The condensed consolidated financial statements of Humana Inc. in this document
present the Company's financial position, results of operations and cash flows,
and should be read in conjunction with the following discussion and analysis.
References to "we," "us," "our," "Company," and "Humana" mean Humana Inc. and
its subsidiaries. This discussion includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
filings with the Securities and Exchange Commission, or SEC, in our press
releases, investor presentations, and in oral statements made by or with the
approval of one of our executive officers, the words or phrases like "believes,"
"expects," "anticipates," "intends," "likely will result," "estimates,"
"projects" or variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties and
assumptions, including, among other things, information set forth in Item 1A. -
Risk Factors in our 2021 Form 10-K, as modified by any changes to those risk
factors included in this document and in other reports we filed subsequent to
February 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 in Louisville, Kentucky, is a leading health and
well-being company committed to helping our millions of medical and specialty
members achieve their best health. Our successful history in care delivery and
health plan administration is helping us create a new kind of integrated care
with the power to improve health and well being and lower costs. Our efforts are
leading to a better quality of life for people with Medicare, families,
individuals, military service personnel, and communities at large. To accomplish
that, we support physicians and other health care professionals as they work to
deliver the right care in the right place for their patients, our members. Our
range of clinical capabilities, resources and tools, such as in home care,
behavioral health, pharmacy services, data analytics and wellness solutions,
combine to produce a simplified experience that makes health care easier to
navigate and more effective.
Our industry relies on two key statistics to measure performance. The benefit
ratio, which is computed by taking
total benefits expense as a percentage of premiums revenue, represents a
statistic used to measure underwriting profitability. The operating cost ratio,
which is computed by taking total operating costs, excluding 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
On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home,
or KAH, the nation's largest home health and hospice provider, from TPG Capital,
or TPG, and Welsh, 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
On April 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, or KAH 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 from KAH Hospice
to Humana and equity proceeds from the 60% interest purchased by CD&R.
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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.
Value Creation Initiatives
During 2022, in order to create capacity to fund growth and investment in our
Medicare Advantage business and further expansion of our Healthcare Services
capabilities in 2023, we committed to drive additional value for the enterprise
through cost saving, productivity initiatives, and value acceleration from
previous investments. As a result of these initiatives, during the second
quarter of 2022, we recorded a charge of $203 million, primarily related to
asset and software impairment and abandonment in the amount of $140 million.
These charges are included within operating costs in the condensed consolidated
statements of income for the three and six months ended June 30, 2022, and were
recorded at the corporate level and not allocated to the segments. Included in
this charge is $21 million in future severance payments in connection with the
optimization of our workforce to increase speed, agility, and the pace at which
Humana must work as a large, integrated healthcare organization. We expect this
liability to be primarily paid within the next 12 months and classified it as a
current liability, included in trade accounts payable and accrued expenses. We
anticipate additional charges in the remainder of the year across these same
categories as additional cost saving, productivity initiatives, and value
acceleration opportunities are identified.
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-emergent and elective medical care have resulted in lower overall healthcare
system utilization. At the same time, COVID-19 treatment and testing costs
increased utilization. During the first half 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, 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
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
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the company's strategic partnerships 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 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
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 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 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.
At June 30, 2022, approximately 3,095,300 members, or 68%,
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of our individual Medicare Advantage members were in value-based relationships
under our integrated care delivery model, as compared to 2,914,300 members, or
67%, at June 30, 2021.
•Net income was $697 million, or $5.48 per diluted common share, and $588
million, or $4.55, for the three months ended June 30, 2022, and 2021,
respectively. Net income was $1.6 billion, or $12.77 per diluted common share,
and $1.4 billion, or $10.94 per diluted common share, for the six months ended
June 30, 2022, and 2021, respectively. This comparison was significantly
impacted by charges associated with productivity initiatives related to
previously disclosed $1 billion value creation plan, tax provision related to
the pending sale of Kindred at Home's Hospice and Personal Care divisions,
put/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
and period:
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