Humana Inc. — Q1 2019 Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Financial statements are unaudited. Humana’s principal businesses are Medicare-focused health insurance and healthcare services.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Total revenue | $16.107 billion | $14.279 billion; up 12.8% |
| Net income | $566 million | $491 million; up 15.3% |
| Diluted EPS | $4.16 | $3.53; up 17.8% |
| Income from operations | $847 million | $760 million |
| Benefit ratio | 86.2% | 84.5% |
| Operating cost ratio | 10.4% | 12.4% |
| Operating cash flow | $896 million | $3.686 billion |
| Cash and cash equivalents | $3.877 billion | $2.343 billion at Dec. 31, 2018 |
| Total debt | $6.094 billion | $6.069 billion at Dec. 31, 2018 |
Premium revenue increased 13.3% to $15.651 billion, led by Medicare Advantage growth and higher per-member premiums. Benefits expense rose 15.6% to $13.493 billion. The benefit ratio increased 1.7 percentage points; favorable prior-year claims reserve development reduced it by approximately 170 basis points. Operating costs fell 5.1%, and the operating cost ratio improved by 2.0 percentage points, reflecting efficiencies and the temporary suspension of the health insurance industry fee.
Operating cash flow is not directly comparable year over year: Q1 2018 included an early $3.3 billion Medicare premium remittance. Humana said that, excluding this timing effect, Q1 2019 operating cash flow improved on working-capital timing and higher earnings. Current and long-term debt totaled $6.094 billion. The company reported $2.0 billion of undrawn revolving-credit capacity and debt to capitalization of 36.0%, within its 50% covenant limit. Management believes available cash, investments, operating cash flow, and borrowing capacity can fund needs for at least the next 12 months.
Material changes and segment performance
- Retail: Earnings increased 74.2% to $465 million. Individual Medicare Advantage membership rose 13.7% to 3.433 million; stand-alone Part D membership fell 11.8% to 4.448 million. The segment’s benefit ratio rose to 88.3%, while its operating cost ratio improved to 8.2%.
- Group and Specialty: Earnings declined 21.8% to $165 million. The benefit ratio increased to 76.4%, partly reflecting unfavorable prior-period reserve development and membership mix. Fully insured commercial group medical membership declined 10.9%.
- Healthcare Services: Earnings were $175 million, up 1.2%. Services revenue grew 50% to $156 million, primarily from provider services; the segment operating cost ratio increased to 96.6%.
Net income growth also reflected the 2019 suspension of the health insurance industry fee, a lower effective tax rate (24.4% versus 30.7%), and fewer diluted shares, primarily from repurchases. The fee is scheduled to resume in 2020 under current law. Investment income decreased 28.4% to $101 million, primarily due to lower realized gains and lower average invested balances. Other expense was $39 million, including fair-value changes associated with Kindred at Home put and call options.
Outlook, commentary, risks, and contingencies
- Humana estimated that the 2020 Medicare Advantage Final Rate Notice would produce a 2.2% rate increase for its individual Medicare Advantage business, versus CMS’s 2.53% sector estimate on a comparable basis excluding EGWP funding changes. This is a rate projection, not earnings guidance.
- Management attributed growth prospects to its integrated care model. About 65% of individual Medicare Advantage members were in value-based provider relationships; chronic-care-program membership increased 10.9% year over year.
- CMS’s transition from RAPS to encounter-data-based risk adjustment could affect risk scores and payments. CMS audits and a proposed RADV methodology—including extrapolation without a fee-for-service adjuster—could have a material adverse effect. Humana stated that its estimated audit settlements were not material at quarter-end.
- Humana is cooperating with a Department of Justice information request concerning Medicare risk-adjustment practices and is defending a False Claims Act qui tam case concerning a Medicare Part D plan. The company cannot estimate possible losses beyond amounts accrued for the described legal matters; outcomes could be material.
- Humana is pursuing approximately $611 million in unpaid 2014–2016 risk-corridor payments in court. It has recorded no revenue or receivable for the claim, and there is no assurance it will prevail.
- Humana reported approximately $952 million net current liability for Medicare Part D CMS subsidies/discounts at March 31, 2019, compared with $331 million at year-end; these amounts relate to programs for which it says it assumes no risk.
- The 2019 adoption of lease accounting added approximately $470 million of lease liabilities and $436 million of right-of-use assets; management said it did not materially affect results, cash flows, or liquidity. The company had no material change to its stated 2018 Form 10-K risk factors and reported effective disclosure controls.
Important facts for investors to verify
- Whether Medicare Advantage membership growth and pricing sustain earnings as new members may initially carry higher benefit ratios.
- How claims experience, favorable reserve development, and the benefit ratio evolve in subsequent quarters.
- The cash-flow comparison after accounting for the $3.3 billion early Medicare remittance in Q1 2018, and the effect of working-capital timing.
- The final CMS risk-adjustment/RADV rules, audit outcomes, and any related payment or legal exposure.
- The 2020 health insurance industry fee’s return and its effect on expenses, tax rate, and reported ratios.
- Progress and financial contribution from Healthcare Services, including provider operations and the Kindred at Home investment and associated options.