022, Humana agreed to sell a 60% interest in KAH’s Hospice and Personal Care divisions to CD&R at a $3.4 billion enterprise valuation. Expected cash proceeds are approximately $2.8 billion; closing was anticipated in Q3 2022, subject to regulatory approvals.
- Key regulatory and legal exposures include CMS and HHS-OIG risk-adjustment data validation audits, a DOJ information request concerning Medicare risk-adjustment practices, and a False Claims Act qui tam case in which summary-judgment motions were denied on March 31, 2022. The company said it could not estimate possible losses beyond any accruals and that outcomes could be material.
- Investment securities had $760 million of gross unrealized losses at quarter-end, primarily attributed to higher interest rates; no material credit allowances were recorded. Management said it did not intend to sell the affected debt securities and did not expect to be required to sell before recovery, while noting future fair-value declines or realized losses remain possible.
- Humana stated that available cash, investments, operating cash flows, and borrowing capacity were adequate for at least the next 12 months. It reported 45.8% debt to capitalization under applicable credit-agreement definitions, below the 60% covenant limit. The filing reported no changes to risk factors from the 2021 Form 10-K.
Important facts for investors to verify
- Whether utilization and claims costs normalize, and how reserve development affects benefit ratios in subsequent quarters.
- Whether the KAH Hospice and Personal Care transaction closes on expected terms and timing, and how proceeds and retained ownership affect debt and earnings.
- Developments in CMS risk-adjustment audits, the DOJ inquiry, and the qui tam litigation, including any updated accruals or disclosed loss estimates.
- Actual 2023 Medicare Advantage rate and membership effects compared with management’s stated rate expectations.
- Investment portfolio valuation and liquidity, as well as debt levels, share repurchases, and dividend commitments.
- The filing states that disclosure-control effectiveness evaluation excluded KAH, representing 2% of consolidated assets and 3% of revenue; verify progress integrating KAH into those controls.