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hum:State
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
|
|
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
|
|
|
$
|
—
|
|
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
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
|
|
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
|
|
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.
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.
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
|
|
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.
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.
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.
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
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
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,
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
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.
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
|
|
|
—
|
|
|
—
|
|
|