Humana Inc. 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019, compared with the same 2018 periods. Humana operates Retail, Group and Specialty, and Healthcare Services segments; Medicare products accounted for approximately 80% of premiums and services revenue in the first nine months of 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $16.24bn | $14.21bn | $48.59bn | $42.74bn |
| Operating income | $868m | $961m | $2.83bn | $2.58bn |
| Net income | $689m | $644m | $2.20bn | $1.33bn |
| Diluted EPS | $5.14 | $4.65 | $16.24 | $9.58 |
| Benefit ratio | 85.0% | 82.0% | 85.2% | 83.5% |
| Operating cost ratio | 11.7% | 13.5% | 10.9% | 12.8% |
- Revenue growth reflected Medicare Advantage membership and per-member premium growth, partly offset by declining stand-alone Part D membership. Individual Medicare Advantage membership rose 16.7% year over year to 3.55 million; stand-alone PDP membership fell 12.7% to 4.38 million.
- Q3 operating income declined despite higher revenue, as benefits expense rose faster than premiums. Net income increased partly because of lower income taxes and other income. Nine-month net income and EPS were also favorably affected by the absence of the $786m KMG sale loss recognized in 2018.
- The higher benefit ratio reflected, among other factors, the suspension of the health insurance industry fee, membership mix, and less favorable prior-period claims development. The lower operating cost ratio reflected fee suspension, scale efficiencies, and productivity initiatives.
- Operating cash flow for the first nine months was $4.77bn versus $2.51bn; management attributed the improvement to working-capital timing, higher earnings, and a prior-year reinsurance-related cash payment. Investing cash flow was negative $477m and financing cash flow negative $1.11bn.
- Cash and cash equivalents were $5.53bn at September 30, 2019, versus $2.34bn at year-end 2018. Current assets were $20.32bn and current liabilities $11.11bn.
- Short-term debt was $699m and long-term debt $5.37bn, totaling approximately $6.06bn. Humana issued $1bn of senior notes in August and used proceeds, with cash, to repay a $650m term note and $400m notes due October 1. It had $2bn of unused capacity under its revolving credit facility and reported 34% debt-to-capitalization under the facility covenant.
Changes, outlook, and notable items
- Retail segment earnings rose 40.6% to $1.96bn for the first nine months, while Group and Specialty earnings fell 53.2% to $174m; Healthcare Services earnings increased 2.9% to $611m.
- Management said 2020 Medicare contracts were renewed and product offerings approved. It highlighted its integrated-care strategy and reported 66% of individual Medicare Advantage members in value-based relationships. The filing does not provide a full-year financial guidance figure.
- The health insurance industry fee was suspended for 2019 but was scheduled under then-current law to resume in 2020. Management noted regulatory or legislative changes could affect premiums, enrollment, costs, and profitability.
- A workforce optimization program initiated in Q3 generated an estimated $46m charge, or $0.26 per diluted share; the liability was expected to be paid primarily within 12 months. The company also accelerated $19m of software depreciation in the quarter and nine-month period.
- Medicare risk-adjustment exposure includes the phased shift from RAPS to encounter data, CMS RADV audits, and uncertainty over audit methodology and overpayment rules. The filing warns these matters could materially affect results. Humana also disclosed a DOJ information request and a qui tam action, and is pursuing approximately $611m in unpaid risk-corridor payments without recording revenue or a receivable.
- Humana reported adequate liquidity for at least the next 12 months, subject to operating, regulatory, and market risks. State-regulated subsidiaries had $7.6bn of statutory capital and surplus against $5.7bn in aggregate minimum requirements as of June 30, 2019.
Important facts for investors to verify
- Whether the elevated benefit ratio persists, particularly as Medicare membership grows and the PDP/Medicare Advantage mix changes.
- The impact of the scheduled 2020 health insurance industry fee and any changes to Medicare reimbursement or risk-adjustment policy.
- Developments in CMS RADV audits, encounter-data implementation, the DOJ inquiry, and other disclosed legal matters.
- Final settlement of the $1bn accelerated share repurchase agreement, expected in Q4 2019, and subsequent debt and capital-allocation decisions.
- How much of nine-month operating cash flow reflects sustainable earnings versus working-capital timing and claims-payable movements.