Humana Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Humana operates Retail, Group and Specialty, and Healthcare Services segments. Medicare products accounted for approximately 81% of premiums and services revenue in the first nine months of 2022. The company’s strategy emphasizes Medicare Advantage growth and integrated care and healthcare services.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $22.8 billion | $20.7 billion | $70.4 billion | $62.0 billion |
| Operating income | $1.172 billion | $628 million | $3.676 billion | $3.087 billion |
| Net income attributable to Humana | $1.195 billion | $1.531 billion | $2.821 billion | $2.947 billion |
| Diluted EPS | $9.39 | $11.84 | $22.16 | $22.77 |
| Benefit ratio | 85.6% | 87.1% | 86.0% | 86.3% |
| Operating cost ratio | 13.5% | 12.6% | 13.0% | 10.9% |
Revenue growth reflected Medicare Advantage and state-based contract membership growth, higher individual Medicare Advantage premiums, and higher Healthcare Services revenue. Q3 operating income rose substantially year over year, but net income and EPS declined. The comparisons were affected by unusual investment and acquisition-related items, including the $1.129 billion pre-tax gain on Humana’s previously held Kindred at Home investment in 2021.
Segment performance and material changes
- Retail: Segment earnings were $737 million in Q3 and $2.450 billion for the nine-month period, versus $456 million and $2.086 billion, respectively, in 2021. Individual Medicare Advantage membership grew 3.8% year over year to 4.56 million; state-based Medicaid and other membership grew 20.9% to 1.10 million.
- Group and Specialty: Segment earnings were $49 million in Q3 and $282 million for the nine-month period, compared with a $28 million Q3 loss and $186 million in 2021. Fully insured commercial medical membership fell 16.7%; the company cited pricing discipline and competitive pressures. Lower benefit ratios supported earnings, while higher operating cost ratios partly offset the improvement.
- Healthcare Services: Segment earnings were $630 million in Q3 and $1.513 billion for the nine-month period, up from $373 million and $953 million. Services revenue growth reflected the 2021 consolidation of Kindred at Home, partly offset by the 2022 hospice divestiture.
- Humana sold a 60% interest in Kindred at Home Hospice on August 11, 2022, for approximately $2.7 billion of net proceeds, including $1.9 billion of debt repayments. The sale generated a $240 million pre-tax gain. Hospice contributed $958 million of revenue and $150 million of pre-tax earnings before the sale during the nine-month period.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $9.714 billion, versus $2.358 billion in 2021. It included a $5.8 billion early receipt of October Medicare premiums because the payment date fell on a weekend; the receipt increased unearned revenue and is a significant timing factor.
- Investing cash flow was positive $6 million, compared with negative $6.454 billion in 2021. Financing cash flow was positive $444 million, versus positive $3.727 billion.
- Cash and cash equivalents were $13.558 billion at September 30, 2022, versus $3.394 billion at year-end 2021. Current investment securities were $13.124 billion. Current liabilities included $6.012 billion of unearned revenue.
- Short- and long-term debt totaled $10.597 billion at quarter-end, versus $12.494 billion at December 31, 2021. Humana repaid a $2.0 billion term loan in August. It reported $303 million of commercial paper outstanding and no revolver borrowings; remaining capacity was $2.4 billion under its five-year facility and $1.5 billion under its 364-day facility.
- Operating cash and investments are subject to insurance-subsidiary regulatory limits. Regulated subsidiaries had $11.0 billion of statutory capital and surplus against $7.9 billion of aggregate minimum requirements, based on the latest filed statements.
Outlook, commentary and risks
- Management said it expects available cash, investments, operating cash flow, and financing capacity to meet operating, regulatory, investment, and debt needs for at least the next 12 months. The filing does not provide a clear numerical earnings or revenue forecast.
- Humana recorded $285 million of 2022 value-creation initiative charges through September, mainly for asset and software impairment or abandonment and workforce severance. It anticipated additional charges during the rest of 2022. The initiatives are intended to fund Medicare Advantage growth and Healthcare Services investment in 2023.
- Management reported lower-than-anticipated overall healthcare utilization in 2022 as the decline in COVID-19-related utilization outpaced recovery in non-COVID-19 utilization. Utilization patterns remain a source of earnings and cash-flow variability.
- Investment securities had $1.906 billion of gross unrealized losses at quarter-end, primarily attributed to higher market interest rates. Management said it did not intend to sell the securities and considered forced sale before recovery unlikely, but disclosed that further fair-value declines, realized losses, or credit allowances remain possible.
- Key regulatory exposure includes CMS and HHS-OIG Medicare Advantage risk-adjustment data validation audits and potential changes to audit extrapolation methodology. The company said estimated settlements recorded to date were not material, but potential future effects could be material.
- The filing describes ongoing government investigations and litigation, including a False Claims Act case concerning a Medicare Part D plan. Humana is defending the matter; it stated that possible losses beyond accrued amounts could not be estimated and that outcomes could be substantial. Other regulatory reviews and ordinary-course lawsuits also remain possible sources of fines, sanctions, or costs.
- All material CMS Medicare contracts were renewed for 2023 and product offerings approved. The company reported 4.9 million existing Medicare Advantage members, or 96%, in contracts rated four stars or higher for the cited 2024 bonus year ratings.
Most important facts for investors to verify
- How much of the reported cash-flow increase reflects the timing of the $5.8 billion Medicare premium receipt, and how operating cash flow normalizes in subsequent periods.
- Underlying earnings trends excluding the 2021 Kindred at Home investment gain, the 2022 hospice-sale gain, investment valuation changes, and productivity charges.
- Medical utilization, benefit ratios, claims reserve development, and the effect of membership and product mix on margins.
- Progress and costs of the value-creation initiatives, including any additional charges and their effect on planned 2023 investments.
- Updates on CMS risk-adjustment audits, related litigation, and any potential financial exposure not currently estimable.
- Investment portfolio valuation and debt refinancing or repayment needs, including the impact of interest rates and credit-rating changes.