Humana Inc. — 2010 Form 10-K Summary
Business context and reporting period
Humana reported for the fiscal year ended December 31, 2010; the filing also gives unaudited fourth-quarter results. The company provides health insurance, pharmacy and supplemental benefits, and healthcare services. It reported approximately 10.2 million medical members and 7.1 million specialty members at year-end. Government programs generated 78% of premiums and administrative services fees; Medicare alone represented about 65%, making results highly exposed to government contracts and regulation.
Financial and operating metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $33.87 billion | $30.96 billion |
| Premium revenue | $32.71 billion | $29.93 billion |
| Income from operations | $1.85 billion | $1.71 billion |
| Net income | $1.10 billion | $1.04 billion |
| Diluted earnings per share | $6.47 | $6.15 |
| Benefit ratio | 82.8% | 82.8% |
| SG&A expense ratio | 13.9% | 13.8% |
| Operating cash flow | $2.24 billion | $1.42 billion |
| Cash and investments | $10.05 billion | $9.11 billion |
| Long-term debt | $1.67 billion | $1.68 billion |
At December 31, 2010, cash and cash equivalents were $1.67 billion, total assets were $16.10 billion, and stockholders’ equity was $6.92 billion. The company had no borrowings under its $1.0 billion revolving credit agreement and reported $989.6 million of remaining capacity. Management said available cash, investments, operating cash flow and credit resources were adequate for operating needs and obligations for at least the next twelve months. Capital expenditures were $222.3 million in 2010.
Material changes versus the prior comparable period
- Total revenue rose 9.4% and net income rose 5.7%. Government segment pretax income increased 10.0% to $1.65 billion; Commercial segment pretax income declined 2.5% to $101.6 million.
- Medicare Advantage membership increased 14.9% to 1.73 million, with premium revenue up 17.5% to $19.29 billion. Stand-alone Medicare drug plan membership fell 8.8% to 1.76 million. Commercial medical membership declined 8.6% to 3.12 million, reflecting pricing discipline, workforce-related losses and a lost large ASO account.
- Operating cash flow increased by $820.2 million, primarily due to higher earnings, enrollment activity and working-capital changes. Investing cash use included $832.5 million for acquisitions, principally Concentra.
- On December 21, Humana acquired Concentra for $804.7 million in cash, adding occupational medicine, urgent care and workplace and primary-care services. The acquired business contributed only a short period to 2010 results.
Outlook, commentary, risks and unusual items
- Management expected 2011 Medicare Advantage membership growth of 90,000–110,000, or approximately 5%–6%, and stand-alone PDP growth of 525,000–575,000, or approximately 30%–33%. The company expected a 2011 effective tax rate of about 37% and capital expenditures of approximately $280 million.
- 2010 results included $231.2 million of favorable prior-year reserve releases not considered ordinary, equivalent to $0.86 per diluted share. The filing attributes these mainly to improved claims processing, lower-than-estimated utilization and shorter claim submission cycles.
- In the fourth quarter, Humana recorded a $138.9 million charge to strengthen reserves for its closed long-term-care block, after approved premium increases fell below assumptions and lower interest rates and higher expenses worsened expected results. It also recorded a $147.5 million write-down of deferred acquisition costs for individual major medical policies, reflecting the impact of health reform’s minimum medical-loss-ratio requirement.
- Health reform introduces minimum benefit ratios, rebates, Medicare Advantage payment changes, coverage requirements and future industry fees and taxes. The company said regulations and implementation details remained uncertain and could affect pricing, costs, enrollment, markets and cash flows.
- CMS’s proposed Medicare Advantage risk-adjustment audit methodology could lead to material payment adjustments; Humana disputed the proposal and said the final approach and financial impact were uncertain. Six Humana contracts had been selected for RADV audits.
- The TRICARE South Region contract was extended through March 31, 2012, with the Department of Defense intending to exercise the option. The award of the next-generation contract remained unresolved; Humana warned that failure to win could lead to a goodwill impairment, potentially in the second half of 2011.
- Humana disclosed an ongoing internal investigation into certain Florida subsidiary operations, voluntarily reported to federal and state authorities. It also described provider litigation, government audits and investigations, including disputes involving TRICARE provider payments. Outcomes and potential penalties were not predictable.
- Fourth-quarter 2010 net income was $107.3 million, versus $250.7 million in fourth-quarter 2009; the 2010 quarter included the long-term-care reserve charge. The filing also identifies the deferred acquisition-cost write-down in second-quarter results.
Important facts for investors to verify
- Whether subsequent claims development supports the $231.2 million of favorable reserve releases and whether benefits-payable estimates remain adequate.
- The ultimate CMS RADV audit methodology, any payment adjustments, and the resolution of Humana’s Florida investigation and other regulatory matters.
- The result of the next-generation TRICARE South Region procurement and any resulting goodwill impairment, exit costs or operating changes.
- Actual 2011 Medicare membership, benefit costs and margins against management’s outlook, including the effects of health-reform requirements and the Part D membership shift.
- Concentra integration and performance, and the adequacy of long-term-care reserves and reinsurance recoverables.