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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
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.
(Exact name of registrant as specified in its charter)
 
Delaware
 
61-0647538
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
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      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      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.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
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  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class of Common Stock
Outstanding at March 31, 2020
$0.16 2/3 par value
132,206,069 shares



Humana Inc.
FORM 10-Q
MARCH 31, 2020
INDEX
 
 
Page
Part I: Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
Certifications
 





Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2020
 
December 31,
2019
 
(in millions, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,054

 
$
4,054

Investment securities
11,104

 
10,972

Receivables, less allowance for doubtful accounts of $73 in 2020
and $69 in 2019
2,009

 
1,056

Other current assets
5,384

 
3,806

Total current assets
24,551

 
19,888

Property and equipment, net
2,023

 
1,955

Long-term investment securities
393

 
406

Equity method investments
1,093

 
1,063

Goodwill
4,443

 
3,928

Other long-term assets
2,130

 
1,834

Total assets
$
34,633

 
$
29,074

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Benefits payable
$
7,090

 
$
6,004

Trade accounts payable and accrued expenses
5,399

 
3,754

Book overdraft
169

 
225

Unearned revenues
274

 
247

Short-term debt
1,898

 
699

Total current liabilities
14,830

 
10,929

Long-term debt
6,057

 
4,967

Future policy benefits payable
205

 
206

Other long-term liabilities
1,186

 
935

Total liabilities
22,278

 
17,037

Commitments and contingencies (Note 13)

 

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;
198,629,992 shares issued at March 31, 2020 and December 31, 2019
33

 
33

Capital in excess of par value
2,857

 
2,820

Retained earnings
17,871

 
17,483

Accumulated other comprehensive income
48

 
156

Treasury stock, at cost, 66,423,923 shares at March 31, 2020 and
66,524,771 shares at December 31, 2019
(8,454
)
 
(8,455
)
Total stockholders’ equity
12,355

 
12,037

Total liabilities and stockholders’ equity
$
34,633

 
$
29,074

See accompanying notes to condensed consolidated financial statements.

3


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three months ended
March 31,
 
2020
 
2019
 
(in millions, except per share results)
Revenues:
 
 
 
Premiums
$
18,362

 
$
15,651

Services
424

 
355

Investment income
149

 
101

Total revenues
18,935

 
16,107

Operating expenses:
 
 
 
Benefits
15,629

 
13,493

Operating costs
2,117

 
1,660

Depreciation and amortization
115

 
107

Total operating expenses
17,861

 
15,260

Income from operations
1,074

 
847

Interest expense
60

 
62

Other expense, net
297

 
39

Income before income taxes and equity in net earnings
717

 
746

Provision for income taxes
252

 
183

Equity in net earnings
8

 
3

Net income
$
473

 
$
566

Basic earnings per common share
$
3.58

 
$
4.18

Diluted earnings per common share
$
3.56

 
$
4.16

See accompanying notes to condensed consolidated financial statements.

4


Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
March 31,
 
2020
 
2019
 
(in millions)
Net income
$
473

 
$
566

Other comprehensive income:
 
 
 
Change in gross unrealized investment
gains/losses
(92
)
 
196

Effect of income taxes
22

 
(45
)
Total change in unrealized
investment gains/losses, net of tax
(70
)
 
151

Reclassification adjustment for net
realized gains
(45
)
 

Effect of income taxes
10

 

Total reclassification adjustment, net
of tax
(35
)
 

Other comprehensive (loss) income, net of tax
(105
)
 
151

Comprehensive loss attributable to equity method investments
(3
)
 
(2
)
Comprehensive income
$
365

 
$
715


See accompanying notes to condensed consolidated financial statements.

5



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
 
Issued
Shares

Amount


(dollars in millions, share amounts in thousands)
Three months ended March 31, 2020
Balances, December 31, 2019
198,630

 
$
33

 
$
2,820

 
$
17,483

 
$
156

 
$
(8,455
)
 
$
12,037

Net income

 

 

 
473

 

 

 
473

Impact of adopting ASC 326 -
Current expected credit loss
standard (CECL)
 
 
 
 
 
 
(2
)
 
 
 
 
 
(2
)
Other comprehensive loss


 


 


 


 
(108
)
 


 
(108
)
Common stock repurchases

 

 

 


 

 
(17
)
 
(17
)
Dividends and dividend
equivalents

 

 

 
(83
)
 


 

 
(83
)
Stock-based compensation

 

 
36

 

 

 


 
36

Restricted stock unit vesting

 

 
(6
)
 


 

 
6

 

Stock option exercises

 

 
7

 

 

 
12

 
19

Balances, March 31, 2020
198,630

 
$
33

 
$
2,857

 
$
17,871

 
$
48

 
$
(8,454
)
 
$
12,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
Balances, December 31, 2018
198,595

 
$
33

 
$
2,535

 
$
15,072

 
$
(159
)
 
$
(7,320
)
 
$
10,161

Net income

 

 

 
566

 

 

 
566

Other comprehensive income


 


 


 


 
149

 


 
149

Common stock repurchases

 

 
150

 


 

 
(160
)
 
(10
)
Dividends and dividend
equivalents

 

 

 
(75
)
 


 

 
(75
)
Stock-based compensation

 

 
33

 

 

 


 
33

Restricted stock unit vesting

 

 
(13
)
 


 

 
13

 

Stock option exercises

 

 
17

 

 

 

 
17

Balances, March 31, 2019
198,595

 
$
33

 
$
2,722

 
$
15,563

 
$
(10
)
 
$
(7,467
)
 
$
10,841

See accompanying notes to condensed consolidated financial statements.


 
 
 
 
 
 
 
 
 
 
 
 
 
 


6



Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the three months ended
March 31,
 
2020
 
2019
 
(in millions)
Cash flows from operating activities
 
 
 
Net income
$
473

 
$
566

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Net realized capital (gains) losses
(49
)
 
2

Equity in net earnings
(8
)
 
(3
)
Stock-based compensation
36

 
33

Depreciation
124

 
118

Amortization
21

 
18

Benefit for deferred income taxes
(3
)
 
(21
)
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
 
 
 
Receivables
(953
)
 
(940
)
Other assets
(1,470
)
 
(102
)
Benefits payable
1,086

 
1,162

Other liabilities
1,203

 
16

Unearned revenues
27

 
29

Other
(13
)
 
18

Net cash provided by operating activities
474

 
896

Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
(709
)
 

Purchases of property and equipment
(192
)
 
(139
)
Purchases of investment securities
(2,459
)
 
(2,175
)
Maturities of investment securities
735

 
397

Proceeds from sales of investment securities
1,415

 
2,062

Net cash (used in) provided by investing activities
(1,210
)
 
145

Cash flows from financing activities
 
 
 
Receipts from contract deposits, net
574

 
554

Proceeds from issuance of senior notes, net
1,090

 

Proceeds from issuance of commercial paper, net
198

 
17

Proceeds from term loan
1,000

 

Change in book overdraft
(55
)
 
(17
)
Common stock repurchases
(17
)
 
(10
)
Dividends paid
(73
)
 
(68
)
Proceeds from stock option exercises and other, net
19

 
17

Net cash provided by financing activities
2,736

 
493

Increase in cash and cash equivalents
2,000

 
1,534

Cash and cash equivalents at beginning of period
4,054

 
2,343

Cash and cash equivalents at end of period
$
6,054

 
$
3,877

Supplemental cash flow disclosures:
 
 
 
Interest payments
$
40

 
$
29

Income tax refunds, net
$
(6
)
 
$
(22
)

See accompanying notes to condensed consolidated financial statements.

7



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, 2019, that was filed with the Securities and Exchange Commission, or the SEC, on February 20, 2020. We refer to the Form 10-K as the “2019 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, 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 2019 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.
COVID-19
The emergence of stay-at-home and physical distancing orders and other restrictions on movement and economic activity intended to reduce the spread of the novel coronavirus, or COVID-19, during the second half of March 2020 has impacted our business. During this short period of time, we experienced lower hospital admissions and utilization as members and providers began to defer non-essential procedures. We also saw an increase in pharmacy costs as a result of us allowing early prescription refills to permit members to prepare for extended supply needs as well as COVID-19 specific administrative costs, including a $50 million contribution to the Humana Foundation to promote its COVID-19 relief efforts in the communities served by Humana. Taken together, the net impact of COVID-19 was not material to the results of our operations during the first quarter of 2020.
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 2019 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 14 for disaggregation of revenue by segment and type.
At March 31, 2020, accounts receivable related to services were $141 million. For the three months ended March 31, 2020, 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 March 31, 2020.
For the three months ended March 31, 2020, 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.

8



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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 the fee resumed in calendar year 2020. The Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, permanently repealed the health insurance industry fee beginning in calendar year 2021.
In September 2020, we expect to pay the federal government $1.2 billion for the annual health insurance industry fee attributed to calendar year 2020. 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 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 the deferred cost was recorded in operating cost expense of approximately $306 million for the three months ended March 31, 2020 resulting from the amortization of the 2020 annual health insurance industry fee.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 was effective for us beginning January 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 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 primarily of available for sale debt securities. We adopted the new standard effective January 1, 2020. Due to the high concentration of our financial assets measured at amortized cost being with the federal government resulting in zero nonpayment risk as well as our available for sale debt securities primarily being in an unrealized gain position, the adoption of the new standard 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 2022, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements. 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.

9



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

3. ACQUISITIONS AND DIVESTITURES
On January 31, 2020, we purchased privately held Enclara Healthcare, or Enclara, one of the nation’s largest hospice pharmacy and benefit management providers for cash consideration of approximately $709 million, net of cash received. This resulted in a preliminary purchase price allocation to goodwill of $515 million, other intangible assets of $240 million, and net tangible liabilities assumed of $11 million. The goodwill was assigned to the Healthcare Services segment. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 11.4 years. The purchase price allocation is preliminary, subject to completion of valuation analysis, including for example, refining assumptions used to calculate the fair value of intangible assets.
On February 1, 2020, our Partners in Primary Care wholly-owned subsidiary entered into a strategic partnership with Welsh, Carson, Anderson & Stowe, or WCAS, to accelerate the expansion of our primary care model. The WCAS partnership is expected to open approximately 50 payor-agnostic, senior-focused primary care centers over 3 years beginning in 2020. Partners in Primary Care committed to the acquisition of a non-controlling interest in the approximately $600 million entity accounted for under the equity method of accounting. In addition, the agreement includes a series of put and call options through which WCAS may require us to purchase their interest in the entity, and through which we may acquire WCAS’s interest, over the next 5 to 10 years.
During 2019, we 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 acquired in 2020 and 2019 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 2020 and 2019 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.

10



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 March 31, 2020 and December 31, 2019, respectively:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in millions)
March 31, 2020
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
394

 
$
4

 
$

 
$
398

Mortgage-backed securities
3,438

 
160

 
(1
)
 
3,597

Tax-exempt municipal securities
1,549

 
16

 
(12
)
 
1,553

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
834

 
16

 
(28
)
 
822

Asset-backed securities
1,126

 
1

 
(46
)
 
1,081

Corporate debt securities
4,082

 
48

 
(84
)
 
4,046

Total debt securities
$
11,423

 
$
245

 
$
(171
)
 
$
11,497

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
$
353

 
$
1

 
$

 
$
354

Mortgage-backed securities
3,628

 
85

 
(3
)
 
3,710

Tax-exempt municipal securities
1,433

 
30

 

 
1,463

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
786

 
18

 

 
804

Asset-backed securities
1,093

 
3

 
(3
)
 
1,093

Corporate debt securities
3,867

 
82

 
(2
)
 
3,947

Total debt securities
$
11,160

 
$
219

 
$
(8
)
 
$
11,371


We also held $7 million of equity securities consisting of common stock carried at fair value as of December 31, 2019.

11



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 March 31, 2020 and December 31, 2019, 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)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
2

 
$

 
$

 
$

 
$
2

 
$

Mortgage-backed
securities
67

 
(1
)
 
1

 

 
68

 
(1
)
Tax-exempt municipal
securities
309

 
(10
)
 
176

 
(2
)
 
485

 
(12
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
198

 
(15
)
 
131

 
(13
)
 
329

 
(28
)
Asset-backed securities
144

 
(5
)
 
891

 
(41
)
 
1,035

 
(46
)
Corporate debt securities
1,453

 
(55
)
 
710

 
(29
)
 
2,163

 
(84
)
Total debt securities
$
2,173

 
$
(86
)
 
$
1,909

 
$
(85
)
 
$
4,082

 
$
(171
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S.
government corporations
and agencies:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
obligations
$
48

 
$

 
$
23

 
$

 
$
71

 
$

Mortgage-backed
securities
315

 
(1
)
 
204

 
(2
)
 
519

 
(3
)
Tax-exempt municipal
securities
58

 

 
75

 

 
133

 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Commercial
118

 

 
36

 

 
154

 

Asset-backed securities
20

 

 
607

 
(3
)
 
627

 
(3
)
Corporate debt securities
589

 
(2
)
 
155

 

 
744

 
(2
)
Total debt securities
$
1,148

 
$
(3
)
 
$
1,100

 
$
(5
)
 
$
2,248

 
$
(8
)

Approximately 96% of our debt securities were investment-grade quality, with a weighted average credit rating of AA by Standard & Poor's Rating Service, or S&P, at March 31, 2020. 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 1% of our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types.

12



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Our unrealized losses from all securities were generated from approximately 450 positions out of a total of approximately 1,500 positions at March 31, 2020. All issuers of securities we own that were trading at an unrealized loss at March 31, 2020 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 March 31, 2020, 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. Additionally, we did not record any material credit allowances for securities that were in an unrealized loss position at March 31, 2020.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three months ended March 31, 2020 and 2019:
 
Three months ended
March 31,
 
2020
 
2019
 
(in millions)
Gross realized gains
$
56

 
$
10

Gross realized losses
(7
)
 
(12
)
Net realized capital gains (losses)
$
49

 
$
(2
)

There were no material other-than-temporary impairments for the three months ended March 31, 2019.
The contractual maturities of debt securities available for sale at March 31, 2020, 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
$
1,337

 
$
1,339

Due after one year through five years
1,918

 
1,905

Due after five years through ten years
1,750

 
1,736

Due after ten years
1,020

 
1,017

Mortgage and asset-backed securities
5,398

 
5,500

Total debt securities
$
11,423

 
$
11,497



13



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at March 31, 2020 and December 31, 2019, 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)
March 31, 2020
 
 
 
 
 
 
 
Cash equivalents
$
5,857

 
$
5,857

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
398

 

 
398

 

Mortgage-backed securities
3,597

 

 
3,597

 

Tax-exempt municipal securities
1,553

 

 
1,553

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
822

 

 
822

 

Asset-backed securities
1,081

 

 
1,081

 

Corporate debt securities
4,046

 

 
4,046

 

Total debt securities
11,497

 

 
11,497

 

Total invested assets
$
17,354

 
$
5,857

 
$
11,497

 
$

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Cash equivalents
$
3,660

 
$
3,660

 
$

 
$

Debt securities:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government
corporations and agencies:
 
 
 
 
 
 
 
U.S. Treasury and agency obligations
354

 

 
354

 

Mortgage-backed securities
3,710

 

 
3,710

 

Tax-exempt municipal securities
1,463

 

 
1,463

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Commercial
804

 

 
804

 

Asset-backed securities
1,093

 

 
1,093

 

Corporate debt securities
3,947

 

 
3,947

 

Total debt securities
11,371

 

 
11,371

 

Common stock
7

 
7

 

 

Total invested assets
$
15,038

 
$
3,667

 
$
11,371

 
$





14



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 $6,455 million at March 31, 2020 and $5,366 million at December 31, 2019. The fair value of our senior notes debt was $6,841 million at March 31, 2020 and $5,916 million at December 31, 2019. The fair value of our senior note 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 term note and commercial paper borrowings. The term loan outstanding and commercial paper borrowings were $1,500 million as of March 31, 2020. The commercial paper borrowings were $300 million as of December 31, 2019.
Put and Call Options Measured at Fair Value
As part of our investment in Kindred at Home, we entered into a shareholders agreement with TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, the Sponsors, that provides 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 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 put and call options, which are exercisable at a fixed EBITDA multiple and provide a minimum return on the Sponsor's investment if exercised, are measured at fair value each period using a Monte Carlo simulation.
The put and call options fair values were $137 million and $368 million, respectively, at March 31, 2020, and $28 million and $557 million, respectively, at December 31, 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.

The significant unobservable inputs utilized in these Level 3 fair value measurements (and selected values) include the enterprise value of Kindred at Home, annualized volatility and secured credit rate. Enterprise value was derived from a discounted cash flow model, which utilized significant unobservable inputs for long-term net operating profit after tax margin, or NOPAT, to measure underlying cash flows, weighted average cost of capital and long term growth rate. The table below presents the assumptions used for each reporting period.

 
March 31, 2020
December 31, 2019
Annualized volatility
28.0
%
19.8
%
Secured credit rate
4.1
%
2.2
%
NOPAT
12.0
%
12.0
%
Weighted average cost of capital
10.5
%
10.0
%
Long term growth rate
3.0
%
3.0
%


The calculation of NOPAT utilized net income plus after tax interest expense. We regularly evaluate each of the assumptions used in establishing these assets and liabilities. Significant changes in assumptions for weighted average cost of capital, long term growth rates, NOPAT, volatility, credit spreads, risk free rate, and underlying cash flow estimates, could result in significantly lower or higher fair value measurements. A change in one of these assumptions is not necessarily accompanied by a change in another assumption.

Other Assets and Liabilities Measured at Fair Value

As disclosed in Note 3, we acquired Enclara during 2020. 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 net tangible liabilities assumed were recorded at their carrying values as of the date of acquisition, as their carrying values

15



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in this acquisition 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 this acquisition, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 2020.
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 2019 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at March 31, 2020 and December 31, 2019. 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.
 
March 31, 2020
 
December 31, 2019
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
Risk
Corridor
Settlement
 
CMS
Subsidies/
Discounts
 
(in millions)
Other current assets
$
59

 
$
894

 
$
5

 
$
585

Trade accounts payable and accrued expenses
(148
)
 
(1,241
)
 
(120
)
 
(356
)
Net current (liability) asset
(89
)
 
(347
)
 
(115
)
 
229

Other long-term assets
183

 

 
6

 

Other long-term liabilities
(130
)
 

 
(61
)
 

Net long-term asset (liability)
53

 

 
(55
)
 

Total net (liability) asset
$
(36
)
 
$
(347
)
 
$
(170
)
 
$
229


7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for our reportable segments for the three months ended March 31, 2020 were as follows:
 
Retail
 
Group and Specialty
 
Healthcare
Services
 
Total
 
(in millions)
Balance at January 1, 2020
$
1,535

 
$
261

 
$
2,132

 
$
3,928

Acquisitions

 

 
515

 
515

Balance at March 31, 2020
$
1,535

 
$
261

 
$
2,647

 
$
4,443



16



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 March 31, 2020 and December 31, 2019.
 
 
 
March 31, 2020
 
December 31, 2019
 
Weighted
Average
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
 
 
 
($ in millions)
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer contracts/
relationships
9.5 years
 
$
849

 
$
514

 
$
335

 
$
646

 
$
496

 
$
150

Trade names and
technology
7.0 years
 
121

 
85

 
36

 
84

 
84

 

Provider contracts
11.8 years
 
70

 
46

 
24

 
70

 
44

 
26

Noncompetes and
other
7.3 years
 
29

 
28

 
1

 
29

 
28

 
1

Total other intangible
assets
9.3 years
 
$
1,069

 
$
673

 
$
396

 
$
829

 
$
652

 
$
177


Amortization expense for other intangible assets was approximately $21 million for the three months ended March 31, 2020 and $18 million for the three months ended March 31, 2019. The following table presents our estimate of amortization expense remaining for 2020 and each of the five next succeeding years:
 
(in millions)
For the years ending December 31,
 
2020
$
67

2021
56

2022
53

2023
40

2024
33

2025
33



17



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

8. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, was as follows for the three months ended March 31, 2020 and 2019:
 
 
For the three months ended March 31,
 
 
2020
 
2019
 
 
(in millions)
Balances, beginning of period
 
$
6,004

 
$
4,862

Less: Reinsurance recoverables
 
(68
)
 
(95
)
Balances, beginning of period, net
 
5,936

 
4,767

Incurred related to:
 
 
 
 
Current year
 
15,913

 
13,760

Prior years
 
(284
)
 
(267
)
Total incurred
 
15,629

 
13,493

Paid related to:
 
 
 
 
Current year
 
(10,205
)
 
(8,725
)
Prior years
 
(4,280
)
 
(3,595
)
Total paid
 
(14,485
)
 
(12,320
)
Reinsurance recoverable
 
10

 
84

Balances, end of period
 
$
7,090

 
$
6,024


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.
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail and Group and Specialty segments as of March 31, 2020 and 2019, 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.









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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Retail Segment
Activity in benefits payable for our Retail segment was as follows for the three months ended March 31, 2020 and 2019:
 
 
For the three months ended March 31,
 
 
2020
 
2019
 
 
(in millions)
Balances, beginning of period
 
$
5,363

 
$
4,338

Less: Reinsurance recoverables
 
(68
)
 
(95
)
Balances, beginning of period, net
 
5,295

 
4,243

Incurred related to:
 
 
 
 
Current year
 
14,698

 
12,606

Prior years
 
(238
)
 
(283
)
Total incurred
 
14,460

 
12,323

Paid related to:
 
 
 
 
Current year
 
(9,490
)
 
(8,032
)
Prior years
 
(3,778
)
 
(3,133
)
Total paid
 
(13,268
)
 
(11,165
)
Reinsurance recoverable
 
10

 
84

Balances, end of period
 
$
6,497

 
$
5,485


At March 31, 2020, benefits payable for our Retail segment included IBNR of approximately $4.4 billion, primarily associated with claims incurred in 2019.
Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, was as follows for the three months ended March 31, 2020 and 2019:
 
 
For the three months ended March 31,
 
 
2020
 
2019
 
 
(in millions)
Balances, beginning of period
 
$
641

 
$
517

Incurred related to:
 
 
 
 
Current year
 
1,357

 
1,271

Prior years
 
(46
)
 
16

Total incurred
 
1,311

 
1,287

Paid related to:
 
 
 
 
Current year
 
(857
)
 
(803
)
Prior years
 
(502
)
 
(462
)
Total paid
 
(1,359
)
 
(1,265
)
Balances, end of period
 
$
593

 
$
539


At March 31, 2020, benefits payable for our Group and Specialty segment included IBNR of approximately $528 million, primarily associated with claims incurred in 2019.

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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
 
 
 
March 31,
 
 
2020
 
Net outstanding liabilities
(in millions)
 
Retail
$
6,487

 
Group and Specialty
593

 
    Benefits payable, net of reinsurance
7,080

 
 
 
 
Reinsurance recoverable on unpaid claims
 
 
Retail
10

 
     Total benefits payable, gross
$
7,090


9. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three months ended March 31, 2020 and 2019:
 
Three months ended March 31,
 
2020
 
2019
 
(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders
$
473

 
$
566

Weighted average outstanding shares of common stock
used to compute basic earnings per common share
132,135

 
135,383

Dilutive effect of:
 
 
 
Employee stock options
92

 
130

Restricted stock
584

 
449

Shares used to compute diluted earnings per common share
132,811

 
135,962

Basic earnings per common share
$
3.58

 
$
4.18

Diluted earnings per common share
$
3.56

 
$
4.16

Number of antidilutive stock options and restricted stock
excluded from computation
660

 
703



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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

10. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 2019 and 2020 under our Board approved quarterly cash dividend policy:
Record
Date
 
Payment
Date
 
Amount
per Share
 
Total
Amount
 
 
 
 
 
 
(in millions)
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

2020 payments
 
 
 
 
 
 
12/31/2019
 
1/31/2020
 
$
0.55

 
$
73

3/31/2020
 
4/24/2020
 
$
0.625

 
$
83


In April 2020, the Board declared a cash dividend of $0.625 per share payable on July 31, 2020, to stockholders of record on June 30, 2020.
Stock Repurchases
Our Board of Directors may authorize the purchase of our common stock 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 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 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 July 2019 ASR. Upon final settlement of the July 2019 ASR on December 26, 2019, we received an additional 0.7 million shares as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement, less a discount, of $296.19, bringing the total shares received under the July 2019 ASR to 3.4 million. In addition, upon settlement we reclassified the $200 million value of stock initially held back by Citi from capital in excess of par value to treasury stock.
Our remaining repurchase authorization was approximately $2 billion of the $3 billion share repurchase program as of April 28, 2020.
In connection with employee stock plans, we acquired 0.04 million common shares for $17 million and 0.03 million common shares for $10 million during the three months ended March 31, 2020 and 2019, respectively.


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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

11. INCOME TAXES
The effective income tax rate was 34.8% for the three months ended March 31, 2020, compared to 24.4% for the three months ended March 31, 2019, primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020.
12.  DEBT
The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(in millions)
Short-term debt:
 
 
 
Commercial paper
$
500

 
$
300

Term note
1,000

 

Senior notes:

 
 
$400 million, 2.50% due December 15, 2020
398

 
399

Total short-term debt
$
1,898

 
$
699

 
 
 
 
Long-term debt:
 
 
 
Senior notes:
 
 
 
  $600 million, 3.15% due December 1, 2022
$
598

 
$
598

  $400 million, 2.90% due December 15, 2022
398

 
397

  $600 million, 3.85% due October 1, 2024
597

 
597

  $600 million, 4.50% due April 1, 2025
594

 

  $600 million, 3.95% due March 15, 2027
596

 
595

  $500 million, 3.125% due August 15, 2029
495

 
495

  $500 million, 4.875% due April 1, 2030
494

 

  $250 million, 8.15% due June 15, 2038
262

 
262

  $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

 
492

   Total long-term debt
$
6,057

 
$
4,967


Senior Notes    
In March 2020, we issued $600 million of 4.500% senior notes due April 1, 2025 and $500 million of 4.875% senior notes due April 1, 2030. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid, were approximately $1,090 million. We intend to use the net proceeds for general corporate purposes, which may include the repayment of existing indebtedness.
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.

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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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. If drawn upon, the revolving credit would revert to using the alternative base rate once LIBOR is discontinued. 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.
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 39% as measured in accordance with the credit agreement as of March 31, 2020. 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 million incremental loan facility.
At March 31, 2020, we had no borrowings and no letters of credit outstanding under the credit agreement. Accordingly, as of March 31, 2020, we had $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 three months ended March 31, 2020 was $600 million, with $500 million outstanding at March 31, 2020 compared to $300 million outstanding at December 31, 2019. The outstanding commercial paper at March 31, 2020 had a weighted average annual interest rate of 2%.
Term Note
In February 2020, we entered into a new $1 billion term loan commitment with a bank that matures 1 year after the first draw, subject to a 1 year extension. In March 2020, we made a draw on the entire term loan commitment of $1 billion. The facility fee, interest rate and financial covenants are consistent with those of our revolving credit agreement. There is no prepayment penalty.
13. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare products, which accounted for approximately 83% of our total premiums and services revenue for the three months ended March 31, 2020, 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 2020, and all of our product offerings for 2020 have been approved.

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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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 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.
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 2019, 25% of the risk score was calculated from claims data submitted through EDS. CMS increased that percentage to 50% in 2020 and will increase that percentage to 75% in 2021. 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 and 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 program, or Medicare FFS. We refer to the process of accounting for errors in FFS claims as the "FFS 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 certain of our Medicare Advantage 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

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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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 believe that the Proposed Rule fails to address adequately the statutory requirement of actuarial equivalence, and have provided substantive comments to CMS on the Proposed Rule as part of the notice-and-comment rulemaking process. Whether, and to what extent, CMS finalizes the Proposed Rule, and 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.

We 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 appealed 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.
At March 31, 2020, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the three months ended March 31, 2020, 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 6 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.
Our state-based Medicaid business accounted for approximately 5% of our total premiums and services revenue for the three months ended March 31, 2020. 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

25



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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.
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 continue to vigorously defend against these 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. On April 27, 2020, the U.S. Supreme Court ruled that the government is obligated to pay the losses under this risk corridor program, and that Congress did not impliedly repeal the obligation under its appropriations riders.  As such, we will continue to seek payments owed to us. 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 March 31, 2020. 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.
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,

26



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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. Under 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.
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 nonperformance 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.
14. SEGMENT INFORMATION
We manage our business with three reportable segments: Retail, Group and Specialty, and Healthcare Services. 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

27



Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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 and the strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers.
Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy 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-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 billion and $3.1 billion for the three months ended March 31, 2020 and 2019, 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 $30 million and $29 million for the three months ended March 31, 2020 and 2019, 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 2019 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 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.

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Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Our segment results were as follows for the three months ended March 31, 2020 and 2019:
 
Retail
 
Group and Specialty
 
Healthcare
Services
 
Eliminations/
Corporate
 
Consolidated
Three months ended March 31, 2020
(in millions)
External revenues
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
Individual Medicare Advantage
$
12,794

 
$

 
$

 
$

 
$
12,794

Group Medicare Advantage
2,011

 

 

 

 
2,011

Medicare stand-alone PDP
755

 

 

 

 
755

Total Medicare
15,560

 

 

 

 
15,560

Fully-insured
163

 
1,229

 

 

 
1,392

Specialty

 
429