HUMANA INC. The condensed consolidated financial statements ofHumana Inc. in this document present the Company's financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to "we," "us," "our," "Company," and "Humana" meanHumana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with theSecurities and Exchange Commission , orSEC , in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like "believes," "expects," "anticipates," "intends," "likely will result," "estimates," "projects" or variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. - Risk Factors in our 2021 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent toFebruary 17, 2022 , in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward-looking statements.
Executive Overview
General
Humana Inc. , headquartered inLouisville, Kentucky , is a leading health and well-being company committed to helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and well being and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as in home care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective. Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.
Kindred at Home Acquisition
OnAugust 17, 2021 , we acquired the remaining 60% interest in Kindred at Home, or KAH, the nation's largest home health and hospice provider, fromTPG Capital , or TPG, andWelsh, Carson, Anderson & Stowe , or WCAS, two private equity funds, or the Sponsors, for an enterprise value of$8.2 billion , which includes our equity value of$2.4 billion associated with our 40% minority ownership interest. We paid the approximate$5.8 billion transaction price (net of our existing equity stake) through a combination of debt financing, the assumption of existing KAH indebtedness and parent company cash.
Sale of Hospice and Personal Care Divisions
OnApril 21, 2022 , we signed a definitive agreement with private investment firm Clayton, Dubilier & Rice, or CD&R, to divest a 60% interest in the Hospice and Personal Care divisions of Humana's Kindred at Home subsidiary, orKAH Hospice , at an enterprise valuation of$3.4 billion . These divisions include patient-centered services for Hospice, Palliative, Community and Personal Care. Under the agreement, we will receive cash proceeds of approximately$2.8 billion , which includes a combination of debt repayments fromKAH Hospice to Humana and equity proceeds from the 60% interest purchased by CD&R. 33
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The transaction is expected to close in the third quarter of 2022 and is subject to customary state and federal regulatory approvals.
COVID-19
The emergence and spread of the novel coronavirus, or COVID-19, beginning in the first quarter of 2020 has impacted our business. During periods of increased incidences of COVID-19, a reduction in non-COVID-19 hospital admissions for non-essential care have resulted in lower overall healthcare system utilization. At the same time, COVID-19 treatment and testing costs increased utilization. During the first quarter of 2022, we experienced lower overall utilization of the healthcare system than anticipated, as the reduction in COVID-19 utilization following the increased incidence associated with the Omicron variant outpaced the increase in non-COVID-19 utilization. The significant disruption in utilization during 2020 also impacted our ability to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles, and, as such, significantly affected our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans. Finally, changes in utilization patterns and actions taken in 2021 as a result of the COVID-19 pandemic, including the suspension of certain financial recovery programs for a period of time and shifting the timing of claim payments and provider capitation surplus payments, impacted our claim reserve development and operating cash flows for 2021.
Business Segments
We manage our business with three reportable segments:Retail, Group and Specialty, and Healthcare Services. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources. The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, including Temporary Assistance for Needy Families, or TANF, dual eligible demonstration, andLong-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 ourTRICARE T2017 East Region contract. The Healthcare Services segment includes pharmacy, provider, and home services, along with other services and capabilities to promote wellness and advance population health. The operations of the recently acquired full ownership of Kindred at Home, as well as the company's strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers are also included in the Healthcare Services segment. The results of each segment are measured by segment earnings, and for our Healthcare Services Segment, also include equity in net earnings from our equity method investees. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home solutions services, to ourRetail 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. 34 -------------------------------------------------------------------------------- Table of Contents Seasonality COVID-19 disrupted the pattern of our quarterly earnings and operating cash flows largely due to the temporary deferral of non-essential care which resulted in reductions in non-COVID-19 hospital admissions and lower overall healthcare system utilization during higher levels of COVID-19 hospital admissions. Likewise, during periods of increased incidences of COVID-19, COVID-19 treatment and testing costs increase. Similar impacts and seasonal disruptions from either higher or lower utilization are expected to persist as we respond to and recover from the COVID-19 global health crisis. 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 onJanuary 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 standalone 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.
2022 Highlights
•Our strategy offers 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. AtMarch 31, 2022 , approximately 3,053,600 members, or 67%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,810,700 members, or 65%, atMarch 31, 2021 . •OnApril 4, 2022 ,Centers for Medicare & Medicaid Services (CMS) published its Announcement of Calendar Year 2023 Medicare Advantage Capitation Rates and Part C and Part D Payment Policies (the Final Rate Notice). The company expects the Final Rate Notice to result in a 4.6% rate increase for non-end stage renal disease, or ESRD, Medicare Advantage business, excluding the impact of Employer Group Waiver Plan funding changes. The company's 4.6% rate increase compares to CMS's estimate for the sector of 5.0% on a comparable basis, with the variance primarily driven by average Star ratings, as well as county rebasing and the company's geographic footprint. CMS also establishes separate rates of payment for ESRD beneficiaries enrolled in Medicare Advantage plans. The company expects the Final Rate Notice to result in a 6.8% rate increase in 2023 for ESRD beneficiaries, which reflects CMS's United States Per Capita Cost trend of 9.6%, offset by 2.8% for ESRD risk model change impacts.
•Net income was
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call valuation adjustments associated with certain equity method investments,
transaction and integration costs, as well as the change in the fair value of
publicly-traded equity securities. The impact of these adjustments to our
consolidated income before income taxes and equity in net earnings and diluted
earnings per common share was as follows for the 2022 and 2021 quarter:
For the three
months ended March
31,
2022 2021Consolidated income before income taxes and equity in net earnings:
Put/call valuation adjustments associated with company's non consolidating minority interest investments
$ (21) $ 115 Transaction and integration costs 17 - Change in the fair value of publicly-traded equity securities 109 85 Total$ 105 $ 200 For the three months ended March 31, 2022 2021
Diluted earnings per common share:
Put/call valuation adjustments associated with company's non consolidating minority interest investments
$ (0.12) $ 0.69 Transaction and integration costs 0.10 - Change in the fair value of publicly-traded equity securities 0.66 0.51 Total$ 0.64 $ 1.20
•Excluding these adjustments, our improved comparisons of our results of operations were primarily impacted by our Healthcare Services segment, including the consolidation of Kindred at Home operations.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of theU.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, which was not deductible for income tax purposes and significantly increased our effective tax rate, was in effect for 2020, but was 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 such as the Families First Coronavirus Response Act, or the Families First Act, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and other legislative or regulatory action taken in response to COVID-19 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 36 -------------------------------------------------------------------------------- Table of Contents 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 home solutions services, to ourRetail and Group and Specialty segment customers and are described in Note 14 to the condensed consolidated financial statements included in this report. 37 -------------------------------------------------------------------------------- Table of Contents Comparison of Results of Operations for 2022 and 2021 The following discussion primarily deals with our results of operations for the three months endedMarch 31, 2022 , or the 2022 quarter, and the three months endedMarch 31, 2021 , or the 2021 quarter. Consolidated For the three months ended March 31, Change 2022 2021 Dollars Percentage (dollars in millions, except per common share results) Revenues: Premiums: Retail $ 21,302$ 18,591 $ 2,711 14.6 % Group and Specialty 1,401 1,533 (132) (8.6) % Total premiums 22,703 20,124 2,579 12.8 % Services: Retail 6 5 1 20.0 % Group and Specialty 195 190 5 2.6 % Healthcare Services 1,063 271 792 292.3 % Total services 1,264 466 798 171.2 % Investment income 3 78 (75) (96.2) % Total revenues 23,970 20,668 3,302 16.0 % Operating expenses: Benefits 19,625 17,296 2,329 13.5 % Operating costs 2,886 2,007 879 43.8 % Depreciation and amortization 170 142 28 19.7 % Total operating expenses 22,681 19,445 3,236 16.6 % Income from operations 1,289 1,223 66 5.4 % Interest expense 90 68 22 32.4 % Other (income) expense, net (21) 115 136 118.3 % Income before income taxes and equity in net earnings 1,220 1,040 180 17.3 % Provision for income taxes 286 233 53 22.7 % Equity in net (losses) earnings (4) 21 (25) (119.0) % Net income $ 930$ 828 $ 102 12.3 % Diluted earnings per common share $ 7.29$ 6.39 $ 0.90 14.1 % Benefit ratio (a) 86.4 % 85.9 % 0.5 % Operating cost ratio (b) 12.0 % 9.7 % 2.3 % Effective tax rate 23.5 % 22.0 % 1.5 %
(a)Represents benefits expense as a percentage of premiums revenue. (b)Represents operating costs as a percentage of total revenues less investment income.
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Premiums Revenue
Consolidated premiums increased $2.6 billion , or 12.8%, from $20.1 billion in
the 2021 quarter to $22.7 billion in the 2022 quarter primarily due to
individual Medicare Advantage and state-based contracts membership growth and
higher per member individual Medicare Advantage premiums, partially offset by
declining year-over-year membership associated with the group commercial medical
products.
Services Revenue
Consolidated services revenue increased
Investment Income
Investment income decreased$75 million , or 96.2%, from$78 million in the 2021 quarter to$3 million in the 2022 quarter primarily due to the decrease in the fair value of our publicly traded equity securities investments.
Benefit Expense
Consolidated benefits expense increased$2.3 billion , or 13.5%, from$17.3 billion in the 2021 quarter to$19.6 billion in the 2022 quarter. The consolidated benefit ratio increased 50 basis points from 85.9% for the 2021 quarter to 86.4% for the 2022 quarter primarily due to the lower favorable prior-period medical claims reserve development, partially offset by higher per member individual Medicare Advantage premiums and lower admissions per thousand, or APT, associated with the Medicare Advantage business. Consolidated benefits expense included$360 million of favorable prior-period medical claims reserve development in the 2022 quarter and$555 million of favorable prior-period medical claims development in the 2021 quarter. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 160 basis points in the 2022 quarter and decreased the consolidated benefit ratio by approximately 280 basis points in the 2021 quarter. Operating Costs Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent. Consolidated operating costs increased$879 million , or 43.8%, from$2.0 billion in the 2021 quarter to$2.9 billion in the 2022 quarter. The consolidated operating cost ratio increased 230 basis points from 9.7% for the 2021 quarter to 12.0% for the 2022 quarter primarily due to the impact of the consolidation of Kindred at Home operations, which have a significantly higher operating cost ratio than our historical consolidated operating cost ratio, partially offset by scale efficiencies associated with growth in individual Medicare Advantage membership.
Depreciation and Amortization
Depreciation and amortization increased$28 million , or 19.7%, from$142 million in the 2021 quarter to$170 million in the 2022 quarter primarily due to capital expenditures. Interest Expense
Interest expense increased
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Income Taxes
The effective income tax rate was 23.5% and 22.0% for the three months ended
March 31, 2022 , and 2021, respectively. The increase was primarily due to the
favorable tax treatment we incurred during the 2021 period related to our equity
method investment activity that did not occur during the 2022 period.
Retail Segment
March 31, Change
2022 2021 Members Percentage
Membership:
Medical membership:
Individual Medicare Advantage 4,538,200 4,291,300 246,900 5.8 %
Group Medicare Advantage 562,200 556,700 5,500 1.0 %
Medicare stand-alone PDP 3,607,000 3,666,200 (59,200) (1.6) %
Total Retail Medicare 8,707,400 8,514,200 193,200 2.3 %
State-based Medicaid and other 1,010,300 838,900 171,400 20.4 %
Medicare Supplement 318,400 328,100 (9,700) (3.0) %
Total Retail medical members 10,036,100 9,681,200 354,900 3.7 %
For the three months ended March 31, Change
2022 2021 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage $ 17,052 $ 14,815 $ 2,237 15.1 %
Group Medicare Advantage 1,875 1,755 120 6.8 %
Medicare stand-alone PDP 639 664 (25) (3.8) %
Total Retail Medicare 19,566 17,234 2,332 13.5 %
State-based Medicaid and other 1,554 1,179 375 31.8 %
Medicare Supplement 182 178 4 2.2 %
Total premiums 21,302 18,591 2,711 14.6 %
Services 6 5 1 20.0 %
Total premiums and services revenue $ 21,308 $ 18,596 $ 2,712 14.6 %
Segment earnings $ 784 $ 794 $ (10) (1.3) %
Benefit ratio 88.0 % 87.7 % 0.3 %
Operating cost ratio 8.0 % 7.8 % 0.2 %
Segment Earnings
•Retail segment earnings decreased $10 million , or 1.3%, from $794 million in
the 2021 quarter to $784 million in the 2022 quarter primarily due to the same
factors that led to the segment's higher benefit and operating cost ratio as
more fully described below.
Enrollment
•Individual Medicare Advantage membership increased 246,900 members, or 5.8%,
from
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Period, or AEP. The membership growth was further impacted by continued
enrollment resulting from special elections, age-ins, and Dual Eligible Special
Need Plans, or D-SNP, members. Individual Medicare Advantage membership includes
640,600 D-SNP members as of March 31, 2022 , a net increase of 139,500, or 27.8%,
from 501,100 as of March 31, 2021 .
•Group Medicare Advantage membership increased 5,500, or 1.0%, from
•Medicare stand-alone PDP membership decreased 59,200 members, or 1.6%, from
•State-based Medicaid membership increased 171,400 members, or 20.4%, fromMarch 31, 2021 toMarch 31, 2022 reflecting the suspension of state eligibility redetermination efforts due to the currently enacted public health emergency, or PHE. Premiums Revenue •Retail segment premiums increased$2.7 billion , or 14.6%, from$18.6 billion in the 2021 quarter to$21.3 billion in the 2022 quarter primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums.
Benefits Expense
•The Retail segment benefit ratio increased 30 basis points from 87.7% for the 2021 quarter to 88.0% for the 2022 quarter primarily due to the lower favorable prior-period medical claims reserve development, partially offset by the impact of higher per member individual Medicare Advantage premiums and lower APT associated with the Medicare Advantage business. •The Retail segment's benefits expense included$328 million of favorable prior-period medical claims reserve development in the 2022 quarter and$463 million of favorable prior-period medical claims development in the 2021 quarter. Prior-period medical claims reserve development decreased the Retail segment's benefit ratio by approximately 150 basis points in the 2022 quarter and decreased the Retail segment's benefit ratio by approximately 250 basis points in the 2021 quarter.
Operating Costs
•The Retail segment operating cost ratio increased 20 basis points from 7.8% for
the 2021 quarter to 8.0% for the 2022 quarter primarily due to additional
marketing costs in the 2022 quarter to support individual Medicare Advantage
growth, as well as strategic technology investments to position us for long-term
success. These factors were partially offset by scale efficiencies associated
with growth in our individual Medicare Advantage membership.
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Group and Specialty Segment
March 31, Change
2022 2021 Members Percentage
Membership:
Medical membership:
Fully-insured commercial group 624,400 721,300 (96,900) (13.4) %
ASO 451,800 500,600 (48,800) (9.7) %
Military services 6,027,500 6,047,400 (19,900) (0.3) %
Total group medical members 7,103,700 7,269,300 (165,600) (2.3) %
Specialty membership (a) 5,182,600 5,326,100 (143,500) (2.7) %
(a)Specialty products include dental, vision, and other supplemental health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.
For the three months ended March
31, Change
2022 2021 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group $ 972 $ 1,099 $ (127) (11.6) %
Group specialty 429 434 (5) (1.2) %
Total premiums 1,401 1,533 (132) (8.6) %
Services 195 190 5 2.6 %
Total premiums and services revenue $ 1,596 $ 1,723 $ (127) (7.4) %
Segment earnings $ 132 $ 174 $ (42) (24.1) %
Benefit ratio 74.7 % 74.7 % - %
Operating cost ratio 25.7 % 22.9 % 2.8 %
Segment Earnings
•Group and Specialty segment earnings decreased $42 million , or 24.1%, from $174
million in the 2021 quarter to $132 million in the 2022 quarter primarily due to
the same factors that led to the segment's higher operating ratio as more fully
described below.
Enrollment
•Fully-insured commercial group medical membership decreased 96,900 members, or
13.4%, from March 31, 2021 to March 31, 2022 reflecting the impact of pricing
discipline to address COVID-19 and improve profitability.
•Group ASO commercial medical membership decreased 48,800 members, or 9.7%, from
March 31, 2021 to March 31, 2022 reflecting continued intensified competition
for small group accounts, partially offset by strong retention among large group
accounts.
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•Military services membership decreased 19,900 members, or 0.3%, from March 31,
2021 to March 31, 2022 . Membership includes military service members, retirees,
and their families to whom we are providing healthcare services under the
current TRICARE East Region contract.
•Specialty membership decreased 143,500 members, or 2.7%, from March 31, 2021 to
March 31, 2022 primarily due to the loss of dental and vision groups cross-sold
with medical, as reflected in the loss of group fully-insured commercial medical
membership above. In addition, current membership reflects the economic impact
of the COVID-19 pandemic.
Premiums Revenue
•Group and Specialty segment premiums decreased $132 million , or 8.6%, from $1.5
billion in the 2021 quarter to $1.4 billion in the 2022 quarter primarily due to
the decline in our fully-insured commercial medical and ASO commercial
membership partially offset by higher per member premiums across our
fully-insured commercial business.
Services Revenue
•Group and Specialty segment services revenue increased
Benefits Expense
•The Group and Specialty segment benefit ratio of 74.7% for the 2022 quarter was inline with the 2021 quarter reflecting the lower favorable prior-period medical claims reserve development, offset by pricing and benefit design efforts to address COVID-19 and increase profitability, less severe COVID-19 impact within the fully-insured commercial business due to the enrolled population's vaccination rate in the 2022 quarter compared to the 2021 quarter, as well as the impact of the specialty product's lower benefit ratio, as the segment results now reflect a higher mix of the specialty business. •The Group and Specialty segment's benefits expense included$32 million of favorable prior-period medical claims reserve development in the 2022 quarter and$92 million of favorable prior-period medical claims reserve development in the 2021 quarter. Prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 230 basis points in the 2022 quarter and decreased the Group Specialty segment benefit ratio by approximately 600 basis points in the 2021 quarter.
Operating Costs
•The Group and Specialty segment operating cost ratio increased 280 basis points from 22.9% for the 2021 quarter to 25.7% for the 2022 quarter primarily due to the impact of membership declining at a greater rate than the decline in absolute administrative expenses, as well as a greater proportion of membership associated with our ASO commercial and military services businesses, which have a higher operating cost ratio than the fully-insured commercial product. The increase further reflects investments in the Military services business across demonstration programs, partners service contracts and in preparation for the next generation of theUnited States Department of Defenses's TRICARE contracts, as well as investments in our specialty business to promote growth. 43 --------------------------------------------------------------------------------
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Healthcare Services Segment
For the three months ended March 31, Change
2022 2021 Dollars Percentage
(in millions)
Revenues:
Services:
Home solutions $ 726 $ 24 $ 702 2925.0 %
Pharmacy solutions 224 156 68 43.6 %
Provider services 113 91 22 24.2 %
Total services revenues 1,063 271 792 292.3 %
Intersegment revenues:
Home solutions 202 123 79 64.2 %
Pharmacy solutions 6,673 6,217 456 7.3 %
Provider services 748 586 162 27.6 %
Total intersegment revenues 7,623 6,926 697 10.1 %
Total services and intersegment
revenues $ 8,686 $ 7,197 $ 1,489 20.7 %
Segment earnings $ 446 $ 269 $ 177 65.8 %
Operating cost ratio 94.2 % 96.0 % (1.8) %
Segment Earnings
•Healthcare Services segment earnings increased $177 million , or 65.8%, from
$269 million in the 2021 quarter to $446 million in the 2022 quarter primarily
due to consolidation of Kindred at Home earnings, individual Medicare Advantage
and state-based contracts membership growth leading to higher pharmacy earnings
as well as the same factors that led to the segment's lower operating cost
ratio.
Script Volume
•Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 131 million in the 2022 quarter, up 4.3%, versus scripts of approximately 126 million in the 2021 quarter primarily due to individual Medicare Advantage membership growth, partially offset by the decline in stand-alone PDP, fully-insured commercial and ASO membership .
Services Revenues
•Services revenues increased$792 million , or 292.3%, from$271 million in the 2021 quarter to$1.1 billion in the 2022 quarter primarily due to the impact of Kindred at Home revenues from external customers.
Intersegment Revenues
•Intersegment revenues increased$697 million , or 10.1%, from$6.9 billion in the 2021 quarter to$7.6 billion in the 2022 quarter primarily due to strong individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy revenues, the impact of greater mail-order pharmacy penetration by retained members, as well as higher revenues associated with growth in our provider business. 44 -------------------------------------------------------------------------------- Table of Contents Operating Costs •The Healthcare Services segment operating cost ratio decreased 180 basis points from 96.0% for the 2021 quarter to 94.2% for the 2022 quarter primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, combined with a favorable impact to the ratio related to our pharmacy operations.
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 the section entitled "Risk Factors" in our 2021 Form 10-K and Item 1A of Part II of this document. Cash and cash equivalents increased to approximately$4.9 billion atMarch 31, 2022 from$3.4 billion atDecember 31, 2021 . The change in cash and cash equivalents for the three months endedMarch 31, 2022 and 2021 is summarized as follows: Three Months Ended 2022 2021 (in millions)
Net cash provided by (used in) operating activities
(648) (1,488)
Net cash provided by financing activities 1,816
1,529
Increase (decrease) in cash and cash equivalents
Cash Flow from Operating Activities
Cash flows provided by operations of$302 million in the 2022 quarter increased$1.1 billion from cash flows used in operations of$837 million in the 2021 quarter primarily due to the pay down of claims inventory and capitation for provider surplus amounts earned in 2020 and additional provider support in the 2021 quarter, combined with other favorable working capital items and higher earnings in the 2022 quarter compared to the 2021 quarter. The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables. 45 -------------------------------------------------------------------------------- Table of Contents The detail of benefits payable was as follows atMarch 31, 2022 andDecember 31, 2021 : December 31, 2022 Quarter 2021 Quarter March 31, 2022 2021 Change Change (in millions) IBNR (1)$ 5,826 $
5,695
1,477 907 570 402
Other benefits payable (3) 2,075 1,687 388 (120)
Total benefits payable $ 9,378 $ 8,289 $ 1,089 $ 508
Payables from acquisition - (42)Change in benefits payable per cash flow
statement resulting in cash from operations$ 1,089 $ 466 (1)IBNR represents an estimate of benefits payable for claims incurred but not reported, or 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). (2)Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.
(3)Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.
The increase in benefits payable in the 2022 quarter was primarily due to an increase in reported claims in process, higher capitation accruals and higher IBNR. Higher reported claims in process was a function of month-end cut off. IBNR increased primarily as a result of increased individual Medicare Advantage and state-based contracts membership.
The detail of total net receivables was as follows at
December 31, 2022 Quarter 2021 Quarter
March 31, 2022 2021 Change Change
(in millions)
Medicare $ 2,572 $
1,214
563 579 (16) 37
Military services 108 104 4 6
Allowance for doubtful accounts (69) (83) 14 1
Total net receivables $ 3,174 $
1,814
- (9)Change in receivables per cash flow
statement resulting in cash from operations$ 1,360 $ 1,049 The changes in Medicare receivables for both the 2022 quarter and the 2021 quarter reflect individual Medicare Advantage membership growth and the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter. 46 -------------------------------------------------------------------------------- Table of Contents Cash Flow from Investing Activities
In the first quarter of 2022 and 2021, we acquired immaterial businesses of
approximately
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$295 million in the 2022 quarter and$290 million in the 2021 quarter.
Net purchases of investment securities were
Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claim payments by$2.48 billion and$1.02 billion in the 2022 and 2021 quarters, respectively.
Under our administrative services only TRICARE contracts, health care costs
payments for which we do not assume risk exceeded reimbursements from the
federal government by
Net repayments from the issuance of commercial paper were$265 million in the 2022 quarter and net proceeds from the issuance of commercial paper were$603 million in the 2021 quarter. The maximum principal amount outstanding at any one time during the 2022 quarter was$1.5 billion .
In
OnJanuary 11, 2022 , we entered into theJanuary 2022 ASR Agreements with Mizuho and Wells Fargo to repurchase$1 billion of our common stock as part of the$3 billion repurchase program authorized by the Board of Directors onFebruary 17, 2021 . OnJanuary 12, 2022 , we made a payment of$1 billion and received an initial delivery of 2.2 million shares of our common stock.
We acquired common shares in connection with employee stock plans for an
aggregate cost of
We paid dividends to stockholders of
The remainder of the cash used in or provided by financing activities in 2022 and 2021 primarily resulted from the change in book overdraft.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 10 to the condensed consolidated financial statements.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 10 to the condensed consolidated financial statements.
Debt
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For a detailed discussion of our debt, including our senior notes, term loans,
credit agreements, commercial paper program, and other short-term borrowings,
please refer to Note 12 to the condensed consolidated financial statements.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares. Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating atMarch 31, 2022 was BBB+ according toStandard & Poor's Rating Services , or S&P, and Baa3 according to Moody's Investors Services, Inc., or Moody's. A downgrade by S&P to BB+ or by Moody's to Ba1 triggers an interest rate increase of 25 basis points with respect to$250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by less than$1 million , up to a maximum 100 basis points, or annual interest expense by$3 million . In addition, we operate as a holding company in a highly regulated industry.Humana Inc. , our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were$1.1 billion atMarch 31, 2022 compared to$1.3 billion atDecember 31, 2021 . This decrease primarily was due to capital expenditures, repayment of borrowings under the commercial paper program, cash dividends to shareholders, capital contributions to certain subsidiaries and acquisitions partially offset by net proceeds from the senior notes, earnings in non-regulated Healthcare Services subsidiaries. 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 regulators).
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers toHumana Inc. , our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid toHumana Inc. by these subsidiaries, without prior approval by state regulatory authorities, or ordinary dividends, is limited based on the entity's level of statutory income and statutory capital and surplus. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an extraordinary dividend requiring prior regulatory approval. In most states, prior notification is provided before paying a dividend even if approval is not required. Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as ofDecember 31, 2021 , our state regulated subsidiaries had aggregate statutory capital and surplus of approximately$9.6 billion , which exceeded aggregate minimum regulatory requirements of$7.6 billion . The amount of ordinary dividends that may be paid to our parent company in 2022 is approximately$1.5 billion in the aggregate. The amount, timing and mix of ordinary and extraordinary dividend payments will vary due to state regulatory requirements, the level of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix. Actual dividends paid to our parent company were approximately$1.6 billion in 2021. 48
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