Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nyse  >  Humana Inc.    HUM

HUMANA INC.

(HUM)
  Report
Delayed Quote. Delayed Nyse - 03/27 04:10:00 pm
297.07 USD   -2.43%
07:44aHUMANA : to Waive Medical Costs Related to Coronavirus Treatment
DJ
07:04aHUMANA : to Waive Medical Costs Related to Coronavirus Treatment
BU
03/30HUMANA : Ex-dividend day for
FA
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
News SummaryMost relevantAll newsPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

HUMANA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

share with twitter share with LinkedIn share with facebook
share via e-mail
02/20/2020 | 03:55pm EDT
For discussion of 2017 items and year-over-year comparisons between 2018 and
2017 that are not included in this 2019 Form 10-K, refer to "Item 7. -
Management Discussion and Analysis of Financial Condition and Results of
Operations" found in our Form 10-K for the year ended December 31, 2018, that
was filed with the Securities and Exchange Commission on February 21, 2019.
Executive Overview
General
Humana Inc., headquartered in Louisville, Kentucky, is a leading health and
well-being company committed to helping our millions of medical and specialty
members achieve their best health. Our successful history in care delivery and
health plan administration is helping us create a new kind of integrated care
with the power to improve health and well­being and lower costs. Our efforts are
leading to a better quality of life for people with Medicare, families,
individuals, military service personnel, and communities at large. To accomplish
that, we support physicians and other health care professionals as they work to
deliver the right care in the right place for their patients, our members. Our
range of clinical capabilities, resources and tools, such as in­home care,
behavioral health, pharmacy services, data analytics and wellness solutions,
combine to produce a simplified experience that makes health care easier to
navigate and more effective.
Our industry relies on two key statistics to measure performance. The benefit
ratio, which is computed by taking total benefits expense as a percentage of
premiums revenue, represents a statistic used to measure underwriting
profitability. The operating cost ratio, which is computed by taking total
operating costs, excluding Merger termination fee and related costs, net, and
depreciation and amortization, as a percentage of total revenue less investment
income, represents a statistic used to measure administrative spending
efficiency.
Business Segments
We manage our business with three reportable segments: Retail, Group and
Specialty, and Healthcare Services. Beginning January 1, 2018, we exited the
individual commercial fully-insured medical health insurance business, as well
as certain other business in 2018, and therefore no longer report separately the
Individual Commercial segment and the Other Businesses category in the current
year. Previously, the Other Businesses category included businesses that were
not individually reportable because they did not meet the quantitative
thresholds required by generally accepted accounting principles, primarily our
closed-block of commercial long-term care insurance policies which were sold in
2018. The reportable segments are based on a combination of the type of health
plan customer and adjacent businesses centered on well-being solutions for our
health plans and other customers, as described below. These segment groupings
are consistent with information used by our Chief Executive Officer, the chief
operating decision maker, to assess performance and allocate resources. See Note
18 to the consolidated financial statements included in Item 8. - Financial
Statements and Supplementary Data for segment financial information.
The Retail segment consists of Medicare benefits, marketed to individuals or
directly via group Medicare accounts. In addition, the Retail segment also
includes our contract with CMS to administer the Limited Income Newly Eligible
Transition, or LI-NET, prescription drug plan program and contracts with various
states to provide Medicaid, dual eligible, and Long-Term Support Services
benefits, which we refer to collectively as our state-based contracts. The Group
and Specialty segment consists of employer group commercial fully-insured
medical and specialty health insurance benefits marketed to individuals and
employer groups, including dental, vision, and other supplemental health
benefits, as well as administrative services only, or ASO products. In addition,
our Group and Specialty segment includes our military services business,
primarily our TRICARE T2017 East Region contract. The Healthcare Services
segment includes our services offered to our health plan members as well as to
third parties, including pharmacy solutions, provider services, and clinical
care service, such as home health and other services and capabilities to promote
wellness and advance population health, including our minority investment in
Kindred at Home.
The results of each segment are measured by income before income taxes and
equity in net earnings from Kindred at Home, or segment earnings. Transactions
between reportable segments primarily consist of sales of services rendered

                                       39
--------------------------------------------------------------------------------

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.
Seasonality
One of the product offerings of our Retail segment is Medicare stand-alone
prescription drug plans, or PDPs, under the Medicare Part D program. Our
quarterly Retail segment earnings and operating cash flows are impacted by the
Medicare Part D benefit design and changes in the composition of our membership.
The Medicare Part D benefit design results in coverage that varies as a member's
cumulative out-of-pocket costs pass through successive stages of a member's plan
period, which begins annually on January 1 for renewals. These plan designs
generally result in us sharing a greater portion of the responsibility for total
prescription drug costs in the early stages and less in the latter stages. As a
result, the PDP benefit ratio generally decreases as the year progresses. In
addition, the number of low income senior members as well as year-over-year
changes in the mix of membership in our stand-alone PDP products affects the
quarterly benefit ratio pattern.

In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.


Our Group and Specialty segment also experiences seasonality in the benefit
ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in
the Retail segment, with the Group and Specialty segment's benefit ratio
increasing as fully-insured members progress through their annual deductible and
maximum out-of-pocket expenses.

Aetna Merger
On February 16, 2017, under the terms of the Agreement and Plan of Merger, or
Merger Agreement, with Aetna Inc., and certain wholly owned subsidiaries of
Aetna Inc., which we collectively refer to as Aetna, we received a breakup fee
of $1 billion from Aetna, which is included in our consolidated statement of
income in the line captioned "Merger termination fee and related costs, net."
Acquisitions and Divestitures
In the first quarter of 2020, we acquired privately held Enclara Healthcare, or
Enclara, one of the nation's largest hospice pharmacy and benefit management
providers for cash consideration of approximately $707 million, net of cash
received. The purchase accounting is incomplete due to the timing of the
availability of information.
Also in the first quarter of 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. 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 - 10
years.
In the third quarter of 2018, we completed the sale of our wholly-owned
subsidiary KMG America Corporation, or KMG, to Continental General Insurance
Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings,
Inc., a diversified holding company. KMG's subsidiary, Kanawha Insurance
Company, or KIC, included our closed block of non-strategic commercial long-term
care policies. Upon closing, we funded the transaction with

                                       40
--------------------------------------------------------------------------------

approximately $190 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $160 million of statutory capital with the sale.


Also in the third quarter of 2018, we, along with TPG Capital, or TPG, and WCAS
(together, the "Sponsors"), completed the acquisitions of Kindred and Curo,
respectively, merging Curo with the hospice business of Kindred at Home. As part
of these transactions, we acquired a 40% minority interest in Kindred at Home, a
leading home health and hospice company, for total cash consideration of
approximately $1.1 billion.

In the second quarter of 2018, we acquired Family Physicians Group, or FPG, for
cash consideration of approximately $185 million, net of cash received. FPG is
one of the largest at-risk providers serving Medicare Advantage and Managed
Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes
clinics located in Lake, Orange, Osceola and Seminole counties. The acquisition
of FPG advances our strategy of helping physicians and clinicians evolve from
treating health episodically to managing health holistically.
In the first quarter of 2018, we acquired the remaining equity interest in MCCI
Holdings, LLC, or MCCI, a privately held management service organization
headquartered in Miami, Florida, which primarily coordinates medical care for
Medicare Advantage beneficiaries in Florida and Texas. The purchase price
consisted primarily of $169 million cash, as well as our existing investment in
MCCI and a note receivable and a revolving note with an aggregate balance of
$383 million.
These transactions are more fully discussed in Note 3 and Note 4 to the
consolidated financial statements.
Highlights
•     Our 2019 results reflect the continued implementation of our strategy to

offer our members affordable health care combined with a positive consumer

experience in growing markets. At the core of this strategy is our

integrated care delivery model, which unites quality care, high member

engagement, and sophisticated data analytics. Our approach to primary,

physician-directed care for our members aims to provide quality care that

is consistent, integrated, cost-effective, and member-focused, provided by

both employed physicians and physicians with network contract arrangements.

The model is designed to improve health outcomes and affordability for

individuals and for the health system as a whole, while offering our

members a simple, seamless healthcare experience. We believe this strategy

is positioning us for long-term growth in both membership and earnings. We

offer providers a continuum of opportunities to increase the integration of

care and offer assistance to providers in transitioning from a

fee-for-service to a value-based arrangement. These include performance

bonuses, shared savings and shared risk relationships. At December 31,

2019, approximately 2,407,000 members, or 67%, of our individual Medicare

Advantage members were in value-based relationships under our integrated

care delivery model, as compared to 2,039,100 members, or 67%, at December

31, 2018. Medicare Advantage and dual demonstration program membership

enrolled in a Humana chronic care management program was 868,800 at

December 31, 2019, an increase of 21.3% from 716,000 at December 31, 2018.

These members may not be unique to each program since members have the

ability to enroll in multiple programs. The increase is driven by our

improved process for identifying and enrolling members in the appropriate

program at the right time, coupled with growth in Special Needs Plans, or

      SNP, membership.


•      On February 5, 2020, after the stock market closed, the Centers for

Medicare and Medicaid Services ("CMS") issued Part II of the 2021 Advance

Notice of Methodological Changes for Medicare Advantage Capitation Rates

and Part C and Part D Payment Policies (the "Advance Notice"). CMS has

invited public comment on the Advance Notice before publishing final rates

on April 6, 2020 (the "Final Notice").



In the Advance Notice, CMS estimates Medicare Advantage plans across the sector
will, on average, experience a 0.93 percent increase in benchmark funding based
on proposals included therein. As indicated by CMS, its estimate excludes the
impact of fee-for-service county rebasing/repricing because the related impact
is dependent upon finalization of certain data, which will be available with the
publication of the Final Notice.  Based on our preliminary analysis using the
same factors CMS included in its estimate, the components of

                                       41
--------------------------------------------------------------------------------

which are detailed on CMS' website, we anticipate that the proposals in the
Advance Notice would result in a change to our benchmark funding relatively in
line with CMS' estimate.
Also on February 5, 2020, CMS issued a proposed rule (which we refer to as the
"2021 Proposed Rule") related to the administration of the MA and Part D
programs, including, among other things, the Agency's implementation of recent
legislation removing the limitation on MA eligibility for
end-stage-renal-disease, or ESRD, Medicare-eligible beneficiaries beginning in
2021, allowing for Medicare Advantage plans to offer additional supplemental
benefits including telehealth, and addressing opioid recovery and treatment. The
2021 Proposed Rule also recognizes the potential opportunity to create new
options for beneficiaries, including ESRD beneficiaries, and their access to
care through greater flexibility around current network adequacy requirements.
CMS has invited public comments to the 2021 Proposed Rule on or before April 6,
2020.
The Advance Notice and the 2021 Proposed Rule are subject to the required notice
and comment period, and we cannot predict when or to what extent CMS will adopt
the proposals in the Advance Notice or the 2021 Proposed Rule.  We will be
drawing upon our program expertise to provide CMS formal commentary on the
impact of both the Advance Notice and the 2021 Proposed Rule and the related
impact upon Medicare beneficiaries' quality of care and service to our members
through the MA and Part D programs.

• Net income was $2.7 billion for 2019 compared to $1.7 billion in 2018 and

earnings per diluted common share increased $7.94 from $12.16 earnings per

diluted common share in 2018 to $20.10 earnings per diluted common share in

2019. This comparison was primarily impacted by higher segment earnings in

our Retail and Healthcare Services segments, partially offset by lower

Group and Specialty segment earnings. These changes were further favorably

impacted by the put/call valuation adjustments associated with our

investment in Kindred at Home and by a lower number of shares used to

compute dilutive earnings per share, primarily reflecting share

repurchases. In addition, year-over-year comparison to 2019 was impacted by

the loss on the sale of KMG of $786 million recognized in 2018.

• Contributing to our Retail segment revenue growth was our individual and

group Medicare Advantage membership, which increased 550,700 members, or

15.5%, from 3,561,800 members at December 31, 2018 to 4,112,500 members at

December 31, 2019.

• Our operating cash flow of $5.3 billion for 2019 improved from $2.2 billion

for 2018, reflecting the significant impact of increasing premiums and

enrollment, as premiums generally are collected in advance of claim

payments by a period of up to several months. The year-over-year comparison

was further impacted by the timing of other working capital changes, higher

earnings in 2019 versus 2018, and the negative impact on 2018 cash flows

resulting from the funding of reinsurance transactions in connection with

the sale of KMG.

• In July 2019, the Board of Directors approved a $3.0 billion share

repurchase authorization with an expiration date of June 30, 2022. We

subsequently entered into an agreement with a third-party financial

institution on July 31, 2019, to effect a $1.0 billion ASR program under

the authorization. Under the terms of this program, which was completed in

the fourth quarter of 2019, we repurchased approximately 3,376,200 shares

at an average price, after a discount, of $296.19. Aside from the

completion of the ASR program, we have not completed any open market stock

      repurchases. As of February 19, 2020, we had a remaining repurchase
      authorization of $2.0 billion.

• In August 2019, we issued $500 million of 3.125% senior notes due August

15, 2029, and $500 million of 3.950% senior notes due August 15, 2049. Our

net proceeds, reduced for the underwriters discount and commission and

offering expenses, were $987 million. We used the net proceeds from this

offering, together with available cash, to repay the $650 million

outstanding amount due under our term note in August 2019, and the $400

million aggregate principal amount of our 2.625% senior notes due on its

maturity date of October 1, 2019.

• In 2019 we initiated an involuntary workforce optimization program that

will allow us to promote operational excellence, accelerate our strategy,

fund critical initiatives and advance our growth objectives. As a result we

recorded estimated charges of $47 million, or $0.26 per diluted common

      share, on the corporate level, included



                                       42
--------------------------------------------------------------------------------

with operating costs in the condensed consolidated statements of income. We
expect this liability to be primarily paid within 12 months.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of the
U.S. health insurance industry. Certain significant provisions of the Health
Care Reform Law include, among others, mandated coverage requirements, mandated
benefits and guarantee issuance associated with commercial medical insurance,
rebates to policyholders based on minimum benefit ratios, adjustments to
Medicare Advantage premiums, the establishment of federally facilitated or
state-based exchanges coupled with programs designed to spread risk among
insurers, and the introduction of plan designs based on set actuarial values. In
addition, the Health Care Reform Law established insurance industry assessments,
including an annual health insurance industry fee. The annual health insurance
industry fee was suspended in 2019, but will resume for calendar year 2020, not
be deductible for income tax purposes, and significantly increase our effective
tax rate. In 2018, the fee levied on the health insurance industry was $14.3
billion. Under current law, the health industry fee will be permanently repealed
beginning in calendar year 2021.
It is reasonably possible that the Health Care Reform Law and related
regulations, as well as other current or future legislative, judicial or
regulatory changes, including restrictions on our ability to manage our provider
network or otherwise operate our business, or restrictions on profitability,
including reviews by regulatory bodies that may compare our Medicare Advantage
profitability to our non-Medicare Advantage business profitability, or compare
the profitability of various products within our Medicare Advantage business,
and require that they remain within certain ranges of each other, increases in
member benefits or changes to member eligibility criteria without corresponding
increases in premium payments to us, or increases in regulation of our
prescription drug benefit businesses, in the aggregate may have a material
adverse effect on our results of operations (including restricting revenue,
enrollment and premium growth in certain products and market segments,
restricting our ability to expand into new markets, increasing our medical and
operating costs, further lowering our Medicare payment rates and increasing our
expenses associated with assessments); our financial position (including our
ability to maintain the value of our goodwill); and our cash flows.

We intend for the discussion of our financial condition and results of
operations that follows to assist in the understanding of our financial
statements and related changes in certain key items in those financial
statements from year to year, including the primary factors that accounted for
those changes. Transactions between reportable segments primarily consist of
sales of services rendered by our Healthcare Services segment, primarily
pharmacy, provider, and clinical care services, to our Retail and Group and
Specialty segment customers and are described in Note 18 to the consolidated
financial statements included in Item 8. - Financial Statements and
Supplementary Data in this 2019 Form 10-K.

                                       43
--------------------------------------------------------------------------------

Comparison of Results of Operations for 2019 and 2018
Certain financial data on a consolidated basis and for our segments was as
follows for the years ended December 31, 2019 and 2018:
Consolidated
                                                                                  Change
                                           2019             2018          Dollars       Percentage
                                             (dollars in millions, except per
                                                  common share results)
Revenues:
Premiums:
Retail                                $    56,254$    48,108$    8,146          16.9  %
Group and Specialty                         6,694             6,803           (109 )        (1.6 )%
Individual Commercial                           -                 8             (8 )      (100.0 )%
Other Businesses                                -                22            (22 )      (100.0 )%
Total premiums                             62,948            54,941          8,007          14.6  %
Services:
Retail                                         17                11              6          54.5  %
Group and Specialty                           790               835            (45 )        (5.4 )%
Healthcare Services                           632               607             25           4.1  %
Other Businesses                                -                 4             (4 )      (100.0 )%
Total services                              1,439             1,457            (18 )        (1.2 )%
Investment income                             501               514            (13 )        (2.5 )%
Total revenues                             64,888            56,912          7,976          14.0  %
Operating expenses:
Benefits                                   53,857            45,882          7,975          17.4  %
Operating costs                             7,381             7,525           (144 )        (1.9 )%
Depreciation and amortization                 458               405             53          13.1  %
Total operating expenses                   61,696            53,812          7,884          14.7  %
Income from operations                      3,192             3,100             92           3.0  %
Loss on sale of business                        -               786           (786 )      (100.0 )%
Interest expense                              242               218             24          11.0  %
Other (income) expense, net                  (506 )              33           (539 )     (1633.3 )%
Income before income taxes and
equity in net earnings                      3,456             2,063          1,393          67.5  %
Provision for income taxes                    763               391            372          95.1  %
Equity in net earnings of Kindred
at Home                                        14                11              3          27.3  %
Net income                            $     2,707$     1,683$    1,024          60.8  %
Diluted earnings per common share     $     20.10$     12.16$     7.94          65.3  %
Benefit ratio (a)                            85.6 %            83.5 %                        2.1  %
Operating cost ratio (b)                     11.5 %            13.3 %                       (1.8 )%
Effective tax rate                           22.0 %            18.9 %                        3.1  %

(a) Represents total benefits expense as a percentage of premiums revenue.

(b) Represents total operating costs, excluding depreciation and amortization,

      as a percentage of total revenues less investment income.



                                       44
--------------------------------------------------------------------------------

Summary

Net income for 2019 was $2.7 billion, or $20.10 per diluted common share,
compared to $1.7 billion, or $12.16 per diluted common share, in 2018. This
increase primarily was impacted by our Medicare Advantage business and
Healthcare Services segment, as well as by previously implemented productivity
initiatives that led to significant operating cost efficiencies in 2019. These
impacts were partially offset by strategic investments in our integrated care
delivery model, the impact of higher compensation accruals for the Annual
Incentive Plan, or AIP, offered to employees across all levels of the company,
lower Group and Specialty segment earnings, increased spending associated with
the 2020 Medicare Annual Election Period, or AEP, and the impact of workforce
optimization. These changes were further favorably impacted by the put/call
valuation adjustments associated with our investment in Kindred at Home and by a
lower number of shares used to compute dilutive earnings per share, primarily
reflecting share repurchases. In addition, 2019 was impacted by the loss on the
sale of KMG recognized in 2018.
Premiums Revenue
Consolidated premiums increased $8.0 billion, or 14.6%, from $54.9 billion for
2018 to $62.9 billion for 2019 primarily due to higher premiums in the Retail
segment, driven by higher premium revenues from our Medicare Advantage business
resulting from membership growth and higher per member premiums associated with
individual Medicare Advantage. These increases were partially offset by the
impact of declining stand-alone PDP membership, as well as lower premiums in the
Group and Specialty segment as discussed in the detailed segment results
discussion that follows.
Services Revenue
Consolidated services revenue decreased $18 million, or 1.2%, from $1.5 billion
for 2018 to $1.4 billion for 2019, primarily due to a decrease in services
revenue in the Group and Specialty segment, partially offset by an increase in
the Healthcare Services segment as detailed in the segment results discussion
that follows.
Investment Income
Investment income was $501 million for 2019, decreasing $13 million, or 2.5%,
from 2018, primarily due to lower realized capital gains, partially offset by
higher average invested balances and interest rates.
Benefits Expense
Consolidated benefits expense was $53.9 billion for 2019, an increase of $8.0
billion, or 17.4%, from 2018 reflecting an increase in the Retail and Group and
Specialty segments benefits expense as discussed in the detailed segment results
discussion that follows. As more fully described herein under the section
entitled "Benefits Expense Recognition", 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. We
experienced favorable medical claims reserve development related to prior fiscal
years of $336 million in 2019 and $503 million in 2018.
The consolidated benefit ratio for 2019 was 85.6%, an increase of 210 basis
points from 2018 primarily due to the suspension of the health insurance
industry fee in 2019, which was contemplated in the pricing and benefit design
of our products, lower favorable prior-period medical claims reserve
development, an increase in the Group and Specialty benefit ratio as discussed
in the detailed segment results discussion that follows, and the shift in
Medicare membership mix due to the loss of stand-alone PDP members and
significant growth in Medicare Advantage members. These increases were partially
offset by engaging our Medicare Advantage members in clinical programs, as well
as ensuring they are appropriately documented under the CMS risk-adjustment
model, and lower than expected medical costs as compared to the assumptions used
in the pricing of our individual Medicare Advantage business for 2019. Favorable
prior-period medical claims reserve development decreased the consolidated
benefit ratio by approximately 50 basis points in 2019 and 90 basis points in
2018.

                                       45
--------------------------------------------------------------------------------

Operating Costs
Our segments incur both direct and shared indirect operating costs. We allocate
the indirect costs shared by the segments primarily as a function of revenues.
As a result, the profitability of each segment is interdependent.
Consolidated operating costs decreased $144 million, or 1.9%, from 2018 to $7.4
billion in 2019 reflecting a decrease in operating costs in the Retail and the
Group and Specialty segments as discussed in the detailed segment results
discussion that follows.
The consolidated operating cost ratio for 2019 was 11.5%, decreasing 180 basis
points from 13.3% in 2018 primarily due to the suspension of the health
insurance industry fee in 2019, scale efficiencies associated with growth in our
Medicare Advantage membership, and significant operating cost efficiencies in
2019 driven by previously implemented productivity initiatives. These
improvements were partially offset by strategic investments in our integrated
care delivery model, the impact of higher compensation expense accruals in 2019
for the AIP offered to employees across all levels, increased spending
associated with the Medicare AEP, and charges associated with workforce
optimization. The higher compensation accruals resulted from our continued
strong performance, including customer satisfaction as measured by the net
promoter score, along with higher than anticipated individual Medicare Advantage
membership growth. The nondeductible health insurance industry fee impacted the
operating cost ratio by approximately 180 basis points in 2018.
Depreciation and Amortization
Depreciation and amortization in 2019 totaled $458 million compared to $405
million in 2018, an increase of 13.1%, primarily due to capital expenditures.
Interest Expense
Interest expense was $242 million for 2019 compared to $218 million for 2018, an
increase of $24 million, or 11.0% The increase was primarily due to the higher
average borrowings outstanding including the impact of the borrowings under the
November 2018 term loan agreement and senior notes issued in August 2019.
Income Taxes
Our effective tax rate during 2019 was 22.0% compared to the effective tax rate
of 18.9% in 2018. This change primarily reflects the impact of the suspension of
the non-deductible health insurance industry fee in 2019 as well as the deferred
tax benefit recognized in 2018 from the loss on sale of KMG. The effective
income tax rate in 2018 reflected a $430 million deferred tax benefit, resulting
from the loss on the sale of KMG attributable to its original tax basis and
subsequent capital contributions to fund accumulated losses. See Note 12 to the
consolidated financial statements included in Item 8. - Financial Statements and
Supplementary Data for a complete reconciliation of the federal statutory rate
to the effective tax rate.
Retail Segment
                                                                   Change
                                   2019         2018       Members     Percentage
Membership:
Medical membership:
Individual Medicare Advantage   3,587,200    3,064,000     523,200         17.1  %
Group Medicare Advantage          525,300      497,800      27,500          5.5  %
Medicare stand-alone PDP        4,365,200    5,004,300    (639,100 )      (12.8 )%
Total Retail Medicare           8,477,700    8,566,100     (88,400 )       (1.0 )%
State-based Medicaid              469,000      341,100     127,900         37.5  %
Medicare Supplement               298,400      254,300      44,100         17.3  %
Total Retail medical members    9,245,100    9,161,500      83,600          0.9  %



                                       46
--------------------------------------------------------------------------------
                                                                        Change
                                         2019         2018       Dollars    Percentage
                                                        (in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage         $ 43,128$ 35,656$ 7,472         21.0  %
Group Medicare Advantage                 6,475        6,103         372          6.1  %
Medicare stand-alone PDP                 3,165        3,584        (419 )      (11.7 )%
Total Retail Medicare                   52,768       45,343       7,425         16.4  %
State-based Medicaid                     2,898        2,255         643         28.5  %
Medicare Supplement                        588          510          78         15.3  %
Total premiums                          56,254       48,108       8,146         16.9  %
Services                                    17           11           6         54.5  %
Total premiums and services revenue   $ 56,271$ 48,119$ 8,152         16.9  %
Segment earnings                      $  2,235$  1,733$   502         29.0  %
Benefit ratio                             86.4 %       85.1 %                    1.3  %
Operating cost ratio                       9.4 %       11.1 %                   (1.7 )%

Segment Earnings • Retail segment earnings were $2.2 billion in 2019, an increase of $502

million, or 29.0%, compared to $1.7 billion in 2018 primarily reflecting a

lower operating cost ratio, partially offset by the higher benefit ratio as

more fully described below. As expected, the higher-than-anticipated

individual Medicare Advantage membership growth during the previous AEP had

a muted impact on the segment's earnings in 2019. While new Medicare

Advantage members increase revenue, on average, they have a break even

impact on segment earnings in the first year as they were not previously

engaged in clinical programs or appropriately documented under the CMS risk

adjustment model, and accordingly, carry a higher benefit ratio.

Enrollment

• Individual Medicare Advantage membership increased 523,200 members, or

17.1%, from 3,064,000 members as of December 31, 2018 to 3,587,200 members

as of December 31, 2019, primarily due to membership additions associated

with the 2019 AEP and Open Election Period, or OEP, for Medicare

beneficiaries. The OEP sales period, which ran from January 1 to March 31,

added approximately 43,700 members. Since the conclusion of the OEP,

enrollment continued to increase due to strong sales to age-ins and those

eligible for Dual Eligible Special Need Plans, or D-SNP. Individual

Medicare Advantage membership includes 288,200 D-SNP members as of

December 31, 2019, a net increase of 69,600, or 31.8%, from 218,600

December 31, 2018. For the full year 2020, we anticipate a net membership

increase in our Individual Medicare Advantage offerings of 270,000 members

to 330,000 members.

• Group Medicare Advantage membership increased 27,500 members, or 5.5%, from

497,800 members as of December 31, 2018 to 525,300 members as of

December 31, 2019, primarily due to net membership additions associated

      with the 2019 AEP for Medicare beneficiaries. For the full year 2020, we
      anticipate a net membership increase in our Group Medicare Advantage
      offerings of approximately 90,000 members.

• Medicare stand-alone PDP membership decreased 639,100 members, or 12.8%,

from 5,004,300 members as of December 31, 2018 to 4,365,200 members as of

December 31, 2019, primarily reflecting net declines during the 2019 AEP

for Medicare beneficiaries. The anticipated decline primarily was due to

the competitive nature of the industry and the pricing discipline we have

employed, which resulted in us no longer being the low cost plan in any

market for 2019. For the full year 2020, we anticipate a net membership

decline in our Medicare stand-alone PDP offerings of approximately 550,000

      members.



                                       47
--------------------------------------------------------------------------------

• State-based Medicaid membership increased 127,900 members, or 37.5%, from

341,100 members as of December 31, 2018 to 469,000 members as of

December 31, 2019, primarily driven by the statewide award of a

comprehensive contract under the Managed Medical Assistance, or MMA,

program in Florida. Our January 31, 2020 state-based contracts membership

was 608,000, representing growth of 139,000, or 30%, from December 31,

2019. This growth primarily reflects the impact of terminating the

reinsurance agreement with CareSource effective January 1, 2020, which

ceded all risk for our Kentucky Medicaid contract.

Premiums revenue • Retail segment premiums increased $8.1 billion, or 16.9%, from 2018 to 2019

period primarily due to Medicare Advantage membership growth and higher per

member premiums, as well as increased state-based contracts membership.

These favorable items were partially offset by the decline in membership in

our stand-alone PDP offerings.

Benefits expense • The Retail segment benefit ratio of 86.4% for 2019 increased 130 basis

points from 85.1% in 2018 primarily due to the suspension of the health

insurance industry fee in 2019 which was contemplated in the pricing and

benefit design of our products, lower favorable prior-period medical claims

reserve development, as well as the shift in Medicare membership mix due to

the loss of stand-alone PDP members and the significant growth in Medicare

Advantage members. These increases were partially offset by engaging our

Medicare Advantage members in clinical programs as well as ensuring they

are appropriately documented under the CMS risk adjustment model, lower

      than expected medical costs as compared to the assumptions used in the
      pricing of our individual Medicare Advantage business for 2019, and the

impact of a less severe flu season experienced in the first quarter of 2019

compared to that in the first quarter of 2018.

• The Retail segment's benefits expense for 2019 included the beneficial

effect of $386 million in favorable prior-year medical claims reserve

development versus $398 million in 2018. This favorable prior-year medical

claims reserve development decreased the Retail segment benefit ratio by

approximately 70 basis points in 2019 versus approximately 80 basis points

      in 2018.


Operating costs
•     The Retail segment operating cost ratio of 9.4% for 2019 decreased 170
      basis points from 11.1% in 2018 primarily due to the suspension of the
      health insurance industry fee in 2019, as well as scale efficiencies
      associated with growth in our Medicare Advantage membership, and
      significant operating cost efficiencies in 2019 driven by previously

implemented productivity initiatives. These improvements were partially

offset by the strategic investments in our integrated care delivery model,

the impact of higher compensation expense accruals in 2019 for the AIP as a

      result of our continued strong performance, and increased spending
      associated with the Medicare AEP.

• The non-deductible health insurance industry fee increased the operating

      cost ratio by approximately 190 basis points in 2018.



                                       48
--------------------------------------------------------------------------------
Group and Specialty Segment
                                                                    Change
                                    2019         2018       Members     Percentage
Membership:
Medical membership:
Fully-insured commercial group     908,600    1,004,700     (96,100 )       (9.6 )%
ASO                                529,200      481,900      47,300          9.8  %
Military services                5,984,300    5,928,600      55,700          0.9  %
Total group medical members      7,422,100    7,415,200       6,900          0.1  %
Specialty membership (a)         5,425,900    6,072,300    (646,400 )      (10.6 )%

(a) Specialty products include dental, vision, and other supplemental health

products. Members included in these products may not be unique to each

      product since members have the ability to enroll in multiple products.


                                                                      Change
                                        2019        2018       Dollars    Percentage
                                                (in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group        $ 5,123$ 5,444$  (321 )       (5.9 )%
Specialty                               1,571       1,359         212         15.6  %
Total premiums                          6,694       6,803        (109 )       (1.6 )%
Services                                  790         835         (45 )       (5.4 )%
Total premiums and services revenue   $ 7,484$ 7,638$  (154 )       (2.0 )%
Segment earnings                      $    28$   361$  (333 )      (92.2 )%
Benefit ratio                            86.0 %      79.7 %                    6.3  %
Operating cost ratio                     22.0 %      23.6 %                   (1.6 )%

Segment Earnings • Group and Specialty segment earnings were $28 million in 2019, a decrease

of $333 million, or 92.2%, from $361 million in 2018 primarily due to a

higher benefit ratio, along with lower military services business earnings.

Earnings comparisons related to the military services business were

unfavorably impacted by the receipt of certain contractual incentives and

adjustments in 2018 related to the previous TRICARE contract which did not

recur in 2019. These decreases were partially offset by the improvement in

the operating cost ratio as more fully described below.

Enrollment

• Fully-insured commercial group medical membership decreased 96,100 members,

or 9.6% from 1,004,700 members as of December 31, 2018 primarily reflecting

lower membership in small group accounts due in part to more small group

accounts selecting level-funded ASO products in 2019, as well as the loss

of certain large group accounts due to the competitive pricing environment.

The portion of group fully-insured commercial medical membership in small

      group accounts was approximately 59% at December 31, 2019 and 61% at
      December 31, 2018.

• Group ASO commercial medical membership increased 47,300 members, or 9.8%,

from 481,900 members as of December 31, 2018 to 529,200 members as of

December 31, 2019 reflecting more small group accounts selecting

level-funded ASO products in 2019, partially offset by the loss of certain

      large group accounts as a



                                       49
--------------------------------------------------------------------------------

result of continued discipline in pricing of services for self-funded accounts
amid a highly competitive environment.
•     Military services membership increased 55,700 members, or 0.9%, from

5,928,600 members as of December 31, 2018 to 5,984,300 members as of

December 31, 2019. Membership includes military service members, retirees,

and their families to whom we provide healthcare services under the current

T2017 TRICARE East Region contract. The current contract, which covers

thirty-two states, became effective on January 1, 2018.

• Specialty membership decreased 646,400 members, or 10.6%, from 6,072,300 as

of December 31, 2018 to 5,425,900 members as of December 31, 2019 primarily

due to the loss of certain group accounts, including one jumbo account,

offering stand-alone dental and vision products.

Premiums revenue • Group and Specialty segment premiums decreased $109 million, or 1.6%, from

$6.8 billion in 2018 to $6.7 billion in 2019, primarily due to a decline in

our fully-insured group commercial and specialty membership as well as the

exit of our voluntary benefit and financial protection products in

connection with the sale of KMG in 2018. These decreases were partially

      offset by higher stop-loss revenues related to our level-funded ASO
      accounts resulting from membership growth in this product and higher per
      member premiums across the fully-insured business.

Services revenue • Group and Specialty segment services revenue decreased $45 million, or

5.4%, from 2018 to 2019 primarily due to the impact of certain contractual

incentives and adjustments related to the previous TRICARE contract

received in 2018, which did not recur in 2019.

Benefits expense • The Group and Specialty segment benefit ratio increased 630 basis points

      from 79.7% in 2018 to 86.0% in 2019 primarily due to the impact of the
      continued migration of fully-insured group members to level-funded ASO
      products in 2019 resulting in a membership mix transformation, the
      suspension of the health insurance industry fee in 2019 which was
      contemplated in the pricing and benefit design of our products, and
      unfavorable prior-year medical claims reserve development driven by

provider settlements. The benefit ratio was further negatively impacted by

      adjustments to dental network contracted rates resulting from dental
      network recontracting and expansion to position the business for the
      future.

• The Group and Specialty segment's benefits expense included the unfavorable

effect of $50 million in prior-year medical claims reserve development in

2019 versus the beneficial effect of $46 million in favorable prior-year

medical claims reserve development in 2018. This unfavorable prior-year

medical claims reserve development increased the Group and Specialty

segment benefit ratio by approximately 70 basis points in 2019 while the

favorable prior-year medical claims reserve development decreased the Group

      and Specialty segment benefit ratio by approximately 70 basis points in
      2018.


Operating costs
•     The Group and Specialty segment operating cost ratio of 22.0% for 2019
      decreased 160 basis points from 23.6% for 2018, primarily due to the
      suspension of the health insurance industry fee in 2019, significant
      operating cost efficiencies in 2019 driven by previously implemented

productivity initiatives, as well as the exit of our voluntary benefit and

financial protection products in connection with the sale of KMG in 2018,

which carried a higher operating cost ratio. These improvements were offset

by the higher compensation expense accruals in 2019 for the AIP as a result

of our continued strong consolidated performance.

• The non-deductible health insurance industry fee increased the operating

      cost ratio by approximately 160 basis points in 2018.



                                       50
--------------------------------------------------------------------------------
Healthcare Services Segment
                                                                             Change
                                              2019         2018       Dollars    Percentage
                                                      (in millions)
Revenues:
Services:
Clinical care services                     $    140$    176$   (36 )      (20.5 )%
Pharmacy solutions                              186          203         (17 )       (8.4 )%
Provider services                               306          228          78         34.2  %
Total services revenues                         632          607          25          4.1  %
Intersegment revenues:
Pharmacy solutions                           22,189       20,514       1,675          8.2  %
Provider services                             2,344        1,994         350         17.6  %
Clinical care services                          616          662         (46 )       (6.9 )%
Total intersegment revenues                  25,149       23,170       1,979          8.5  %
Total services and intersegment revenues   $ 25,781       23,777     $ 2,004          8.4  %
Segment earnings                           $    789$    754$    35          4.6  %
Operating cost ratio                           96.4 %       96.3 %                    0.1  %

Segment Earnings • Healthcare Services segment earnings were $789 million in 2019, an increase

      of $35 million, or 4.6%, from 2018. This increase primarily was due to
      higher earnings from our pharmacy operations and clinical operations, and
      higher earnings from Kindred at Home operations. These factors were
      partially offset by additional investments in new clinical assets
      associated with our provider services business.


Script Volume
•     Humana Pharmacy Solutions® script volumes for the Retail and Group and
      Specialty segment membership increased to approximately 456 million in
      2019, up 3.6% versus scripts of approximately 440 million in 2018. The
      increase primarily reflects growth associated with higher Medicare
      Advantage and state-based contracts membership, partially offset by the
      decline in stand-alone PDP membership.

Services revenue • Services revenue increased $25 million, or 4.1%, from 2018 to $632 million

for 2019 primarily due to revenue growth from our provider services

business.

Intersegment revenues • Intersegment revenues increased $1.98 billion, or 8.5%, from 2018 to $25

billion for 2019 primarily due to strong Medicare Advantage membership

growth, partially offset by the loss of intersegment revenues associated

with the decline in stand-alone PDP membership. Intersegment revenues in

2019 were further impacted by higher revenues associated with our provider

      services business reflecting the previously disclosed acquisitions of MCCI
      and FPG.

Operating costs • The Healthcare Services segment operating cost ratio of 96.4% for 2019 was

      relatively unchanged from 96.3% for 2018.



                                       51
--------------------------------------------------------------------------------

Liquidity

Historically, our primary sources of cash have included receipts of premiums,
services revenue, and investment and other income, as well as proceeds from the
sale or maturity of our investment securities, and borrowings. Our primary uses
of cash historically have included disbursements for claims payments, operating
costs, interest on borrowings, taxes, purchases of investment securities,
acquisitions, capital expenditures, repayments on borrowings, dividends, and
share repurchases. Because premiums generally are collected in advance of claim
payments by a period of up to several months, our business normally should
produce positive cash flows during periods of increasing premiums and
enrollment. Conversely, cash flows would be negatively impacted during periods
of decreasing premiums and enrollment. From period to period, our cash flows may
also be affected by the timing of working capital items including premiums
receivable, benefits payable, and other receivables and payables. Our cash flows
are impacted by the timing of payments to and receipts from CMS associated with
Medicare Part D subsidies for which we do not assume risk. The use of cash flows
may be limited by regulatory requirements of state departments of insurance (or
comparable state regulators) which require, among other items, that our
regulated subsidiaries maintain minimum levels of capital and seek approval
before paying dividends from the subsidiaries to the parent. Our use of cash
flows derived from our non-insurance subsidiaries, such as in our Healthcare
Services segment, is generally not restricted by state departments of insurance
(or comparable state regulators).
For additional information on our liquidity risk, please refer to Item 1A. -
Risk Factors in this 2019 Form 10-K.
Cash and cash equivalents increased to $4.1 billion at December 31, 2019 from
$2.3 billion at December 31, 2018. The change in cash and cash equivalents for
the years ended December 31, 2019, 2018 and 2017 is summarized as follows:
                                                   2019         2018        

2017

                                                           (in millions)

Net cash provided by operating activities $ 5,284$ 2,173$ 4,051 Net cash used in investing activities

             (1,278 )     (3,087 )    (2,941 )
Net cash used in financing activities             (2,295 )       (785 )      (945 )
Increase (decrease) in cash and cash equivalents $ 1,711$ (1,699 )   $ 

165



Cash Flow from Operating Activities
The change in operating cash flows over the three year period primarily results
from the corresponding change in the timing of working capital items, earnings,
and enrollment activity as discussed below. The increase in operating cash flows
in 2019 reflect the significant impacts of increasing premiums and enrollment,
as premiums generally are collected in advance of claim payments by a period of
up to several months, higher earnings, the timing of other working capital
items, and the impact of an approximately $245 million payment related to
reinsuring certain voluntary benefit and financial protection products to a
third party in connection with the sale of KMG in 2018.
The decrease in operating cash flows in 2018 primarily was due to the receipt of
the merger termination fee in 2017, net of related expenses and taxes paid,
funding the reinsurance of certain voluntary benefit and financial protection
products to a third party in connection with the sale of KMG in 2018 and the
timing of working capital items.
The most significant drivers of changes in our working capital are typically the
timing of payments of benefits expense and receipts for premiums. We illustrate
these changes with the following summaries of benefits payable and receivables.

                                       52
--------------------------------------------------------------------------------

The detail of benefits payable was as follows at December 31, 2019, 2018 and
2017:
                                                                           Change
                                      2019       2018       2017       2019      2018
                                                       (in millions)
IBNR (1)                            $ 4,150$ 3,361$ 3,154$   789$ 207
Reported claims in process (2)          628        617        614         11        3
Other benefits payable (3)            1,226        884        900        342      (16 )
Total benefits payable              $ 6,004$ 4,862$ 4,668      1,142      194
Payables from disposition                                                          58
Change in benefits payable per cash
flow statement resulting in cash
from operations                                                      $ 

1,142 $ 252

(1) IBNR represents an estimate of benefits payable for claims incurred but not

reported (IBNR) at the balance sheet date and includes unprocessed claim

inventories. The level of IBNR is primarily impacted by membership levels,

medical claim trends and the receipt cycle time, which represents the

length of time between when a claim is initially incurred and when the

claim form is received and processed (i.e. a shorter time span results in a

lower IBNR). IBNR includes unprocessed claims inventories.

(2) Reported claims in process represents the estimated valuation of processed

claims that are in the post claim adjudication process, which consists of

administrative functions such as audit and check batching and handling, as

well as amounts owed to our pharmacy benefit administrator which fluctuate

due to bi-weekly payments and the month-end cutoff.

(3) Other benefits payable include amounts owed to providers under capitated

and risk sharing arrangements.

The increase in benefits payable in 2019 and 2018 was primarily due to an increase in IBNR, mainly as a result of Medicare Advantage membership growth. In addition, 2019 was impacted by an increase in the amounts owed to providers under capitated and risk sharing arrangements.


The detail of total net receivables was as follows at December 31, 2019, 2018
and 2017:
                                                                                     Change
                                                2019        2018       2017      2019     2018
                                                                (in millions)
Medicare                                      $   835$   836$ 511$ (1 )$ 325
Commercial and other                              162         135       273       27      (138 )
Military services                                 128         123       166        5       (43 )
Allowance for doubtful accounts                   (69 )       (79 )     (96 )     10        17
Total net receivables                         $ 1,056$ 1,015$ 854       41       161
Reconciliation to cash flow statement:
Change in receivables from acquisition                                           (12 )       -
Change in receivables disposed from sale of
business                                                                           3         3
Change in receivables per cash flow statement
resulting in cash used by operations                                        

$ 32$ 164

Medicare receivables are impacted by changes in revenue associated with individual and group Medicare membership changes as well as the timing of accruals and related collections associated with the CMS risk-adjustment model.

                                       53
--------------------------------------------------------------------------------

The decrease in commercial and other receivables in 2018 as compared to 2017,
was due primarily to a decrease in our receivable associated with the commercial
risk adjustment provision of the Health Care Reform Law. This decrease
corresponds with our exit from the Individual Commercial business.
Military services receivables at December 31, 2019, 2018, and 2017 primarily
consist of administrative services only fees owed from the federal government
for administrative services provided under our TRICARE contracts. The 2017
balance also includes transition-in receivables under our T2017 East Region
contract collected in 2018.
Many provisions of the Health Care Reform Law became effective in 2014,
including the non-deductible health insurance industry fee. The annual health
insurance industry fee was suspended for the calendar year 2017, but resumed in
calendar year 2018.The annual health insurance industry fee was again suspended
in 2019, but will resume for calendar year 2020, not be deductible for income
tax purposes, and significantly increase our effective tax rate. Under current
law, the health industry fee will be permanently repealed beginning in calendar
year 2021. We paid the federal government annual health insurance industry fees
of $1.04 billion in 2018.
In addition to the timing of payments of benefits expense, receipts for premiums
and services revenues, and amounts due under the health insurance industry fee
provisions of the Health Care Reform Law, other items impacting operating cash
flows include income tax payments and the timing of payroll cycles.
Cash Flow from Investing Activities
Our ongoing capital expenditures primarily relate to our information technology
initiatives, support of services in our provider services operations including
medical and administrative facility improvements necessary for activities such
as the provision of care to members, claims processing, billing and collections,
wellness solutions, care coordination, regulatory compliance and customer
service. Total capital expenditures, excluding acquisitions, were $736 million
in 2019, $612 million in 2018, and $524 million in 2017.

In 2018, we completed the sale of our wholly-owned subsidiary KMG to CGIC. Upon
closing, we funded the transaction with approximately $190 million of parent
company cash contributed into KMG, subject to customary adjustments, in addition
to the transfer of approximately $160 million of statutory capital with the
sale. Total cash and cash equivalents, including parent company funding,
disposed at the time of sale, was $805 million. See Note 3 to the consolidated
financial statements included in Item 8. - Financial Statements and
Supplementary Data
During 2018 we paid cash consideration of approximately $1.1 billion to acquire
a 40% minority interest in Kindred at Home, $169 million to acquire the
remaining interest in MCCI, and $185 million to acquire all of FPG, as discussed
in Notes 3 and 4 to the consolidated financial statements included in Item 8. -
Financial Statements and Supplementary Data.

We reinvested a portion of our operating cash flows in investment securities,
primarily investment-grade fixed income securities, totaling $542 million, $221
million, and $2.4 billion, during 2019, 2018 and 2017 respectively.
Cash Flow from Financing Activities
Our financing cash flows are significantly impacted by the timing of claims
payments and the related receipts from CMS associated with Medicare Part D claim
subsidies for which we do not assume risk. Monthly prospective payments from CMS
for reinsurance and low-income cost subsidies are based on assumptions submitted
with our annual bid. Settlement of the reinsurance and low-income cost subsidies
is based on a reconciliation made approximately 9 months after the close of each
calendar year. Claims payments were $560 million higher than receipts from CMS
associated with Medicare Part D claim subsidies for which we do not assume risk
during 2019 and $653 million higher during 2018. Receipts from CMS associated
with Medicare Part D claims subsidies for which we do not assume risk were $1.9
billion higher than claims payments during 2017. Our net payable for CMS
subsidies and brand name prescription drug discounts was $229 million at
December 31, 2019 compared to a net payable of $331 million at December 31,
2018.
Under our administrative services only TRICARE contract, health care cost
payments for which we do not assume risk exceeded reimbursements from the
federal government by $63 million in 2019 and reimbursements from the federal

                                       54
--------------------------------------------------------------------------------

government exceeded health care cost payments for which we do not assume risk by
$38 million in 2018 and $11 million in 2017.
Claims payments associated with cost sharing provisions of the Health Care
Reform Law for which we do not assume risk were $25 million in 2018. Claims
payments associated with cost sharing provisions of the Health Care Reform Law
for which we do not assume risk were higher than reimbursements from HHS by $44
million in 2017.
We repurchased common shares for $1.07 billion, $1.09 billion and $3.37 billion
in 2019, 2018 and 2017 under share repurchase plans authorized by the Board of
Directors and in connection with employee stock plans.
As discussed further below, we paid dividends to stockholders of $291 million in
2019, $265 million in 2018, and $220 million in 2017.
We entered into a commercial paper program in October 2014. Net repayments of
commercial paper were $360 million in 2019 and the maximum principal amount
outstanding at any one time during 2019 was $801 million. Net proceeds from the
issuance of commercial paper were $485 million in 2018 and the maximum principal
amount outstanding at any one time during 2018 was $923 million. Net repayments
of commercial paper were $153 million in 2017 and the maximum principal amount
outstanding at any one time during 2017 was $500 million.
In November 2018, we entered into a $1.0 billion term note agreement with a bank
at a variable rate of interest due within one year. For a detailed discussion of
our debt please refer to Note 13 to the consolidated financial statements
included in Item 8. - Financial Statements and Supplementary Data.

In August 2019, we issued $500 million of 3.125% senior notes due August 15,
2029 and $500 million of 3.950% senior notes due August 15, 2049. Our net
proceeds, reduced for the underwriters' discount and commission and offering
expenses paid were $987 million. We used the net proceeds from this offering,
together with available cash, to repay the $650 million outstanding amount due
under our term note in August 2019, and the $400 million aggregate principal
amount of our 2.625% senior notes due on maturity at October 1, 2019. In
December 2017, we issued $400 million of 2.50% senior notes due December 15,
2020 and $400 million of 2.90% senior notes due December 15, 2022. Our net
proceeds, reduced for the underwriters' discount and commission and offering
expenses paid as of December 31, 2017, were $794 million. We used the net
proceeds, together with available cash, to fund the redemption of our $300
million aggregate principal amount of 6.30% senior notes maturing in August 2018
and our $500 million aggregate principal amount of 7.20% senior notes maturing
in June 2018 at 100% of the principal amount plus applicable premium for early
redemption and accrued and unpaid interest to the redemption date, for cash
totaling approximately $829 million.
The remainder of the cash used in or provided by financing activities in 2019,
2018, and 2017 primarily resulted from proceeds from stock option exercises and
the change in book overdraft.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 16
to the consolidated financial statements included in Item 8. - Financial
Statements and Supplementary Data.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 16 to the
consolidated financial statements included in Item 8. - Financial Statements and
Supplementary Data.
Debt
In February 2020, we entered into a new $1 billion term loan commitment with a
bank that allows for up to three draws with the initial draw at a minimum of
$300 million that matures 1 year after the first draw, subject to a 1 year
extension.  Following any initial draw, any unused commitments in excess of $300
million expire on June 30, 2020,

                                       55
--------------------------------------------------------------------------------

with the remaining commitments of up to $300 million available until September
30, 2020. If the initial draw has not been made by June 30, 2020, then all
commitments expire on June 30, 2020. The facility fee, interest rate and
financial covenants are consistent with those of our revolving credit agreement.
There is no prepayment penalty.
For a detailed discussion of our debt, including our senior notes, credit
agreement and commercial paper program, please refer to Note 13 to the
consolidated financial statements included in Item 8. - Financial Statements and
Supplementary Data.
Acquisitions and Divestiture
For a detailed discussion of our acquisitions and divestitures, please refer to
Notes 3 and 4 to the consolidated financial statements included in Item 8. -
Financial Statements and Supplementary Data

Liquidity Requirements


We believe our cash balances, investment securities, operating cash flows, and
funds available under our credit agreement and our commercial paper program or
from other public or private financing sources, taken together, provide adequate
resources to fund ongoing operating and regulatory requirements, acquisitions,
future expansion opportunities, and capital expenditures for at least the next
twelve months, as well as to refinance or repay debt, and repurchase shares.

Adverse changes in our credit rating may increase the rate of interest we pay
and may impact the amount of credit available to us in the future. Our
investment-grade credit rating at December 31, 2019 was BBB+ according to
Standard & Poor's Rating Services, or S&P, and Baa3 according to Moody's
Investors Services, Inc., or Moody's. A downgrade by S&P to BB+ or by Moody's to
Ba1 triggers an interest rate increase of 25 basis points with respect to $250
million of our senior notes. Successive one notch downgrades increase the
interest rate an additional 25 basis points, or annual interest expense by $1
million, up to a maximum 100 basis points, or annual interest expense by $3
million.

In addition, we operate as a holding company in a highly regulated industry.
Humana Inc., our parent company, is dependent upon dividends and administrative
expense reimbursements from our subsidiaries, most of which are subject to
regulatory restrictions. We continue to maintain significant levels of aggregate
excess statutory capital and surplus in our state-regulated operating
subsidiaries. Cash, cash equivalents, and short-term investments at the parent
company increased to $1.4 billion at December 31, 2019 from $578 million at
December 31, 2018. This increase primarily reflects insurance subsidiaries
dividends, non-insurance subsidiaries' profits and net proceeds from debt
issuance, partially offset by common stock repurchases, insurance subsidiaries'
capital contributions, repayment of debt and capital expenditures. Our use of
operating cash derived from our non-insurance subsidiaries, such as our
Healthcare Services segment, is generally not restricted by Departments of
Insurance (or comparable state regulatory agencies). Our regulated insurance
subsidiaries paid dividends to the parent of $1.8 billion in 2019, $2.3 billion
in 2018, and $1.4 billion in 2017. Refer to our parent company financial
statements and accompanying notes in Schedule I - Parent Company Financial
Information. The amount of ordinary dividends that may be paid to our parent
company in 2020 is approximately $1 billion, in the aggregate. Actual dividends
paid may vary due to consideration of excess statutory capital and surplus and
expected future surplus requirements related to, for example, premium volume and
product mix.
Regulatory Requirements
For a detailed discussion of our regulatory requirements, including aggregate
statutory capital and surplus as well as dividends paid from the subsidiaries to
the parent, please refer to Note 16 to the consolidated financial statements
included in Item 8. - Financial Statements and Supplementary Data.

                                       56
--------------------------------------------------------------------------------

Contractual Obligations We are contractually obligated to make payments for years subsequent to December 31, 2019 as follows:

                                                            Payments Due by Period
                                                  Less than                                       More than
                                     Total         1 Year         1-3 Years       3-5 Years        5 Years
                                                                 (in millions)
Debt                              $   5,700$       700$     1,000$       600$     3,400
Interest (1)                          3,348             226             418             349           2,355
Operating leases (2)                    501             133             215              83              70
Purchase obligations (3)              2,503             922           1,136             346              99
Future policy benefits payable
and other long-term liabilities
(4)                                     478              26             226              65             161
Total                             $  12,530$     2,007$     2,995$     1,443$     6,085

(1) Interest includes the estimated contractual interest payments under our

debt agreements.

(2) We lease facilities, computer hardware, and other furniture and equipment

under long-term operating leases that are noncancelable and expire on

various dates through 2046 . We sublease facilities or partial facilities

to third party tenants for space not used in our operations which partially

      mitigates our operating lease commitments. See also Note 10 to the
      consolidated financial statements included in Item 8. - Financial
      Statements and Supplementary Data.

(3) Purchase obligations include agreements to purchase services, primarily

      information technology related services, or to make improvements to real
      estate, in each case that are enforceable and legally binding on us and

that specify all significant terms, including: fixed or minimum levels of

service to be purchased; fixed, minimum or variable price provisions; and

the appropriate timing of the transaction. Purchase obligations exclude

agreements that are cancelable without penalty.

(4) Includes future policy benefits payable ceded to third parties through 100%

      coinsurance agreements as more fully described in Note 19 to the
      consolidated financial statements included in Item 8. - Financial
      Statements and Supplementary Data. We expect the assuming reinsurance
      carriers to fund these obligations and reflected these amounts as
      reinsurance recoverables included in other long-term assets on our
      consolidated balance sheet. Amounts payable in less than one year are

included in trade accounts payable and accrued expenses in the consolidated

balance sheet.



Off-Balance Sheet Arrangements
As of December 31, 2019, we were not involved in any special purpose entity, or
SPE, transactions. For a detailed discussion of off-balance sheet arrangements,
please refer to Note 17 to the consolidated financial statements included in
Item 8. - Financial Statements and Supplementary Data.
Guarantees and Indemnifications
For a detailed discussion of our guarantees and indemnifications, please refer
to Note 17 to the consolidated financial statements included in Item 8. -
Financial Statements and Supplementary Data.
Government Contracts
For a detailed discussion of our government contracts, including our Medicare,
Military, and Medicaid contracts, please refer to Note 17 to the consolidated
financial statements included in Item 8. - Financial Statements and
Supplementary Data.

                                       57
--------------------------------------------------------------------------------

Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements and accompanying notes,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. We continuously evaluate our estimates and those critical
accounting policies primarily related to benefits expense and revenue
recognition as well as accounting for impairments related to our investment
securities, goodwill, and long-lived assets. These estimates are based on
knowledge of current events and anticipated future events and, accordingly,
actual results ultimately may differ from those estimates. We believe the
following critical accounting policies involve the most significant judgments
and estimates used in the preparation of our consolidated financial statements.
Benefits Expense Recognition
Benefits expense is recognized in the period in which services are provided and
includes an estimate of the cost of services which have been incurred but not
yet reported, or IBNR. IBNR represents a substantial portion of our benefits
payable as follows:
                                                          Percentage                             Percentage
                                   December 31, 2019       of Total       December 31, 2018       of Total
                                                            (dollars in millions)
IBNR                             $             4,150           69.1 %   $             3,361           69.1 %
Reported claims in process                       628           10.5 %                   617           12.7 %
Other benefits payable                         1,226           20.4 %                   884           18.2 %
Total benefits payable           $             6,004          100.0 %   $             4,862          100.0 %


Our reserving practice is to consistently recognize the actuarial best point
estimate within a level of confidence required by actuarial standards. For
further discussion of our reserving methodology, including our use of completion
and claims per member per month trend factors to estimate IBNR, refer to Note 2
to the consolidated financial statements included in Item 8. - Financial
Statements and Supplementary Data.
The completion and claims per member per month trend factors are the most
significant factors impacting the IBNR estimate. The portion of IBNR estimated
using completion factors for claims incurred prior to the most recent two months
is generally less variable than the portion of IBNR estimated using trend
factors. The following table illustrates the sensitivity of these factors
assuming moderately adverse experience and the estimated potential impact on our
operating results caused by reasonably likely changes in these factors based on
December 31, 2019 data:
   Completion Factor (a):         Claims Trend Factor (b):
  Factor       Decrease in        Factor       Decrease in
Change (c)   Benefits Payable   Change (c)   Benefits Payable
                    (dollars in millions)
  0.70%           $(308)         (3.00)%          $(270)
  0.60%           $(264)         (2.75)%          $(248)
  0.50%           $(220)         (2.50)%          $(225)
  0.40%           $(176)         (2.25)%          $(203)
  0.30%           $(132)         (2.00)%          $(180)
  0.20%           $(88)          (1.75)%          $(158)
  0.10%           $(44)          (1.50)%          $(135)

(a) Reflects estimated potential changes in benefits payable at December 31,

2019 caused by changes in completion factors for incurred months prior to

      the most recent two months.



                                       58
--------------------------------------------------------------------------------

(b) Reflects estimated potential changes in benefits payable at December 31,

2019 caused by changes in annualized claims trend used for the estimation

of per member per month incurred claims for the most recent two months.

(c) The factor change indicated represents the percentage point change.



The following table provides a historical perspective regarding the accrual and
payment of our benefits payable, excluding military services. Components of the
total incurred claims for each year include amounts accrued for current year
estimated benefits expense as well as adjustments to prior year estimated
accruals. Refer to Note 11 to the consolidated financial statements included in
Item 8. - Financial Statements and Supplementary Data for Retail and Group and
Specialty segment tables including information about incurred and paid claims
development as of December 31, 2019, net of reinsurance, as well as cumulative
claim frequency and the total of IBNR included within the net incurred claims
amounts.
                                    2019         2018         2017
                                            (in millions)
Balances at January 1            $  4,862$  4,668$  4,563
Less: Reinsurance recoverables        (95 )        (70 )        (76 )
Balances at January 1, net          4,767        4,598        4,487
Incurred related to:
Current year                       54,193       46,385       44,001
Prior years                          (336 )       (503 )       (483 )
Total incurred                     53,857       45,882       43,518
Paid related to:
Current year                      (48,421 )    (41,736 )    (39,496 )
Prior years                        (4,267 )     (3,977 )     (3,911 )
Total paid                        (52,688 )    (45,713 )    (43,407 )
Reinsurance recoverable                68           95           70
Balances at December 31          $  6,004$  4,862$  4,668



                                       59
--------------------------------------------------------------------------------

The following table summarizes the changes in estimate for incurred claims
related to prior years attributable to our key assumptions. As previously
described, our key assumptions consist of trend and completion factors estimated
using an assumption of moderately adverse conditions. The amounts below
represent the difference between our original estimates and the actual benefits
expense ultimately incurred as determined from subsequent claim payments.
                                                 Favorable Development by 

Changes in Key Assumptions

                                            2019                           2018                        2017
                                                   Factor                        Factor                     Factor
                                   Amount        Change (a)       Amount       Change (a)     Amount      Change (a)
                                                                (dollars in millions)
Trend factors                    $   (233 )        (3.1 )%      $   (229 )       (3.3 )%     $  (279 )      (2.7 )%
Completion factors                   (103 )        (0.3 )%          (274 )       (0.8 )%        (204 )      (0.7 )%
Total                            $   (336 )$   (503 )$  (483 )

(a) The factor change indicated represents the percentage point change.



As previously discussed, 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. We experienced favorable medical claims reserve
development related to prior fiscal years of $336 million in 2019, $503 million
in 2018, and $483 million in 2017. The table below details our favorable medical
claims reserve development related to prior fiscal years by segment for 2019,
2018, and 2017.
                                     (Favorable) Unfavorable Medical Claims Reserve
                                                      Development                                      Change
                                     2019                   2018                 2017            2019           2018
                                                                    (in millions)
Retail Segment                $         (386 )       $         (398 )       $       (386 )$       12$      (12 )
Group and Specialty Segment               50                    (46 )                (40 )           96             (6 )
Individual Commercial Segment              -                    (57 )                (56 )           57             (1 )
Other Businesses                           -                     (2 )                 (1 )            2             (1 )
Total                         $         (336 )       $         (503 )       $       (483 )$      167$      (20 )


The favorable medical claims reserve development for 2019, 2018, and 2017
primarily reflects the consistent application of trend and completion factors
estimated using an assumption of moderately adverse conditions. Our favorable
development for each of the years presented above is discussed further in Note
11 to the consolidated financial statements included in Item 8. - Financial
Statements and Supplementary Data.
We continually adjust our historical trend and completion factor experience with
our knowledge of recent events that may impact current trends and completion
factors when establishing our reserves. Because our reserving practice is to
consistently recognize the actuarial best point estimate using an assumption of
moderately adverse conditions as required by actuarial standards, there is a
reasonable possibility that variances between actual trend and completion
factors and those assumed in our December 31, 2019 estimates would fall towards
the middle of the ranges previously presented in our sensitivity table.
There was no benefit expense excluded from the previous table for the years
ended December 31, 2019 and 2018. Benefits expense reduced by $22 million
associated with future policy benefits for the year ended December 31, 2017 was
excluded from the previous table.

                                       60
--------------------------------------------------------------------------------

Revenue Recognition
We generally establish one-year commercial membership contracts with employer
groups, subject to cancellation by the employer group on 30-day written notice.
Our Medicare contracts with CMS renew annually. Our military services contracts
with the federal government and certain contracts with various state Medicaid
programs generally are multi-year contracts subject to annual renewal
provisions.
We receive monthly premiums from the federal government and various states
according to government specified payment rates and various contractual terms.
We bill and collect premium from employer groups and members in our Medicare and
other individual products monthly. Changes in premium revenues resulting from
the periodic changes in risk-adjustment scores derived from medical diagnoses
for our membership are estimated by projecting the ultimate annual premium and
recognized ratably during the year with adjustments each period to reflect
changes in the ultimate premium.
Premiums revenue is estimated by multiplying the membership covered under the
various contracts by the contractual rates. Premiums revenue is recognized as
income in the period members are entitled to receive services, and is net of
estimated uncollectible amounts, retroactive membership adjustments, and
adjustments to recognize rebates under the minimum benefit ratios required under
the Health Care Reform Law. We estimate policyholder rebates by projecting
calendar year minimum benefit ratios for the small group and large group
markets, as defined by the Health Care Reform Law using a methodology prescribed
by HHS, separately by state and legal entity. Medicare Advantage products are
also subject to minimum benefit ratio requirements under the Health Care Reform
Law. Estimated calendar year rebates recognized ratably during the year are
revised each period to reflect current experience. Retroactive membership
adjustments result from enrollment changes not yet processed, or not yet
reported by an employer group or the government. We routinely monitor the
collectability of specific accounts, the aging of receivables, historical
retroactivity trends, estimated rebates, as well as prevailing and anticipated
economic conditions, and reflect any required adjustments in current operations.
Premiums received prior to the service period are recorded as unearned revenues.
Medicare Risk-Adjustment Provisions
CMS utilizes a risk-adjustment model which apportions premiums paid to Medicare
Advantage, or MA, plans according to health severity. 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 for
enrollees with predictably higher costs. 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 this diagnosis
data to calculate the risk-adjusted premium payment to MA plans. Rates paid to
MA plans are established under an actuarial bid model, including a process that
bases our payments on a comparison of our beneficiaries' risk scores, derived
from medical diagnoses, to those enrolled in the government's Medicare FFS
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 providers to
appropriately document all medical data, including the diagnosis data submitted
with claims. 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 will increase that
percentage to 50% in 2020 and has proposed to 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.
We estimate risk-adjustment revenues based on medical diagnoses for our
membership. The risk-adjustment model, including CMS changes to the submission
process, is more fully described in Item 1. - Business under the section titled
"Individual Medicare," and in Item 1A. - Risk Factors.

                                       61
--------------------------------------------------------------------------------

Investment Securities
Investment securities totaled $11.4 billion, or 39% of total assets at
December 31, 2019, and $10.4 billion, or 41% of total assets at December 31,
2018. The investment portfolio was primarily comprised of debt securities,
detailed below, at December 31, 2019 and entirely at December 31, 2018. The fair
value of debt securities were as follows at December 31, 2019 and 2018:
                                                     Percentage                      Percentage
                                     12/31/2019       of Total       12/31/2018       of Total

                                                       (dollars in millions)
U.S.Treasury and other U.S.
government corporations and
agencies:
U.S.Treasury and agency
obligations                        $        354            3.1 %   $        417            4.0 %
Mortgage-backed securities                3,710           32.6 %          2,544           24.4 %
Tax-exempt municipal securities           1,463           12.9 %          2,771           26.5 %
Mortgage-backed securities:
Residential                                   -              - %             55            0.5 %
Commercial                                  804            7.1 %            523            5.0 %
Asset-backed securities                   1,093            9.6 %            985            9.4 %
Corporate debt securities                 3,947           34.7 %          3,142           30.2 %
Total debt securities              $     11,371          100.0 %   $     10,437          100.0 %


Approximately 96% of our debt securities were investment-grade quality, with a
weighted average credit rating of AA by S&P at December 31, 2019. Most of the
debt securities that were below investment-grade were rated BB, the higher end
of the below investment-grade rating scale. Tax-exempt municipal securities were
diversified among general obligation bonds of states and local municipalities in
the United States as well as special revenue bonds issued by municipalities to
finance specific public works projects such as utilities, water and sewer,
transportation, or education. Our general obligation bonds are diversified
across the United States with no individual state exceeding 1% of our total debt
securities. Our investment policy limits investments in a single issuer and
requires diversification among various asset types.












                                       62
--------------------------------------------------------------------------------

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 December 31, 2019:
                                         Less than 12 months                      12 months or more                       Total

                                                            Gross                                 Gross                         Gross
                                        Fair              Unrealized            Fair            Unrealized        Fair        Unrealized
                                        Value               Losses             Value              Losses         Value          Losses
                                                                              (in millions)
  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:
  Residential                              -                     -                 -                   -              -              -
  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 )


Under the other-than-temporary impairment model for debt securities held, we
recognize an impairment loss in income in an amount equal to the full difference
between the amortized cost basis and the fair value when we have the intent to
sell the debt security or it is more likely than not we will be required to sell
the debt security before recovery of our amortized cost basis. However, if we do
not intend to sell the debt security, we evaluate the expected cash flows to be
received as compared to amortized cost and determine if a credit loss has
occurred. In the event of a credit loss, only the amount of the impairment
associated with the credit loss is recognized currently in income with the
remainder of the loss recognized in other comprehensive income.
When we do not intend to sell a security in an unrealized loss position,
potential other-than-temporary impairment is considered using a variety of
factors, including the length of time and extent to which the fair value has
been less than cost; adverse conditions specifically related to the industry,
geographic area or financial condition of the issuer or underlying collateral of
a security; payment structure of the security; changes in credit rating of the
security by the rating agencies; the volatility of the fair value changes; and
changes in fair value of the security after the balance sheet date. For debt
securities, we take into account expectations of relevant market and economic
data. For example, with respect to mortgage and asset-backed securities, such
data includes underlying loan level data and structural features such as
seniority and other forms of credit enhancements. A decline in fair value is
considered other-than-temporary when we do not expect to recover the entire
amortized cost basis of the security. We estimate the amount of the credit loss
component of a debt security as the difference between the amortized cost and
the present value of the expected cash flows of the security. The present value
is determined using the best estimate of future cash flows discounted at the
implicit interest rate at the date of purchase. The risks inherent in assessing
the impairment of an investment include the risk that market factors may differ
from our expectations, facts and circumstances factored into our assessment may
change with the passage of time, or we may decide to subsequently sell the
investment. The determination of whether a decline in the value of an investment
is other than temporary requires us to exercise significant diligence and
judgment. The discovery of new information and the passage of time can
significantly change these judgments. The status of the general economic
environment and significant changes in the national securities markets influence
the determination of fair value and the assessment of investment impairment.
There is a continuing risk that declines in fair value may occur and additional
material realized losses from sales or other-than-temporary impairments may be
recorded in future periods.

                                       63
--------------------------------------------------------------------------------

All issuers of securities we own that were trading at an unrealized loss at
December 31, 2019 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
December 31, 2019, we did not intend to sell the securities with an unrealized
loss position in accumulated other comprehensive income, and it is not likely
that we will be required to sell these securities before recovery of their
amortized cost basis. As a result, we believe that the securities with an
unrealized loss were not other-than-temporarily impaired at December 31, 2019.
There were no material other-than-temporary impairments in 2019, 2018, or 2017.
Goodwill and Long-lived Assets
At December 31, 2019, goodwill and other long-lived assets represented 21% of
total assets and 50% of total stockholders' equity, compared to 23% and 58%,
respectively, at December 31, 2018.
We are required to test at least annually for impairment at a level of reporting
referred to as the reporting unit, and more frequently if adverse events or
changes in circumstances indicate that the asset may be impaired. A reporting
unit either is our operating segments or one level below the operating segments,
referred to as a component, which comprise our reportable segments. A component
is considered a reporting unit if the component constitutes a business for which
discrete financial information is available that is regularly reviewed by
management. We are required to aggregate the components of an operating segment
into one reporting unit if they have similar economic characteristics. Goodwill
is assigned to the reporting unit that is expected to benefit from a specific
acquisition.
We use the one-step process to review goodwill for impairment to determine both
the existence and amount of goodwill impairment, if any. Our strategy,
long-range business plan, and annual planning process support our goodwill
impairment tests. These tests are performed, at a minimum, annually in the
fourth quarter, and are based on an evaluation of future discounted cash flows.
We rely on this discounted cash flow analysis to determine fair value. However
outcomes from the discounted cash flow analysis are compared to other market
approach valuation methodologies for reasonableness. We use discount rates that
correspond to a market-based weighted-average cost of capital and terminal
growth rates that correspond to long-term growth prospects, consistent with the
long-term inflation rate. Key assumptions in our cash flow projections,
including changes in membership, premium yields, medical and operating cost
trends, and certain government contract extensions, are consistent with those
utilized in our long-range business plan and annual planning process. If these
assumptions differ from actual, including the impact of the Health Care Reform
Law or changes in Government rates, the estimates underlying our goodwill
impairment tests could be adversely affected. Goodwill impairment tests
completed in each of the last three years did not result in an impairment loss.
The fair value of our reporting units with significant goodwill exceeded
carrying amounts by a substantial margin. A 100 basis point increase in the
discount rate would not have a significant impact on the amount of margin for
any of our reporting units with significant goodwill, with the exception of our
clinical and provider reporting units in our Healthcare Services segment. Our
clinical and provider reporting units primarily provide services to our Retail
members. A significant increase in the discount rate, decrease in the long-term
growth rate, or substantial reductions in our underlying cash flow assumptions,
including revenue growth rates, medical and operating cost trends, and projected
operating income, could have a negative impact on the estimated fair value of
these reporting units. The clinical reporting unit had a fair value of $544
million which exceeded its carrying value of $533 million by $11 million or 2%.
If the discount rate increased 100 basis points, then the clinical reporting
unit would incur an impairment loss of approximately $62 million. The provider
reporting unit had a fair value of $2.3 billion which exceeded its carrying
value of $1.3 billion by $1.0 billion or 78%. The provider reporting unit
estimate of fair value relies on multiple assumptions regarding the underlying
long-term cash flows, any one of which may be significantly impacted by future
changes in estimates and may negatively impact fair value. The clinical and
provider reporting units account for $524 million and $761 million,
respectively, of goodwill. Impairment tests completed for 2019, 2018, and 2017
did not result in an impairment loss.
Long-lived assets consist of property and equipment and other finite-lived
intangible assets. These assets are depreciated or amortized over their
estimated useful life, and are subject to impairment reviews. We periodically
review long-lived assets whenever adverse events or changes in circumstances
indicate the carrying value of the asset may not be recoverable. In assessing
recoverability, we must make assumptions regarding estimated future cash flows
and other factors to determine if an impairment loss may exist, and, if so,
estimate fair value. We also must estimate and make assumptions regarding the
useful life we assign to our long-lived assets. If these estimates or their
related assumptions

                                       64

--------------------------------------------------------------------------------


change in the future, we may be required to record impairment losses or change
the useful life, including accelerating depreciation or amortization for these
assets. There were no material impairment losses in the last three years.

© Edgar Online, source Glimpses

share with twitter share with LinkedIn share with facebook
share via e-mail
Latest news on HUMANA INC.
07:44aHUMANA : to Waive Medical Costs Related to Coronavirus Treatment
DJ
07:04aHUMANA : to Waive Medical Costs Related to Coronavirus Treatment
BU
03/30HUMANA : Ex-dividend day for
FA
03/27HUMANA : AM Best Assigns Issue Credit Ratings to Humana Inc.'s Senior Unsecured ..
AQ
03/27HUMANA INC : Entry into a Material Definitive Agreement, Creation of a Direct Fi..
AQ
03/26HUMANA : Completes Aggregate $1.1 Billion Debt Offering
BU
03/26AM BEST : Assigns Issue Credit Ratings to Humana Inc.'s Senior Unsecured Notes
BU
03/26HUMANA : Works to Increase Capacity for Coronavirus Treatment
BU
03/25Humana Up Over 15%, on Pace for Largest Percent Increase Since May 2015 -- Da..
DJ
03/24HUMANA INC : Entry into a Material Definitive Agreement, Other Events, Financial..
AQ
More news