UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-5975
HUMANA INC.
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|
(Exact name of registrant as specified in its charter) |
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|
| | |
Delaware | | 61-0647538 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
500 West Main Street
Louisville, Kentucky40202
(Address of principal executive offices, including zip code)
(502) (502) 580-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, $0.16 2/3 par value | HUM | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ý☒ | | Accelerated filer | ¨☐ |
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Non-accelerated filer | ¨☐ | | Smaller reporting company | ¨☐ |
| | | | |
Emerging growth company | ¨☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No ý☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
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| |
Class of Common Stock | Outstanding at September 30, 20182019 |
$0.16 2/3 par value | 137,186,880132,426,045 shares |
Humana Inc.
FORM 10-Q
SEPTEMBER 30, 20182019
INDEX
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| | Page |
Part I: Financial Information | |
Item 1. | Financial Statements (Unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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| Certifications | |
Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
| (in millions, except share amounts) | (in millions, except share amounts) |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 4,142 |
| | $ | 4,042 |
| $ | 5,527 |
| | $ | 2,343 |
|
Investment securities | 9,695 |
| | 9,557 |
| 10,430 |
| | 10,026 |
|
Receivables, less allowance for doubtful accounts of $92 in 2018 and $96 in 2017 | 1,062 |
| | 854 |
| |
Receivables, less allowance for doubtful accounts of $73 in 2019 and $79 in 2018 | | 848 |
| | 1,015 |
|
Other current assets | 4,178 |
| | 2,949 |
| 3,519 |
| | 3,564 |
|
Total current assets | 19,077 |
| | 17,402 |
| 20,324 |
| | 16,948 |
|
Property and equipment, net | 1,685 |
| | 1,584 |
| 1,864 |
| | 1,735 |
|
Long-term investment securities | 405 |
| | 2,745 |
| 404 |
| | 411 |
|
Equity method investment in Kindred at Home | 1,048 |
| | — |
| 1,061 |
| | 1,047 |
|
Goodwill | 3,895 |
| | 3,281 |
| 3,922 |
| | 3,897 |
|
Other long-term assets | 1,380 |
| | 2,166 |
| 1,605 |
| | 1,375 |
|
Total assets | $ | 27,490 |
| | $ | 27,178 |
| $ | 29,180 |
| | $ | 25,413 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Benefits payable | $ | 5,020 |
| | $ | 4,668 |
| $ | 6,220 |
| | $ | 4,862 |
|
Trade accounts payable and accrued expenses | 5,413 |
| | 4,069 |
| 3,640 |
| | 3,067 |
|
Book overdraft | 199 |
| | 141 |
| 273 |
| | 171 |
|
Unearned revenues | 294 |
| | 378 |
| 274 |
| | 283 |
|
Short-term debt | 398 |
| | 150 |
| 699 |
| | 1,694 |
|
Total current liabilities | 11,324 |
| | 9,406 |
| 11,106 |
| | 10,077 |
|
Long-term debt | 4,774 |
| | 4,770 |
| 5,365 |
| | 4,375 |
|
Future policy benefits payable | 196 |
| | 2,923 |
| 211 |
| | 219 |
|
Other long-term liabilities | 603 |
| | 237 |
| 897 |
| | 581 |
|
Total liabilities | 16,897 |
| | 17,336 |
| 17,579 |
| | 15,252 |
|
Commitments and contingencies (Note 14) |
| |
|
| |
|
Stockholders’ equity: | | | | | | |
Preferred stock, $1 par; 10,000,000 shares authorized; none issued | — |
| | — |
| — |
| | — |
|
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,593,361 shares issued at September 30, 2018 and 198,572,458 shares issued at December 31, 2017 | 33 |
| | 33 |
| |
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,628,992 shares issued at September 30, 2019 and 198,594,841 shares issued at December 31, 2018 | | 33 |
| | 33 |
|
Capital in excess of par value | 2,707 |
| | 2,445 |
| 2,608 |
| | 2,535 |
|
Retained earnings | 14,786 |
| | 13,670 |
| 17,045 |
| | 15,072 |
|
Accumulated other comprehensive (loss) income | (206 | ) | | 19 |
| |
Treasury stock, at cost, 61,406,481 shares at September 30, 2018 and 60,893,762 shares at December 31, 2017 | (6,727 | ) | | (6,325 | ) | |
Accumulated other comprehensive income (loss) | | 177 |
| | (159 | ) |
Treasury stock, at cost, 66,202,947 shares at September 30, 2019 and 63,028,169 shares at December 31, 2018 | | (8,262 | ) | | (7,320 | ) |
Total stockholders’ equity | 10,593 |
| | 9,842 |
| 11,601 |
| | 10,161 |
|
Total liabilities and stockholders’ equity | $ | 27,490 |
| | $ | 27,178 |
| $ | 29,180 |
| | $ | 25,413 |
|
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| (in millions, except per share results) | (in millions, except per share results) |
Revenues: | | | | | | | | | | | | | | |
Premiums | $ | 13,712 |
| | $ | 12,955 |
| | $ | 41,236 |
| | $ | 39,556 |
| $ | 15,712 |
| | $ | 13,712 |
| | $ | 47,139 |
| | $ | 41,236 |
|
Services | 381 |
| | 223 |
| | 1,090 |
| | 706 |
| 393 |
| | 381 |
| | 1,103 |
| | 1,090 |
|
Investment income | 113 |
| | 104 |
| | 418 |
| | 316 |
| 136 |
| | 113 |
| | 351 |
| | 418 |
|
Total revenues | 14,206 |
| | 13,282 |
| | 42,744 |
| | 40,578 |
| 16,241 |
| | 14,206 |
| | 48,593 |
| | 42,744 |
|
Operating expenses: | | | | | | | | | | | | | | |
Benefits | 11,243 |
| | 10,642 |
| | 34,449 |
| | 32,857 |
| 13,357 |
| | 11,243 |
| | 40,168 |
| | 34,449 |
|
Operating costs | 1,900 |
| | 1,688 |
| | 5,410 |
| | 4,694 |
| 1,889 |
| | 1,900 |
| | 5,252 |
| | 5,410 |
|
Merger termination fee and related costs, net | — |
| | — |
| | — |
| | (947 | ) | |
Depreciation and amortization | 102 |
| | 94 |
| | 302 |
| | 278 |
| 127 |
| | 102 |
| | 343 |
| | 302 |
|
Total operating expenses | 13,245 |
| | 12,424 |
| | 40,161 |
| | 36,882 |
| 15,373 |
| | 13,245 |
| | 45,763 |
| | 40,161 |
|
Income from operations | 961 |
| | 858 |
| | 2,583 |
| | 3,696 |
| 868 |
| | 961 |
| | 2,830 |
| | 2,583 |
|
Loss on sale of business | (4 | ) | | — |
| | 786 |
| | — |
| |
(Gain) loss on sale of business | | — |
| | (4 | ) | | — |
| | 786 |
|
Interest expense | 53 |
| | 59 |
| | 159 |
| | 166 |
| 62 |
| | 53 |
| | 184 |
| | 159 |
|
Other expense, net | 11 |
| | — |
| | 11 |
| | — |
| |
Other (income) expense, net | | (82 | ) | | 11 |
| | (217 | ) | | 11 |
|
Income before income taxes and equity in net earnings | 901 |
| | 799 |
| | 1,627 |
| | 3,530 |
| 888 |
| | 901 |
| | 2,863 |
| | 1,627 |
|
Provision for income taxes | 266 |
| | 300 |
| | 308 |
| | 1,266 |
| 200 |
| | 266 |
| | 684 |
| | 308 |
|
Equity in net earnings of Kindred at Home | 9 |
| | — |
| | 9 |
| | — |
| 1 |
| | 9 |
| | 16 |
| | 9 |
|
Net income | $ | 644 |
| | $ | 499 |
| | $ | 1,328 |
| | $ | 2,264 |
| $ | 689 |
| | $ | 644 |
| | $ | 2,195 |
| | $ | 1,328 |
|
Basic earnings per common share | $ | 4.68 |
| | $ | 3.46 |
| | $ | 9.64 |
| | $ | 15.56 |
| $ | 5.16 |
| | $ | 4.68 |
| | $ | 16.31 |
| | $ | 9.64 |
|
Diluted earnings per common share | $ | 4.65 |
| | $ | 3.44 |
| | $ | 9.58 |
| | $ | 15.44 |
| $ | 5.14 |
| | $ | 4.65 |
| | $ | 16.24 |
| | $ | 9.58 |
|
Dividends declared per common share | $ | 0.50 |
| | $ | 0.40 |
| | $ | 1.50 |
| | $ | 1.20 |
| |
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Net income | $ | 689 |
| | $ | 644 |
| | $ | 2,195 |
| | $ | 1,328 |
|
Other comprehensive income: | | | | | | | |
Change in gross unrealized investment gains/losses | 87 |
| | (42 | ) | | 452 |
| | (254 | ) |
Effect of income taxes | (20 | ) | | 10 |
| | (105 | ) | | 64 |
|
Total change in unrealized investment gains/losses, net of tax | 67 |
| | (32 | ) | | 347 |
| | (190 | ) |
Reclassification adjustment for net realized gains | (1 | ) | | 3 |
| | (7 | ) | | (49 | ) |
Effect of income taxes | — |
| | (1 | ) | | 2 |
| | 14 |
|
Total reclassification adjustment, net of tax | (1 | ) | | 2 |
| | (5 | ) | | (35 | ) |
Other comprehensive income (loss), net of tax | 66 |
| | (30 | ) | | 342 |
| | (225 | ) |
Comprehensive loss attributable to equity method investment in Kindred at Home | (1 | ) | | — |
| | (6 | ) | | — |
|
Comprehensive income | $ | 754 |
| | $ | 614 |
| | $ | 2,531 |
| | $ | 1,103 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Net income | $ | 644 |
| | $ | 499 |
| | $ | 1,328 |
| | $ | 2,264 |
|
Other comprehensive (loss) income: | | | | | | | |
Change in gross unrealized investment gains/losses | (42 | ) | | 26 |
| | (254 | ) | | 152 |
|
Effect of income taxes | 10 |
| | (9 | ) | | 64 |
| | (56 | ) |
Total change in unrealized investment gains/losses, net of tax | (32 | ) | | 17 |
| | (190 | ) | | 96 |
|
Reclassification adjustment for net realized losses (gains) | 3 |
| | — |
| | (49 | ) | | (28 | ) |
Effect of income taxes | (1 | ) | | — |
| | 14 |
| | 10 |
|
Total reclassification adjustment, net of tax | 2 |
| | — |
| | (35 | ) | | (18 | ) |
Other comprehensive (loss) income, net of tax | (30 | ) | | 17 |
| | (225 | ) | | 78 |
|
Comprehensive income | $ | 614 |
| | $ | 516 |
| | $ | 1,103 |
| | $ | 2,342 |
|
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | Common Stock |
| Capital In Excess of Par Value |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Treasury Stock |
| Total Stockholders’ Equity | Common Stock |
| Capital In Excess of Par Value |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Treasury Stock |
| Total Stockholders’ Equity |
| Issued Shares |
| Amount |
| Issued Shares |
| Amount |
|
| | (dollars in millions, share amounts in thousands) |
Three months ended September 30, 2019 | | Three months ended September 30, 2019 |
Balances, June 30, 2019 | | 198,628 |
|
| $ | 33 |
|
| $ | 2,763 |
|
| $ | 16,429 |
|
| $ | 112 |
|
| $ | (7,465 | ) |
| $ | 11,872 |
|
Net income | |
|
|
|
|
|
| 689 |
|
|
|
|
|
| 689 |
|
Other comprehensive income | |
|
|
|
|
|
|
|
|
|
|
|
| 65 |
|
|
|
|
| 65 |
|
Common stock repurchases | |
|
|
|
| (200 | ) |
|
|
|
|
|
| (800 | ) |
| (1,000 | ) |
Dividends and dividend equivalents | |
|
|
|
| — |
|
| (73 | ) |
|
|
|
|
|
| (73 | ) |
Stock-based compensation | |
|
|
|
| 43 |
|
|
|
|
|
|
|
|
| 43 |
|
Restricted stock unit vesting | | — |
|
| — |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
Stock option exercises | | 1 |
|
| — |
|
| 2 |
|
|
|
|
|
| 3 |
|
| 5 |
|
Balances, September 30, 2019 | | 198,629 |
|
| $ | 33 |
|
| $ | 2,608 |
|
| $ | 17,045 |
|
| $ | 177 |
|
| $ | (8,262 | ) |
| $ | 11,601 |
|
| (dollars in millions, share amounts in thousands) | | | | | | | | | | | | | |
Three months ended September 30, 2018 | Balances, June 30, 2018 | 198,591 |
|
| $ | 33 |
|
| $ | 2,672 |
|
| $ | 14,211 |
|
| $ | (176 | ) |
| $ | (6,529 | ) |
| $ | 10,211 |
| 198,591 |
|
| $ | 33 |
|
| $ | 2,672 |
|
| $ | 14,211 |
|
| $ | (176 | ) |
| $ | (6,529 | ) |
| $ | 10,211 |
|
Net income |
|
|
|
|
|
| 644 |
|
|
|
|
|
| 644 |
|
|
|
|
|
|
| 644 |
|
|
|
|
|
| 644 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
| (30 | ) |
|
|
|
| (30 | ) |
|
|
|
|
|
|
|
|
|
|
|
| (30 | ) |
|
|
|
| (30 | ) |
Common stock repurchases |
|
|
|
| — |
|
|
|
|
|
|
| (201 | ) |
| (201 | ) |
|
|
|
| — |
|
|
|
|
|
|
| (201 | ) |
| (201 | ) |
Dividends and dividend equivalents |
|
|
|
| — |
|
| (69 | ) |
|
|
|
|
|
| (69 | ) |
|
|
|
| — |
|
| (69 | ) |
|
|
|
|
|
| (69 | ) |
Stock-based compensation |
|
|
|
| 35 |
|
|
|
|
|
|
|
|
| 35 |
|
|
|
|
| 35 |
|
|
|
|
|
|
|
|
| 35 |
|
Restricted stock unit vesting | — |
|
| — |
|
| (3 | ) |
|
|
|
|
|
| 3 |
|
| — |
| — |
|
| — |
|
| (3 | ) |
|
|
|
|
|
| 3 |
|
| — |
|
Stock option exercises | 2 |
|
| — |
|
| 3 |
|
|
|
|
|
| — |
|
| 3 |
| 2 |
|
| — |
|
| 3 |
|
|
|
|
|
| — |
|
| 3 |
|
Balances, September 30, 2018 | 198,593 |
|
| $ | 33 |
|
| $ | 2,707 |
|
| $ | 14,786 |
|
| $ | (206 | ) |
| $ | (6,727 | ) |
| $ | 10,593 |
| 198,593 |
|
| $ | 33 |
|
| $ | 2,707 |
|
| $ | 14,786 |
|
| $ | (206 | ) |
| $ | (6,727 | ) |
| $ | 10,593 |
|
| | | | | | | | | | | | | | |
Three months ended September 30, 2017 | |
Balances, June 30, 2017 | 198,570 |
|
| $ | 33 |
|
| $ | 2,306 |
|
| $ | 13,101 |
|
| $ | (5 | ) |
| $ | (4,482 | ) |
| $ | 10,953 |
| |
Net income |
|
|
|
|
|
| 499 |
|
|
|
|
|
| 499 |
| |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
| 17 |
|
|
|
|
| 17 |
| |
Common stock repurchases |
|
|
|
| 300 |
|
|
|
|
|
|
| (541 | ) |
| (241 | ) | |
Dividends and dividend equivalents |
|
|
|
| — |
|
| (58 | ) |
|
|
|
|
|
| (58 | ) | |
Stock-based compensation |
|
|
|
| 33 |
|
|
|
|
|
|
|
|
| 33 |
| |
Restricted stock unit vesting | — |
|
| — |
|
| (6 | ) |
|
|
|
|
|
| 6 |
|
| — |
| |
Stock option exercises | 2 |
|
| — |
|
| 8 |
|
|
|
|
|
|
|
| 8 |
| |
Balances, September 30, 2017 | 198,572 |
|
| $ | 33 |
|
| $ | 2,641 |
|
| $ | 13,542 |
|
| $ | 12 |
|
| $ | (5,017 | ) |
| $ | 11,211 |
| |
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | Common Stock |
| Capital In Excess of Par Value |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Treasury Stock |
| Total Stockholders’ Equity | Common Stock | | Capital In Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity |
| Issued Shares |
| Amount |
| Issued Shares | | Amount | |
| | (dollars in millions, share amounts in thousands) |
Nine months ended September 30, 2019 | | Nine months ended September 30, 2019 |
Balances, December 31, 2018 | | 198,595 |
| | $ | 33 |
| | $ | 2,535 |
| | $ | 15,072 |
| | $ | (159 | ) | | $ | (7,320 | ) | | $ | 10,161 |
|
Net income | |
| |
| |
| | 2,195 |
| |
| |
| | 2,195 |
|
Other comprehensive income | |
|
| |
|
| |
|
| | — |
| | 336 |
| |
|
| | 336 |
|
Common stock repurchases | |
| |
| | (50 | ) | |
|
| |
| | (960 | ) | | (1,010 | ) |
Dividends and dividend equivalents | |
| |
| | — |
| | (222 | ) | |
|
| | . | | (222 | ) |
Stock-based compensation | |
| |
| | 119 |
| |
| |
| |
|
| | 119 |
|
Restricted stock unit vesting | | 32 |
| | — |
| | (3 | ) | |
|
| |
| | 3 |
| | — |
|
Stock option exercises | | 2 |
| | — |
| | 7 |
| |
| |
| | 15 |
| | 22 |
|
Balances, September 30, 2019 | | 198,629 |
| | $ | 33 |
| | $ | 2,608 |
| | $ | 17,045 |
| | $ | 177 |
| | $ | (8,262 | ) | | $ | 11,601 |
|
| (dollars in millions, share amounts in thousands) | | | | | | | | | | | | | |
Nine months ended September 30, 2018 | Balances, December 31, 2017 | 198,572 |
|
| $ | 33 |
|
| $ | 2,445 |
|
| $ | 13,670 |
|
| $ | 19 |
|
| $ | (6,325 | ) |
| $ | 9,842 |
| 198,572 |
| | $ | 33 |
| | $ | 2,445 |
| | $ | 13,670 |
| | $ | 19 |
| | $ | (6,325 | ) | | $ | 9,842 |
|
Net income |
|
|
|
|
|
| 1,328 |
|
|
|
|
|
| 1,328 |
|
| |
| |
| | 1,328 |
| |
| |
| | 1,328 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
| (4 | ) |
| (225 | ) |
|
|
|
| (229 | ) |
|
| |
|
| |
|
| | (4 | ) | | (225 | ) | |
|
| | (229 | ) |
Common stock repurchases |
|
|
|
| 200 |
|
|
|
|
|
|
| (494 | ) |
| (294 | ) |
| |
| | 200 |
| |
|
| |
| | (494 | ) | | (294 | ) |
Dividends and dividend equivalents |
|
|
|
| — |
|
| (208 | ) |
|
|
|
|
|
| (208 | ) |
| |
| | — |
| | (208 | ) | |
|
| |
| | (208 | ) |
Stock-based compensation |
|
|
|
| 105 |
|
|
|
|
|
|
|
|
| 105 |
|
| |
| | 105 |
| |
| |
| |
|
| | 105 |
|
Restricted stock unit vesting | — |
|
| — |
|
| (92 | ) |
|
|
|
|
|
| 92 |
|
| — |
| — |
| | — |
| | (92 | ) | |
|
| |
| | 92 |
| | — |
|
Stock option exercises | 21 |
|
| — |
|
| 49 |
|
|
|
|
|
|
|
| 49 |
| 21 |
| | — |
| | 49 |
| |
| |
| | — |
| | 49 |
|
Balances, September 30, 2018 | 198,593 |
|
| $ | 33 |
|
| $ | 2,707 |
|
| $ | 14,786 |
|
| $ | (206 | ) |
| $ | (6,727 | ) |
| $ | 10,593 |
| 198,593 |
| | $ | 33 |
| | $ | 2,707 |
| | $ | 14,786 |
| | $ | (206 | ) | | $ | (6,727 | ) | | $ | 10,593 |
|
| | | | | | | | | | | | | | |
Nine months ended September 30, 2017 | |
Balances, December 31, 2016 | 198,495 |
|
| $ | 33 |
|
| $ | 2,562 |
|
| $ | 11,454 |
|
| $ | (66 | ) |
| $ | (3,298 | ) |
| $ | 10,685 |
| |
Net income |
|
|
|
|
|
| 2,264 |
|
|
|
|
|
| 2,264 |
| |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
| 78 |
|
|
|
|
| 78 |
| |
Common stock repurchases |
|
|
|
| — |
|
|
|
|
|
|
| (1,819 | ) |
| (1,819 | ) | |
Dividends and dividend equivalents |
|
|
|
| — |
|
| (176 | ) |
|
|
|
|
|
| (176 | ) | |
Stock-based compensation |
|
|
|
| 116 |
|
|
|
|
|
|
|
|
| 116 |
| |
Restricted stock unit vesting | — |
|
| — |
|
| (100 | ) |
|
|
|
|
|
| 100 |
|
| — |
| |
Stock option exercises | 77 |
|
| — |
|
| 63 |
|
|
|
|
|
|
|
| 63 |
| |
Balances, September 30, 2017 | 198,572 |
|
| $ | 33 |
|
| $ | 2,641 |
|
| $ | 13,542 |
|
| $ | 12 |
|
| $ | (5,017 | ) |
| $ | 11,211 |
| |
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| For the nine months ended September 30, |
| 2019 | | 2018 |
| (in millions) |
Cash flows from operating activities | | | |
Net income | $ | 2,195 |
| | $ | 1,328 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Loss on sale of business | — |
| | 786 |
|
Net realized capital gains | (23 | ) | | (90 | ) |
Equity in net earnings of Kindred at Home | (16 | ) | | (9 | ) |
Stock-based compensation | 119 |
| | 105 |
|
Depreciation | 382 |
| | 330 |
|
Amortization | 53 |
| | 70 |
|
(Benefit) provision for deferred income taxes | (21 | ) | | 165 |
|
Changes in operating assets and liabilities, net of effect of businesses acquired and dispositions: | | | |
Receivables | 179 |
| | (211 | ) |
Other assets | 334 |
| | (939 | ) |
Benefits payable | 1,358 |
| | 410 |
|
Other liabilities | 168 |
| | 548 |
|
Unearned revenues | (9 | ) | | (84 | ) |
Other | 53 |
| | 97 |
|
Net cash provided by operating activities | 4,772 |
| | 2,506 |
|
Cash flows from investing activities | | | |
Cash transferred in sale of business | — |
| | (805 | ) |
Acquisitions, net of cash acquired | — |
| | (354 | ) |
Acquisition, equity method investment in Kindred at Home | — |
| | (1,095 | ) |
Purchases of property and equipment | (506 | ) | | (436 | ) |
Purchases of investment securities | (4,130 | ) | | (3,379 | ) |
Maturities of investment securities | 1,281 |
| | 815 |
|
Proceeds from sales of investment securities | 2,878 |
| | 2,614 |
|
Net cash used in investing activities | (477 | ) | | (2,640 | ) |
Cash flows from financing activities | | | |
Receipts from contract deposits, net | 11 |
| | 378 |
|
Proceeds from issuance of senior notes, net | 987 |
| | — |
|
(Repayments) proceeds from issuance of commercial paper, net | (358 | ) | | 240 |
|
Repayment of term loan | (650 | ) | | — |
|
Change in book overdraft | 102 |
| | 58 |
|
Common stock repurchases | (1,010 | ) | | (294 | ) |
Dividends paid | (216 | ) | | (195 | ) |
Proceeds from stock option exercises and other, net | 23 |
| | 47 |
|
Net cash (used in) provided by financing activities | (1,111 | ) | | 234 |
|
Increase in cash and cash equivalents | 3,184 |
| | 100 |
|
Cash and cash equivalents at beginning of period | 2,343 |
| | 4,042 |
|
Cash and cash equivalents at end of period | $ | 5,527 |
| | $ | 4,142 |
|
Supplemental cash flow disclosures: | | | |
Interest payments | $ | 136 |
| | $ | 120 |
|
Income tax payments, net | $ | 578 |
| | $ | 511 |
|
|
| | | | | | | |
| For the nine months ended September 30, |
| 2018 | | 2017 |
| (in millions) |
Cash flows from operating activities | | | |
Net income | $ | 1,328 |
| | $ | 2,264 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Loss on sale of business | 786 |
| | — |
|
Net realized capital gains | (90 | ) | | (28 | ) |
Equity in net earnings of Kindred at Home | (9 | ) | | — |
|
Stock-based compensation | 105 |
| | 116 |
|
Depreciation | 330 |
| | 303 |
|
Other intangible amortization | 70 |
| | 54 |
|
Provision (benefit) for deferred income taxes | 165 |
| | (54 | ) |
Changes in operating assets and liabilities, net of effect of businesses acquired and dispositions: | | | |
Receivables | (211 | ) | | 358 |
|
Other assets | (939 | ) | | (369 | ) |
Benefits payable | 410 |
| | 396 |
|
Other liabilities | 548 |
| | 641 |
|
Unearned revenues | (84 | ) | | 3,167 |
|
Other, net | 97 |
| | 114 |
|
Net cash provided by operating activities | 2,506 |
| | 6,962 |
|
Cash flows from investing activities | | | |
Cash transferred in sale of business | (805 | ) | | — |
|
Acquisitions, net of cash acquired | (354 | ) | | (10 | ) |
Acquisition, equity method investment in Kindred at Home | (1,095 | ) | | — |
|
Purchases of property and equipment, net | (436 | ) | | (376 | ) |
Purchases of investment securities | (3,379 | ) | | (4,337 | ) |
Maturities of investment securities | 815 |
| | 919 |
|
Proceeds from sales of investment securities | 2,614 |
| | 2,028 |
|
Net cash used in investing activities | (2,640 | ) | | (1,776 | ) |
Cash flows from financing activities | | | |
Receipts from contract deposits, net | 378 |
| | 1,931 |
|
Proceeds from issuance of senior notes, net | — |
| | 985 |
|
Proceeds (repayment) from issuance of commercial paper, net | 240 |
| | (153 | ) |
Change in book overdraft | 58 |
| | (41 | ) |
Common stock repurchases | (294 | ) | | (1,819 | ) |
Dividends paid | (195 | ) | | (162 | ) |
Proceeds from stock option exercises and other | 47 |
| | 61 |
|
Net cash provided by financing activities | 234 |
| | 802 |
|
Increase in cash and cash equivalents | 100 |
| | 5,988 |
|
Cash and cash equivalents at beginning of period | 4,042 |
| | 3,877 |
|
Cash and cash equivalents at end of period | $ | 4,142 |
| | $ | 9,865 |
|
Supplemental cash flow disclosures: | | | |
Interest payments | $ | 120 |
| | $ | 124 |
|
Income tax payments, net | $ | 511 |
| | $ | 1,206 |
|
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2017,2018, that was filed with the Securities and Exchange Commission, or the SEC, on February 16, 2018.21, 2019. We refer to the Form 10-K as the “2017“2018 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 20172018 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
Workforce Optimization
During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program. These programs impacted approximately 3,600 associates, or 7.8%, of our workforce in 2017. As a result, in 2017 we recorded charges of $148 million, or $0.64 per diluted common share. At December 31, 2017, $140 million was classified as a current liability, included in our condensed consolidated balance sheet in the trade accounts payable and accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period. The remaining workforce optimization liability at September 30, 2018 was $29 million and is expected to be substantially paid in 2018.
Aetna Merger
On February 16, 2017, under the terms of the Agreement and Plan of Merger, or Merger Agreement, with Aetna Inc., and certain wholly owned subsidiaries of Aetna Inc., which we collectively refer to as Aetna, we received a breakup fee of $1 billion from Aetna, which is included in our consolidated statement of income in the line captioned "Merger termination fee and related costs, net."
Revenue Recognition
Our revenues include premium and service revenues. Service revenues include administrative service fees that are recorded based upon established per member per month rates and the number of members for the month and are recognized as services are provided for the month. Additionally, service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For more information about our revenues, refer to Note 2 to the consolidated financial statements included in our 20172018 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 15 for disaggregation of revenue by segment and type.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
At September 30, 2018,2019, accounts receivable related to services were $148$141 million. For the three and nine months ended September 30, 2018,2019, we had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet at September 30, 2018.2019.
For the three and nine months ended September 30, 2018,2019, services revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further, services revenue expected to be recognized in any future year related to remaining performance obligations was not material.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSEquity Method Investment in Kindred at Home
In May 2014, the Financial Accounting Standards Board,third quarter of 2018, we, along with TPG Capital, or FASB, issued new guidanceTPG, and Welsh, Carson, Anderson & Stowe, or WCAS, completed the acquisitions of Kindred Healthcare, Inc., or Kindred, and privately-held Curo Health Services, or Curo, respectively, merging Curo with the hospice business of the Kindred at Home Division, or Kindred at Home. As part of these transactions, we acquired a 40% minority interest in Kindred at Home, a leading home health and hospice company, for total cash consideration of approximately $1.1 billion.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
We account for our 40% investment in Kindred at Home using the equity method of accounting. This investment is reflected as "Equity method investment in Kindred at Home" in our condensed consolidated balance sheets, with our share of income or loss reported as "Equity in net earnings of Kindred at Home" in our condensed consolidated statements of income.
We entered into a shareholders agreement with TPG and WCAS, the Sponsors, that amendsprovides for certain rights and obligations of each party. The shareholders agreement with the accounting for revenue recognition.Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture beginning on July 2, 2021 and ending on July 1, 2022. Likewise, we have a call option under which we have the right to require the Sponsors to sell their interest in the joint venture to Humana beginning on July 2, 2022 and ending on July 1, 2023. The amendmentsput and call options, which are intended toexercisable at a fixed EBITDA multiple and provide a more robust frameworkminimum return on the Sponsor's investment if exercised, are measured at fair value each period using a Monte Carlo simulation. The simulation relies on assumptions around Kindred at Home's equity value, risk free interest rates, volatility, and the details specific to the put and call options. The final purchase price allocation resulted in approximately $1 billion being allocated to the investment and $236 million and $291 million allocated to the put and call options, respectively. The fair values of the put option and call option were $90 million and $327 million, respectively, at September 30, 2019. The put option is included within other long-term liabilities and the call option is included within other long-term assets. The change in fair value of the put and call options is reflected as "Other (income) expense, net" in our condensed consolidated statements of income.
Health Care Reform
The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) enacted significant reforms to various aspects of the U.S. health insurance industry. Certain of these reforms became effective January 1, 2014, including an annual insurance industry premium-based fee. The Continuing Resolution bill, H.R. 195, enacted on January 22, 2018, included a one year suspension in 2019 of the health insurance industry fee, but under current law, the fee is scheduled to resume in calendar year 2020. In October 2018, we paid the federal government $1.04 billion for addressing revenue issues, improve comparabilitythe annual health insurance industry fee attributed to calendar year 2018. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, was not deductible for tax purposes. Each year on January 1, except when suspended, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of revenue recognition practices,the deferred cost was recorded in operating cost expense of approximately $258 million and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. Accordingly, our premiums revenue and investment income, collectively representing approximately 97% of our consolidated external revenues$778 million for the three and nine months ended September 30, 2018, are not included inrespectively, resulting from the scopeamortization of the new guidance. We adopted the new standard effective January 1, 2018 using the modified retrospective approach. As the majority of our revenues are not subject to the new guidance and the remaining revenues’ accounting treatment did not materially differ from pre-existing accounting treatment, the adoption of the new standard did not have a material impact on our consolidated results of operations, financial condition, cash flows, or related disclosures.annual health insurance industry fee.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued new guidance related to accounting for leases which requires lessees to record
assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). TheWe adopted the new standard effective January 1, 2019, as allowed, using the modified retrospective approach. We elected the practical expedients of not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification for any expired or existing leases and not reassessing any initial direct costs for existing leases. In addition, we elected the practical expedient to not separate lease and nonlease components for all of our asset classes. We made a permitted accounting policy election to not apply the new guidance is effective for us beginningto leases with annual and interim periods in 2019, with earlier adoption permitted.an initial term of 12 months or less. We expect to adopt the guidance that allows us not to adjust comparative periods and record a cumulative effect adjustment, if any, to retained earnings. We arerecognize those lease payments in the processcondensed consolidated statement of implementingincome on a newstraight-line basis over the lease accounting systemterm. As of January 1, 2019, the adoption of the standard resulted in recognition of right-of-use, or ROU, liabilities of approximately $470 million and expect to record significant leasedROU assets of $436 million, which equals the ROU liabilities net of accrued rent and corresponding lease obligations based on our existing population of individual leases. We doincentives. The standard does not expect a material impact onmaterially affect our results of operations, or cash flows.flows and liquidity. See Note 8 for further information.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-saleavailable for sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available-for-saleavailable for sale debt securities. We have identified and are currently evaluatinganalyzing our financial assets measured at amortized cost that are in scope of the new CECL model. We continue to consider the impact of the modified impairment model as it relates to our available for sale debt securities. We continue to analyze and evaluate these impacts on our results of operations, financial condition, and cash flows.
In March 2017, the FASB issued new guidance that amends the accounting for premium amortization on purchased callable debt securities by shortening the amortization period. This amended guidance requires the premium to be amortized to the earliest call date instead of maturity date. The new guidance is effective for us beginning with annual and interim periods in 2019. We do not expect adoption of thisThis guidance will have a material impact on our results of operations, financial condition and cash flows.
In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act. The new guidance is effective for us beginning January 1, 2019, with early adoption permitted. We early
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
adopted this guidance in the first quarter of 2018 and it did not have a material impact on our results of operations, financial condition or cash flows.
In September 2018, the FASB issued new guidance related to accounting for long-duration contracts of insurers which revises key elements of the measurement models and disclosure requirements for long-duration contracts issued by insurers and reinsurers. The new guidance is effective for us beginning with annual and interim periods in 2021, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. The FASB has recently proposed delaying the effective date beginning with annual and interim periods in 2022. We are currently evaluating the impact on our results of operations, financial position and cash flows.
There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.
3. ACQUISITIONS AND DIVESTITURES
Acquisition of a 40% Minority Interest in Kindred’s Homecare Business and Curo Health Services
On July 2, 2018, we completed the acquisition of a 40% minority interest in the Kindred at Home Division, or Kindred at Home, of Kindred Healthcare, Inc., or Kindred, for cash consideration of approximately $850 million, including our share of transaction and related expenses. TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, collectively, the Sponsors, along with us jointly created a consortium to purchase all of the outstanding and issued securities of Kindred. Immediately following the closing of that transaction, Kindred at Home and the Specialty Hospital company were separated, with the result being that the Long Term Acute Care and Rehabilitation businesses (the Specialty Hospital Company) is owned by the Sponsors and Kindred at Home is owned by a joint venture owned by the Sponsors and us.
On July 11, 2018, we, along with the same Kindred at Home Sponsors, TPG and WCAS, collectively referred to as the "Consortium," completed the acquisition of privately-held Curo Health Services, or Curo, one of the nation's leading hospice operators providing care to patients at 245 locations in 22 states. The transaction was structured as a merger of Curo with the hospice business of Kindred at Home, and we thereby purchased a 40% minority interest in Curo for cash consideration of approximately $250 million.
We account for our 40% investment in Kindred at Home using the equity method of accounting. Investments accounted for under the equity method are initially recorded at cost and subsequently adjusted to our share of the net income or loss from Kindred at Home. This investment is reflected as "Equity method investment in Kindred at Home" in our condensed consolidated balance sheets, and our share of income or loss is included in our condensed consolidated statements of income in the line captioned "Equity in net earnings of Kindred at Home."
We entered into a shareholders agreement with the Sponsors that provide for certain rights and obligations of each party. The shareholders agreement with the Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture starting at the end of year three and ending at the end of year four following the closing. Likewise, we have a call option under which we have the right to require the Sponsors to sell their interest in the joint venture to Humana beginning at the end of year four and ending at the end of year five following the closing. The put and call options, which provide a minimum return on the Sponsor's investment if exercised, are measured at fair value each period using a Monte Carlo simulation. The simulation relies on assumptions around Kindred at Home's equity value, risk free interest rates, volatility, and the details specific to the put and call options. Both options are exercisable at a fixed EBITDA multiple. The final purchase price allocation resulted in approximately $1 billion being allocated to the investment and $236 million and $291 million allocated to the put and call options, respectively. The fair values of the put option and call option were $221 million and $265 million, respectively, at September 30, 2018. The put option is included within other long-term liabilities and the call option is included within other long-term assets. The change in fair value of the put and call options is reflected as "Other expense, net" in our condensed consolidated statements of income.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Sale of Closed Block of Commercial Long-Term Care Insurance Business
On August 9,In the third quarter of 2018, we completed the sale of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG's subsidiary, Kanawha Insurance Company, or KIC, includesincluded our closed block of non-strategic commercial long-term care policies. Upon closing, we funded the transaction with approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale.
In connection with the sale of KMG, we recognized a pretax loss, including transaction costs, of $786 million which is reported as loss on sale of business in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2018. We recordedand a $430corresponding $452 million income tax benefit resulting from the loss which is includedbenefit.
Also, in the accompanying condensed consolidated statementsthird quarter of income for the nine months ended September 30, 2018.
During the nine months ended September 30, 2018, we entered into reinsurance contracts to transfer the risk associated with certain voluntary benefit and financial protection products previously issued primarily by KIC to a third party. We transferred approximately $245 million of cash to the third party and recorded a commensurate reinsurance recoverable as a result of these transactions. The reinsurance recoverable was included as part of the net assets disposed. There was no material impact to operating results from these reinsurance transactions.
KMG revenues and pretax income for the nine months ended September 30, 2018 and 2017 were $182 million and $199 million, respectively. For the nine months ended September 30, 2018 and 2017 KMG pretax income was $47 million and pretax loss was $15 million, respectively. KMG revenues and pretax loss for the three months ended September 30, 2017 were $66 million and $5 million, respectively, and2018 were not material for the three months ended September 30, 2018.material.
The assets and liabilities of KMG that were disposed of on August 9, 2018 were as follows:
|
| | | |
| August 9, 2018 |
Assets | (in millions) |
Cash and cash equivalents | $ | 805 |
|
Receivables, net | 3 |
|
Investment securities | 1,576 |
|
Other assets | 1,085 |
|
Total assets disposed | $ | 3,469 |
|
Liabilities | |
Benefits payable | $ | 58 |
|
Trade accounts payable and accrued expenses | 70 |
|
Future policy benefits payable | 2,573 |
|
Total liabilities disposed | $ | 2,701 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Other Acquisitions and Divestitures
On March 1,In the first quarter of 2018, we acquired the remaining equity interest in MCCI Holdings, LLC, or MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, as well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million. This resulted in a preliminary purchase price allocation to goodwill of $479$483 million, other intangible assets of $80 million, and net tangible assets of $27$24 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 8 years. Goodwill and other intangible assets are amortizable as deductible expenses for tax purposes.
On April 10,In the second quarter of 2018, we acquired Family Physicians Group, or FPG, for cash consideration of approximately $185 million, net of cash received. FPG serves Medicare Advantage and Managed Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. This resulted in a preliminary purchase price allocation to goodwill of $135$133 million, other intangible assets of $38 million and net tangible assets of $17$14 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 4.9 years. The purchase price allocations for MCCI and FPG are preliminary, subject to completion of valuation analysis, including for example, refining assumptions used to calculate the fair value of intangible assets.final.
During 2019 and 2018, and 2017, we also acquired other health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the respective acquisition dates. Acquisition-related costs recognized in 20182019 and 20172018 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at September 30, 20182019 and December 31, 2017,2018, respectively:
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
September 30, 2019 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 373 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 374 |
|
Mortgage-backed securities | 3,543 |
| | 101 |
| | (3 | ) | | 3,641 |
|
Tax-exempt municipal securities | 1,465 |
| | 36 |
| | — |
| | 1,501 |
|
Mortgage-backed securities: | | | | | | | |
Residential | — |
| | — |
| | — |
| | — |
|
Commercial | 641 |
| | 27 |
| | — |
| | 668 |
|
Asset-backed securities | 1,030 |
| | 3 |
| | (3 | ) | | 1,030 |
|
Corporate debt securities | 3,509 |
| | 84 |
| | (3 | ) | | 3,590 |
|
Total debt securities | $ | 10,561 |
| | $ | 253 |
| | $ | (10 | ) | | $ | 10,804 |
|
| | | | | | | |
We held $30 million of equity securities as of September 30, 2019 consisting of common stock. |
| | | | | | | |
December 31, 2018 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 419 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 417 |
|
Mortgage-backed securities | 2,595 |
| | 3 |
| | (54 | ) | | 2,544 |
|
Tax-exempt municipal securities | 2,805 |
| | 3 |
| | (37 | ) | | 2,771 |
|
Mortgage-backed securities: | | | | | | | |
Residential | 55 |
| | — |
| | — |
| | 55 |
|
Commercial | 537 |
| | — |
| | (14 | ) | | 523 |
|
Asset-backed securities | 991 |
| | 1 |
| | (7 | ) | | 985 |
|
Corporate debt securities | 3,239 |
| | 1 |
| | (98 | ) | | 3,142 |
|
Total debt securities | $ | 10,641 |
| | $ | 9 |
| | $ | (213 | ) | | $ | 10,437 |
|
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
September 30, 2018 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 649 |
| | $ | — |
| | $ | (5 | ) | | $ | 644 |
|
Mortgage-backed securities | 2,418 |
| | — |
| | (89 | ) | | 2,329 |
|
Tax-exempt municipal securities | 2,920 |
| | 2 |
| | (65 | ) | | 2,857 |
|
Mortgage-backed securities: | | | | | | | |
Residential | 57 |
| | — |
| | (1 | ) | | 56 |
|
Commercial | 528 |
| | — |
| | (18 | ) | | 510 |
|
Asset-backed securities | 686 |
| | — |
| | (2 | ) | | 684 |
|
Corporate debt securities | 3,111 |
| | 2 |
| | (93 | ) | | 3,020 |
|
Total debt securities | $ | 10,369 |
| | $ | 4 |
| | $ | (273 | ) | | $ | 10,100 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 532 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 531 |
|
Mortgage-backed securities | 1,625 |
| | 4 |
| | (19 | ) | | 1,610 |
|
Tax-exempt municipal securities | 3,884 |
| | 33 |
| | (28 | ) | | 3,889 |
|
Mortgage-backed securities: | | | | | | | |
Residential | 26 |
| | — |
| | — |
| | 26 |
|
Commercial | 455 |
| | 3 |
| | (2 | ) | | 456 |
|
Asset-backed securities | 407 |
| | 1 |
| | — |
| | 408 |
|
Corporate debt securities | 5,175 |
| | 244 |
| | (37 | ) | | 5,382 |
|
Total debt securities | $ | 12,104 |
| | $ | 286 |
| | $ | (88 | ) | | $ | 12,302 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at September 30, 20182019 and December 31, 2017,2018, respectively:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) |
September 30, 2019 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 31 |
| | $ | — |
| | $ | 21 |
| | $ | (1 | ) | | $ | 52 |
| | $ | (1 | ) |
Mortgage-backed securities | 122 |
| | (1 | ) | | 269 |
| | (2 | ) | | 391 |
| | (3 | ) |
Tax-exempt municipal securities | — |
| | — |
| | 207 |
| | — |
| | 207 |
| | — |
|
Mortgage-backed securities: | | | | | | | | | | | |
Residential | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial | 24 |
| | — |
| | 55 |
| | — |
| | 79 |
| | — |
|
Asset-backed securities | 196 |
| | (1 | ) | | 420 |
| | (2 | ) | | 616 |
| | (3 | ) |
Corporate debt securities | 261 |
| | (1 | ) | | 191 |
| | (2 | ) | | 452 |
| | (3 | ) |
Total debt securities | $ | 634 |
| | $ | (3 | ) | | $ | 1,163 |
| | $ | (7 | ) | | $ | 1,797 |
| | $ | (10 | ) |
| | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 179 |
| | $ | (1 | ) | | $ | 153 |
| | $ | (2 | ) | | $ | 332 |
| | $ | (3 | ) |
Mortgage-backed securities | 956 |
| | (16 | ) | | 1,019 |
| | (38 | ) | | 1,975 |
| | (54 | ) |
Tax-exempt municipal securities | 809 |
| | (9 | ) | | 1,648 |
| | (28 | ) | | 2,457 |
| | (37 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | — |
| | — |
| | 15 |
| | — |
| | 15 |
| | — |
|
Commercial | 372 |
| | (8 | ) | | 133 |
| | (6 | ) | | 505 |
| | (14 | ) |
Asset-backed securities | 824 |
| | (7 | ) | | 40 |
| | — |
| | 864 |
| | (7 | ) |
Corporate debt securities | 1,434 |
| | (35 | ) | | 1,439 |
| | (63 | ) | | 2,873 |
| | (98 | ) |
Total debt securities | $ | 4,574 |
| | $ | (76 | ) | | $ | 4,447 |
| | $ | (137 | ) | | $ | 9,021 |
| | $ | (213 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) |
September 30, 2018 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 476 |
| | $ | (1 | ) | | $ | 143 |
| | $ | (4 | ) | | $ | 619 |
| | $ | (5 | ) |
Mortgage-backed securities | 1,661 |
| | (52 | ) | | 642 |
| | (37 | ) | | 2,303 |
| | (89 | ) |
Tax-exempt municipal securities | 1,578 |
| | (29 | ) | | 1,120 |
| | (36 | ) | | 2,698 |
| | (65 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | 56 |
| | (1 | ) | | 1 |
| | — |
| | 57 |
| | (1 | ) |
Commercial | 407 |
| | (13 | ) | | 74 |
| | (5 | ) | | 481 |
| | (18 | ) |
Asset-backed securities | 480 |
| | (2 | ) | | 15 |
| | — |
| | 495 |
| | (2 | ) |
Corporate debt securities | 1,835 |
| | (43 | ) | | 882 |
| | (50 | ) | | 2,717 |
| | (93 | ) |
Total debt securities | $ | 6,493 |
| | $ | (141 | ) | | $ | 2,877 |
| | $ | (132 | ) | | $ | 9,370 |
| | $ | (273 | ) |
| | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 273 |
| | $ | (1 | ) | | $ | 130 |
| | $ | (1 | ) | | $ | 403 |
| | $ | (2 | ) |
Mortgage-backed securities | 581 |
| | (2 | ) | | 672 |
| | (17 | ) | | 1,253 |
| | (19 | ) |
Tax-exempt municipal securities | 1,590 |
| | (16 | ) | | 661 |
| | (12 | ) | | 2,251 |
| | (28 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | 20 |
| | — |
| | 3 |
| | — |
| | 23 |
| | — |
|
Commercial | 131 |
| | (1 | ) | | 28 |
| | (1 | ) | | 159 |
| | (2 | ) |
Asset-backed securities | 107 |
| | — |
| | 10 |
| | — |
| | 117 |
| | — |
|
Corporate debt securities | 1,297 |
| | (10 | ) | | 804 |
| | (27 | ) | | 2,101 |
| | (37 | ) |
Total debt securities | $ | 3,999 |
| | $ | (30 | ) | | $ | 2,308 |
| | $ | (58 | ) | | $ | 6,307 |
| | $ | (88 | ) |
Approximately 97%96% of our debt securities were investment-grade quality, with a weighted average credit rating of AA+AA by Standard & Poor's Rating Service, or S&P, at September 30, 2018.2019. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 9%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
equivalent weighted average S&P credit ratingindividual state exceeding 1% of AA exclusive of the bond insurers’ guarantee.our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 1,250250 positions out of a total of approximately 1,5201,530 positions at September 30, 2018.2019. All issuers of securities we own that were trading at an unrealized loss at September 30, 20182019 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the securities were purchased. At September 30, 2018,2019, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at September 30, 2018.2019.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in millions) |
Gross realized gains | $ | 41 |
| | $ | 10 |
| | $ | 59 |
| | $ | 105 |
|
Gross realized losses | (23 | ) | | (2 | ) | | (36 | ) | | (15 | ) |
Net realized capital (losses) gains | $ | 18 |
| | $ | 8 |
| | $ | 23 |
|
| $ | 90 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Gross realized gains | $ | 10 |
| | $ | 3 |
| | $ | 105 |
| | $ | 34 |
|
Gross realized losses | (2 | ) | | (3 | ) | | (15 | ) | | (6 | ) |
Net realized capital gains | $ | 8 |
| | $ | — |
|
| $ | 90 |
|
| $ | 28 |
|
There were no0 material other-than-temporary impairments for the three and nine months ended September 30, 20182019 or 2017.2018.
The contractual maturities of debt securities available for sale at September 30, 2018,2019, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (in millions) |
Due within one year | $ | 839 |
| | $ | 840 |
|
Due after one year through five years | 2,277 |
| | 2,312 |
|
Due after five years through ten years | 1,730 |
| | 1,789 |
|
Due after ten years | 501 |
| | 524 |
|
Mortgage and asset-backed securities | 5,214 |
| | 5,339 |
|
Total debt securities | $ | 10,561 |
| | $ | 10,804 |
|
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (in millions) |
Due within one year | $ | 711 |
| | $ | 709 |
|
Due after one year through five years | 3,152 |
| | 3,092 |
|
Due after five years through ten years | 2,038 |
| | 1,962 |
|
Due after ten years | 779 |
| | 758 |
|
Mortgage and asset-backed securities | 3,689 |
| | 3,579 |
|
Total debt securities | $ | 10,369 |
| | $ | 10,100 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at September 30, 20182019 and December 31, 2017,2018, respectively, for financial assets measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (in millions) |
September 30, 2019 | | | | | | | |
Cash equivalents | $ | 5,015 |
| | $ | 5,015 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 374 |
| | — |
| | 374 |
| | — |
|
Mortgage-backed securities | 3,641 |
| | — |
| | 3,641 |
| | — |
|
Tax-exempt municipal securities | 1,501 |
| | — |
| | 1,501 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | — |
| | — |
| | — |
| | — |
|
Commercial | 668 |
| | — |
| | 668 |
| | — |
|
Asset-backed securities | 1,030 |
| | — |
| | 1,030 |
| | — |
|
Corporate debt securities | 3,590 |
| | — |
| | 3,590 |
| | — |
|
Total debt securities | 10,804 |
| | — |
| | 10,804 |
| | — |
|
Common stock | 30 |
| | 30 |
| | — |
| | — |
|
Total invested assets | $ | 15,849 |
| | $ | 5,045 |
| | $ | 10,804 |
| | $ | — |
|
| | | | | | | |
December 31, 2018 | | | | | | | |
Cash equivalents | $ | 2,024 |
| | $ | 2,024 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 417 |
| | — |
| | 417 |
| | — |
|
Mortgage-backed securities | 2,544 |
| | — |
| | 2,544 |
| | — |
|
Tax-exempt municipal securities | 2,771 |
| | — |
| | 2,771 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | 55 |
| | — |
| | 55 |
| | — |
|
Commercial | 523 |
| | — |
| | 523 |
| | — |
|
Asset-backed securities | 985 |
| | — |
| | 985 |
| | — |
|
Corporate debt securities | 3,142 |
| | — |
| | 3,142 |
| | — |
|
Total debt securities | 10,437 |
| | — |
| | 10,437 |
| | — |
|
Total invested assets | $ | 12,461 |
| | $ | 2,024 |
| | $ | 10,437 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (in millions) |
September 30, 2018 | | | | | | | |
Cash equivalents | $ | 4,990 |
| | $ | 4,990 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 644 |
| | — |
| | 644 |
| | — |
|
Mortgage-backed securities | 2,329 |
| | — |
| | 2,329 |
| | — |
|
Tax-exempt municipal securities | 2,857 |
| | — |
| | 2,857 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | 56 |
| | — |
| | 56 |
| | — |
|
Commercial | 510 |
| | — |
| | 510 |
| | — |
|
Asset-backed securities | 684 |
| | — |
| | 684 |
| | — |
|
Corporate debt securities | 3,020 |
| | — |
| | 3,020 |
| | — |
|
Total debt securities | 10,100 |
| | — |
| | 10,100 |
| | — |
|
Total invested assets | $ | 15,090 |
| | $ | 4,990 |
| | $ | 10,100 |
| | $ | — |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
Cash equivalents | $ | 4,564 |
| | $ | 4,564 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 531 |
| | — |
| | 531 |
| | — |
|
Mortgage-backed securities | 1,610 |
| | — |
| | 1,610 |
| | — |
|
Tax-exempt municipal securities | 3,889 |
| | — |
| | 3,889 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | 26 |
| | — |
| | 26 |
| | — |
|
Commercial | 456 |
| | — |
| | 456 |
| | — |
|
Asset-backed securities | 408 |
| | — |
| | 408 |
| | — |
|
Corporate debt securities | 5,382 |
| | — |
| | 5,381 |
| | 1 |
|
Total debt securities | 12,302 |
| | — |
| | 12,301 |
| | 1 |
|
Total invested assets | $ | 16,866 |
| | $ | 4,564 |
| | $ | 12,301 |
| | $ | 1 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $4,774$5,765 million at September 30, 20182019 and $4,770$4,774 million at December 31, 2017.2018. The fair value of our senior notes debt was $4,879$6,246 million at September 30, 20182019 and $5,191 million at December 31, 2017.2018. The fair value of our long-term debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There wereborrowings and term note. The outstanding commercial paper borrowings of $398were $299 million as of September 30, 20182019 and $150we repaid the term note balance in August 2019. The term loan outstanding and commercial paper borrowings were $1,295 million as of December 31, 2017.2018.
Other Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we acquired MCCI and FPG and other health and wellness related businesses during 2018 and 2017.2018. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, and the put option liability and call option asset associated with our investment in Kindred at Home as detailed in Note 1, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 20182019 or 2017.2018.
6. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described further in Note 2 to the consolidated financial statements included in our 20172018 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 20182019 and December 31, 2017.2018. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers.
|
| | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Risk Corridor Settlement | | CMS Subsidies/ Discounts | | Risk Corridor Settlement | | CMS Subsidies/ Discounts |
| (in millions) |
Other current assets | $ | 11 |
| | $ | 337 |
| | $ | 15 |
| | $ | 172 |
|
Trade accounts payable and accrued expenses | (49 | ) | | (781 | ) | | (103 | ) | | (503 | ) |
Net current liability | (38 | ) | | (444 | ) | | (88 | ) | | (331 | ) |
Other long-term assets | 25 |
| | — |
| | 7 |
| | — |
|
Other long-term liabilities | (142 | ) | | — |
| | (89 | ) | | — |
|
Net long-term liability | (117 | ) | | — |
| | (82 | ) | | — |
|
Total net liability | $ | (155 | ) | | $ | (444 | ) | | $ | (170 | ) | | $ | (331 | ) |
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Risk Corridor Settlement | | CMS Subsidies/ Discounts | | Risk Corridor Settlement | | CMS Subsidies/ Discounts |
| (in millions) |
Other current assets | $ | 6 |
| | $ | 268 |
| | $ | 4 |
| | $ | 101 |
|
Trade accounts payable and accrued expenses | (214 | ) | | (1,688 | ) | | (255 | ) | | (1,085 | ) |
Net current liability | (208 | ) | | (1,420 | ) | | (251 | ) | | (984 | ) |
Other long-term assets | 27 |
| | — |
| | — |
| | — |
|
Other long-term liabilities | (122 | ) | | — |
| | (28 | ) | | — |
|
Net long-term liability | (95 | ) | | — |
| | (28 | ) | | — |
|
Total net liability | $ | (303 | ) | | $ | (1,420 | ) | | $ | (279 | ) | | $ | (984 | ) |
7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
programs effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs, applicable to certain of our commercial medical insurance products, are further discussed in Note 2 to our 2017 Form 10-K. The temporary programs were only applicable for years 2014 through 2016. As a result of our exit from our individual commercial medical business effective January 1, 2018, the permanent risk adjustment program is currently only applicable to our commercial small group health insurance business.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under the Health Care Reform Law, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.
The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Risk Adjustment Settlement | | Reinsurance Recoverables | | Risk Adjustment Settlement | | Reinsurance Recoverables |
| (in millions) |
Premiums receivable | $ | 68 | | | $ | — |
| | $ | 62 | | | $ | — |
|
Other current assets | — | | | — |
| | — | | | 44 |
|
Trade accounts payable and accrued expenses | (40 | ) | | — |
| | (80 | ) | | — |
|
Other long-term assets | — | | | — |
| | 5 | | | — |
|
Total net asset (liability) | $ | 28 | | | $ | — |
| | $ | (13 | ) | | $ | 44 |
|
Net payments under the 3Rs were $60 million during the nine months ended September 30, 2018. Net collections were $307 million during the nine months ended September 30, 2017.
In October 2018, we paid the federal government approximately $1.04 billion for our portion of the annual health insurance industry fee attributed to calendar year 2018 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for when the fee is suspended, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost was recorded in operating cost expense of approximately $258 million and $778 million for the three and nine months ended September 30, 2018, resulting from the amortization of the 2018 annual health insurance industry fee. The annual health insurance industry fee was suspended for calendar year 2017, and is also, under current law, suspended for calendar year 2019.
8.7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 20182019 were as follows:
|
| | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Total |
| (in millions) |
Balance at January 1, 2019 | $ | 1,535 |
| | $ | 261 |
| | $ | 2,101 |
| | $ | 3,897 |
|
Acquisitions | — |
| | — |
| | 25 |
| | 25 |
|
Balance at September 30, 2019 | $ | 1,535 |
| | $ | 261 |
| | $ | 2,126 |
| | $ | 3,922 |
|
|
| | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Total |
| (in millions) |
Balance at January 1, 2018 | $ | 1,059 |
| | $ | 261 |
| | $ | 1,961 |
| | $ | 3,281 |
|
Acquisitions | 476 |
| | — |
| | 138 |
| | 614 |
|
Balance at September 30, 2018 | $ | 1,535 |
| | $ | 261 |
| | $ | 2,099 |
| | $ | 3,895 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 20182019 and December 31, 2017.2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| | | ($ in millions) |
Other intangible assets: | | | | | | | | | | | | | |
Customer contracts/ relationships | 8.7 years | | $ | 647 |
| | $ | 481 |
| | $ | 166 |
| | $ | 646 |
| | $ | 434 |
| | $ | 212 |
|
Trade names and technology | 6.4 years | | 84 |
| | 84 |
| | — |
| | 84 |
| | 83 |
| | 1 |
|
Provider contracts | 11.8 years | | 69 |
| | 42 |
| | 27 |
| | 68 |
| | 37 |
| | 31 |
|
Noncompetes and other | 7.3 years | | 29 |
| | 28 |
| | 1 |
| | 29 |
| | 28 |
| | 1 |
|
Total other intangible assets | 8.7 years | | $ | 829 |
| | $ | 635 |
| | $ | 194 |
| | $ | 827 |
| | $ | 582 |
| | $ | 245 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | December 31, 2017 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| | | ($ in millions) |
Other intangible assets: | | | | | | | | | | | | | |
Customer contracts/ relationships | 8.7 years | | $ | 646 |
| | $ | 419 |
| | $ | 227 |
| | $ | 566 |
| | $ | 401 |
| | $ | 165 |
|
Trade names and technology | 6.4 years | | 84 |
| | 82 |
| | 2 |
| | 104 |
| | 84 |
| | 20 |
|
Provider contracts | 11.9 years | | 68 |
| | 36 |
| | 32 |
| | 68 |
| | 30 |
| | 38 |
|
Noncompetes and other | 7.3 years | | 29 |
| | 27 |
| | 2 |
| | 32 |
| | 29 |
| | 3 |
|
Total other intangible assets | 8.7 years | | $ | 827 |
| | $ | 564 |
| | $ | 263 |
| | $ | 770 |
| | $ | 544 |
| | $ | 226 |
|
Amortization expense for other intangible assets was approximately $17 million for the three months ended September 30, 2019 and $19 million for the three months ended September 30, 2018 and $18 million for the three months ended September 30, 2017.2018. For the nine months ended September 30, 20182019 and 2017,2018, amortization expense for other intangible assets was approximately $70$53 million and $54$70 million, respectively. Amortization expense for the nine months ended September 30, 2018 included $12 million associated with the write-off of a trade name value reflecting the re-branding of certain provider assets. The following table presents our estimate of amortization expense remaining for 20182019 and each of the five next succeeding years:
|
| | | |
| (in millions) |
For the years ending December 31, | |
2019 | $ | 17 |
|
2020 | 67 |
|
2021 | 34 |
|
2022 | 31 |
|
2023 | 18 |
|
2024 | 11 |
|
|
| | | |
| (in millions) |
For the years ending December 31, | |
2018 | $ | 90 |
|
2019 | 70 |
|
2020 | 67 |
|
2021 | 34 |
|
2022 | 31 |
|
2023 | 18 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
8. LEASES
2019
We determine if a contract contains a lease by evaluating the nature and substance of the agreement. We lease facilities, computer hardware, and other furniture and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For new lease agreements, we combine lease and nonlease components for all of our asset classes. See Note 2 for further information.
When portions of the lease payments are not fixed or depend on an index or rate, we consider those payments to be variable in nature. These include, but are not limited to, common area maintenance, taxes and insurance. Variable lease payments are recorded in the period in which the obligation for the payment is incurred.
Most leases include options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
At September 30, 2019, $404 million of operating ROU assets are included within other long-term assets in our condensed consolidated balance sheet. Additionally, at September 30, 2019, $120 million and $324 million of operating ROU lease liabilities are included within trade accounts payable and accrued expenses and other long-term liabilities, respectively, in our condensed consolidated balance sheet based on the remaining lease term.
For the three and nine months ended September 30, 2019, total fixed operating lease costs, excluding short-term lease costs, were $37 million and $115 million, respectively, and are included within operating costs in our condensed consolidated statement of income. Short-term lease costs were not material. In addition, for the three and nine months ended September 30, 2019, total variable operating lease costs were $21 million and $56 million, respectively and are included within operating costs in our condensed consolidated statement of income. We sublease facilities or partial facilities to third party tenants for space not used in our operations. For the three and nine months ended September 30, 2019, sublease rental income was $10 million and $29 million, respectively, and is included within operating costs in our condensed consolidated statement of income.
The weighted average remaining lease term is 4.8 years with a weighted average discount rate of 4.2% at September 30, 2019. For the nine months ended September 30, 2019, cash paid for amounts included in the measurement of lease liabilities included within our operating cash flows was $112 million.
|
| | | | |
Maturity of Lease Liabilities | | September 30, 2019 |
| | (in millions) |
2019 (excluding the nine months ended September 30, 2019) | | $ | 36 |
|
2020 | | 128 |
|
2021 | | 110 |
|
2022 | | 89 |
|
2023 | | 45 |
|
After 2023 | | 82 |
|
Total lease payments | | 490 |
|
Less: Interest | | 46 |
|
Present value of ROU lease liabilities | | $ | 444 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, as adjusted for collateralized borrowings, based on the information available at date of adoption or commencement date in determining the present value of lease payments.
For the year ended 2018, under prior lease disclosure requirements
We lease facilities, computer hardware, and other furniture and equipment under long-term operating leases that are non-cancelable and expire on various dates through 2046. We sublease facilities or partial facilities to third party tenants for space not used in our operations. Rent with scheduled escalation terms are accounted for on a straight-line basis over the lease term. Rent expense and sublease rental income, which are recorded net as an operating cost, for all operating leases were as follows for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| (in millions) |
Rent expense | $ | 167 |
| | $ | 204 |
| | $ | 179 |
|
Sublease rental income | (32 | ) | | (33 | ) | | (26 | ) |
Net rent expense | $ | 135 |
| | $ | 171 |
| | $ | 153 |
|
Future annual minimum payments due subsequent to December 31, 2018 under all of our noncancelable operating leases with initial terms in excess of one year are as follows:
|
| | | | | | | | | | | |
| Minimum Lease Payments | | Sublease Rental Receipts | | Net Lease Commitments |
| (in millions) |
For the years ending December 31,: | | | | | |
2019 | $ | 147 |
| | $ | (13 | ) | | $ | 134 |
|
2020 | 113 |
| | (12 | ) | | 101 |
|
2021 | 96 |
| | (10 | ) | | 86 |
|
2022 | 79 |
| | (9 | ) | | 70 |
|
2023 | 34 |
| | (9 | ) | | 25 |
|
Thereafter | 50 |
| | (23 | ) | | 27 |
|
Total | $ | 519 |
| | $ | (76 | ) | | $ | 443 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
| | (in millions) |
Balances, beginning of period | | $ | 4,862 |
| | $ | 4,668 |
|
Less: Reinsurance recoverables | | (95 | ) | | (70 | ) |
Balances, beginning of period, net | | 4,767 |
| | 4,598 |
|
Incurred related to: | | | | |
Current year | | 40,499 |
| | 34,915 |
|
Prior years | | (331 | ) | | (467 | ) |
Total incurred | | 40,168 |
| | 34,448 |
|
Paid related to: | | | | |
Current year | | (34,625 | ) | | (30,204 | ) |
Prior years | | (4,158 | ) | | (3,920 | ) |
Total paid | | (38,783 | ) | | (34,124 | ) |
Reinsurance recoverable | | 68 |
| | 98 |
|
Balances, end of period | | $ | 6,220 |
| | $ | 5,020 |
|
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 4,668 |
| | $ | 4,563 |
|
Less: Reinsurance recoverables | | (70 | ) | | (76 | ) |
Balances, beginning of period, net | | 4,598 |
| | 4,487 |
|
Incurred related to: | | | | |
Current year | | 34,915 |
| | 33,318 |
|
Prior years | | (467 | ) | | (430 | ) |
Total incurred | | 34,448 |
| | 32,888 |
|
Paid related to: | | | | |
Current year | | (30,204 | ) | | (28,741 | ) |
Prior years | | (3,920 | ) | | (3,745 | ) |
Total paid | | (34,124 | ) | | (32,486 | ) |
Reinsurance recoverable | | 98 |
| | 70 |
|
Balances, end of period | | $ | 5,020 |
| | $ | 4,959 |
|
Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.
Benefits expense excluded from the previous table related to our long duration policies was as follows for the nine months ended September 30, 20182019 and 2017.2018. The Other Businesses category was related to our closed-block of commercial long-term care insurance policies, which were sold in 2018. We also exited our Individual Commercial business beginning January 1, 2018.
| | | | For the nine months ended September 30, | | For the nine months ended September 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
| | (in millions) | | (in millions) |
Future policy benefits: | | | | | | | | |
Individual Commercial | | $ | (14 | ) | | $ | (67 | ) | | $ | — |
| | $ | (14 | ) |
Other Businesses | | 15 |
| | 36 |
| | — |
| | 15 |
|
Total future policy benefits | | $ | 1 |
| | $ | (31 | ) | | $ | — |
| | $ | 1 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail and Group and Specialty and Individual Commercial segments as of September 30, 20182019 and 2017,2018, net of reinsurance, and the total estimate of benefits payable for claims incurred but not reported, or IBNR, included within the net incurred claims amounts. Our Individual Commercial segment incurred claims development was favorable by $58 million for the nine months ended September 30, 2018.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
| | (in millions) |
Balances, beginning of period | | $ | 4,338 |
| | $ | 3,963 |
|
Less: Reinsurance recoverables | | (95 | ) | | (70 | ) |
Balances, beginning of period, net | | 4,243 |
| | 3,893 |
|
Incurred related to: | | | | |
Current year | | 36,762 |
| | 31,209 |
|
Prior years | | (366 | ) | | (367 | ) |
Total incurred | | 36,396 |
| | 30,842 |
|
Paid related to: | | | | |
Current year | | (31,476 | ) | | (27,062 | ) |
Prior years | | (3,634 | ) | | (3,334 | ) |
Total paid | | (35,110 | ) | | (30,396 | ) |
Reinsurance recoverable | | 68 |
| | 98 |
|
Balances, end of period | | $ | 5,597 |
| | $ | 4,437 |
|
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 3,963 |
| | $ | 3,507 |
|
Less: Reinsurance recoverables | | (70 | ) | | (76 | ) |
Balances, beginning of period, net | | 3,893 |
| | 3,431 |
|
Incurred related to: | | | | |
Current year | | 31,209 |
| | 29,356 |
|
Prior years | | (367 | ) | | (339 | ) |
Total incurred | | 30,842 |
| | 29,017 |
|
Paid related to: | | | | |
Current year | | (27,062 | ) | | (25,460 | ) |
Prior years | | (3,334 | ) | | (2,822 | ) |
Total paid | | (30,396 | ) | | (28,282 | ) |
Reinsurance recoverable | | 98 |
| | 70 |
|
Balances, end of period | | $ | 4,437 |
| | $ | 4,236 |
|
At September 30, 2018,2019, benefits payable for our Retail segment included IBNR of approximately $2.8$3.5 billion, primarily associated with claims incurred in 2018.2019.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2019 | | 2018 |
| | (in millions) |
Balances, beginning of period | | $ | 517 |
| | $ | 568 |
|
Incurred related to: | | | | |
Current year | | 4,142 |
| | 4,018 |
|
Prior years | | 35 |
| | (41 | ) |
Total incurred | | 4,177 |
| | 3,977 |
|
Paid related to: | | | | |
Current year | | (3,547 | ) | | (3,462 | ) |
Prior years | | (524 | ) | | (509 | ) |
Total paid | | (4,071 | ) | | (3,971 | ) |
Balances, end of period | | $ | 623 |
| | $ | 574 |
|
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 568 |
| | $ | 578 |
|
Incurred related to: | | | | |
Current year | | 4,018 |
| | 3,996 |
|
Prior years | | (41 | ) | | (44 | ) |
Total incurred | | 3,977 |
| | 3,952 |
|
Paid related to: | | | | |
Current year | | (3,462 | ) | | (3,452 | ) |
Prior years | | (509 | ) | | (517 | ) |
Total paid | | (3,971 | ) | | (3,969 | ) |
Balances, end of period | | $ | 574 |
| | $ | 561 |
|
At September 30, 2018,2019, benefits payable for our Group and Specialty segment included IBNR of approximately $490$530 million, primarily associated with claims incurred in 2018.2019.
Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the nine months ended September 30, 2018 and 2017:
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 101 |
| | $ | 454 |
|
Incurred related to: | | | | |
Current year | | — |
| | 502 |
|
Prior years | | (58 | ) | | (46 | ) |
Total incurred | | (58 | ) | | 456 |
|
Paid related to: | | | | |
Current year | | — |
| | (393 | ) |
Prior years | | (34 | ) | | (383 | ) |
Total paid | | (34 | ) | | (776 | ) |
Balance, end of period | | $ | 9 |
| | $ | 134 |
|
At September 30, 2018, benefits payable for our Individual Commercial segment included IBNR of approximately $2 million, associated with claims incurred in 2017 and prior.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Reconciliation to Consolidated
The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated
statement of financial position is as follows:
|
| | | | |
| Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance |
|
| | September 30, |
| | 2019 |
| Net outstanding liabilities | (in millions) |
| Retail | $ | 5,529 |
|
| Group and Specialty | 623 |
|
| Benefits payable, net of reinsurance | 6,152 |
|
| | |
| Reinsurance recoverable on unpaid claims | |
| Retail | 68 |
|
| Total benefits payable, gross | $ | 6,220 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
| | | | |
| Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance |
|
| | September 30, |
| | 2018 |
| Net outstanding liabilities | |
| Retail | $ | 4,339 |
|
| Group and Specialty | 574 |
|
| Individual Commercial | 9 |
|
| Other Businesses | — |
|
| Benefits payable, net of reinsurance | 4,922 |
|
| | |
| Reinsurance recoverable on unpaid claims | |
| Retail | 98 |
|
| Total benefits payable, gross | $ | 5,020 |
|
10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (dollars in millions, except per common share results; number of shares in thousands) |
Net income available for common stockholders | $ | 689 |
| | $ | 644 |
| | $ | 2,195 |
| | $ | 1,328 |
|
Weighted average outstanding shares of common stock used to compute basic earnings per common share | 133,321 |
| | 137,709 |
| | 134,589 |
| | 137,792 |
|
Dilutive effect of: | | | | | | | |
Employee stock options | 101 |
| | 186 |
| | 99 |
| | 199 |
|
Restricted stock | 603 |
| | 783 |
| | 501 |
| | 704 |
|
Shares used to compute diluted earnings per common share | 134,025 |
| | 138,678 |
| | 135,189 |
| | 138,695 |
|
Basic earnings per common share | $ | 5.16 |
| | $ | 4.68 |
| | $ | 16.31 |
| | $ | 9.64 |
|
Diluted earnings per common share | $ | 5.14 |
| | $ | 4.65 |
| | $ | 16.24 |
| | $ | 9.58 |
|
Number of antidilutive stock options and restricted stock excluded from computation | 302 |
| | 36 |
| | 589 |
| | 284 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (dollars in millions, except per common share results; number of shares in thousands) |
Net income available for common stockholders | $ | 644 |
| | $ | 499 |
| | $ | 1,328 |
| | $ | 2,264 |
|
Weighted average outstanding shares of common stock used to compute basic earnings per common share | 137,709 |
| | 144,215 |
| | 137,792 |
| | 145,546 |
|
Dilutive effect of: | | | | | | | |
Employee stock options | 186 |
| | 165 |
| | 199 |
| | 174 |
|
Restricted stock | 783 |
| | 980 |
| | 704 |
| | 902 |
|
Shares used to compute diluted earnings per common share | 138,678 |
| | 145,360 |
| | 138,695 |
| | 146,622 |
|
Basic earnings per common share | $ | 4.68 |
| | $ | 3.46 |
| | $ | 9.64 |
| | $ | 15.56 |
|
Diluted earnings per common share | $ | 4.65 |
| | $ | 3.44 |
| | $ | 9.58 |
| | $ | 15.44 |
|
Number of antidilutive stock options and restricted stock excluded from computation | 36 |
| | 399 |
| | 284 |
| | 595 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
11. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 20172018 and 20182019 under our Board approved quarterly cash dividend policy:
|
| | | | | | | | | | |
Record Date | | Payment Date | | Amount per Share | | Total Amount |
| | | | | | (in millions) |
2018 payments | | | | | | |
12/29/2017 | | 1/26/2018 | | $ | 0.40 |
| | $ | 55 |
|
3/30/2018 | | 4/27/2018 | | $ | 0.50 |
| | $ | 69 |
|
6/29/2018 | | 7/27/2018 | | $ | 0.50 |
| | $ | 69 |
|
9/28/2018 | | 10/26/2018 | | $ | 0.50 |
| | $ | 69 |
|
2019 payments | | | | | | |
12/31/2018 | | 1/25/2019 | | $ | 0.50 |
| | $ | 68 |
|
3/29/2019 | | 4/26/2019 | | $ | 0.55 |
| | $ | 74 |
|
6/28/2019 | | 7/26/2019 | | $ | 0.55 |
| | $ | 74 |
|
9/30/2019 | | 10/25/2019 | | $ | 0.55 |
| | $ | 73 |
|
|
| | | | | | | | | | |
Record Date | | Payment Date | | Amount per Share | | Total Amount |
| | | | | | (in millions) |
2017 payments | | | | | | |
1/12/2017 | | 1/27/2017 | | $ | 0.29 |
| | $ | 43 |
|
3/31/2017 | | 4/28/2017 | | $ | 0.40 |
| | $ | 58 |
|
6/30/2017 | | 7/31/2017 | | $ | 0.40 |
| | $ | 58 |
|
9/29/2017 | | 10/27/2017 | | $ | 0.40 |
| | $ | 57 |
|
2018 payments | | | | | | |
12/29/2017 | | 1/26/2018 | | $ | 0.40 |
| | $ | 55 |
|
3/30/2018 | | 4/27/2018 | | $ | 0.50 |
| | $ | 69 |
|
6/29/2018 | | 7/27/2018 | | $ | 0.50 |
| | $ | 69 |
|
9/28/2018 | | 10/26/2018 | | $ | 0.50 |
| | $ | 69 |
|
On November 2, 2018,October 24, 2019, the Board declared a cash dividend of $0.50$0.55 per share payable on January 25, 2019,31, 2020, to stockholders of record on December 31, 2018.2019.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Stock Repurchases
On December 14, 2017, ourOur Board of Directors authorizedmay authorize the repurchase of up to $3.0 billionpurchase of our common shares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans.shares. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.
On December 21,14, 2017, our Board of Directors authorized the repurchase of up to $3.0 billion of our common shares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans.
On November 28, 2018, we entered into an accelerated stock repurchase agreement, or ASR, the December 2017November 2018 ASR, with Bank of America, N.A., or BofA,Goldman Sachs to repurchase $1.0 billion$750 million of our common stock as part of the $3.0 billion share repurchase authorization from ourprogram authorized by the Board of Directors.Directors on December 14, 2017. On December 22, 2017,November 29, 2018, we made a payment of $1.0 billion$750 million to BofAGoldman Sachs from available cash on hand and received an initial delivery of 3.281.94 million shares of our common stock from BofAGoldman Sachs based on the then current market price of Humanaour common stock. The payment to BofAGoldman Sachs was recorded as a reduction to stockholders’ equity, consisting of a $600 million increase in treasury stock, which reflects the value of the initial 1.94 million shares received upon initial settlement, and a $150 million decrease in capital in excess of par value, which reflected the value of stock held back by Goldman Sachs pending final settlement of the November 2018 ASR. Upon final settlement of the November 2018 ASR on February 28, 2019, we received an additional 0.6 million shares as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement of $295.15, less a discount and subject to adjustments pursuant to the terms and conditions of the November 2018 ASR, bringing the total shares received under this program to 2.54 million. In addition, upon settlement we reclassified the $150 million value of stock initially held back by Goldman Sachs from capital in excess of par value to treasury stock.
On July 30, 2019, the Board of Directors replaced a previous share repurchase authorization of up to $3 billion (of which approximately $1.03 billion remained unused) with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on June 30, 2022.
On July 31, 2019, we entered into an accelerated stock repurchase agreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We recorded the payment to Citi as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 3.282.7 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflectedreflects the value of stock held back by BofACiti pending final settlement of the December 2017July 2019 ASR. Upon settlementThe final number of shares that we may receive, or be required to remit, under the ASRagreement, will be determined based on March 26, 2018, we received an additional 0.46 million shares as determined by the average daily volume weighted-averagevolume-weighted average share price of our common stock duringover the term of the agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the July 2019 ASR. We expect final settlement under the July 2019 ASR Agreementto occur during the fourth quarter of $267.55, bringing2019. The agreement contains provisions customary for agreements of this type, including provisions for adjustments to the totaltransaction terms upon certain specified events, the circumstances generally under which final settlement of the agreement may be accelerated, extended, or terminated early by Citi or Humana as well as various acknowledgments and representations made by the parties to each other. At final settlement, under certain circumstances, we may be entitled to receive additional shares received under this programof our common stock from Citi or we may be required to 3.74 million. In addition, upon settlementmake a payment. If we reclassified the $200 million valueare obligated to make payment, we may elect to satisfy such obligation in cash or shares of stock initially held back by BofA from capital in excess of par value to treasuryour common stock.
In connection with employee stock plans, we acquired 35,000 common shares for $10 million and 0.3 million common shares for $70 million during the nine months ended September 30, 2019 and 2018, respectively.
Treasury Stock Reissuance
We reissued 0.2 million shares of treasury stock during the nine months ended September 30, 2019 at a cost of $18.6 million associated with restricted stock unit vestings and option exercises.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Excluding the 0.46 million shares received in March 2018 upon final settlement of our ASR Agreement for which no cash was paid during the period, as well as any prior year ASR activity, share repurchases were as follows during the nine months ended September 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | |
| | | | Nine months ended September 30, |
| | | | 2018 | | 2017 |
Authorization Date | | Purchase Not to Exceed | | Shares | | Cost | | Shares | | Cost |
| | (in millions) |
February 2017 | | $ | 2,250 |
| | — |
| | $ | — |
| | 0.96 |
| | $ | 240 |
|
December 2017 | | $ | 3,000 |
| | 0.68 |
| | 224 |
| | — |
| | — |
|
Total repurchases | | | | 0.68 |
| | $ | 224 |
| | 0.96 |
| | $ | 240 |
|
Our remaining repurchase authorization was approximately $1.8 billion as of November 6, 2018.
In connection with employee stock plans, we acquired 0.26 million common shares for $70 million and 0.37 million common shares for $79 million during the nine months ended September 30, 2018 and 2017, respectively.
Treasury Stock Reissuance
We reissued 0.87 million shares of treasury stock during the nine months ended September 30, 2018 at a cost of $92 million associated with restricted stock unit vestings and option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included net unrealized gains, net of tax, on our investment securities of $177 million at September 30, 2019 and net unrealized losses, net of tax, on our investment securities of $206 million at September 30, 2018 and net unrealized gains, net of tax, on our investment securities of $125$159 million at December 31, 2017. In addition, accumulated other comprehensive income included $106 million, net of tax, at December 31, 2017 for an additional liability that would exist on our closed block of long-term care insurance policies if unrealized gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current yields. Refer to Note 18 to the consolidated financial statements in our 2017 Form 10-K for further discussion of our long-term care insurance policies.2018.
12. INCOME TAXES
The effective income tax rate was 29.1%22.5% and 23.8% for the three and nine months ended September 30, 2018,2019, respectively, compared to 37.5%29.1% and 18.8% for the three months ended September 30, 2017 and was 18.8% for the nine months ended September 30, 2018, compared to 35.9% for the nine months ended September 30, 2017,respectively, primarily due to the tax benefit recognized from the loss on the sale of KMG and the tax reform law enacted on December 22, 2017 (the "Tax Reform Law"), which was partially offset by the impact of the reinstatementsuspension of the non-deductible health insurance industry fee in 2018.2019 as well as the deferred tax benefit recognized in 2018 from the loss on sale of KMG. The effective income tax rate for the nine months ended September 30, 2017 included previously non-deductible transaction2018 reflected a $430 million deferred tax benefit, resulting from the loss on the sale of KMG attributable to its original tax basis and subsequent capital contributions to fund accumulated losses.
13. DEBT
The carrying value of debt outstanding, net of unamortized debt issuance costs, that,was as a result of the termination of the Merger Agreement, became deductible for tax purposes. The Tax Reform Law reduced the statutory federal corporate income tax rate to 21 percent from 35 percent, beginning in 2018. The accounting for certain income tax effects of the Tax Reform Law is provisional. Revisions to prior estimates are recorded as additional analysis is completed using information availablefollows at each measurement date during 2018, with adjustments to the income tax provision recorded as new information becomes known. Revisions to our prior estimates for the income tax effects of the Tax Reform Law decreased our tax expense for the nine months ended September 30, 2019 and December 31, 2018 by $39.3 million.:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (in millions) |
Short-term debt: | | | |
Commercial paper | $ | 299 |
| | $ | 645 |
|
Term note | — |
| | 650 |
|
Senior note: |
| | |
$400 million, 2.625% due October 1, 2019 | 400 |
| | 399 |
|
Total short-term debt | $ | 699 |
| | $ | 1,694 |
|
| | | |
Long-term debt: | | | |
Senior notes: | | | |
$400 million, 2.50% due December 15, 2020 | $ | 399 |
| | $ | 398 |
|
$400 million, 2.90% due December 15, 2022 | 397 |
| | 396 |
|
$600 million, 3.15% due December 1, 2022 | 597 |
| | 596 |
|
$600 million, 3.85% due October 1, 2024 | 597 |
| | 597 |
|
$600 million, 3.95% due March 15, 2027 | 595 |
| | 594 |
|
$500 million, 3.125% due August 15, 2029 | 495 |
| | — |
|
$250 million, 8.15% due June 15, 2038 | 262 |
| | 263 |
|
$400 million, 4.625% due December 1, 2042 | 396 |
| | 396 |
|
$750 million, 4.95% due October 1, 2044 | 739 |
| | 739 |
|
$400 million, 4.80% due March 15, 2047 | 396 |
| | 396 |
|
$500 million, 3.95% due August 15, 2049 | 492 |
| | — |
|
Total long-term debt | $ | 5,365 |
| | $ | 4,375 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
13. DEBT
The carrying value of long-term debt outstanding, net of unamortized debt issuance costs, was as follows at September 30, 2018 and December 31, 2017:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| (in millions) |
Senior notes: | | | |
$400 million, 2.625% due October 1, 2019 | $ | 399 |
| | $ | 399 |
|
$400 million, 2.50% due December 15, 2020 | 398 |
| | 397 |
|
$400 million, 2.90% due December 15, 2022 | 396 |
| | 396 |
|
$600 million, 3.15% due December 1, 2022 | 597 |
| | 595 |
|
$600 million, 3.85% due October 1, 2024 | 596 |
| | 595 |
|
$600 million, 3.95% due March 15, 2027 | 595 |
| | 594 |
|
$250 million, 8.15% due June 15, 2038 | 263 |
| | 263 |
|
$400 million, 4.625% due December 1, 2042 | 396 |
| | 396 |
|
$750 million, 4.95% due October 1, 2044 | 739 |
| | 739 |
|
$400 million, 4.80% due March 15, 2047 | 395 |
| | 396 |
|
Total long-term debt | $ | 4,774 |
| | $ | 4,770 |
|
Senior Notes
In December 2017,August 2019, we issued $400$500 million of 2.50%3.125% senior notes due DecemberAugust 15, 20202029 and $400$500 million of 2.90%3.950% senior notes due DecemberAugust 15, 2022.2049. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of December 31, 2017,September 30, 2019 were $794$987 million. We used the net proceeds from this offering, together with available cash, to fundrepay the redemption of$650 million outstanding amount due under our $300term note in August 2019, and the $400 million aggregate principal amount of 6.30% senior notes maturing in August 2018 and our $500 million aggregate principal amount of 7.20% senior notes maturing in June 2018 at 100% of the principal amount plus applicable premium for early redemption and accrued and unpaid interest to the redemption date, for cash totaling approximately $829 million. We recognized a loss on extinguishment of debt of approximately $17 million in December 2017 for the redemption of these senior notes, which is included in interest expense in the consolidated statements of income.
In March 2017, we issued $600 million of 3.95%2.625% senior notes due March 15, 2027 and $400 millionon its maturity date of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million.October 1, 2019.
Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, our senior notes contain a change of control provision that may require us to purchase the notes under certain circumstances.
Credit Agreement
Our 5-year, $2.0 billion unsecured revolving credit agreement expires May 2022. Under the credit agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. The LIBOR spread, currently 110.0 basis points, varies depending on our credit ratings ranging from 91.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, may fluctuate between 9.0 and 25.0 basis points, depending upon our credit ratings. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The terms of the credit agreement include standard provisions related to conditions of borrowing which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive covenants and a financial covenant regarding maximum debt to capitalization of 50%, as well as customary events of default. We are in compliance with this financial covenant, with actual debt to capitalization of 32.8%34% as measured in accordance with the credit agreement as of September 30, 2018.2019. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the credit agreement to a maximum of $2.5 billion, through a $500.0$500 million incremental loan facility.
At September 30, 20182019, we had no0 borrowings and no0 letters of credit outstanding under the credit agreement. Accordingly, as of September 30, 20182019, we had $2.0$2.0 billion of remaining borrowing capacity (which excludes the uncommitted $500 million incremental loan facility under the credit agreement), none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Commercial Paper
Under our commercial paper program we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the nine months ended September 30, 20182019 was $442 million. There were$670 million, with $299 million outstanding borrowings of $398 million at September 30, 2018 and $1502019 compared to $645 million outstanding at December 31, 2017. 2018. The outstanding commercial paper at September 30, 2019 had a weighted average annual interest rate of 2.5%.
Term Note
In November 2018, we entered into a $1.0 billion term note agreement with a bank at a variable rate of interest due within one year. We may elect to incur interest at either the bank's base rate or LIBOR plus 115 basis points. The base rate is defined as the higher of the daily federal funds rate plus 50 basis points; or the bank's prime rate; or LIBOR plus 100 basis points. The term note shares the customary terms and provisions as well as financial covenants of our
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Credit Agreement, as discussed above. The note was prepayable without penalty. We repaid $350 million prior to December 31, 2018 and repaid the outstanding balance of $650 million in August 2019.
14. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare products, which accounted for approximately 80% of our total premiums and services revenue for the nine months ended September 30, 2018,2019, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for 2019,2020, and all of our product offerings filed with CMS for 20192020 have been approved.
CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to reflect the health status of our enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk-adjustmentrisk adjustment model. These compliance efforts include the internal contract level audits described in more detail below, as well as ordinary course reviews of our internal business processes.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
CMS is phasing-in the process of calculating risk scores using diagnoses data from the Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter Data System, or EDS. The RAPS process requires MA plans to apply a filter logic based on CMS guidelines and only submit diagnoses that satisfy those guidelines. For submissions through EDS, CMS requires MA plans to submit all the encounter data and CMS will apply the risk adjustment filtering logic to determine the risk scores. For 2017, 25%2018, 15% of the risk score was calculated from claims data submitted through EDS. In 2019 and 2020 CMS has revised the pace of the phase-inwill increase that percentage to 25% and for 2018 and 2019, 15% and 25%50%, respectively, of the risk score will be calculated from claims data submitted through EDS.respectively. The phase-in from RAPS to EDS could result in different risk scores from each dataset as a result of plan processing issues, CMS processing issues, or filtering logic differences between RAPS and EDS, and could have a material adverse effect on our results of operations, financial position, or cash flows.
CMS isand the Office of the Inspector General of Health and Human Services, or HHS-OIG, are continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.
In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provided that, in calculating the economic impact of audit results for an MA contract, if any, the results of the RADV audit sample would be extrapolated to the entire MA contract after a comparison of the audit results to a similar audit of the government’s traditional fee-for-service Medicare FFS (weprogram, or Medicare FFS. We refer to the process of
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
accounting for errors in FFS claims as the "FFS Adjuster").Adjuster." This comparison of RADV audit results to the FFS error rate is necessary to determine the economic impact, if any, of RADV audit results because the government used the Medicare FFS program data set, including any attendant errors that are present in that data set, to estimate the costs of various health status conditions and to set the resulting adjustments to MA plans’ payment rates in order to establish actuarial equivalence in payment rates as required under the Medicare statute. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the Medicare FFS program dataset).
The final RADV extrapolation methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to CMS RADV contract level audits conducted for contract year 2011 and subsequent years. CMS is currently conducting RADV contract level audits for contract years 2011, 2012, and 2013 in which two, five and fivecertain of our Medicare Advantage plans are being audited, respectively. Per CMS guidance, selected MA contracts will be notified of an audit at some point after the close of the final reconciliation for the payment year being audited.plans.
Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For Service business which we used to represent a proxy of the FFS Adjuster which has not yet been finalized. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. We report the results of these internal contract level audits to CMS, including identified overpayments, if any.
On October 26, 2018, CMS issued a proposed rule and accompanying materials (which we refer to as the “Proposed Rule”) related to, among other things, the RADV audit methodology described above. If implemented, the Proposed Rule would use extrapolation in RADV audits applicable to payment year 2011 contract-level audits and all subsequent audits, without the application of a FFS Adjuster to audit findings. We are studying the Proposed Rule and CMS’ underlying analysis contained therein. We believe however, that the Proposed Rule fails to address adequately the statutory requirement of actuarial equivalence, and we expect to providehave provided substantive comments to CMS on the Proposed Rule as part of the notice-and-comment rulemaking process. We are also evaluatingWhether, and to what extent, CMS finalizes the potential impact of the Proposed
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Rule, if adopted as proposed, whichand any related regulatory, industry or company reactions, could have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, as part of our internal compliance efforts, we routinely perform ordinary course reviews of our internal business processes related to, among other things, our risk coding and data submissions in connection with the risk- adjustment model. These reviews may also result in the identification of errors and the submission of corrections to CMS, that may, either individually or in the aggregate, be material. As such, the result of these reviews may have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, weWe believe that CMS' statements and policies regarding the requirement to report and return identified overpayments received by MA plans are inconsistent with CMS' 2012 RADV audit methodology, and the Medicare statute's requirements. These statements and policies, such as certain statements contained in the preamble to CMS’ final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015 (which we refer to as the "Overpayment Rule"), and the Proposed Rule, appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without addressing the principles underlying the FFS Adjuster referenced above. On September 7, 2018, the Federal District Court for the District of Columbia vacated CMS's Overpayment Rule, concluding that it violated the Medicare statute, including the requirement for actuarial equivalence, and that the Overpayment Rule was also arbitrary and capricious in departing from CMS's RADV methodology without adequate explanation (among other reasons). CMS has filed a motion for reconsideration related to certain aspects of the Federal District Court's opinion and has simultaneously filed a notice to appeal the decision to the Circuit Court of Appeals.
We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
At September 30, 2018,2019, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the nine months ended September 30, 2018,2019, primarily consisted of the TRICARE T2017 East Region contract. The T2017 East Region contract is a consolidation of the former T3 North and South Regions, comprising thirty-two states and approximately 5.96 million TRICARE beneficiaries, under which delivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 of each year during its term at the government's option.On October 11, 2018, we received notice from the Defense Health Agency of its intent to exercise the second option period under the East Region contract, with delivery of health care services commencing on January 1, 2019.
Our state-based Medicaid business accounted for approximately 4% of our total premiums and services revenue for the nine months ended September 30, 2018.2019. In addition to our state-based Temporary Assistance for Needy Families, or TANF, Medicaid contracts in Florida and Kentucky, we have contracts in Florida for Long Term Support Services (LTSS), and in Illinois for stand-alone dual eligible demonstration programs serving individuals dually eligible for both the federal Medicare program and the applicable state-based Medicaid program.
The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, or increases in member benefits or member eligibility criteria without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Legal Proceedings and Certain Regulatory Matters
As previously disclosed, the Civil Division of the United States Department of Justice provided us with an information request in December 2014, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We continue to cooperate with and voluntarily respond to the information requests from the Department of Justice. These matters are expected to result in additional qui tam litigation.
As previously disclosed, on January 19, 2016, an individual filed a qui tam suit captioned United States of America ex rel. Steven Scott v. Humana, Inc., in United States District Court, Central District of California, Western Division. The complaint alleges certain civil violations by us in connection with the actuarial equivalence of the plan benefits under Humana’s Basic PDP plan, a prescription drug plan offered by us under Medicare Part D. The action seeks damages and penalties on behalf of the United States under the False Claims Act. The court ordered the qui tam action unsealed on September 13, 2017, so that the relator could proceed, following notice from the U.S. Government that it was not intervening at that time. On January 29, 2018, the suit was transferred to the United States District Court, Western District of Kentucky, Louisville Division. We take seriously our obligations to comply with applicable CMS requirements and actuarial standards of practice, and we arecontinue to vigorously defendingdefend against these allegations.allegations since the transfer to the Western District of Kentucky. We have engaged in active discovery with the relator who has pursued the matter on behalf of the United States following its unsealing, and expect that discovery process to conclude in the near future and for the Court to consider our motion for summary judgment.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers. We have not recognized revenue, nor have we recorded a receivable, for any amount due from the federal government for unpaid risk corridor payments as of September 30, 2018.2019. We have fully recognized all liabilities due to the federal government that we have incurred under the risk corridor program, and have paid all amounts due to the federal government as required. There is no assurance that we will prevail in the lawsuit.
Other Lawsuits and Regulatory Matters
Our current and past business practices are subject to review or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance, health care delivery and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, statutory capital requirements, provider contracting, risk adjustment, competitive practices, commission payments, privacy issues, utilization management practices, pharmacy benefits, access to care, and sales practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.
We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business
operations, certain of which may be styled as class-action lawsuits. Among other matters, this litigation may include employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate and payment disputes, including disputes over reimbursement rates required by statute, general contractual matters, intellectual property matters, and challenges to subrogation practices. For example, a number of hospitals and other providers have asserted that, under their network provider contracts, we are not entitled to reduce Medicare Advantage payments to these providers in connection with changes in Medicare payment systems and in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985, as amended (commonly referred to as “sequestration”). Those challenges have led and could lead to arbitration demands or other litigation. Also, underUnder state guaranty assessment laws, including those related to state cooperative failures in the industry, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
As a government contractor, we may also be subject to qui tam litigation brought by individuals who seek to sue
on behalf of the government, alleging that the government contractor submitted false claims to the government including, among other allegations, those resulting from coding and review practices under the Medicare risk adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the individual may continue to prosecute the action on his or her own, on behalf of the government. We also are subject to other allegations of non-performance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.
A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extra contractual damages, care delivery malpractice, and claims arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.
We record accruals for the contingencies discussed in the sections above to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings, which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.
The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting judgments, penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities or as a result of actions by third parties. Nevertheless, it is reasonably possible that any such outcome of litigation, judgments, penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.
15. SEGMENT INFORMATION
We manage our business with four3 reportable segments: Retail, Group and Specialty, and Healthcare ServicesServices. Beginning January 1, 2018, we exited the individual commercial fully-insured medical health insurance business, as well as certain other business, and therefore no longer report separately the Individual Commercial. In addition,Commercial segment and the Other BusinessesBusiness category includesin the current year. Previously, the Other Business category included businesses that arewere not individually reportable because they dodid not meet the quantitative thresholds required by generally accepted accounting principles. Theseprinciples, primarily our closed-block of commercial long-term care insurance policies which were sold in 2018. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at Home. The Individual Commercial segment consisted of our individual commercial fully-insured medical health insurance benefits. We reportreported under the category of Other
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Businesses those businesses that dodid not align with the reportable segments described above, primarily our closed-block long-term care insurance policies, which were sold.sold in 2018.
Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions®Solutions®, or HPS, and includes the operations of Humana Pharmacy, Inc., our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, contracting with retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in the arrangement on behalf of members in our other segments. As principal, our Healthcare Services segment reports revenues on a gross basis, including co-share amounts from members collected by third party retail pharmacies at the point of service.
In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based and non-risk-based managed care agreements with our health plans. Under risk basedrisk-based agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services. Under non risk-based agreements, our health plans retain the economic risk of funding the assigned members' healthcare services. Our Healthcare Services segment reports provider services revenues associated with risk-based agreements on a gross basis, whereby capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services. Provider services revenues associated with non-risk-based agreements are presented net of associated healthcare costs.
We present our condensed consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of $3.5$4.0 billion and $3.6$3.5 billion for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 20182019 and 20172018 these amounts were $9.7$10.7 billion and $9.8$9.7 billion, respectively. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our provider services and pharmacy operations, are included with benefits expense. The amount of this expense was $29$32 million and $26$29 million for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 20182019 and 2017,2018, the amount of this expense was $98$92 million and $79$98 million, respectively.
Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our 20172018 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty and Individual Commercial segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations in the tables presenting segment results below.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Our segment results were as follows for the three and nine months ended September 30, 20182019 and 20172018: | | | Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated | Retail | | Group and Specialty | | Healthcare Services | | Eliminations/ Corporate | | Consolidated |
| (in millions) | |
Three months ended September 30, 2018 | | | | | | | | | | | |
Three months ended September 30, 2019 | | (in millions) |
External revenues | External revenues | | | | | | | | | | | | | External revenues | | | | | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 8,912 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,912 |
| $ | 10,752 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,752 |
|
Group Medicare Advantage | 1,542 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,542 |
| 1,609 |
| | — |
| | — |
| | — |
| | 1,609 |
|
Medicare stand-alone PDP | 893 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 893 |
| 781 |
| | — |
| | — |
| | — |
| | 781 |
|
Total Medicare | 11,347 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,347 |
| 13,142 |
| | — |
| | — |
| | — |
| | 13,142 |
|
Fully-insured | 129 |
| | 1,345 |
| | — |
| | 1 |
| | — |
| | — |
| | 1,475 |
| 150 |
| | 1,278 |
| | — |
| | — |
| | 1,428 |
|
Specialty | — |
| | 325 |
| | — |
| | — |
| | — |
| | — |
| | 325 |
| — |
| | 400 |
| | — |
| | — |
| | 400 |
|
Medicaid and other | 561 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 565 |
| 742 |
| | — |
| | — |
| | — |
| | 742 |
|
Total premiums | 12,037 |
| | 1,670 |
| | — |
| | 1 |
| | 4 |
| | — |
| | 13,712 |
| 14,034 |
| | 1,678 |
| | — |
| | — |
| | 15,712 |
|
Services revenue: | | | | | | | | | | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 113 |
| | — |
| | — |
| | — |
| | 113 |
| — |
| | — |
| | 136 |
| | — |
| | 136 |
|
ASO and other | 1 |
| | 215 |
| | — |
| | — |
| | — |
| | — |
| | 216 |
| 4 |
| | 200 |
| | — |
| | — |
| | 204 |
|
Pharmacy | — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | 52 |
| — |
| | — |
| | 53 |
| | — |
| | 53 |
|
Total services revenue | 1 |
| | 215 |
| | 165 |
| | — |
| | — |
| | — |
| | 381 |
| 4 |
| | 200 |
| | 189 |
| | — |
| | 393 |
|
Total external revenues | 12,038 |
| | 1,885 |
| | 165 |
| | 1 |
| | 4 |
| | — |
| | 14,093 |
| 14,038 |
| | 1,878 |
| | 189 |
| | — |
| | 16,105 |
|
Intersegment revenues | | | | | | | | | | | | | | | | | | | | | | |
Services | — |
| | 4 |
| | 4,214 |
| | — |
| | — |
| | (4,218 | ) | | — |
| — |
| | 4 |
| | 4,654 |
| | (4,658 | ) | | — |
|
Products | — |
| | — |
| | 1,576 |
| | — |
| | — |
| | (1,576 | ) | | — |
| — |
| | — |
| | 1,759 |
| | (1,759 | ) | | — |
|
Total intersegment revenues | — |
| | 4 |
| | 5,790 |
| | — |
| | — |
| | (5,794 | ) | | — |
| — |
| | 4 |
| | 6,413 |
| | (6,417 | ) | | — |
|
Investment income | 35 |
| | 5 |
| | 11 |
| | — |
| | 10 |
| | 52 |
| | 113 |
| 50 |
| | 7 |
| | — |
| | 79 |
| | 136 |
|
Total revenues | 12,073 |
| | 1,894 |
| | 5,966 |
| | 1 |
| | 14 |
| | (5,742 | ) | | 14,206 |
| 14,088 |
| | 1,889 |
| | 6,602 |
| | (6,338 | ) | | 16,241 |
|
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
Benefits | 10,020 |
| | 1,347 |
| | — |
| | (4 | ) | | 12 |
| | (132 | ) | | 11,243 |
| 12,050 |
| | 1,448 |
| | — |
| | (141 | ) | | 13,357 |
|
Operating costs | 1,352 |
| | 445 |
| | 5,720 |
| | — |
| | 2 |
| | (5,619 | ) | | 1,900 |
| 1,310 |
| | 413 |
| | 6,348 |
| | (6,182 | ) | | 1,889 |
|
Depreciation and amortization | 67 |
| | 21 |
| | 40 |
| | — |
| | — |
| | (26 | ) | | 102 |
| 89 |
| | 24 |
| | 43 |
| | (29 | ) | | 127 |
|
Total operating expenses | 11,439 |
| | 1,813 |
| | 5,760 |
| | (4 | ) | | 14 |
| | (5,777 | ) | | 13,245 |
| 13,449 |
| | 1,885 |
| | 6,391 |
| | (6,352 | ) | | 15,373 |
|
Income from operations | 634 |
| | 81 |
| | 206 |
| | 5 |
| | — |
| | 35 |
| | 961 |
| 639 |
| | 4 |
| | 211 |
| | 14 |
| | 868 |
|
Loss on sale of business | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) | |
Interest expense | — |
| | — |
| | — |
| | — |
| | — |
| | 53 |
| | 53 |
| — |
| | — |
| | — |
| | 62 |
| | 62 |
|
Other expense, net | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
| |
Income (loss) before income taxes and equity in net earnings | 634 |
| | 81 |
| | 206 |
| | 5 |
| | — |
| | (25 | ) | | 901 |
| |
Other income, net | | — |
| | — |
| | — |
| | (82 | ) | | (82 | ) |
Income before income taxes and equity in net earnings | | 639 |
| | 4 |
| | 211 |
| | 34 |
| | 888 |
|
Equity in net earnings of Kindred at Home | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Segment earnings | $ | 634 |
| | $ | 81 |
| | $ | 215 |
| | $ | 5 |
| | $ | — |
| | $ | (25 | ) | | $ | 910 |
| $ | 639 |
| | $ | 4 |
| | $ | 212 |
| | $ | 34 |
| | $ | 889 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated | Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated |
| (in millions) | (in millions) |
Three months ended September 30, 2017 | | | | | | | | | | | |
Three months ended September 30, 2018 | | Three months ended September 30, 2018 | | | | | | | | | | |
External revenues | External revenues | | | | | | | | | | | | | External revenues | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 8,077 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,077 |
| $ | 8,912 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,912 |
|
Group Medicare Advantage | 1,272 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,272 |
| 1,542 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,542 |
|
Medicare stand-alone PDP | 921 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 921 |
| 893 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 893 |
|
Total Medicare | 10,270 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,270 |
| 11,347 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,347 |
|
Fully-insured | 121 |
| | 1,370 |
| | — |
| | 224 |
| | — |
| | — |
| | 1,715 |
| 129 |
| | 1,345 |
| | — |
| | 1 |
| | — |
| | — |
| | 1,475 |
|
Specialty | — |
| | 331 |
| | — |
| | — |
| | — |
| | — |
| | 331 |
| — |
| | 325 |
| | — |
| | — |
| | — |
| | — |
| | 325 |
|
Medicaid and other | 630 |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 639 |
| 561 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 565 |
|
Total premiums | 11,021 |
| | 1,701 |
| | — |
| | 224 |
| | 9 |
| | — |
| | 12,955 |
| 12,037 |
| | 1,670 |
| | — |
| | 1 |
| | 4 |
| | — |
| | 13,712 |
|
Services revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 60 |
| | — |
| | — |
| | — |
| | 60 |
| — |
| | — |
| | 113 |
| | — |
| | — |
| | — |
| | 113 |
|
ASO and other | 2 |
| | 140 |
| | — |
| | — |
| | 1 |
| | — |
| | 143 |
| 1 |
| | 215 |
| | — |
| | — |
| | — |
| | — |
| | 216 |
|
Pharmacy | — |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | 20 |
| — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | 52 |
|
Total services revenue | 2 |
| | 140 |
| | 80 |
| | — |
| | 1 |
| | — |
| | 223 |
| 1 |
| | 215 |
| | 165 |
| | — |
| | — |
| | — |
| | 381 |
|
Total external revenues | 11,023 |
| | 1,841 |
| | 80 |
| | 224 |
| | 10 |
| | — |
| | 13,178 |
| 12,038 |
| | 1,885 |
| | 165 |
| | 1 |
| | 4 |
| | — |
| | 14,093 |
|
Intersegment revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Services | — |
| | 5 |
| | 4,339 |
| | — |
| | — |
| | (4,344 | ) | | — |
| — |
| | 4 |
| | 4,214 |
| | — |
| | — |
| | (4,218 | ) | | — |
|
Products | — |
| | — |
| | 1,572 |
| | — |
| | — |
| | (1,572 | ) | | — |
| — |
| | — |
| | 1,576 |
| | — |
| | — |
| | (1,576 | ) | | — |
|
Total intersegment revenues | — |
| | 5 |
| | 5,911 |
| | — |
| | — |
| | (5,916 | ) | | — |
| — |
| | 4 |
| | 5,790 |
| | — |
| | — |
| | (5,794 | ) | | — |
|
Investment income | 23 |
| | 7 |
| | 9 |
| | 1 |
| | 22 |
| | 42 |
| | 104 |
| 35 |
| | 5 |
| | 11 |
| | — |
| | 10 |
| | 52 |
| | 113 |
|
Total revenues | 11,046 |
| | 1,853 |
| | 6,000 |
| | 225 |
| | 32 |
| | (5,874 | ) | | 13,282 |
| 12,073 |
| | 1,894 |
| | 5,966 |
| | 1 |
| | 14 |
| | (5,742 | ) | | 14,206 |
|
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefits | 9,294 |
| | 1,354 |
| | — |
| | 147 |
| | 34 |
| | (187 | ) | | 10,642 |
| 10,020 |
| | 1,347 |
| | — |
| | (4 | ) | | 12 |
| | (132 | ) | | 11,243 |
|
Operating costs | 1,081 |
| | 385 |
| | 5,726 |
| | 49 |
| | 3 |
| | (5,556 | ) | | 1,688 |
| 1,352 |
| | 445 |
| | 5,720 |
| | — |
| | 2 |
| | (5,619 | ) | | 1,900 |
|
Depreciation and amortization | 61 |
| | 21 |
| | 34 |
| | 3 |
| | — |
| | (25 | ) | | 94 |
| 67 |
| | 21 |
| | 40 |
| | — |
| | — |
| | (26 | ) | | 102 |
|
Total operating expenses | 10,436 |
| | 1,760 |
| | 5,760 |
| | 199 |
| | 37 |
| | (5,768 | ) | | 12,424 |
| 11,439 |
| | 1,813 |
| | 5,760 |
| | (4 | ) | | 14 |
| | (5,777 | ) | | 13,245 |
|
Income (loss) from operations | 610 |
| | 93 |
| | 240 |
| | 26 |
| | (5 | ) | | (106 | ) | | 858 |
| |
Income from operations | | 634 |
| | 81 |
| | 206 |
| | 5 |
| | — |
| | 35 |
| | 961 |
|
Gain on sale of business | | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Interest expense | — |
| | — |
| | — |
| | — |
| | — |
| | 59 |
| | 59 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 53 |
| | 53 |
|
Other expense, net | | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Income (loss) before income taxes and equity in net earnings | 610 |
| | 93 |
| | 240 |
| | 26 |
| | (5 | ) | | (165 | ) | | 799 |
| 634 |
| | 81 |
| | 206 |
| | 5 |
| | — |
| | (25 | ) | | 901 |
|
Equity in net earnings of Kindred at Home | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Segment earnings | $ | 610 |
| | $ | 93 |
| | $ | 240 |
| | $ | 26 |
| | $ | (5 | ) | | $ | (165 | ) | | $ | 799 |
| |
Segment earnings (loss) | | $ | 634 |
| | $ | 81 |
| | $ | 215 |
| | $ | 5 |
| | $ | — |
| | $ | (25 | ) | | $ | 910 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated | Retail | | Group and Specialty | | Healthcare Services | | Eliminations/ Corporate | | Consolidated |
| (in millions) | (in millions) |
Nine months ended September 30, 2018 | | | | | | | | | | | | | |
Nine months ended September 30, 2019 | | Nine months ended September 30, 2019 | | | | | | | | |
External revenues | External revenues | | | | | | | | | | | | | External revenues | | | | | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 26,790 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 26,790 |
| $ | 32,254 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 32,254 |
|
Group Medicare Advantage | 4,575 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,575 |
| 4,867 |
| | — |
| | — |
| | — |
| | 4,867 |
|
Medicare stand-alone PDP | 2,703 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,703 |
| 2,408 |
| | — |
| | — |
| | — |
| | 2,408 |
|
Total Medicare | 34,068 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 34,068 |
| 39,529 |
| | — |
| | — |
| | — |
| | 39,529 |
|
Fully-insured | 379 |
| | 4,083 |
| | — |
| | 6 |
| | — |
| | — |
| | 4,468 |
| 434 |
| | 3,873 |
| | — |
| | — |
| | 4,307 |
|
Specialty | — |
| | 1,014 |
| | — |
| | — |
| | — |
| | — |
| | 1,014 |
| — |
| | 1,160 |
| | — |
| | — |
| | 1,160 |
|
Medicaid and other | 1,664 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 1,686 |
| 2,143 |
| | — |
| | — |
| | — |
| | 2,143 |
|
Total premiums | 36,111 |
| | 5,097 |
| | — |
| | 6 |
| | 22 |
| | — |
| | 41,236 |
| 42,106 |
| | 5,033 |
| | — |
| | — |
| | 47,139 |
|
Services revenue: | | | | | | | | | | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 290 |
| | — |
| | — |
| | — |
| | 290 |
| — |
| | — |
| | 367 |
| | — |
| | 367 |
|
ASO and other | 6 |
| | 642 |
| | — |
| | — |
| | 4 |
| | — |
| | 652 |
| 14 |
| | 587 |
| | — |
| | — |
| | 601 |
|
Pharmacy | — |
| | — |
| | 148 |
| | — |
| | — |
| | — |
| | 148 |
| — |
| | — |
| | 135 |
| | — |
| | 135 |
|
Total services revenue | 6 |
| | 642 |
| | 438 |
| | — |
| | 4 |
| | — |
| | 1,090 |
| 14 |
| | 587 |
| | 502 |
| | — |
| | 1,103 |
|
Total external revenues | 36,117 |
| | 5,739 |
| | 438 |
| | 6 |
| | 26 |
| | — |
| | 42,326 |
| 42,120 |
| | 5,620 |
| | 502 |
| | — |
| | 48,242 |
|
Intersegment revenues | | | | | | | | | | | | | | | | | | | | | | |
Services | — |
| | 13 |
| | 12,426 |
| | — |
| | — |
| | (12,439 | ) | | — |
| — |
| | 13 |
| | 13,456 |
| | (13,469 | ) | | — |
|
Products | — |
| | — |
| | 4,722 |
| | — |
| | — |
| | (4,722 | ) | | — |
| — |
| | — |
| | 5,128 |
| | (5,128 | ) | | — |
|
Total intersegment revenues | — |
| | 13 |
| | 17,148 |
| | — |
| | — |
| | (17,161 | ) | | — |
| — |
| | 13 |
| | 18,584 |
| | (18,597 | ) | | — |
|
Investment income | 102 |
| | 18 |
| | 34 |
| | — |
| | 110 |
| | 154 |
| | 418 |
| 139 |
| | 17 |
| | 1 |
| | 194 |
| | 351 |
|
Total revenues | 36,219 |
| | 5,770 |
| | 17,620 |
| | 6 |
| | 136 |
| | (17,007 | ) | | 42,744 |
| 42,259 |
| | 5,650 |
| | 19,087 |
| | (18,403 | ) | | 48,593 |
|
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
Benefits | 30,842 |
| | 3,977 |
| | — |
| | (73 | ) | | 77 |
| | (374 | ) | | 34,449 |
| 36,396 |
| | 4,177 |
| | — |
| | (405 | ) | | 40,168 |
|
Operating costs | 3,784 |
| | 1,355 |
| | 16,910 |
| | 3 |
| | 6 |
| | (16,648 | ) | | 5,410 |
| 3,664 |
| | 1,232 |
| | 18,371 |
| | (18,015 | ) | | 5,252 |
|
Depreciation and amortization | 199 |
| | 66 |
| | 125 |
| | — |
| | — |
| | (88 | ) | | 302 |
| 239 |
| | 67 |
| | 121 |
| | (84 | ) | | 343 |
|
Total operating expenses | 34,825 |
| | 5,398 |
| | 17,035 |
| | (70 | ) | | 83 |
| | (17,110 | ) | | 40,161 |
| 40,299 |
| | 5,476 |
| | 18,492 |
| | (18,504 | ) | | 45,763 |
|
Income from operations | 1,394 |
| | 372 |
| | 585 |
| | 76 |
| | 53 |
| | 103 |
| | 2,583 |
| 1,960 |
| | 174 |
| | 595 |
| | 101 |
| | 2,830 |
|
Loss on sale of business | — |
| | — |
| | — |
| | — |
| | — |
| | 786 |
| | 786 |
| |
Interest expense | — |
| | — |
| | — |
| | — |
| | — |
| | 159 |
| | 159 |
| — |
| | — |
| | — |
| | 184 |
| | 184 |
|
Other expense, net | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
| |
Income (loss) before income taxes and equity in net earnings | 1,394 |
| | 372 |
| | 585 |
| | 76 |
| | 53 |
| | (853 | ) | | 1,627 |
| |
Other income, net | | — |
| | — |
| | — |
| | (217 | ) | | (217 | ) |
Income before income taxes and equity in net earnings | | 1,960 |
| | 174 |
| | 595 |
| | 134 |
| | 2,863 |
|
Equity in net earnings of Kindred at Home | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
| — |
| | — |
| | 16 |
| | — |
| | 16 |
|
Segment earnings | $ | 1,394 |
| | $ | 372 |
| | $ | 594 |
| | $ | 76 |
| | $ | 53 |
| | $ | (853 | ) | | $ | 1,636 |
| $ | 1,960 |
| | $ | 174 |
| | $ | 611 |
| | $ | 134 |
| | $ | 2,879 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated |
| (in millions) |
Nine months ended September 30, 2018 | | | | | | | | | | |
External Revenues | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 26,790 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 26,790 |
|
Group Medicare Advantage | 4,575 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,575 |
|
Medicare stand-alone PDP | 2,703 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,703 |
|
Total Medicare | 34,068 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 34,068 |
|
Fully-insured | 379 |
| | 4,083 |
| | — |
| | 6 |
| | — |
| | — |
| | 4,468 |
|
Specialty | — |
| | 1,014 |
| | — |
| | — |
| | — |
| | — |
| | 1,014 |
|
Medicaid and other | 1,664 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 1,686 |
|
Total premiums | 36,111 |
| | 5,097 |
| | — |
| | 6 |
| | 22 |
| | — |
| | 41,236 |
|
Services revenue: | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 290 |
| | — |
| | — |
| | — |
| | 290 |
|
ASO and other | 6 |
| | 642 |
| | — |
| | — |
| | 4 |
| | — |
| | 652 |
|
Pharmacy | — |
| | — |
| | 148 |
| | — |
| | — |
| | — |
| | 148 |
|
Total services revenue | 6 |
| | 642 |
| | 438 |
| | — |
| | 4 |
| | — |
| | 1,090 |
|
Total external revenues | 36,117 |
| | 5,739 |
| | 438 |
| | 6 |
| | 26 |
| | — |
| | 42,326 |
|
Intersegment revenues | | | | | | | | | | | | | |
Services | — |
| | 13 |
| | 12,426 |
| | — |
| | — |
| | (12,439 | ) | | — |
|
Products | — |
| | — |
| | 4,722 |
| | — |
| | — |
| | (4,722 | ) | | — |
|
Total intersegment revenues | — |
| | 13 |
| | 17,148 |
| | — |
| | — |
| | (17,161 | ) | | — |
|
Investment income | 102 |
| | 18 |
| | 34 |
| | — |
| | 110 |
| | 154 |
| | 418 |
|
Total revenues | 36,219 |
| | 5,770 |
| | 17,620 |
| | 6 |
| | 136 |
| | (17,007 | ) | | 42,744 |
|
Operating expenses: | | | | | | | | | | | | | |
Benefits | 30,842 |
| | 3,977 |
| | — |
| | (73 | ) | | 77 |
| | (374 | ) | | 34,449 |
|
Operating costs | 3,784 |
| | 1,355 |
| | 16,910 |
| | 3 |
| | 6 |
| | (16,648 | ) | | 5,410 |
|
Depreciation and amortization | 199 |
| | 66 |
| | 125 |
| | — |
| | — |
| | (88 | ) | | 302 |
|
Total operating expenses | 34,825 |
| | 5,398 |
| | 17,035 |
| | (70 | ) | | 83 |
| | (17,110 | ) | | 40,161 |
|
Income from operations | 1,394 |
| | 372 |
| | 585 |
| | 76 |
| | 53 |
| | 103 |
| | 2,583 |
|
Loss on sale of business | — |
| | — |
| | — |
| | — |
| | — |
| | 786 |
| | 786 |
|
Interest expense | — |
| | — |
| | — |
| | — |
| | — |
| | 159 |
| | 159 |
|
Other expense, net | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Income (loss) before income taxes and equity in net earnings | 1,394 |
| | 372 |
| | 585 |
| | 76 |
| | 53 |
| | (853 | ) | | 1,627 |
|
Equity in net earnings of Kindred at Home | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Segment earnings (loss) | $ | 1,394 |
| | $ | 372 |
| | $ | 594 |
| | $ | 76 |
| | $ | 53 |
| | $ | (853 | ) | | $ | 1,636 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated |
| (in millions) |
Nine months ended September 30, 2017 | | | | | | | | | | |
External Revenues | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 24,735 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24,735 |
|
Group Medicare Advantage | 3,867 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,867 |
|
Medicare stand-alone PDP | 2,787 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,787 |
|
Total Medicare | 31,389 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31,389 |
|
Fully-insured | 357 |
| | 4,098 |
| | — |
| | 754 |
| | — |
| | — |
| | 5,209 |
|
Specialty | — |
| | 976 |
| | — |
| | — |
| | — |
| | — |
| | 976 |
|
Medicaid and other | 1,954 |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | 1,982 |
|
Total premiums | 33,700 |
| | 5,074 |
| | — |
| | 754 |
| | 28 |
| | — |
| | 39,556 |
|
Services revenue: | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 193 |
| | — |
| | — |
| | — |
| | 193 |
|
ASO and other | 6 |
| | 444 |
| | — |
| | — |
| | 5 |
| | — |
| | 455 |
|
Pharmacy | — |
| | — |
| | 58 |
| | — |
| | — |
| | — |
| | 58 |
|
Total services revenue | 6 |
| | 444 |
| | 251 |
| | — |
| | 5 |
| | — |
| | 706 |
|
Total external revenues | 33,706 |
| | 5,518 |
| | 251 |
| | 754 |
| | 33 |
| | — |
| | 40,262 |
|
Intersegment revenues | | | | | | | | | | | | | |
Services | — |
| | 15 |
| | 12,958 |
| | — |
| | — |
| | (12,973 | ) | | — |
|
Products | — |
| | — |
| | 4,706 |
| | — |
| | — |
| | (4,706 | ) | | — |
|
Total intersegment revenues | — |
| | 15 |
| | 17,664 |
| | — |
| | — |
| | (17,679 | ) | | — |
|
Investment income | 72 |
| | 25 |
| | 25 |
| | 3 |
| | 64 |
| | 127 |
| | 316 |
|
Total revenues | 33,778 |
| | 5,558 |
| | 17,940 |
| | 757 |
| | 97 |
| | (17,552 | ) | | 40,578 |
|
Operating expenses: | | | | | | | | | | | | | |
Benefits | 29,017 |
| | 3,952 |
| | — |
| | 389 |
| | 95 |
| | (596 | ) | | 32,857 |
|
Operating costs | 2,998 |
| | 1,178 |
| | 17,083 |
| | 151 |
| | 9 |
| | (16,725 | ) | | 4,694 |
|
Merger termination fee and related costs, net | — |
| | — |
| | — |
| | — |
| | — |
| | (947 | ) | | (947 | ) |
Depreciation and amortization | 176 |
| | 63 |
| | 103 |
| | 10 |
| | — |
| | (74 | ) | | 278 |
|
Total operating expenses | 32,191 |
| | 5,193 |
| | 17,186 |
| | 550 |
| | 104 |
| | (18,342 | ) | | 36,882 |
|
Income (loss) from operations | 1,587 |
| | 365 |
| | 754 |
| | 207 |
| | (7 | ) | | 790 |
| | 3,696 |
|
Interest expense | — |
| | — |
| | — |
| | — |
| | — |
| | 166 |
| | 166 |
|
Income (loss) before income taxes and equity in net earnings | 1,587 |
| | 365 |
| | 754 |
| | 207 |
| | (7 | ) | | 624 |
| | 3,530 |
|
Equity in net earnings of Kindred at Home | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Segment earnings | $ | 1,587 |
| | $ | 365 |
| | $ | 754 |
| | $ | 207 |
| | $ | (7 | ) | | $ | 624 |
| | $ | 3,530 |
|
Humana Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the Securities and Exchange Commission, or SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “believes,” “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. – Risk Factors in our 20172018 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent to February 16, 2018,21, 2019, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.
Executive Overview
General
Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company committed to
helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and well being and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as in home care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective.
Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking
total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding Merger termination fee and related costs, net, and depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.
Aetna Merger
On February 16, 2017, under the terms of the Merger Agreement with Aetna, we received a breakup fee of $1 billion from Aetna, which is included in our consolidated statement of income in the line captioned "Merger termination fee and related costs, net."
Acquisitions and Divestitures
In the third quarter of 2018, we completed the sale of our wholly-owned subsidiary KMG to CGIC. KMG's subsidiary, KIC, included our closed block of non-strategic commercial long-term care policies. Upon closing, we funded the transaction with approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale.
On July 2,Also in the third quarter of 2018, we, along with TPG and July 11, 2018, the ConsortiumWCAS, completed the acquisitions of Kindred and Curo, respectively, merging Curo with the hospice business of Kindred at Home. As part of these transactions, we acquired a 40% minority interest in Kindred at Home, a leading home health and Curohospice company, for total cash consideration of approximately $1.1 billion. Earnings from Kindred at Home are included in our consolidated statement
In the second quarter of income in the line captioned "Equity in net earnings of Kindred at Home."
On April 10, 2018, we acquired FPG for cash consideration of approximately $185 million, net of cash received. FPG is one of the largest at-risk providers serving Medicare Advantage and Managed Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. The acquisition of FPG advances our strategy of helping physicians and clinicians evolve from treating health episodically to managing health holistically.
On March 1,
In the first quarter of 2018, we acquired the remaining equity interest in MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, as well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million.
These transactions are more fully discussed in Note 1 and Note 3 to the condensed consolidated financial statements.
Workforce Optimization
We have been committed to productivity initiatives designed to promote operational excellence, accelerate our strategy, fund critical initiatives and advance our growth objectives. During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program that will allow us to achieve these objectives and position us for the future. These programs impacted approximately 3,600 associates, or 7.8%, of our workforce in 2017. As a result, we recorded charges of $148 million, or $0.64 per diluted common share. At December 31, 2017, $140 million was classified as a current liability, included in our condensed consolidated balance sheet in the trade accounts payable and accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period. The remaining workforce optimization liability at September 30, 2018 was $29 million and is expected to be substantially paid in 2018.
Business Segments
We manage our business with fourthree reportable segments: Retail, Group and Specialty, and Healthcare ServicesServices. Beginning January 1, 2018, we exited the individual commercial fully-insured medical health insurance business, as well as certain other business, and therefore no longer report separately the Individual Commercial. In addition,Commercial segment and the Other BusinessesBusiness category includesin the current year. Previously, the Other Business category included businesses that arewere not individually reportable because they dodid not meet the quantitative thresholds required by generally accepted accounting principles. Theseprinciples, primarily our closed-block of commercial long-term care insurance policies which were sold in 2018. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at Home. The Individual Commercial segment consisted of our individual commercial fully-insured medical health insurance benefits. We reportreported under the category of Other Businesses those businesses that dodid not align with the reportable segments described above, primarily our closed-block long-term care insurance policies, which were sold.sold in 2018.
The results of each segment are measured by segment earnings, and for our Healthcare Services Segment, also include the equity in net earnings of Kindred at Home for our Healthcare Services segment.Home. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty and Individual Commercial segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also
share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations.
Seasonality
One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. Our quarterly Retail segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s plan period, which begins annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases as the year progresses. In addition, the number of low-incomelow-
income senior members as well as year-over-year changes in the mix of membership in our stand-alone PDP products affects the quarterly benefit ratio pattern.
In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.
Our Group and Specialty segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in the Retail segment, with the Group and Specialty segment’s benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.
20182019 Highlights
Consolidated
Our consolidated pretax results of $1.6 billion for the nine months ended September 30, 2018 as compared to $3.5 billion for the nine months ended September 30, 2017 were primarily impacted by the loss on the sale of KMG recognized during the nine months ended September 30, 2018, lower year-over-year pretax earnings in the Retail, Healthcare Services and Individual Commercial segments, and the net gain associated with the terminated Merger Agreement, mainly the break-up fee, that was recorded in the nine months ended September 30, 2017. These items were partially offset by higher year-over-year pretax earnings in the Group and Specialty segment in the nine months ended September 30, 2018. The year-over-year comparison was further impacted by the guaranty fund assessment expense to support policyholder obligations of Penn Treaty, an unaffiliated long-term care insurance company, recorded in the nine months ended September 30, 2017.
In connection with the sale of KMG, we recognized a pretax loss, including transaction costs, of $786 million which is reported as loss on sale of business in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2018. We recorded a corresponding $430 million income tax benefit resulting from the loss.
Year-over-year comparisons of diluted earnings per common share are favorably impacted by a lower number of shares used to compute earnings per common share from share repurchases and the impact of a lower tax rate for the nine months ended September 30, 2018.
Our 2018 results through September 30, 2018 reflect the continued implementation of our strategy to offeroffers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning
us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At September 30, 2018,2019, approximately 2,010,8002,340,600 members, or 66.1%66%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 1,901,3002,010,800 members, or 66.5%, at December 31, 2017 and 1,877,800 members, or 65.9%66%, at September 30, 2017.
The annual health insurance industry fee was suspended for calendar year 2017, but has resumed in 2018. Operating costs associated with the health insurer fee attributable to the three and nine months ended September 30, 2018 was $258 million and $778 million, respectively. This fee is not deductible for tax purposes, which increases our effective income tax rate. The one-year suspension in 2017 of the health insurer fee significantly reduced our operating costs and effective tax rate during the three and nine months ended September 30, 2017. The annual health insurance industry fee is also, under current law, suspended for calendar year 2019.
The 2018 quarter includes pretax income from our Individual Commercial business of $5 million, or $0.03 per diluted common share compared to $26 million, or $0.11 per diluted common share, included in the 2017 quarter. The 2018 period includes pretax income from our Individual Commercial business of $76 million, or $0.42 per diluted common share compared to $207 million, or $0.89 per diluted common share, included in the 2017 period.
The 2018 period also includes an adjustment to provisional remeasurement of deferred taxes related to rate change from the tax reform law enacted on December 22, 2017 of $39.3 million, or $0.28 per diluted common share.
We recorded a net gain associated with the terminated Merger Agreement, consisting primarily of the break-up fee, of approximately $947 million, or $4.33 per diluted common share during the nine months ended September 30, 2017. Certain costs associated with the Merger were previously not deductible for tax purposes, but became deductible, and were recorded as such in the three months ended March 31, 2017 as a result of the termination of the Merger Agreement.
On March 1, 2017, a court ordered the liquidation of Penn Treaty (an unaffiliated long-term care insurance company), which triggered assessments from state guaranty associations that resulted in our recording a $54 million, or $0.23 per diluted common share, estimate in operating costs in the three months ended March 31, 2017.
Retail
On April 2, 2018, the Centers for Medicare and Medicaid Services (CMS) issued its announcement of 2019 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter (the Final Rate Notice). We expect the Final Rate Notice to result in a rate increase for our individual Medicare Advantage business that is slightly lower than CMS’ estimate for the sector, on a comparable basis, excluding the impact of Employer Group Waiver Plan (EGWP) funding changes and quality bonus changes. The difference between our and CMS projections primarily results from the geographic distribution of our members relative to the national average. In addition, the Final Rate Notice clarified that CMS has the authority to permit MA organizations to offer tailored supplemental benefits as recommended by a licensed medical professional. We expect that this additional flexibility will allow us to include supplemental benefits that we believe will improve health outcomes for our members.
On April 24, 2018, we received a Notice of Intent to be Awarded a Comprehensive Medicaid Contract under Florida’s Statewide Managed Medicaid Program in all 11 regions, including the South Florida, Tampa, Jacksonville, and Orlando metro areas. The comprehensive program combines the traditional Medicaid, or TANF, and Long-Term Care programs. The new contract will phase in between December 2018 and February 2019.
In October 2018, the Centers for Medicare and Medicaid Services (CMS) published its updated Star quality ratings for bonus year 2020. We received a 5-star rating on CMS' 5-star rating system for two MA contracts offered in Florida and Tennessee. In addition, we received a 4.5-star rating for two MA contracts offered in Florida, Illinois, Kentucky, Mississippi, North Carolina, and Oregon. We have 12 contracts rated 4-star or above and 3 million members in 4-star or above rated contracts to be offered in 2019, representing 84% of our MA membership as of July 2018. The achievement of a 5-star rating for two MA contracts in Florida and Tennessee provides us the ability to market for these contracts throughout the year, creating an opportunity for increased penetration in these important geographies.
Group and Specialty Segment
The T2017 East Region contract is a consolidation of the former T3 North and South Regions, comprising thirty-two states and approximately 5.9 million TRICARE beneficiaries, under which delivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 of each year during its term at the government's option. On October 11, 2018, we received notice from the Defense Health Agency of its intent to exercise the second option period under the East Region contract, with delivery of health care services commencing on January 1, 2019.
Healthcare Services Segment
Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 882,800 at September 30, 2019, an increase of 23.8% from 713,300 at September 30, 2018. These members may not be unique to each program since members have the ability to enroll in multiple programs. The increase is driven by our improved process for identifying and enrolling members in the appropriate program at the right time, coupled with growth in Special Needs Plans, or SNP, membership.
In October 2019, the Centers for Medicare and Medicaid Services published its updated Medicare Star Ratings for bonus year 2021. We have 3.7 million members, or 92% of our Medicare Advantage membership as of August 2019, enrolled in 18 contracts that received a 4-star rating or above. In addition, we received a 5 out of 5-star rating for our CarePlus Health Plans, Inc. contract in Florida, and received a 4.5-star rating for six Medicare Advantage contracts offered in 19 states, which cover approximately 1.2 million members. The continued improvement in our Star ratings reflects our enterprise-wide focus on driving quality and improved health outcomes.
Net income increased $867 million from $1.3 billion in 2018 to $2.2 billion in 2019 and earnings per diluted common share increased $6.66 from $9.58 earnings per diluted common share in 2018 to $16.24 earnings per diluted common share in 2019. This comparison was primarily impacted by our Medicare Advantage business and Healthcare Services segment, as well as by previously implemented productivity initiatives that led to significant operating cost efficiencies in 2019. These impacts were partially offset by strategic investments in our integrated care delivery model, the impact of higher compensation accruals for the Annual Incentive Plan, or AIP, offered to employees across all levels of the company, lower Group and Specialty segment earnings, and the impact of workforce optimization. These changes were further favorably impacted by the suspension of the health industry insurance fee in 2019 and by a decreaselower number of 13.6%shares used to compute dilutive earnings per share, primarily reflecting share repurchases. In addition, the 2019 period was impacted by the loss on the sale of KMG recognized in 2018.
Contributing to our Retail segment revenue growth was our individual Medicare Advantage membership, which increased 508,700 members, or 16.7%, from 825,200 at September 30, 2017, and 10.3% from 794,900 at December 31, 2017. We have undergone an optimization process that ensures the appropriate level2018 to September 30, 2019.
Our operating cash flow of member interaction with clinicians, including moving members into a monitoring program as their needs change, and graduating them out of the care management program when they no longer benefit$4.8 billion for 2019 improved primarily from the services. This drives quality outcomes, which has resultedtiming of working capital changes, higher earnings, and the impact of an approximately $245 million payment related to reinsuring certain voluntary benefit and financial protection products to a third party in connection with the sale of KMG in 2018.
On July 31, 2019, we entered into an accelerated stock repurchase agreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We expect final settlement under the agreement to occur during the fourth quarter of 2019.
In August 2019, we issued $500 million of 3.125% senior notes due August 15, 2029 and $500 million of 3.950% senior notes due August 15, 2049. Our net proceeds, reduced segment earnings but higher returnsfor the underwriters discount and commission and offering expenses paid as of September 30, 2019, were $987 million.
During the third quarter of 2019, we initiated an involuntary workforce optimization program that will allow us to promote operational excellence, accelerate our strategy, fund critical initiatives and advance our growth objectives. As a result we recorded estimated charges of $46 million, or $0.26 per diluted common share, on investment.the corporate level, included with operating costs in the condensed consolidated statements of income. We expect this liability to be primarily paid within 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of the U.S. health insurance industry. Certain significant provisions of the Health Care Reform Law include, among others, mandated coverage requirements, mandated benefits and guarantee issuance associated with commercial medical insurance, rebates to policyholders based on minimum benefit ratios, adjustments to Medicare Advantage premiums, the establishment of federally-facilitatedfederally facilitated or state-based exchanges coupled with programs designed to spread risk among insurers, and the introduction of plan designs based on set actuarial values. In addition, the Health Care Reform Law established insurance industry assessments, including an annual health insurance industry fee. The annual health insurance industry fee levied on the insurance industry iswas $14.3 billion in 2018 and iswas not deductible for income tax purposes, which significantly increasesincreased our effective income tax rate. A one year suspension of the health insurerinsurance industry fee, as we experienced in 2017 and under current law will experience againare experiencing in 2019, significantly impacts our trend in key operating metrics including our operating cost and medical expense ratios, as well as our effective tax rate.
As noted above, the Health Care Reform Law required the establishment of The annual health insurance exchangesindustry fee is scheduled to resume for individuals and small employers to purchase health insurance that became effective January 1, 2014, with an annual open enrollment period. Although we previously participated in these exchanges by offering on-exchange individual commercial medical plans, effective January 1, 2018, we have exited our Individual Commercial medical business.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in paymentscalendar year 2020 under the risk corridor premium stabilization program established under the Health Care Reform Law, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.
current law.
It is reasonably possible that the Health Care Reform Law and related regulations, as well as future legislative, judicial or regulatory changes, including restrictions on our ability to manage our provider network or otherwise operate our business, or restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, increases in member benefits or member eligibility criteria without corresponding increases in premium payments to us, or increases in regulation of our prescription drug benefit businesses, in the aggregate may have a material adverse effect on our results of operations (including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, further lowering our Medicare payment rates and increasing our expenses associated with the non-deductible health insurance industry fee and other assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows.
We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail and Group and Specialty and Individual Commercial segment customers and are described in Note 15 to the condensed consolidated financial statements included in this report.
Comparison of Results of Operations for 20182019 and 20172018
The following discussion primarily deals with our results of operations for the three months ended September 30, 2018,2019, or the 20182019 quarter, the three months ended September 30, 2017,2018, or the 20172018 quarter, the nine months ended September 30, 2019, or the 2019 period, and the nine months ended September 30, 2018, or the 2018 period, and the nine months ended September 30, 2017, or the 2017 period.
| | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | For the three months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (dollars in millions, except per common share results) | | | (dollars in millions, except per common share results) |
Revenues: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Retail | $ | 12,037 |
| | $ | 11,021 |
| | $ | 1,016 |
| | 9.2 | % | $ | 14,034 |
| | $ | 12,037 |
| | $ | 1,997 |
| | 16.6 | % |
Group and Specialty | 1,670 |
| | 1,701 |
| | (31 | ) | | (1.8 | )% | 1,678 |
| | 1,670 |
| | 8 |
| | 0.5 | % |
Individual Commercial | 1 |
| | 224 |
| | (223 | ) | | (99.6 | )% | — |
| | 1 |
| | (1 | ) | | (100.0 | )% |
Other Businesses | 4 |
| | 9 |
| | (5 | ) | | (55.6 | )% | — |
| | 4 |
| | (4 | ) | | (100.0 | )% |
Total premiums | 13,712 |
| | 12,955 |
| | 757 |
| | 5.8 | % | 15,712 |
| | 13,712 |
| | 2,000 |
| | 14.6 | % |
Services: | | | | | | | | | | | | | | |
Retail | 1 |
| | 2 |
| | (1 | ) | | (50.0 | )% | 4 |
| | 1 |
| | 3 |
| | 300.0 | % |
Group and Specialty | 215 |
| | 140 |
| | 75 |
| | 53.6 | % | 200 |
| | 215 |
| | (15 | ) | | (7.0 | )% |
Healthcare Services | 165 |
| | 80 |
| | 85 |
| | 106.3 | % | 189 |
| | 165 |
| | 24 |
| | 14.5 | % |
Other Businesses | — |
| | 1 |
| | (1 | ) | | (100.0 | )% | |
Total services | 381 |
| | 223 |
| | 158 |
| | 70.9 | % | 393 |
| | 381 |
| | 12 |
| | 3.1 | % |
Investment income | 113 |
| | 104 |
| | 9 |
| | 8.7 | % | 136 |
| | 113 |
| | 23 |
| | 20.4 | % |
Total revenues | 14,206 |
| | 13,282 |
| | 924 |
| | 7.0 | % | 16,241 |
| | 14,206 |
| | 2,035 |
| | 14.3 | % |
Operating expenses: | | | | | | | | | | | | | | |
Benefits | 11,243 |
| | 10,642 |
| | 601 |
| | 5.6 | % | 13,357 |
| | 11,243 |
| | 2,114 |
| | 18.8 | % |
Operating costs | 1,900 |
| | 1,688 |
| | 212 |
| | 12.6 | % | 1,889 |
| | 1,900 |
| | (11 | ) | | (0.6 | )% |
Depreciation and amortization | 102 |
| | 94 |
| | 8 |
| | 8.5 | % | 127 |
| | 102 |
| | 25 |
| | 24.5 | % |
Total operating expenses | 13,245 |
| | 12,424 |
| | 821 |
| | 6.6 | % | 15,373 |
| | 13,245 |
| | 2,128 |
| | 16.1 | % |
Income from operations | 961 |
| | 858 |
| | 103 |
| | 12.0 | % | 868 |
| | 961 |
| | (93 | ) | | (9.7 | )% |
Loss on sale of business | (4 | ) | | — |
| | (4 | ) | | (100.0 | )% | |
Gain on sale of business | | — |
| | (4 | ) | | 4 |
| | (100.0 | )% |
Interest expense | 53 |
| | 59 |
| | (6 | ) | | (10.2 | )% | 62 |
| | 53 |
| | 9 |
| | 17.0 | % |
Other expense, net | 11 |
| | — |
| | 11 |
| | 100.0 | % | |
Other (income) expense, net | | (82 | ) | | 11 |
| | (93 | ) | | (845.5 | )% |
Income before income taxes and equity in net earnings | 901 |
| | 799 |
| | 102 |
| | 12.8 | % | 888 |
| | 901 |
| | (13 | ) | | (1.4 | )% |
Provision for income taxes | 266 |
| | 300 |
| | (34 | ) | | (11.3 | )% | 200 |
| | 266 |
| | (66 | ) | | (24.8 | )% |
Equity in net earnings of Kindred at Home | 9 |
| | — |
| | 9 |
| | 100.0 | % | 1 |
| | 9 |
| | (8 | ) | | (88.9 | )% |
Net income | $ | 644 |
| | $ | 499 |
| | $ | 145 |
| | 29.1 | % | $ | 689 |
| | $ | 644 |
| | $ | 45 |
| | 7.0 | % |
Diluted earnings per common share | $ | 4.65 |
| | $ | 3.44 |
| | $ | 1.21 |
| | 35.2 | % | $ | 5.14 |
| | $ | 4.65 |
| | $ | 0.49 |
| | 10.5 | % |
Benefit ratio (a) | 82.0 | % | | 82.1 | % | | | | (0.1 | )% | 85.0 | % | | 82.0 | % | | | | 3.0 | % |
Operating cost ratio (b) | 13.5 | % | | 12.8 | % | | | | 0.7 | % | 11.7 | % | | 13.5 | % | | | | (1.8 | )% |
Effective tax rate | 29.1 | % | | 37.5 | % | | | | (8.4 | )% | 22.5 | % | | 29.1 | % | | | | (6.6 | )% |
| |
(a) | Represents benefits expense as a percentage of premiums revenue. |
| |
(b) | Represents operating costs as a percentage of total revenues less investment income. |
| | | | | | | | | | | | | | | | |
| For the nine months ended September 30, | | Change | For the nine months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (dollars in millions, except per common share results) | | | (dollars in millions, except per common share results) |
Revenues: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Retail | $ | 36,111 |
| | $ | 33,700 |
| | $ | 2,411 |
| | 7.2 | % | $ | 42,106 |
| | $ | 36,111 |
| | $ | 5,995 |
| | 16.6 | % |
Group and Specialty | 5,097 |
| | 5,074 |
| | 23 |
| | 0.5 | % | 5,033 |
| | 5,097 |
| | (64 | ) | | (1.3 | )% |
Individual Commercial | 6 |
| | 754 |
| | (748 | ) | | (99.2 | )% | — |
| | 6 |
| | (6 | ) | | (100.0 | )% |
Other Businesses | 22 |
| | 28 |
| | (6 | ) | | (21.4 | )% | — |
| | 22 |
| | (22 | ) | | (100.0 | )% |
Total premiums | 41,236 |
| | 39,556 |
| | 1,680 |
| | 4.2 | % | 47,139 |
| | 41,236 |
| | 5,903 |
| | 14.3 | % |
Services: | | | | | | | | | | | | | | |
Retail | 6 |
| | 6 |
| | — |
| | — | % | 14 |
| | 6 |
| | 8 |
| | 133.3 | % |
Group and Specialty | 642 |
| | 444 |
| | 198 |
| | 44.6 | % | 587 |
| | 642 |
| | (55 | ) | | (8.6 | )% |
Healthcare Services | 438 |
| | 251 |
| | 187 |
| | 74.5 | % | 502 |
| | 438 |
| | 64 |
| | 14.6 | % |
Other Businesses | 4 |
| | 5 |
| | (1 | ) | | (20.0 | )% | — |
| | 4 |
| | (4 | ) | | (100.0 | )% |
Total services | 1,090 |
| | 706 |
| | 384 |
| | 54.4 | % | 1,103 |
| | 1,090 |
| | 13 |
| | 1.2 | % |
Investment income | 418 |
| | 316 |
| | 102 |
| | 32.3 | % | 351 |
| | 418 |
| | (67 | ) | | (16.0 | )% |
Total revenues | 42,744 |
| | 40,578 |
| | 2,166 |
| | 5.3 | % | 48,593 |
| | 42,744 |
| | 5,849 |
| | 13.7 | % |
Operating expenses: | | | | | | | | | | | | | | |
Benefits | 34,449 |
| | 32,857 |
| | 1,592 |
| | 4.8 | % | 40,168 |
| | 34,449 |
| | 5,719 |
| | 16.6 | % |
Operating costs | 5,410 |
| | 4,694 |
| | 716 |
| | 15.3 | % | 5,252 |
| | 5,410 |
| | (158 | ) | | (2.9 | )% |
Merger termination fee and related costs, net | — |
| | (947 | ) | | 947 |
| | 100.0 | % | |
Depreciation and amortization | 302 |
| | 278 |
| | 24 |
| | 8.6 | % | 343 |
| | 302 |
| | 41 |
| | 13.6 | % |
Total operating expenses | 40,161 |
| | 36,882 |
| | 3,279 |
| | 8.9 | % | 45,763 |
| | 40,161 |
| | 5,602 |
| | 13.9 | % |
Income from operations | 2,583 |
| | 3,696 |
| | (1,113 | ) | | (30.1 | )% | 2,830 |
| | 2,583 |
| | 247 |
| | 9.6 | % |
Loss on sale of business | 786 |
| | — |
| | 786 |
| | 100.0 | % | — |
| | 786 |
| | (786 | ) | | (100.0 | )% |
Interest expense | 159 |
| | 166 |
| | (7 | ) | | (4.2 | )% | 184 |
| | 159 |
| | 25 |
| | 15.7 | % |
Other expense, net | 11 |
| | — |
| | 11 |
| | 100.0 | % | |
Other (income) expense, net | | (217 | ) | | 11 |
| | (228 | ) | | (2,072.7 | )% |
Income before income taxes and equity in net earnings | 1,627 |
| | 3,530 |
| | (1,903 | ) | | (53.9 | )% | 2,863 |
| | 1,627 |
| | 1,236 |
| | 76.0 | % |
Provision for income taxes | 308 |
| | 1,266 |
| | (958 | ) | | (75.7 | )% | 684 |
| | 308 |
| | 376 |
| | 122.1 | % |
Equity in net earnings of Kindred at Home | 9 |
| | — |
| | 9 |
| | 100.0 | % | 16 |
| | 9 |
| | 7 |
| | 77.8 | % |
Net income | $ | 1,328 |
| | $ | 2,264 |
| | $ | (936 | ) | | (41.3 | )% | $ | 2,195 |
| | $ | 1,328 |
| | $ | 867 |
| | 65.3 | % |
Diluted earnings per common share | $ | 9.58 |
| | $ | 15.44 |
| | $ | (5.86 | ) | | (38.0 | )% | $ | 16.24 |
| | $ | 9.58 |
| | $ | 6.66 |
| | 69.5 | % |
Benefit ratio (a) | 83.5 | % | | 83.1 | % | | | | 0.4 | % | 85.2 | % | | 83.5 | % | | | | 1.7 | % |
Operating cost ratio (b) | 12.8 | % | | 11.7 | % | | | | 1.1 | % | 10.9 | % | | 12.8 | % | | | | (1.9 | )% |
Effective tax rate | 18.8 | % | | 35.9 | % | | | | (17.1 | )% | 23.8 | % | | 18.8 | % | | | | 5.0 | % |
| |
(a) | Represents benefits expense as a percentage of premiums revenue. |
| |
(b) | Represents operating costs as a percentage of total revenues less investment income. |
Summary
Net income was $689 million, or $5.14 per diluted common share, in the 2019 quarter compared to $644 million, or $4.65 per diluted common share, in the 2018 quarter compared to $499 million,quarter. Net income was $2.2 billion, or $3.44$16.24 per diluted common share, in the 2017 quarter. Net income was2019 period compared to $1.3 billion, or $9.58 per diluted common share, in the 2018 period comparedperiod. These increases were primarily impacted by our Medicare Advantage business and Healthcare Services segment, as well as by previously implemented productivity initiatives that led to $2.3 billion, or $15.44significant operating cost efficiencies in 2019. These impacts were partially offset by strategic investments in our integrated care delivery model, the impact of higher compensation accruals for the AIP offered to employees across all levels of the company, lower Group and Specialty segment earnings, and the impact of workforce optimization. These changes were further favorably impacted by the suspension of the health industry insurance fee in 2019 and by a lower number of shares used to compute dilutive earnings per diluted common share, inprimarily reflecting share repurchases. In addition, the 2017 period. This comparison2019 period was impacted by the loss on the sale of KMG recognized in 2018, the Merger Agreement break-up fee in 2017, the suspension of the health insurance industry fee for calendar year 2017, the exit of the Individual Commercial business effective January 1, 2018, the Tax Reform Law as previously described, and the estimated guaranty fund assessment expense to support the policy holders obligations of Penn Treaty. Year-over-year comparisons of diluted earnings per common share are also favorably impacted by a lower number of shares from share repurchases.2018.
Premiums Revenue
Consolidated premiums increased $757 million,$2.0 billion, or 5.8%14.6%, from the 20172018 quarter to $13.7$15.7 billion for the 20182019 quarter and increased $1.7$5.9 billion, or 4.2%14.3%, from the 20172018 period to $41.2$47.1 billion for the 20182019 period primarily due to higher premiums in the Retail segment, mainlydriven by higher premium revenues from out Medicare Advantage business resulting from our Medicare Advantage business.membership growth and higher per member premiums. These itemsincreases were partially offset by the impact of declining stand-alone PDP membership year-over-year, as well as lower premiums resulting fromin the exit ofGroup and Specialty segment in the Individual Commercial business.2019 period as discussed in the detailed segment results discussion that follows.
Services Revenue
Consolidated services revenue increased $158$12 million, or 70.9%3.1%, from the 20172018 quarter to $381$393 million for the 20182019 quarter and increased $384 million, or 54.4%, from the 2017 period to $1.1 billion for the 2018 period primarily due to an increase in services revenue in the Healthcare Services andsegment, partially offset by a decline in the Group and Specialty segmentssegment as discusseddetailed in the segment results discussion that follows. Consolidated services revenue was relatively unchanged at $1.10 billion for the 2019 period increasing $13 million, or 1.2%, from the 2018 period due to increased services revenue in the Healthcare Services segment, partially offset by a decline in the Group and Specialty segment as detailed in the segment results discussion that follows.
Investment Income
Investment income totaled $136 million for the 2019 quarter, increasing $23 million, or 20.4%, from $113 million for the 2018 quarter, increasing $9 million, or 8.7%, from $104 million for the 2017 quarterquarter. This increase primarily reflectingreflects higher realized capital gains, higher average invested capital balances, and higher interest rates, partially offset by lower average invested balances.rates. For the 20182019 period, investment income totaled $418$351 million, increasing $102decreasing $67 million, or 32.3%16.0%, from $316$418 million in the 2017 period2018 period. This decrease primarily reflecting higherreflects lower realized capital gains and lower average invested balances, andpartially offset by higher interest rates.
Benefits Expense
Consolidated benefits expense was $11.2$13.4 billion for the 20182019 quarter, an increase of $601 million$2.1 billion from the 20172018 quarter. For the 20182019 period, benefits expense was $34.4$40.2 billion, an increase of $1.6$5.7 billion from the 20172018 period. The consolidated benefit ratio for the 2019 quarter of 85.0% increased 300 basis points from 82.0% in the 2018 quarter. The consolidated benefit ratio for the 2019 period increased 170 basis points to 85.2% from 83.5% in the 2018 period. These increases were primarily due to an increase in the Retail segment benefits expense, partially offset by a decrease in the Individual Commercial segment benefits expense. We experienced favorable medical claims reserve development related to prior fiscal years of $129 million in the 2018 quarter as compared to $85 million in the 2017 quarter. In the 2018 period, we experienced favorable medical claims reserve development related to prior years of $467 million as compared to $430 million in the 2017 period as discussed in the detailed segment results discussion that follows.
The consolidated benefit ratio decreased 10 basis points to 82.0% for the 2018 quarter compared to 82.1% for the 2017 quarter primarily due to the positive impact on the 2018 quarter from the reinstatementsuspension of the health insurance industry fee in 2018,2019, which was contemplated in the pricing and benefit design of our products, and higherlower favorable prior-period medical claims reserve development. These items were partially offset by the enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings along with unfavorable year-over-year comparison ofdevelopment, an increase in the Group and Specialty segmentbenefit ratio as discussed in the detailed segment results discussion that follows. The consolidated benefit ratio forfollows, and the 2018 period was 83.5%, a 40 basis point increase from 83.1% forshift in Medicare membership mix, due to the 2017 period. The year-over-year comparison for the 2018 period was favorably impacted by the exitloss of the Individual Commercial business effective January 1, 2018. Excluding the impact of the Individual Commercial segment, the year-over-year comparison was unfavorably impacted by the enhanced 2018stand-alone PDP members and significant growth in Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings and a more severe flu season.members. These itemsincreases were partially offset by engaging our Medicare Advantage members in clinical programs, as well as ensuring they are appropriately documented under the reinstatement ofCMS risk-adjustment model, and lower than expected medical costs as compared to the health insurance industry fee in 2018, which was contemplatedassumptions used in the pricing and benefit design of our products.individual Medicare Advantage business for 2019. In addition, the 2019 quarter was significantly negatively impacted by weekday seasonality.
The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 40 basis points in the 2019 quarter versus approximately 90 basis points in the 2018 quarter versus approximately 70 basis points in the 2017 quarter. FavorableThe favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 70 basis points to 85.2% for the 2019 period compared to approximately 110 basis points in bothto 83.5% for the 2018 and the 2017 periods.period.
Operating Costs
Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
Consolidated operating costs increased $212decreased $11 million, or 12.6%0.6%, during the 20182019 quarter compared to the 2017 quarter. Consolidated operating costs increased $7162018 quarter and decreased $158 million, or 15.3%2.9%, during the 20182019 period compared to the 2017 period2018 period. These decreases were primarily due to an increasea decrease in operating costs in the Retail and the Group and Specialty segments partially offset by a decrease in operating costsas discussed in the Healthcare Services and Individual Commercial segments.detailed segment results discussion that follows.
The consolidated operating cost ratio for the 20182019 quarter of 13.5% increased 7011.7% decreased 180 basis points from 13.5% in the 2017 quarter. The consolidated operating cost ratio2018 quarter and for the 20182019 period increased 110decreased 190 basis points to 12.8%10.9% from 11.7%12.8% in the 20172018 period. These increasesdecreases were primarily were due to the reinstatementsuspension of the health insurance industry fee in 2018, and long-term sustainability investments in the 2018 quarter and period as a result of the Tax Reform Law. Our long-term sustainability investments include the continuation of investments in our associate workforce, primarily the establishment of an annual incentive program for a broader range of employees, together2019, scale efficiencies associated with additional investments in the communities of our members, technology and our integrated delivery model to drive more affordable healthcare and better clinical outcomes, and an increase in incentive compensation costs under the expanded program noted above, resulting from the continued strong performance. The ratio was further impacted by the growth in our military services business, which carries a higher operating ratio than our other products, due to the previously disclosed transition to the TRICARE East Region contract effective January 1, 2018. These items were partially offset by the favorable impact ofMedicare Advantage membership, and significant operating cost efficiencies in the 2018 quarter and period2019 driven by previously implemented productivity initiatives implementedinitiatives. These improvements were partially offset by strategic investments in 2017,our integrated care delivery model, the impact of the charges recordedhigher compensation expense accruals in the 20172019 quarter for the AIP offered to employees across all levels, and charges associated with workforce optimization. The higher compensation accruals resulted from our continued strong performance, including customer satisfaction as measured by the voluntary and involuntary workforce reduction program, and the favorable year-over-year comparison of the impact of the guaranty fund assessment expense to support policy holder obligations of Penn Treaty in the 2017 period, as well as the exit of the Individual Commercial business, which carried anet promoter score, along with higher operating cost ratio than our other products, effective January 1, 2018.anticipated individual Medicare Advantage membership growth. The non-deductible health insurance industry fee impacted the operating cost ratio by 180 basis points in both the 2018 quarter and 2018 period.
Depreciation and Amortization
Depreciation and amortization for the 20182019 quarter totaled $102$127 million compared to $94$102 million for the 20172018 quarter. For the 20182019 period, depreciation and amortization totaled $302$343 million compared to $278$302 million for the 20172018 period. We accelerated the depreciation related to certain capitalized software of $19 million in the 2019 quarter and period.
Interest Expense
Interest expense for the 20182019 quarter totaled $53of $62 million increased $9 million, compared to $59$53 million for the 2017 quarter, and totaled2018 quarter. Interest expense for the 2019 period of $184 million increased $25 million, compared to $159 million for the 2018 period compared to $166 million for the 2017 period.
Income Taxes
For the 2018 period our effective tax rate was 18.8% compared to the effective tax rate of 35.9% for the 2017 period. These decreases areincreases were primarily due to the tax benefit of $430 million resulting from the sale of KMG as well as the Tax Reform Law previously discussed, partially offset byhigher average borrowings outstanding including the impact of the reinstatementborrowings under the November 2018 term loan agreement and senior notes issued in August 2019.
Income Taxes
The effective income tax rate was 22.5% and 23.8% for the three and nine months ended September 30, 2019, respectively, compared to 29.1% and 18.8% for the three and nine months ended September 30, 2018, respectively. These changes primarily reflect the impact of the suspension of the non-deductible health insurance industry fee in 2018.2019 as well as the deferred tax benefit recognized in 2018 from the loss on sale of KMG. The effective income tax rate for the nine months ended September 30, 2017 included previously non-deductible transaction costs that, as2018 reflected a result$430 million deferred tax benefit, resulting from the loss on the sale of the termination of the Merger Agreement, became deductible forKMG attributable to its original tax purposes. The Tax Reform Law reduced the statutory federal corporate income tax ratebasis and subsequent capital contributions to 21 percent from 35 percent, beginning in 2018. The accounting for certain income tax effects of the Tax Reform Law is provisional. Revisions to prior estimates are recorded as additional analysis is completed using information available at each measurement date during 2018, with adjustments to the income tax provision recorded as new information becomesfund accumulated losses.
known. Revisions to our prior estimates for the income tax effects of the Tax Reform Law decreased our tax expense for the nine months ended September 30, 2018 by $39.3 million.
Retail Segment
| | | September 30, | | Change | September 30, | | Change |
| 2018 | | 2017 | | Members | | Percentage | 2019 | | 2018 | | Members | | Percentage |
Membership: | | | | | | | | | | | | | | |
Medical membership: | | | | | | | | | | | | | | |
Individual Medicare Advantage | 3,043,800 |
| | 2,849,400 |
| | 194,400 |
| | 6.8 | % | 3,552,500 |
| | 3,043,800 |
| | 508,700 |
| | 16.7 | % |
Group Medicare Advantage | 496,800 |
| | 438,400 |
| | 58,400 |
| | 13.3 | % | 523,900 |
| | 496,800 |
| | 27,100 |
| | 5.5 | % |
Medicare stand-alone PDP | 5,015,900 |
| | 5,290,900 |
| | (275,000 | ) | | (5.2 | )% | 4,379,800 |
| | 5,015,900 |
| | (636,100 | ) | | (12.7 | )% |
Total Retail Medicare | 8,556,500 |
| | 8,578,700 |
| | (22,200 | ) | | (0.3 | )% | 8,456,200 |
| | 8,556,500 |
| | (100,300 | ) | | (1.2 | )% |
State-based Medicaid | 323,800 |
| | 363,400 |
| | (39,600 | ) | | (10.9 | )% | 469,000 |
| | 323,800 |
| | 145,200 |
| | 44.8 | % |
Medicare Supplement | 246,600 |
| | 234,900 |
| | 11,700 |
| | 5.0 | % | 286,600 |
| | 246,600 |
| | 40,000 |
| | 16.2 | % |
Total Retail medical members | 9,126,900 |
| | 9,177,000 |
| | (50,100 | ) | | (0.5 | )% | 9,211,800 |
| | 9,126,900 |
| | 84,900 |
| | 0.9 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | For the three months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Premiums and Services Revenue: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 8,912 |
| | $ | 8,077 |
| | $ | 835 |
| | 10.3 | % | $ | 10,752 |
| | $ | 8,912 |
| | $ | 1,840 |
| | 20.6 | % |
Group Medicare Advantage | 1,542 |
| | 1,272 |
| | 270 |
| | 21.2 | % | 1,609 |
| | 1,542 |
| | 67 |
| | 4.3 | % |
Medicare stand-alone PDP | 893 |
| | 921 |
| | (28 | ) | | (3.0 | )% | 781 |
| | 893 |
| | (112 | ) | | (12.5 | )% |
Total Retail Medicare | 11,347 |
| | 10,270 |
| | 1,077 |
| | 10.5 | % | 13,142 |
| | 11,347 |
| | 1,795 |
| | 15.8 | % |
State-based Medicaid | 561 |
| | 630 |
| | (69 | ) | | (11.0 | )% | 742 |
| | 561 |
| | 181 |
| | 32.3 | % |
Medicare Supplement | 129 |
| | 121 |
| | 8 |
| | 6.6 | % | 150 |
| | 129 |
| | 21 |
| | 16.3 | % |
Total premiums | 12,037 |
| | 11,021 |
| | 1,016 |
| | 9.2 | % | 14,034 |
| | 12,037 |
| | 1,997 |
| | 16.6 | % |
Services | 1 |
| | 2 |
| | (1 | ) | | (50.0 | )% | 4 |
| | 1 |
| | 3 |
| | 300.0 | % |
Total premiums and services revenue | $ | 12,038 |
| | $ | 11,023 |
| | $ | 1,015 |
| | 9.2 | % | $ | 14,038 |
| | $ | 12,038 |
| | $ | 2,000 |
| | 16.6 | % |
Segment earnings | $ | 634 |
| | $ | 610 |
| | $ | 24 |
| | 3.9 | % | $ | 639 |
| | $ | 634 |
| | $ | 5 |
| | 0.8 | % |
Benefit ratio | 83.2 | % | | 84.3 | % | | | | (1.1 | )% | 85.9 | % | | 83.2 | % | | | | 2.7 | % |
Operating cost ratio | 11.2 | % | | 9.8 | % | | | | 1.4 | % | 9.3 | % | | 11.2 | % | | | | (1.9 | )% |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, | | Change | For the nine months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Premiums and Services Revenue: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 26,790 |
| | $ | 24,735 |
| | $ | 2,055 |
| | 8.3 | % | $ | 32,254 |
| | $ | 26,790 |
| | $ | 5,464 |
| | 20.4 | % |
Group Medicare Advantage | 4,575 |
| | 3,867 |
| | 708 |
| | 18.3 | % | 4,867 |
| | 4,575 |
| | 292 |
| | 6.4 | % |
Medicare stand-alone PDP | 2,703 |
| | 2,787 |
| | (84 | ) | | (3.0 | )% | 2,408 |
| | 2,703 |
| | (295 | ) | | (10.9 | )% |
Total Retail Medicare | 34,068 |
| | 31,389 |
| | 2,679 |
| | 8.5 | % | 39,529 |
| | 34,068 |
| | 5,461 |
| | 16.0 | % |
State-based Medicaid | 1,664 |
| | 1,954 |
| | (290 | ) | | (14.8 | )% | 2,143 |
| | 1,664 |
| | 479 |
| | 28.8 | % |
Medicare Supplement | 379 |
| | 357 |
| | 22 |
| | 6.2 | % | 434 |
| | 379 |
| | 55 |
| | 14.5 | % |
Total premiums | 36,111 |
| | 33,700 |
| | 2,411 |
| | 7.2 | % | 42,106 |
| | 36,111 |
| | 5,995 |
| | 16.6 | % |
Services | 6 |
| | 6 |
| | — |
| | — | % | 14 |
| | 6 |
| | 8 |
| | 133.3 | % |
Total premiums and services revenue | $ | 36,117 |
| | $ | 33,706 |
| | $ | 2,411 |
| | 7.2 | % | $ | 42,120 |
| | $ | 36,117 |
| | $ | 6,003 |
| | 16.6 | % |
Segment earnings | $ | 1,394 |
| | $ | 1,587 |
| | $ | (193 | ) | | (12.2 | )% | $ | 1,960 |
| | $ | 1,394 |
| | $ | 566 |
| | 40.6 | % |
Benefit ratio | 85.4 | % | | 86.1 | % | | | | (0.7 | )% | 86.4 | % | | 85.4 | % | | | | 1.0 | % |
Operating cost ratio | 10.5 | % | | 8.9 | % | | | | 1.6 | % | 8.7 | % | | 10.5 | % | | | | (1.8 | )% |
Segment Earnings
Retail segment earnings increased $24$5 million, or 3.9%0.8%, from $610 million in the 2017 quarter to $634 million in the 2018 quarter primarily due the year-over-year improvementto $639 million in the segment's benefit ratio, partially offset by the segment's higher operating ratio.2019 quarter. Retail segment earnings decreased $193increased $566 million, or 12.2%40.6%, from $1.6 billion in the 2017 period to $1.4 billion in the 2018 period to $2.0 billion in the 2019 period. These increases primarily due to a higherreflect the lower operating cost ratio, partially offset by an improvingthe higher benefit ratio as more fully described below. As expected, the higher-than-anticipated individual Medicare Advantage membership growth during the previous Annual Election Period, or AEP, had a muted impact on the segment's earnings in the 2019 period. While new Medicare Advantage members increase revenue, on average, they have a break even impact on segment earnings in the first year as they were not previously engaged in a clinical programs or appropriately documented under the CMS risk-adjustment model, and accordingly, carry a higher benefit ratio.
Enrollment
Individual Medicare Advantage membership increased 194,400508,700 members, or 6.8%16.7%, from September 30, 20172018 to September 30, 2018,2019, primarily due to membership additions associated with last year's Annualthe previous AEP and Open Election Period, or AEP,OEP, for Medicare beneficiaries. The OEP sales period, which ran from January 1 to March 31, added approximately 43,700 members. Since March 31, 2019, enrollment has continued to increase due to strong sales to age-ins and those eligible for Dual Eligible Special Need Plans, or D-SNP. Individual Medicare Advantage membership includes 280,700 D-SNP members as of September 30, 2019, a net increase of 69,300, or 32.8%, from 211,400 as of September 30, 2018.
Group Medicare Advantage membership increased 58,400,27,100, or 13.3%5.5%, from September 30, 20172018 to September 30, 2018,2019, primarily due to increased sales to our existing group accounts during last year'snet membership additions associated with the previous AEP for Medicare beneficiaries.
Medicare stand-alone PDP membership decreased 275,000636,100 members, or 5.2%12.7%, from September 30, 20172018 to September 30, 20182019 reflecting net declines during last year'sthe previous AEP for Medicare beneficiaries. These anticipated declines were primarily resulted from the previously disclosed loss of auto assigned members in Florida and South Carolina due to pricing over CMS low income benchmark and continued membership declines in our Enhanced Plan. In addition, growth in our co-branded Walmart plan was significantly lower than historical levels due to the introductioncompetitive nature of additional low-priced competitor offeringsthe industry and the pricing discipline we have employed, which resulted in many regions.us no longer being the low cost plan in any market for 2019.
State-based Medicaid membership decreased 39,600increased 145,200 members, or 10.9%44.8%, from September 30, 20172018 to September 30, 2018,2019, primarily driven by the previously disclosed decision to not participatestatewide award of a comprehensive contract under the Managed Medical Assistance, or MMA, program in Illinois' Integrated Program Medicaid contract, along with lower membership associated with our Florida Medicaid contract due to overall strengthening economic conditions.Florida.
Premiums Revenue
Retail segment premiums increased $1.0$2.0 billion, or 9.2%16.6%, from the 20172018 quarter to the 20182019 quarter and increased $2.4$6.0 billion, or 7.2%16.6%, from the 20172018 period to the 20182019 period primarily due to individual and group
Medicare Advantage membership growth in last year's AEPand higher per member premiums, as well as increased per-member premiums for certain products within the segment,state-based contracts membership. These favorable items were partially offset by declinesthe decline in the state-based contracts andmembership in our stand-alone PDP revenues resulting from membership declines discussed above. Average group and individual Medicare Advantage membership increased 7.6% for the 2018 quarter and 7.5% for the 2018 period. Average membership is calculated by summing the ending membership for each month in a period and dividing the result by the number of months in a period. Premiums revenue reflects changes in membership and average per-member premiums. Items impacting average per-member premiums include changes in premium rates as well as changes in the geographic mix of membership, the mix of product offerings, and the mix of benefit plans selected by our membership.offerings.
Benefits Expense
The Retail segment benefit ratio decreased 110increased 270 basis points from 84.3% in the 2017 quarter to 83.2% in the 2018 quarter to 85.9% in the 2019 quarter primarily due to the reinstatementsuspension of the health insurance industry fee in 20182019 which was contemplated in the pricing and benefit design of our products, the significant unfavorable impact in the 2019 quarter of weekday seasonality, lower favorable prior-period medical claims reserve development, as well as the shift in Medicare membership mix due to the loss of stand-alone PDP members and higher prior-period reserve development.the significant growth in Medicare Advantage members. These itemsincreases were partially offset by engaging our Medicare Advantage members in clinical programs as well as ensuring they are appropriately documented under the CMS risk-adjustment model, and lower than expected medical costs as compared to the assumptions used in the pricing of our individual Medicare Advantage business for 2019. The Retail segment benefit ratio increased 100 basis points from 85.4% in the 2018 period to 86.4% in the 2019 period, primarily reflecting the same factors that affected the 2019 quarter described above, but excluding the impact of weekday seasonality. These factors were partially offset by the unfavorable impact from the enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage segment earnings. The Retail segment decreased 70 basis points from 86.1%a less severe flu season in the 2017 period to 85.4% in the 2018 period due to the same factors impacting the quarter comparison, excluding the impact of the favorable prior-period reserve development. The 2018 period was also impacted by a more severe flu season.2019 period.
The Retail segment’ssegment's benefits expense for the 20182019 quarter included $120$55 million in favorable prior-period medical claims reserve development versus $52$120 million in the 20172018 quarter. For the 20182019 period, the Retail segment’s benefitbenefits expense includeincludes the beneficial effect of $367$366 million in favorable prior-period medical claims reserve development versus $339$367 million in the 20172018 period. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 40 basis points in the 2019 quarter versus approximately 100 basis points in the 2018 quarter versus approximately 50 basis points in the 2017 quarter. Favorable prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 90 basis points in the 2019 period versus approximately 100 basis points in both the 2018 period and the 2017 period.
Operating Costs
The Retail segment operating cost ratio of 9.3% for the 2019 quarter decreased 190 basis points from 11.2% for the 2018 quarter increased 140 basis points from 9.8% for the 2017 quarter. The Retail segment operating cost ratio of 8.7% for the 2019 period decreased 180 basis points from 10.5% for the 2018 period increased 160 basis points from 8.9% forperiod. These decreases primarily were due to the 2017 period. The year-over-year comparison was negatively impacted by the reinstatementsuspension of the health insurance industry fee in 2018,2019, as well as scale efficiencies associated with growth in our Medicare Advantage membership, and significant operating costs efficiencies in 2019 driven by previously implemented productivity initiatives. These decreases were partially offset by the strategic investments made in our integrated care delivery model and the 2018 quarterimpact of higher compensation expense accruals in 2019 for the AIP as a result of the Tax Reform Law, and an increase in incentive compensation costs under the expanded program noted previously, resulting fromour continued strong performance by the company. These items were partially offset by significant operating cost efficiencies in the 2018 quarter and period driven by productivity initiatives implemented in 2017.performance. The non-deductible health insurance industry fee impacted the operating cost ratio by 190 basis points in both the 2018 quarter and the 2018 period.
Group and Specialty Segment
| | | September 30, | | Change | September 30, | | Change |
| 2018 | | 2017 | | Members | | Percentage | 2019 | | 2018 | | Members | | Percentage |
Membership: | | | | | | | | | | | | | | |
Medical membership: | | | | | | | | | | | | | | |
Fully-insured commercial group | 1,029,100 |
| | 1,098,800 |
| | (69,700 | ) | | (6.3 | )% | 927,400 |
| | 1,029,100 |
| | (101,700 | ) | | (9.9 | )% |
ASO | 449,900 |
| | 445,700 |
| | 4,200 |
| | 0.9 | % | 516,800 |
| | 449,900 |
| | 66,900 |
| | 14.9 | % |
Military services | 5,927,400 |
| | 3,099,000 |
|
| 2,828,400 |
|
| 91.3 | % | 5,998,700 |
| | 5,927,400 |
|
| 71,300 |
|
| 1.2 | % |
Total group and specialty medical members | 7,406,400 |
| | 4,643,500 |
| | 2,762,900 |
| | 59.5 | % | 7,442,900 |
| | 7,406,400 |
| | 36,500 |
| | 0.5 | % |
Specialty membership (a) | 6,116,300 |
| | 6,934,000 |
| | (817,700 | ) | | (11.8 | )% | 5,411,400 |
| | 6,116,300 |
| | (704,900 | ) | | (11.5 | )% |
| |
(a) | Specialty products include dental, vision, voluntary benefit products and other supplemental health and financial protection products.health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products. |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | For the three months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Premiums and Services Revenue: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Fully-insured commercial group | $ | 1,345 |
| | $ | 1,370 |
| | $ | (25 | ) | | (1.8 | )% | $ | 1,278 |
| | $ | 1,345 |
| | $ | (67 | ) | | (5.0 | )% |
Group specialty | 325 |
| | 331 |
| | (6 | ) | | (1.8 | )% | 400 |
| | 325 |
| | 75 |
| | 23.1 | % |
Total premiums | 1,670 |
| | 1,701 |
| | (31 | ) | | (1.8 | )% | 1,678 |
| | 1,670 |
| | 8 |
| | 0.5 | % |
Services | 215 |
| | 140 |
| | 75 |
| | 53.6 | % | 200 |
| | 215 |
| | (15 | ) | | (7.0 | )% |
Total premiums and services revenue | $ | 1,885 |
| | $ | 1,841 |
| | $ | 44 |
| | 2.4 | % | $ | 1,878 |
| | $ | 1,885 |
| | $ | (7 | ) | | (0.4 | )% |
Segment earnings | $ | 81 |
| | $ | 93 |
| | $ | (12 | ) | | (12.9 | )% | $ | 4 |
| | $ | 81 |
| | $ | (77 | ) | | (95.1 | )% |
Benefit ratio | 80.7 | % | | 79.6 | % | | | | 1.1 | % | 86.3 | % | | 80.7 | % | | | | 5.6 | % |
Operating cost ratio | 23.6 | % | | 20.9 | % | | | | 2.7 | % | 21.9 | % | | 23.6 | % | | | | (1.7 | )% |
| | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, | | Change | For the nine months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Premiums and Services Revenue: | | | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | | |
Fully-insured commercial group | $ | 4,083 |
| | $ | 4,098 |
| | $ | (15 | ) | | (0.4 | )% | $ | 3,873 |
| | $ | 4,083 |
| | $ | (210 | ) | | (5.1 | )% |
Group specialty | 1,014 |
| | 976 |
| | 38 |
| | 3.9 | % | 1,160 |
| | 1,014 |
| | 146 |
| | 14.4 | % |
Total premiums | 5,097 |
| | 5,074 |
| | 23 |
| | 0.5 | % | 5,033 |
| | 5,097 |
| | (64 | ) | | (1.3 | )% |
Services | 642 |
| | 444 |
| | 198 |
| | 44.6 | % | 587 |
| | 642 |
| | (55 | ) | | (8.6 | )% |
Total premiums and services revenue | $ | 5,739 |
| | $ | 5,518 |
| | $ | 221 |
| | 4.0 | % | $ | 5,620 |
| | $ | 5,739 |
| | $ | (119 | ) | | (2.1 | )% |
Segment earnings | $ | 372 |
| | $ | 365 |
| | $ | 7 |
| | 1.9 | % | $ | 174 |
| | $ | 372 |
| | $ | (198 | ) | | (53.2 | )% |
Benefit ratio | 78.0 | % | | 77.9 | % | | | | 0.1 | % | 83.0 | % | | 78.0 | % | | | | 5.0 | % |
Operating cost ratio | 23.6 | % | | 21.3 | % | | | | 2.3 | % | 21.9 | % | | 23.6 | % | | | | (1.7 | )% |
Segment Earnings
Group and Specialty segment earnings decreased $12$77 million, or 12.9%95.1%, from $93 million in the 2017 quarter to $81 million in the 2018 quarter primarily reflectingto $4 million in the impact of the segment's higher benefit ratio, partially offset by higher pretax earnings associated with our military services business, which was favorably impacted by the timing of certain contractual incentives and adjustments.2019 quarter. Group and Specialty segment earnings increased $7decreased $198 million, or 1.9%53.2%, from $365 million in the 2017 period to $372 million in the 2018 period to $174 million in the 2019 period. These decreases were primarily reflectingdue to a higher pretax earnings associatedbenefit ratio, along with our group ASO commercial medical business, as well as higher year-over-year earnings in ourlower military services business which was favorablyearnings. Earnings comparisons related to the military services business were unfavorably impacted by the timingreceipt of certain contractual incentives and adjustments.adjustments in 2018 related to the previous TRICARE contract which did not recur in 2019. These increasesdecreases were partially offset by slightly higher segment benefit ratio.the improvement in the operating cost ratio as more fully described below.
Enrollment
Fully-insured commercial group medical membership decreased 69,700101,700 members, or 6.3%9.9%, from September 30, 20172018 to September 30, 20182019 primarily reflecting lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products in 2018.2019, as well as the loss of certain large group accounts due to the competitive pricing environment. The portion of group fully-insured commercial medical membership in small group accounts (2-99 sized employer groups) was approximately 62 percent60% at September 30, 20182019 and 64 percent62% at September 30, 2017.2018.
Group ASO commercial medical membership increased 4,20066,900 members, or 0.9%14.9%, from September 30, 20172018 to September 30, 20182019 reflecting more small group accounts selecting level-funded ASO products in 2018,2019, partially offset by the loss of certain large group accounts as a result of continued discipline in pricing of services for self-funded accounts amid a highly competitive environment.
Military services membership increased2,828,400 71,300 members, or 91.3%1.2%, from September 30, 20172018 to September 30, 2018 primarily due to our transition to providing healthcare services to2019. Membership includes military service members, retirees, and their families to whom the company provides healthcare services under the newcurrent T2017 TRICARE East Region contract. The current contract, coveringwhich covers 32 states, which became effective on January 1, 2018.
Specialty membership decreased 817,700704,900 members, or 11.8%11.5%, from September 30, 20172018 to September 30, 20182019 primarily due to reinsuring a portionthe loss of our voluntary benefits and financial protection products membership to a third party in connection with the previously disclosed sale of KMG, as well as the losses of some largecertain group accounts, including one jumbo account, offering stand-alone dental and vision products. These decreases were partially offset by an increase in individual dental and vision membership.
Premiums Revenue
Group and Specialty segment premiums were relatively unchanged increasing $8 million, or 0.5%, from the 2018 quarter to $1.7 billion for the 2019 quarter. Group and Specialty segment premiums decreased $31$64 million, or 1.8%1.3%, from the 2017 quarter2018 period to $1.7$5.0 billion for the 2018 quarter2019 period, primarily due to reinsuringa decline in our voluntary benefitsfully-insured group commercial and financial protection products to a third party in connection with the previously disclosed sale of KMG, and declines in average group fully-insured commercial medical membership,specialty membership. This decrease was partially offset by higher stop-loss premiumsrevenues related to our small group level fundedlevel-funded ASO accounts andresulting from membership growth in this product, higher per-memberper member premiums across most lines ofthe fully-insured business, and lower unfavorable commercial risk adjustment, or CRA, payable estimate in the segment. Group and Specialty segment premiums increased $23 million, or 0.5%, from the 2017 period2019 as compared to $5.1 billion for the 2018, period primarily due towhich resulted in higher stop-loss premiums related to our small group level funded accounts and higher per-member premiums across most lines of business in the segment, partially offset by declines in average group fully-insured commercial medical membership as well as reinsuringrevenues. The 2019 period was further negatively impacted by the exit of our voluntary benefitsbenefit and financial protection products to a third party in connection with the previously disclosed sale of KMG.
KMG in 2018.Services Revenue
Group and Specialty segment services revenue increased $75decreased $15 million, or 53.6%7.0%, from the 20172018 quarter to $215$200 million for the 20182019 quarter and increased $198decreased $55 million, or 44.6%8.6%, from the 20172018 period to $642$587 million for the 20182019 period as a result of the transitionprimarily due to the TRICARE T2017 East Region contract on January 1, 2018, along with the favorable impact of the timing of certain contractual incentives and adjustments.adjustments related to the previous TRICARE contract received in 2018, which did not recur in 2019.
Benefits Expense
The Group and Specialty segment benefit ratio increased 110560 basis points from 79.6% in the 2017 quarter to 80.7% in the 2018 quarter primarily due to retroactive contractual rate adjustments, membership mix, including the continued migration of healthier groups to level funded ASO products in 2018, the unfavorable impact of seasonality on our fully-insured medical claims, as well as lower favorable prior-period reserve development. These factors were partially offset by the reinstatement of the health insurance industry fee in 2018 which was contemplated86.3% in the pricing of our products.2019 quarter. The Group and Specialty segment benefit ratio increased 10500 basis points from 77.9% in the 2017 period to 78.0% in the 2018 period primarily due the same factorsto 83.0% in the year-over-year2019 period. These increases primarily were due to the significant unfavorable impact in the 2019 quarter comparisonof weekday seasonality, the suspension of the health insurance industry fee in 2019 which was contemplated in the pricing and benefit design of our products, as well as the meaningful impact of lower premiumsthe continued migration of fully-insured group members to level-funded ASO products in 2019 resulting in a membership mix transformation. In addition, the impact of adjustments to dental network contracted rates resulting from dental network re-contracting and expansion to position the business for the future, and lower prior-period medical claims reserve development unfavorably impacted the 2019 quarter and period ratio. These items were partially offset by the smaller unfavorable premium adjustment ofin 2019 as compared to 2018 related to our commercial risk adjustment, or CRA accrual related toassociated with the Affordable Care Act, or ACA, compliantACA-compliant business resulting fromas a result of the release of the CMS's final 20172018 CRA data.
The Group and Specialty segment's benefits expense included $7$1 million in the 2018 quarter in favorable prior-period medical claims reserve development in the 2019 quarter versus $13$7 million in the 20172018 quarter. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 10 basis points in the 2019 quarter and approximately 40 basis points in the 2018 quarter and 80 basis points in the 2017 quarter. The Group and Specialty segment's benefits expense included the beneficial effect of aan unfavorable prior-period medical claims reserve development of $35 million in the 2019 period versus favorable prior-period medical claims reserve development of $41 million in the 2018 period versus $44 million in the 2017 period. This favorableThe unfavorable prior-period medical claims reserve development decreasedfor the 2019 period increased the Group and Specialty segment benefit ratio by approximately 8070 basis points inand the favorable prior-period medical claims reserve development for the 2018 period decreased the Group and 90Specialty segment benefit ratio 80 basis points in the 2017 period.points.
Operating Costs
The Group and Specialty segment operating cost ratio of 21.9% for the 2019 quarter decreased 170 basis points from 23.6% for the 2018 quarter increased 270 basis points from 20.9% for the 2017 quarter. For the 20182019 period, the Group and Specialty segment operating cost ratio of 23.6% increased 23021.9% decreased 170 basis points from 21.3%23.6% for the 20172018 period. These increasesdecreases primarily were due to the reinstatementsuspension of the health insurance industry fee in 2019, as well as significant operating cost efficiencies in the 2019 quarter driven by previously implemented productivity initiatives. These improvements were offset by the higher compensation expense accruals in 2019 for the AIP as a result of our continued strong performance. The 2019 period was further impacted by the exit of our voluntary benefit and financial protection products in connection with the sale of KMG in 2018, growth in our military services business, which carriescarried a higher operating cost ratio than other products within the segment, as a result of the transition to the TRICARE T2017 East Region contract, investments made in the 2018 quarter as a result of the Tax Reform Law as previously described, and an increase in incentive compensation costs under the expanded program noted previously, resulting from the continued strong performance by the company. These items were partially offset by significant operating cost efficiencies driven by productivity initiatives implemented in 2017.ratio. The non-
non-deductibledeductible health insurance industry fee impacted the operating cost ratio by 160 basis points in both the 2018 quarter and the 2018 period.
Healthcare Services Segment
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | For the three months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Revenues: | | | | | | | | | | | | | | |
Services: | | | | | | | | | | | | | | |
Provider services | $ | 70 |
| | $ | 21 |
| | $ | 49 |
| | 233.3 | % | $ | 104 |
| | $ | 70 |
| | $ | 34 |
| | 48.6 | % |
Pharmacy solutions | 52 |
| | 20 |
| | 32 |
| | 160.0 | % | 53 |
| | 52 |
| | 1 |
| | 1.9 | % |
Clinical care services | 43 |
| | 39 |
| | 4 |
| | 10.3 | % | 32 |
| | 43 |
| | (11 | ) | | (25.6 | )% |
Total services revenues | 165 |
| | 80 |
| | 85 |
| | 106.3 | % | 189 |
| | 165 |
| | 24 |
| | 14.5 | % |
Intersegment revenues: | | | | | | | | | | | | | | |
Pharmacy solutions | 5,092 |
| | 5,246 |
| | (154 | ) | | (2.9 | )% | 5,673 |
| | 5,092 |
| | 581 |
| | 11.4 | % |
Provider services | 537 |
| | 392 |
| | 145 |
| | 37.0 | % | 591 |
| | 537 |
| | 54 |
| | 10.1 | % |
Clinical care services | 161 |
|
| 273 |
|
| (112 | ) |
| (41.0 | )% | 149 |
|
| 161 |
|
| (12 | ) |
| (7.5 | )% |
Total intersegment revenues | 5,790 |
| | 5,911 |
| | (121 | ) | | (2.0 | )% | 6,413 |
| | 5,790 |
| | 623 |
| | 10.8 | % |
Total services and intersegment revenues | $ | 5,955 |
| | $ | 5,991 |
| | $ | (36 | ) | | (0.6 | )% | $ | 6,602 |
| | $ | 5,955 |
| | $ | 647 |
| | 10.9 | % |
Segment earnings | $ | 215 |
| | $ | 240 |
| | $ | (25 | ) | | (10.4 | )% | $ | 212 |
| | $ | 215 |
| | $ | (3 | ) | | (1.4 | )% |
Operating cost ratio | 96.1 | % | | 95.6 | % | | | | 0.5 | % | 96.2 | % | | 96.1 | % | | | | 0.1 | % |
| | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, | | Change | For the nine months ended September 30, | | Change |
| 2018 | | 2017 | | Dollars | | Percentage | 2019 | | 2018 | | Dollars | | Percentage |
| (in millions) | | | (in millions) | | |
Revenues: | | | | | | | | | | | | | | |
Services: | | | | | | | | | | | | | | |
Provider services | $ | 158 |
| | $ | 58 |
| | $ | 100 |
| | 172.4 | % | $ | 265 |
| | $ | 158 |
| | $ | 107 |
| | 67.7 | % |
Pharmacy solutions | 148 |
| | 58 |
| | 90 |
| | 155.2 | % | 134 |
| | 148 |
| | (14 | ) | | (9.5 | )% |
Clinical care services | 132 |
| | 135 |
| | (3 | ) | | (2.2 | )% | 103 |
| | 132 |
| | (29 | ) | | (22.0 | )% |
Total services revenues | 438 |
| | 251 |
| | 187 |
| | 74.5 | % | 502 |
| | 438 |
| | 64 |
| | 14.6 | % |
Intersegment revenues: | | |
|
| | | | | | |
|
| | | | |
Pharmacy solutions | 15,181 |
| | 15,581 |
| | (400 | ) | | (2.6 | )% | 16,335 |
| | 15,181 |
| | 1,154 |
| | 7.6 | % |
Provider services | 1,456 |
| | 1,207 |
| | 249 |
| | 20.6 | % | 1,792 |
| | 1,456 |
| | 336 |
| | 23.1 | % |
Clinical care services | 511 |
| | 876 |
| | (365 | ) | | (41.7 | )% | 457 |
| | 511 |
| | (54 | ) | | (10.6 | )% |
Total intersegment revenues | 17,148 |
| | 17,664 |
| | (516 | ) | | (2.9 | )% | 18,584 |
| | 17,148 |
| | 1,436 |
| | 8.4 | % |
Total services and intersegment revenues | $ | 17,586 |
| | $ | 17,915 |
| | $ | (329 | ) | | (1.8 | )% | $ | 19,086 |
| | $ | 17,586 |
| | $ | 1,500 |
| | 8.5 | % |
Segment earnings | $ | 594 |
| | $ | 754 |
| | $ | (160 | ) | | (21.2 | )% | $ | 611 |
| | $ | 594 |
| | $ | 17 |
| | 2.9 | % |
Operating cost ratio | 96.2 | % | | 95.4 | % | | | | 0.8 | % | 96.3 | % | | 96.2 | % | | | | 0.1 | % |
Segment Earnings
Healthcare Services segment earnings of $215$212 million for the 20182019 quarter decreased $25was relatively unchanged, decreasing $3 million, or 10.4%1.4%, from $240$215 million in the 20172018 quarter. The decrease primarily resulted from
additional investments in clinical assets associated with our provider services business and slightly lower earnings from Kindred at Home operations. These declines were partially offset by higher earnings from our pharmacy operations and the improvement in core operating results from the provider services business year over year. For the 20182019 period, the Healthcare Services segment earnings of $594
$611 million decreased $160increased $17 million, or 21.2%2.9%, from $754$594 million in the 20172018 period. These decreasesThis increase was primarily were due to the impact of the optimization processhigher earnings from our pharmacy and clinical care services operations and 2019 earnings from Kindred at Home operations. These factors were partially offset by additional investments in new clinical assets associated with our chronic care management programs, as well as the investments made in the 2018 quarter and period as a result of the Tax Reform Law as previously described, partially offset by the impact of Kindred at Home.provider services business.
Script Volume
Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 116 million in the 2019 quarter, up 5.5%, versus scripts of approximately 110 million in the 2018 quarter, up 1.6%, versus scripts of approximately 108 million in the 2017 quarter. For the 20182019 period, script volumes increased to approximately 328339 million, up 1.5%3.4%, versus scripts of approximately 323328 million in the 20172018 period. These increases primarily reflectedreflect growth associated with higher individual Medicare Advantage membership, partially offset by the decline in stand-alone PDP and Individual Commercial membership.
Services Revenues
Services revenues increased $85$24 million, or 106.3%14.5%, from the 20172018 quarter to $165$189 million for the 20182019 quarter and increased $187$64 million, or 74.5%14.6%, from the 20172018 period to $438$502 million for the 20182019 period primarily due to service revenue growth from our provider services and pharmacy solutions businesses.business.
Intersegment Revenues
Intersegment revenues decreased $121increased $623 million, or 2.0%10.8%, from the 20172018 quarter to $5.8$6.4 billion for the 20182019 quarter and decreased $516 million,increased $1.4 billion, or 2.9%8.4%, from the 20172018 period to $17.1$18.6 billion for the 2018 period2019 period. These increases primarily were due to strong Medicare Advantage membership growth, partially offset by the loss of intersegment revenues associated with our exit from the Individual commercial business, a decline in pharmacy solutions revenue year-over-year primarily due to lower stand-alone PDP membership, the result of improving the effectiveness of our chronic care management programs previously discussed, and the impact to our provider services business of the lower Medicare rates year-over-year in geographies where our provider assets are primarily located. These declines were partially offsetmembership. The 2019 period was further impacted by Medicare Advantage membership growth in both the 2018 quarter and period, as well as higher intersegment revenues associated with our provider services business reflecting ourthe previously disclosed acquisition of MCCI Holdings, LLC.and FPG.
Operating Costs
The Healthcare Services segment operating cost ratio of 96.1%96.2% and 96.3% for the 2018 quarter increased 50 basis points from 95.6% for the 20172019 quarter and increased 80 basis pointsperiod, respectively, were relatively unchanged from 95.4% for the 2017 period to96.1% and 96.2% for the 2018 period primarily due to the lag in operating cost reduction associated with improving the effectiveness of our chronic conditions management programs, as compared to the timing of reduction in revenue, the long-term sustainability investments in the 2018 quarter and period, as a result of the Tax Reform Law, and an increase in incentive compensation costs under the expanded program noted previously, resulting from continued strong performance by the company. These items were partially offset by significant operating cost efficiencies in the 2018 quarter and period driven by productivity initiatives implemented in 2017.
Individual Commercial Segment
Individual Commercial segment earnings of $5 million for the 2018 quarter decreased $21 million from the 2017 quarter and decreased $131 million from the 2017 period. The segment earnings in the 2018 quarter and period primarily reflects the impact of favorable prior-period reserve development.respectively.
Liquidity
Historically, our primary sources of cash have included receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities, borrowings, and proceeds from sales of businesses.borrowings. Our primary uses of cash historically have included disbursements for claims payments, operating costs, interest on borrowings, taxes, purchases of investment securities, acquisitions, capital expenditures, repayments on borrowings, dividends, and share repurchases. Because premiums generally are collected in advance of
claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. From period to period, our cash flows may also be affected by the timing of working capital items including premiums receivable, benefits payable, and other receivables and payables. Our cash flows are impacted by the timing of payments to and receipts from CMS associated with Medicare Part D subsidies for which we do not assume risk. The use of cash flows may be limited by regulatory requirements of state departments of insurance (or comparable state regulators) which require, among other items, that our regulated subsidiaries maintain minimum levels of capital and seek approval before paying dividends from the subsidiaries to the parent. Our use of cash flows derived from our non-insurance subsidiaries, such as in our Healthcare Services segment, is generally not restricted by state departments of insurance (or comparable state regulators).
For additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our 20172018 Form 10-K.
Cash and cash equivalents increased to approximately $4.1$5.5 billion at September 30, 20182019 from $4.0$2.3 billion at December 31, 2017.2018. The change in cash and cash equivalents for the nine months ended September 30, 20182019 and 20172018 is summarized as follows:
| | | Nine Months Ended | Nine Months Ended |
| 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Net cash provided by operating activities | $ | 2,506 |
| | $ | 6,962 |
| $ | 4,772 |
| | $ | 2,506 |
|
Net cash used in investing activities | (2,640 | ) | | (1,776 | ) | (477 | ) | | (2,640 | ) |
Net cash provided by financing activities | 234 |
| | 802 |
| |
Net cash (used in) provided by financing activities | | (1,111 | ) | | 234 |
|
Increase in cash and cash equivalents | $ | 100 |
| | $ | 5,988 |
| $ | 3,184 |
| | $ | 100 |
|
Cash Flow from Operating Activities
Our operating cash flowsflow for the 20172019 period were significantly impactedreflects the significant impact of increasing premiums and enrollment, as premiums generally are collected in advance of claim payments by the early receipta period of the Medicare premium remittances of $3.1 billion in September 2017 because the payment date of October 1, 2017 fell on a weekend. Generally, when the first day of a month falls on a weekend or holiday, with the exception of January 1 (New Year's Day), we receive this payment at the end of the previous month.up to several months. Our operating cash flowsflow for the 2019 period further improved from the 2018 period were negatively impacted byfrom the timing of working capital changes, higher earnings, and the impact of an approximately $245 million payment related to reinsuring certain voluntary benefit and financial protection products to a third party in connection with the sale of KMG. Our operating cash flows for the 2017 period were also significantly impacted by the receipt of the $1 billion Merger Agreement break-up fee. Excluding the effects of the reinsurance transactions, Merger termination fee and the timing of the Medicare premium remittances, our operating cash flows were primarily impacted by earnings and the timing of working capital items, including the timing of Medicare risk adjustment payments.KMG in 2018.
The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables.
The detail of benefits payable was as follows at September 30, 20182019 and December 31, 2017:2018:
| | | September 30, 2018 | | December 31, 2017 | | 2018 Period Change | | 2017 Period Change | September 30, 2019 | | December 31, 2018 | | 2019 Period Change | | 2018 Period Change |
| (in millions) | (in millions) |
IBNR (1) | $ | 3,299 |
| | $ | 3,154 |
| | $ | 145 |
| | $ | (114 | ) | $ | 4,017 |
| | $ | 3,361 |
| | $ | 656 |
| | $ | 145 |
|
Reported claims in process (2) | 783 |
| | 614 |
| | 169 |
| | 44 |
| 1,084 |
| | 617 |
| | 467 |
| | 169 |
|
Other benefits payable (3) | 938 |
| | 900 |
| | 38 |
| | 466 |
| 1,119 |
| | 884 |
| | 235 |
| | 38 |
|
Total benefits payable | $ | 5,020 |
| | $ | 4,668 |
| | $ | 352 |
| | $ | 396 |
| $ | 6,220 |
| | $ | 4,862 |
| | $ | 1,358 |
| | $ | 352 |
|
Payables from divestiture | | | | | 58 |
| | — |
| | | | | — |
| | 58 |
|
Change in benefits payable per cash flow statement resulting in cash from operations | | | | | $ | 410 |
| | $ | 396 |
| | | | | $ | 1,358 |
| | $ | 410 |
|
| |
(1) | IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received and processed (i.e. a shorter time span results in a lower IBNR). IBNR includes unprocessed claims inventories. |
| |
(2) | Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff. |
| |
(3) | Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements. |
The increase in benefits payable from December 31, 2018 to September 30, 2019 and from December 31, 2017 to September 30, 2018 primarily was due to an increase in IBNR primarily as a result of Medicare Advantage membership growth, as well as an increase in the amount of processed but unpaid claims which fluctuate due to month-end cutoff as well as an increase in IBNR, primarily as a result of Medicare Advantage membership growth.cutoff. The increase in benefits payable from December 31, 20162018 to September 30, 2017 primarily2019 was due toalso impacted by an increase in the amounts owed to providers under the capitated and risk sharing arrangements. This was partially offset by a decrease in IBNR primarily driven by declines in individual commercial medical membership in the 2017 period, partially offset by an increase in group Medicare Advantage membership.
The detail of total net receivables was as follows at September 30, 20182019 and December 31, 2017:2018:
| | | September 30, 2018 | | December 31, 2017 | | 2018 Period Change | | 2017 Period Change | September 30, 2019 | | December 31, 2018 | | 2019 Period Change | | 2018 Period Change |
| (in millions) | (in millions) |
Medicare | $ | 744 |
| | $ | 511 |
| | $ | 233 |
| | $ | (293 | ) | $ | 638 |
| | $ | 836 |
| | $ | (198 | ) | | $ | 233 |
|
Commercial and other | 292 |
| | 273 |
| | 19 |
| | (138 | ) | 152 |
| | 135 |
| | 17 |
| | 19 |
|
Military services | 118 |
| | 166 |
| | (48 | ) | | 44 |
| 131 |
| | 123 |
| | 8 |
| | (48 | ) |
Allowance for doubtful accounts | (92 | ) | | (96 | ) | | 4 |
| | 29 |
| (73 | ) | | (79 | ) | | 6 |
| | 4 |
|
Total net receivables | $ | 1,062 |
| | $ | 854 |
| | $ | 208 |
| | $ | (358 | ) | $ | 848 |
| | $ | 1,015 |
| | $ | (167 | ) | | $ | 208 |
|
Reconciliation to cash flow statement: | | | | | | | | | | | | | | |
Disposition of receivables from sale of business | | | | | 3 |
| | — |
| |
Receivables from acquisition of business | | | | | | (12 | ) | | 3 |
|
Change in receivables per cash flow statement resulting in cash from operations | | | | | $ | 211 |
| | $ | (358 | ) | | | | | $ | (179 | ) | | $ | 211 |
|
The changes in Medicare receivables for both the 20182019 period and the 20172018 period reflectreflects the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter.
Cash Flow from Investing Activities
Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $506 million in the 2019 period and $436 million in the 2018 period.
Net proceeds from investment securities sales and maturities in the 2019 period were $29 million and $50 million in the 2018 period.
In the third quarter of 2018, we completed the sale of our wholly-owned subsidiary KMG to CGIC. Upon closing, we funded the transaction with approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale. Total cash and cash equivalents, including parent company funding, disposed at September 30, 2018 was $805 million. See Note 3 to our condensed consolidated financial statements.
During July
Also, in the third quarter of 2018, we paid cash consideration of approximately $1.1 billion as part of the Consortium's investment in Kindred, which includes both the Kindred at Home Division and Curo Health Services businesses.
Net proceeds from investment securities sales inDuring the 2018 period, of $50 million primarily reflects actions associated with the sale of KMG described previously. In the 2017 period, we reinvested a portion of our operating cash flows in investment securities, primarily investment-grade fixed income securities, totaling $1.4 billion.
On March 1, 2018 we acquired the remaining equity interest in MCCI. The purchase price included, in part,MCCI and acquired FPG for cash consideration of $169 million and $185 million, respectively, as discussed in Note 3 to the condensed consolidated financial statements.
On April 10, 2018, we acquired Family Physicians Group, or FPG, for cash consideration of approximately $185 million.
Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $436 million in the 2018 period and $376 million in the 2017 period.
Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claims payments by $113 million in the 2019 period and $436 million duringin the 2018 period and higher than claims payments by $1.9 billion during the 2017 period.
Under our administrative services only TRICARE contracts, health care cost payments for which we do not assume risk exceeded reimbursements from the federal government by $102 million in the 2019 period and by $33 million in the 2018 period.
In August 2019, we issued $500 million of 3.125% senior notes due August 15, 2029 and $500 million of 3.950% senior notes due August 15, 2049. Our net proceeds, reduced for the 2017 period, reimbursementsunderwriters' discount and commission and offering expenses paid as of September 30, 2019 were $987 million.We used the net proceeds from this offering, together with available cash, to repay the federal government exceeded health care cost payments for which we do not assume risk by $22 million.
Claims payments associated with cost sharing provisions$650 million outstanding amount due under our term note in August 2019, and the $400 million aggregate principal amount of the Health Care Reform Law for which we do not assume risk were $25 million higher than reimbursements from HHS during the 2018 period and $41 million higher than reimbursements from HHS during the 2017 period.our 2.625% senior notes due on its maturity date of October 1, 2019.
On March 26, 2018July 31, 2019, we completed the final settlement of ourentered into an accelerated stock repurchase alongagreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. See Note 11 to our condensed consolidated financial statements. We expect final settlement under the agreement to occur during the fourth quarter of 2019.
Under a share repurchase plan authorized by the Board of Directors, we repurchased 0.68 million additional share repurchases under the current stock repurchase authorizationshares during the 2018 period for $224 million. There were no other share repurchases under share repurchase plans authorized by the Board of Directors in the 2019 period with the exception of the July 2019 ASR. We also acquired common shares in connection with employee stock plans for an aggregate cost of $10 million in the 2019 period and $70 million in the 2018 period and $79period.
Net repayments of commercial paper were $358 million in the 2017 period.
In March 2017, we issued $600 million of 3.95% senior notes due March 15, 20272019 period and $400 million of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million.
Net proceeds from the issuance of commercial paper were $240 million in the 2018 period. Repayments of commercial paper were $153 million in the 2017 period. The maximum principal amount outstanding at any one time during the 2018 period2019 quarter was $442$670 million.
We paid dividends to stockholders of $216 million during the 2019 period and $195 million during the 2018 period and $162 million during the 2017 period.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 11 to the condensed consolidated financial statements.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 11 to the condensed consolidated financial statements.
Debt
For a detailed discussion of our debt, including our senior notes, credit agreement and commercial paper program, please refer to Note 13 to the condensed consolidated financial statements.
Acquisitions and Divestitures
In the third quarter of 2018, we completed the sale of our wholly-owned subsidiary KMG to CGIC. Upon closing, we funded the transaction with approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale. Total cash and cash equivalents, including parent company funding required disposed at September 30, 2018, was $805 million. See Note 3 to our condensed consolidated financial statements.
During the 2018 period, we completed the acquisitionacquisitions of MCCI and FPG for total cash consideration of $354 million.
During July 2018 we paid cash consideration of approximately $1.1 billion as part of the Consortium's investment in Kindred, which includes both the Kindred at Home Division and Curo Health Services businesses.
For a detailed discussion of these transactions, please refer to Note 3 to the condensed consolidated financial statements.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares.
Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at September 30, 20182019 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by less than $1 million, up to a maximum 100 basis points, or annual interest expense by $3 million.
In addition, we operate as a holding company in a highly regulated industry. Humana Inc., our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were $1.0$1.7 billion at September 30, 20182019 compared to $688$578 million at December 31, 2017.2018. This increase primarily was due to insurance subsidiary dividends in excess of capital contributions from our parent company as well as operating cash derived from our non-insurance subsidiaries during the 2018 period.subsidiary earnings, borrowings under senior notes, and other working capital changes. These itemsincreases were partially offset by the completionnet repayment of the Kindred at Home acquisition, as well as the acquisitionscommercial paper borrowings, repayment of MCCIshort term debt and FPG,senior notes, share repurchases, capital expenditures, subsidiaries capital contributions, and cash dividends and capital expenditures.to shareholders. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by departments of insurance (or comparable state regulator).
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, or ordinary dividends, is limited based on the entity’s level of statutory income and statutory capital and surplus. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an extraordinary dividend requiring prior regulatory approval. In most states, prior notification is provided before paying a dividend even if approval is not required.
Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of June 30, 2018,2019, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $6.6$7.6 billion, which exceeded aggregate minimum regulatory requirements of $5.3$5.7 billion. Subsidiary dividends are subject to state regulatory approval, the amount and timing of which could be reduced or delayed. The amount of dividends paid to our parent company was approximately $1.4 billion during the nine months ended September 30, 2019 compared to $1.9 billion during the nine months ended September 30, 2018 compared to $1.4 billion during the nine months ended September 30, 2017.2018. Actual dividends paid may vary year over year due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.
Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AA+AA at September 30, 2018.2019. Our net unrealized position decreased $467increased $447 million from a net unrealized loss position of $204 million at December 31, 2018 to a net unrealized gain position of $198 million at December 31, 2017 to a net unrealized loss position of $269$243 million at September 30, 2018.2019. At September 30, 2018,2019, we had gross unrealized losses of $273$10 million on our investment portfolio primarily due to an increase in market interest rates since the time the securities were purchased. There were no material other-than-temporary impairments during the nine months ended September 30, 2018.2019. While we believe that these impairments are temporary and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or other-than-temporary impairments may be recorded in future periods.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately 2.42.3 years as of September 30, 20182019 and approximately 4.12.9 years as of December 31, 2017.2018. The decline in the average duration is reflective of the longer duration securities associated with the sale of KMG. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $356 million at September 30, 2018.2019.
Item 4. Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended September 30, 2018.2019.
Based on our evaluation, our CEO, CFO, and our Principal Accounting Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 20182019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
For a description of the legal proceedings pending against us and certain other pending or threatened litigation, investigations, or other matters, see “Legal Proceedings and Certain Regulatory Matters” in Note 14 to the condensed consolidated financial statements beginning on page 31 of this Form 10-Q.
Item 1A. Risk Factors
There have been no changes to the risk factors included in our 20172018 Form 10-K.
| |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
| |
(c) | The following table provides information about our purchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2018:2019: |
|
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1)(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) | | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 2018 | — |
| | $ | — |
| | — |
| | $ | 1,976,514,548 |
|
August 2018 | 65,300 |
| | 325.00 |
| | 65,300 |
| | 1,955,292,156 |
|
September 2018 | 532,624 |
| | 335.96 |
| | 532,624 |
| | 1,776,354,011 |
|
Total | 597,924 |
| | $ | 334.76 |
| | 597,924 |
| | |
|
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1)(2) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) | | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 2019 | — |
| | $ | — |
| | — |
| | $ | 3,000,000,000 |
|
August 2019 | 2,695,872 |
| | 296.75 |
| | 2,695,872 |
| | 2,000,000,000 |
|
September 2019 | — |
| | — |
| | — |
| | 2,000,000,000 |
|
Total | 2,695,872 |
| | $ | — |
| | 2,695,872 |
| | |
| |
(1) | On December 14, 2017, ourJuly 30, 2019, the Board of Directors authorized thereplaced a previous share repurchase authorization of up to $3.0$3 billion (of which approximately $1.03 billion remained unused) with a new authorization for repurchases of up to $3 billion of our common shares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans. Underplans, expiring on June 30, 2022. On July 31, 2019, we entered into an accelerated stock repurchase agreement, the current shareJuly 2019 ASR, with Citibank, N.A., or Citi, to repurchase authorization,$1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We recorded the payment to Citi as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 2.7 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi pending final settlement of the agreement. The final number of shares that we may receive, or be purchased from timerequired to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1remit, under the Securities Exchange Actagreement, will be determined based on the daily volume-weighted average share price of 1934, as amended, or in privately-negotiated transactions (includingour common stock over the term of the July 2019 ASR, less a discount and subject to adjustments pursuant to accelerated share repurchase agreements with investment bankers), subjectthe terms and conditions of the July 2019 ASR. We expect final settlement under the July 2019 ASR to certain regulatory restrictions on volume, pricing, and timing. Our remaining repurchase authorization was approximately $1.8 billion asoccur during the fourth quarter of November 6, 2018.2019. |
| |
(2) | Excludes 0.26 million35,000 shares repurchased in connection with employee stock plans. |
| |
Item 3: | Defaults Upon Senior Securities |
None.
| |
Item 4: | Mine Safety Disclosures |
Not applicable.
None.
Item 6: Exhibits
|
| |
3(i) | Restated Certificate of Incorporation of Humana Inc. filed with the Secretary of State of Delaware on November 9, 1989, as restated to incorporate the amendment of January 9, 1992, and the correction of March 23, 1992 (incorporated herein by reference to Exhibit 4(i) to Humana Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994). |
| By-Laws of Humana Inc., as amended on December 14, 2017 (incorporated herein by reference to Exhibit 3(b) to Humana Inc.’s Current Report on Form 8-K, filed December 14, 2017). |
| Amendment No. 2, dated as of August 16, 2018, to the Amended and Restated Employment Agreement between Humana Inc. and Bruce D. Broussard, dated as of February 27, 2014 (incorporated herein by reference to Exhibit 10.1 to Humana Inc.'s Current Report on Form 8-K, filed August 20, 2018).Executive Incentive Compensation Plan, effective January 1, 2020. |
| Humana Inc. Change in Control Policy, effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.2 to Humana Inc.'s Current Report on Form 8-K, filed August 20, 2018). |
| Humana Inc. Executive Severance Policy, effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.3 to Humana Inc.'s Current Report on Form 8-K, filed August 20, 2018). |
| Principal Executive Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002. |
| Principal Financial Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002. |
| Principal Executive Officer and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following materials from Humana Inc.'s Quarterly Report on Form 10-Q formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 20182019 and December 31, 2017;2018; (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 20182019 and 2017;2018; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20182019 and 2017;2018; (iv) the Consolidated Statements of Equity for the three and nine months ended September 30, 2019 and 2018; (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20182019 and 2017;2018; and (v)(vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
104 | Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | HUMANA INC. |
| | (Registrant) |
| | | |
Date: | November 7, 20186, 2019 | By: | /s/ CYNTHIA H. ZIPPERLE |
| | | Cynthia H. Zipperle |
| | | Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) |
| | | |