Humana Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Humana is a health and well-being company with health plans and healthcare services, with Medicare as its largest business. Amounts below are in millions except per-share data and membership.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $14,279 | $13,762 | +3.8% |
| Income from operations | $760 | $1,738 | -56.3% |
| Income before taxes | $707 | $1,689 | -58.1% |
| Net income | $491 | $1,115 | -56.0% |
| Diluted EPS | $3.53 | $7.49 | -52.9% |
| Operating cash flow | $3,686 | $4,205 | -$519 |
- Premium revenue grew 3.1% to $13,811; services revenue rose 29.2% to $327; investment income increased 27.0% to $141.
- The consolidated benefit ratio was 84.5%, unchanged year over year. The operating cost ratio rose to 12.4% from 11.4%; the effective tax rate fell to 30.7% from 34.0%.
- Cash and cash equivalents were $8,855 at March 31, up from $4,042 at year-end. Current assets were $23,932 and current liabilities $15,455. Cash flow included an early $3.3 billion Medicare premium remittance for April.
- Long-term debt was $4,772 and commercial paper borrowings were $398. Humana had $2.0 billion of unused capacity under its revolving credit agreement, no borrowings under that facility, and reported covenant compliance with a 1.4:1 leverage ratio.
- Investing activities used $405; financing activities provided $1,532. Q1 capital expenditures were $134. Dividends declared were $0.50 per share.
Material changes versus the prior period
- The year-over-year earnings decline primarily reflects the absence of the $947 net Aetna merger termination gain recorded in Q1 2017, principally the $1 billion breakup fee. The comparison also reflects the 2017 suspension of the health insurance industry fee and a $54 Penn Treaty guaranty assessment in 2017.
- Excluding those comparison effects, management cited lower Retail and Healthcare Services earnings, partly offset by higher Group and Specialty earnings. Retail pretax income fell 27.8% to $267; Healthcare Services pretax income fell 29.1% to $173; Group and Specialty pretax income rose 23.4% to $211.
- Medicare Advantage growth supported Retail premiums: individual MA membership increased 6.3% and group MA membership 14.3%. Stand-alone PDP membership declined 3.0%; state-based Medicaid membership declined 11.7%. The new TRICARE East contract drove military services membership growth.
- The 2018 health insurance industry fee contributed $263 to operating costs in the quarter; Humana expects to pay $1.05 billion in September 2018. The fee is nondeductible and is suspended for 2019.
- Operating cash flow was lower than in 2017, but both periods included early Medicare premium receipts; Q1 2017 also included the merger termination fee. These timing and one-time items limit direct comparison.
Outlook, commentary, risks, and unusual items
- No consolidated earnings or revenue guidance is stated in the supplied filing text. Management said it believes available cash, investments, operating cash flow, and borrowing sources are adequate for operating needs, acquisitions, capital expenditures, and debt obligations for at least the next 12 months.
- Humana expected the CMS 2019 Medicare Advantage rate notice to produce a 3% increase for its individual MA business, versus CMS’s 3.5% sector estimate on a comparable basis. The company also cited flexibility for tailored supplemental benefits. Its 2019 bids were due June 4, 2018.
- Humana reported a notice of intent to be awarded a comprehensive Florida Medicaid contract in 10 of 11 regions. This was not described as a completed contract award.
- Strategic transactions: Humana acquired the remaining MCCI interest on March 1 for consideration including $169 cash and existing notes totaling $383; preliminary purchase accounting included $479 goodwill. It acquired Family Physicians Group for about $190 cash on April 10. The planned 40% Kindred at Home investment was about $800 and remained subject to approvals; the Kindred stockholders approved it April 5. On April 23, Humana and partners agreed to acquire Curo for about $1.4 billion, with Humana to own 40%. The Curo transaction was expected to close in summer 2018, subject to approvals. The planned sale of the closed-block long-term care business was expected by Q3 2018 and could result in an estimated $350 net loss; regulatory approval was not assured.
- Key risks include CMS Medicare risk-adjustment data validation and coding audits, the transition from RAPS to encounter-data risk scoring, government-contract renewals and rate changes, and ongoing litigation and regulatory reviews. Humana sought about $611 in unpaid 2014–2016 risk-corridor payments but had recognized no receivable or revenue; recovery was uncertain. The filing says potential legal and regulatory outcomes could be material, but does not provide a clear estimate of possible losses beyond amounts accrued.
- Investment securities had $249 of gross unrealized losses, which management primarily attributed to higher market interest rates and considered temporary. A 1% increase in rates was estimated to reduce securities fair value by about $650. Management reported no material other-than-temporary impairments in the quarter.
- Other notable items: favorable prior-year claims reserve development was $267, versus $231 in Q1 2017; the quarter included a $6.6 tax benefit from revisions to provisional tax-reform estimates. The 2017 workforce optimization program affected about 3,600 employees; $94 of its remaining liability was expected to be paid in 2018.
Important facts for investors to verify
- Assess underlying earnings against Q1 2017 after accounting for the $947 merger-related gain, the 2017 health-fee suspension, the Penn Treaty assessment, and current-period reserve development.
- Monitor medical claims trends, flu-season effects, reserve estimates, MA benefit pricing, and the operating cost impact of the health insurance industry fee and planned investments.
- Confirm CMS risk-adjustment audit developments, encounter-data transition effects, and the status and outcome of the $611 risk-corridor lawsuit.
- Track completion, funding, regulatory approvals, and purchase accounting for Kindred at Home, Curo, the KMG sale, and other provider acquisitions.
- Review Medicare and Medicaid membership trends, the 2019 CMS rate outcome versus management’s estimate, and the renewal and performance of government contracts.