Humana Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless otherwise noted. Humana is a health and well-being company, with Retail, Group and Specialty, and Healthcare Services segments. Medicare products generated approximately 84% of premiums and services revenue.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $20.668 billion | $18.935 billion | +9.2% |
| Premium revenue | $20.124 billion | $18.362 billion | +9.6% |
| Operating income | $1.223 billion | $1.074 billion | +13.9% |
| Net income | $828 million | $473 million | +75.1% |
| Diluted EPS | $6.39 | $3.56 | +79.5% |
| Benefit ratio | 85.9% | 85.1% | +0.8 percentage points |
| Operating cost ratio | 9.7% | 11.3% | -1.6 percentage points |
| Effective tax rate | 22.0% | 34.8% | -12.8 percentage points |
Revenue growth primarily reflected individual Medicare Advantage and state-based contract membership growth. Benefits expense rose 10.7% to $17.296 billion. Favorable prior-period medical claims reserve development was $555 million, versus $284 million in Q1 2020; management said it reduced the consolidated benefit ratio by about 280 basis points, compared with 150 basis points a year earlier. The lower operating cost ratio reflected, among other factors, the end of the non-deductible health insurance industry fee, scale efficiencies, and productivity initiatives.
Investment income declined 47.7% to $78 million, primarily due to lower realized investment gains and lower interest rates. Management cautioned that the year-over-year net income comparison was significantly affected by put/call valuation adjustments and changes in the fair value of publicly traded equity securities. These items had a combined stated pre-tax impact of $200 million in Q1 2021 and $297 million in Q1 2020, and an EPS impact of $1.20 and $1.72, respectively.
Segments and membership
- Retail: Segment earnings rose 15.9% to $794 million; premiums increased 11.3% to $18.591 billion. Individual Medicare Advantage membership grew 11.8% to 4.291 million; state-based Medicaid membership rose 35.9% to 838,900. Group Medicare Advantage and standalone prescription drug plan membership declined 8.3% and 5.9%, respectively.
- Group and Specialty: Segment earnings increased 65.7% to $174 million despite revenue declining 7.0% to $1.723 billion. The benefit ratio improved to 74.7% from 79.1%, reflecting favorable prior-period claims development and pricing and benefit-design actions. Fully insured commercial group medical membership fell 16.3%.
- Healthcare Services: Segment earnings increased 7.6% to $269 million. Services revenue rose 20.4% to $271 million, partly due to the Enclara acquisition. The segment operating cost ratio was unchanged at 96.0%.
Cash flow, debt and liquidity
- Operating cash flow was a use of $837 million, compared with $474 million provided in Q1 2020. Management attributed the decline mainly to working-capital movements, including claims and provider-related payments, and typical first-quarter working-capital patterns.
- Investing activities used $1.488 billion; financing activities provided $1.529 billion. Cash and cash equivalents decreased $796 million to $3.877 billion from year-end 2020.
- At March 31, 2021, current assets were $25.526 billion and current liabilities were $15.300 billion. Short-term debt was $1.204 billion and long-term debt was $6.062 billion. Commercial paper outstanding was $1.2 billion at a weighted average annual rate of 0.31%.
- Humana had $2.0 billion of undrawn capacity under its $2.0 billion revolving credit agreement. It reported 34% debt to capitalization under the agreement’s covenant, against a 50% maximum, and stated it was in compliance. Management believed available resources were adequate for operating and other requirements for at least the next 12 months.
- Investment securities totaled $14.371 billion. Approximately 96% of debt securities were investment grade, with an average S&P rating of AA-. Management estimated that a 1% interest-rate increase would generally reduce the fair value of securities by approximately $640 million.
Outlook, material events and risks
- Kindred at Home: On April 27, 2021, Humana agreed to acquire the remaining 60% of Kindred at Home for an $8.1 billion enterprise value, including the value of Humana’s existing 40% stake. The approximately $5.7 billion net transaction was expected to be funded with parent-company cash and debt, and to close in Q3 2021 subject to regulatory approvals. This is a subsequent event after the reporting date.
- COVID-19: The filing describes reduced non-COVID care utilization during periods of high COVID-19 incidence, alongside increased COVID-19 treatment and testing costs. Disrupted 2020 utilization also affected clinical initiatives and Medicare Advantage risk-adjustment documentation, with potential effects on 2021 revenue. Management expected utilization and seasonality disruptions to persist during recovery.
- Medicare payment and compliance: CMS increased the share of Medicare Advantage risk scores based on Encounter Data System submissions to 75% for 2021, with a full transition planned for 2022. Differences in data, processing, or filtering could materially affect results. CMS and HHS-OIG audits, proposed RADV audit methodology, and risk-adjustment data reviews may also lead to settlements or other material effects; the filing says excess possible losses on described legal matters could not be estimated.
- Legal and regulatory matters: Humana disclosed a Department of Justice information request concerning Medicare Part C risk-adjustment practices and a False Claims Act qui tam case concerning a Medicare Part D plan. It said it was cooperating with the DOJ and defending the lawsuit. Outcomes, penalties, or sanctions could materially affect results, financial position, cash flows, or reputation.
- Other: The health insurance industry fee was permanently repealed beginning in 2021, contributing to the lower tax rate. The filing reported no changes to the risk factors in Humana’s 2020 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- How much of earnings growth reflects underlying segment performance versus claims reserve development, tax changes, and investment or put/call valuation effects.
- Whether the claims reserve estimates and unusually favorable prior-period development remain appropriate as claims develop.
- Cash-flow normalization after the working-capital outflow, including collection timing for Medicare receivables and payments of claims and provider amounts.
- Financing, regulatory approval, closing timing, and integration implications of the Kindred at Home transaction.
- Effects of COVID-related utilization patterns, Medicare risk-adjustment changes, CMS audits, and other regulatory or legal matters.
- Interest-rate exposure and the effect of debt-funded transactions on leverage, liquidity, and credit ratings.