FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 "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 2011 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 24, 2012, 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
Headquartered in Louisville, Kentucky, Humana is a leading health care company
that offers a wide range of insurance products and health and wellness services
that incorporate an integrated approach to lifelong well-being. By leveraging
the strengths of our core businesses, we believe that we can better explore
opportunities for existing and emerging adjacencies in health care that can
further enhance wellness opportunities for the millions of people across the
nation with whom we have relationships.
Our industry relies on two key statistics to measure performance. The benefit
ratio, which is computed by taking total benefit expenses 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 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, Employer Group,
and Health and Well-Being Services. In addition, the Other Businesses category
includes businesses that are not individually reportable because they do not
meet the quantitative thresholds required by generally accepted accounting
principles. These 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 to assess
performance and allocate resources.
The Retail segment consists of Medicare and commercial fully-insured medical and
specialty health insurance benefits, including dental, vision, and other
supplemental health and financial protection products, marketed directly to
individuals. The Employer Group segment consists of Medicare and commercial
fully-insured medical and specialty health insurance benefits, including dental,
vision, and other supplemental health and financial protection products, as well
as administrative services only products marketed to employer groups. The Health
and Well-Being Services segment includes services offered to our health plan
members as well as to third parties that promote health and wellness, including
primary care, pharmacy, integrated wellness, and home care services. The Other
Businesses category consists of our Military services, primarily our TRICARE
South Region contract, Medicaid, and closed-block long-term care businesses as
well as our contract with CMS to administer the Limited Income Newly Eligible
Transition program, or the LI-NET program.
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The results of each segment are measured by income before income taxes.
Transactions between reportable segments consist of sales of services rendered
by our Health and Well-Being Services segment, primarily pharmacy and behavioral
health services, to our Retail and Employer Group customers. Intersegment sales
and expenses are recorded at fair value and eliminated in consolidation. Members
served by our segments often utilize 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 the corporate level. These corporate
amounts are reported separately from our reportable segments and 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. These plans
provide varying degrees of coverage. 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.
Our Employer Group segment also experiences seasonality in the benefit ratio
pattern. However, the effect is opposite of the Retail segment, with the
Employer Group's benefit ratio increasing as fully-insured members progress
through their annual deductible and maximum out-of-pocket expenses.
2012 Highlights
Consolidated
• Our results for the three and six months ended June 30, 2012, were
significantly impacted by a higher benefit ratio. The consolidated benefit
ratio increased 140 basis points to 83.5% for the three months ended
June 30, 2012 and increased 150 basis points to 84.5% for the six months
ended June 30, 2012 compared to the same periods in 2011. The increases
primarily were due to increases in the Retail segment benefit ratios
primarily associated with our individual Medicare Advantage products
discussed in our Retail segment highlights that follow.
• Comparisons to 2011 are impacted by benefit expenses incurred related to
the settlement of litigation associated with our Military services
business during the three months ended June 30, 2012 and favorable
prior-year medical claims reserve development not in the ordinary course
of business that was higher in the three months ended June 30, 2012 than
in the three months ended June 30, 2011 and lower in the six months ended
June 30, 2012 than in the six months end June 30, 2011.
• In April 2012, our Board of Directors replaced its previously approved
share repurchase authorization of up to $1 billion of our common shares
(of which $461 million remained as of April 30, 2012) with a new
authorization for repurchases of up to $1 billion of our common shares,
such authorization to expire on June 30, 2014. As of July 31, 2012, the
remaining authorized amount under the new authorization totaled $874
million.
Retail
• As discussed in the detailed Retail segment results of operations
discussion that follows, we experienced a significant increase in the
benefit ratio in the Retail segment, with the segment's benefit ratio increasing 270 basis points to 84.1% for the three months ended June 30,
2012 and increasing 220 basis points to 85.8% for the six months ended
June 30, 2012. These increases primarily were due to a planned increase in
the target benefit ratio associated with positioning for Health Insurance
Reform Legislation funding changes and minimum benefit ratio requirements
and a higher individual Medicare Advantage benefit ratio experienced on
new membership than the assumptions used in our 2012 Medicare bids.
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• Individual Medicare Advantage membership of 1,895,800 at June 30, 2012
increased 255,500 members, or 15.6%, from 1,640,300 at December 31, 2011
and increased 293,300 members, or 18.3%, from 1,602,500 at June 30, 2011
primarily due to the annual enrollment period associated with the 2012
plan year. We acquired approximately 62,600 members with Arcadian
Management Services, Inc., or Arcadian, effective March 31, 2012, discussed below, and 12,100 members with another acquisition effective
December 30, 2011.
• Individual Medicare stand-alone PDP membership of 2,896,800 at June 30,
2012 increased 356,400 members, or 14.0%, from 2,540,400 at December 31,
2011 and increased 488,100, or 20.3%, from 2,408,700 at June 30, 2011,
primarily due to growth in our national stand-alone Medicare Part D
prescription drug plan co-branded with Wal-Mart Stores, Inc., the Humana
Walmart-Preferred Rx Plan.
• Effective March 31, 2012, we acquired Arcadian, a Medicare Advantage HMO
serving members in 15 U.S. states, increasing our Medicare membership by
approximately 62,600 members and expanding our Medicare footprint and
future growth opportunities. To obtain antitrust approval in connection
with the Arcadian acquisition, we entered into a consent agreement with
the United States Department of Justice that will require divestiture of
overlapping Medicare Advantage health plan business in eight areas within
Arizona, Arkansas, Louisiana, Oklahoma, and Texas. We expect that the
divestitures, anticipated to include approximately 12,600 members, would
be effective January 1, 2013.
• On April 2, 2012, CMS announced that payment rates will increase on
average 3.07% for 2013. We believe we can effectively design Medicare
Advantage products based upon this level of rate increase while continuing
to remain competitive compared to both the combination of original
Medicare with a supplement policy as well as Medicare Advantage products
offered by our competitors. In addition, we will continue to pursue our
cost-reduction and outcome-enhancing strategies, including care
coordination and disease management, which we believe will mitigate the
adverse effects of the rates on our Medicare Advantage members.
Nonetheless, there can be no assurance that we will be able to
successfully execute operational and strategic initiatives with respect to
changes in the Medicare Advantage program. Failure to execute these
strategies may result in a material adverse effect on our results of
operations, financial position, and cash flows.
Employer Group Segment
• Fully-insured group Medicare Advantage membership of 360,500 at June 30,
2012 increased 69,900 members, or 24.1%, from 290,600 at December 31, 2011
and increased 78,500 members, or 27.8%, from 282,000 at June 30, 2011
primarily due to the January 2012 addition of a new large group account.
Health and Well-Being Services Segment
• On July 6, 2012, we acquired SeniorBridge Family Companies, Inc., a
chronic-care provider providing in-home care for seniors, expanding our
existing clinical and home health capabilities and strengthening our
offerings for members with complex chronic-care needs.
Other Businesses
• On April 1, 2012, we began delivering services under the new TRICARE South
Region contract that the Department of Defense TRICARE Management
Activity, or TMA, awarded to us on February 25, 2011. The new 5-year South
Region contract, which expires March 31, 2017, is subject to annual
renewals on April 1 of each year during its term at the government's
option. We account for revenues under the new contract net of estimated
health care costs similar to an administrative services fee only
agreement.
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Health Insurance Reform
In June 2012, the U.S. Supreme Court upheld the constitutionality of various
aspects of The Patient Protection and Affordable Care Act. Together with The
Health Care and Education Reconciliation Act of 2010 (which we collectively
refer to as the Health Insurance Reform Legislation), significant reforms to
various aspects of the U.S. health insurance industry were enacted. While
regulations and interpretive guidance on some provisions of the Health Insurance
Reform Legislation have been issued to date by the Department of Health and
Human Services (HHS), the Department of Labor, the Treasury Department, and the
National Association of Insurance Commissioners, there are many significant
provisions of the legislation that will require additional guidance and
clarification in the form of regulations and interpretations in order to fully
understand the impacts of the legislation on our overall business, which we
expect to occur over the next several years.
Implementation dates of the Health Insurance Reform Legislation vary from
September 23, 2010 to as late as 2018. The following outlines certain provisions
of the Health Insurance Reform Legislation:
• Many changes are already effective and have been implemented by the
Company, including: elimination of pre-existing condition limits for
enrollees under age 19, elimination of certain annual and lifetime caps on
the dollar value of benefits, expansion of dependent coverage to include
adult children until age 26, a requirement to provide coverage for
preventive services without cost to members, new claim appeal
requirements, and the establishment of an interim high risk program for
those unable to obtain coverage due to a pre-existing condition or health
status.
• Effective January 1, 2011, minimum benefit ratios were mandated for all commercial fully-insured medical plans in the large group (85%), small
group (80%), and individual (80%) markets, with annual rebates to
policyholders if the actual benefit ratios, calculated in a manner
prescribed by HHS, do not meet these minimums. Certain states were approved to apply an individual threshold lower than the 80% requirement
temporarily to avoid market disruption. We began accruing for rebates in
2011, based on the manner prescribed by HHS, with initial rebate payments
made in July 2012. Our benefit ratios reported herein, calculated from
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP, differ from
the benefit ratios calculated as prescribed by HHS under the Health
Insurance Reform Legislation. The more noteworthy differences include the
fact that the benefit ratio calculations prescribed by HHS are calculated
separately by state and legal entity; reflect actuarial adjustments where
the membership levels are not large enough to create credible size;
exclude some of our health insurance products; include taxes and fees as
reductions of premium; treat changes in reserves differently than GAAP;
and classify rebate amounts as additions to incurred claims as opposed to
adjustments to premiums for GAAP reporting.
• Medicare Advantage payment benchmarks for 2011 were frozen at 2010 levels
and in 2012, additional cuts to Medicare Advantage plan payments took
effect (plans receive a range of 95% in high-cost areas to 115% in
low-cost areas of Medicare fee-for-service rates), with changes being
phased-in over two to six years, depending on the level of payment
reduction in a county. In addition, in 2011 the gap in coverage for
Medicare Part D prescription drug coverage began to incrementally close.
• Beginning in 2014, the Health Insurance Reform Legislation requires: all
individual and group health plans to guarantee issuance and renew coverage
without pre-existing condition exclusions or health-status rating
adjustments; the elimination of annual limits on coverage on certain
plans; the establishment of state-based exchanges for individuals and
small employers (with up to 100 employees) coupled with programs designed
to spread risk among insurers; the introduction of standardized plan
designs based on set actuarial values; the establishment of a minimum
benefit ratio of 85% for Medicare plans; and insurance industry
assessments, including an annual premium-based assessment and a three-year
$25 billion commercial reinsurance fee. The annual premium-based
assessment levied on the insurance industry is $8 billion in 2014 with
increasing annual amounts thereafter, growing to $14 billion by 2017, and
is not deductible for income tax purposes, which will significantly
increase our effective income tax rate in 2014. In December 2011, the
National Association of Insurance Commissioners, or NAIC, issued proposed
guidance indicating the insurance industry premium-based assessment may
require accrual and associated subsidiary funding consideration in 2013
instead of 2014. This proposed NAIC guidance is contradictory to final GAAP guidance issued by the Financial Accounting Standards Board, or FASB,
in July 2011, which requires accrual of the insurance industry
premium-based assessment beginning in 2014, the year in which it is
payable. Refer to Recently Issued Accounting Pronouncements in Note 2 to
the condensed consolidated financial statements. In June 2012, the NAIC's
Statutory Accounting Principles, or SAP, Working Group deferred issuing
guidance that would have required accrual and associated subsidiary
funding consideration related to the insurance industry premium-based
assessment beginning in 2013.
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The Health Insurance Reform Legislation also specifies required benefit designs,
limits rating and pricing practices, encourages additional competition
(including potential incentives for new market entrants) and expands eligibility
for Medicaid programs. In addition, the law will significantly increase federal
oversight of health plan premium rates and could adversely affect our ability to
appropriately adjust health plan premiums on a timely basis. Financing for these
reforms will come, in part, from material additional fees and taxes on us and
other health insurers, health plans and individuals beginning in 2014, as well
as reductions in certain levels of payments to us and other health plans under
Medicare as described herein.
In addition, certain provisions in the Health Insurance Reform Legislation tie
Medicare Advantage premiums to the achievement of certain quality performance
measures (Star Ratings). Beginning in 2012, Medicare Advantage plans with an
overall Star Rating of three or more stars (out of five) are eligible for a
quality bonus in their basic premium rates. Initially quality bonuses were
limited to the few plans that achieved four or more stars as an overall rating,
but CMS has expanded the quality bonus to three Star plans for a three year
period through 2014. Recent Star Ratings issued by CMS indicated that 98% of our
Medicare Advantage members are now in plans that will qualify for quality bonus
payments in 2013, exclusive of those recently acquired, including Arcadian.
Notwithstanding successful historical efforts to improve our Star Ratings and
other quality measures for 2012 and 2013 and the continuation of such efforts,
there can be no assurances that we will be successful in maintaining or
improving our Star Ratings in future years. Accordingly, our plans may not be
eligible for full level quality bonuses, which could adversely affect the
benefits such plans can offer, reduce membership, and/or reduce profit margins.
As discussed above, implementing regulations and related interpretive guidance
continue to be issued on several significant provisions of the Health Insurance
Reform Legislation. Congress may also withhold the funding necessary to
implement the Health Insurance Reform Legislation, or may attempt to replace the
legislation with amended provisions or repeal it altogether. Given the breadth
of possible changes and the uncertainties of interpretation, implementation, and
timing of these changes, which we expect to occur over the next several years,
the Health Insurance Reform Legislation could change the way we do business,
potentially impacting our pricing, benefit design, product mix, geographic mix,
and distribution channels. In particular, implementing regulations and related
guidance are forthcoming on various aspects of the minimum benefit ratio
requirement's applicability to Medicare, including aggregation, credibility
thresholds, and its possible application to prescription drug plans. The
response of other companies to the Health Insurance Reform Legislation and
adjustments to their offerings, if any, could cause meaningful disruption in the
local health care markets. Further, various health insurance reform proposals
are also emerging at the state level. It is reasonably possible that the Health
Insurance Reform Legislation and related regulations, as well as future
legislative changes, 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, lowering
our Medicare payment rates and increasing our expenses associated with the
non-deductible federal premium tax and other assessments; our financial
position, including our ability to maintain the value of our goodwill; and our
cash flows. If the new non-deductible federal premium tax and other assessments,
including a three-year commercial reinsurance fee, were imposed as enacted, and
if we are unable to adjust our business model to address these new taxes and
assessments, such as through the reduction of our operating costs or inclusion
in premium pricing, there can be no assurance that the non-deductible federal
premium tax and other assessments would not have a material adverse effect on
our results of operations, financial position, and 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 consist of sales of
services rendered by our Health and Well-Being Services segment, primarily
pharmacy and behavioral health services, to our Retail and Employer Group
customers and are described in Note 12 to the condensed consolidated financial
statements.
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Comparison of Results of Operations for 2012 and 2011
The following discussion primarily deals with our results of operations for the
three months ended June 30, 2012, or the 2012 quarter, the three months ended
June 30, 2011, or the 2011 quarter, the six months ended June 30, 2012, or the
2012 period, and the six months ended June 30, 2011, or the 2011 period.
Consolidated
For the three months ended
June 30, Change
2012 2011 Dollars Percentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail $ 6,272 $ 5,392 $ 880 16.3 %
Employer Group 2,522 2,216 306 13.8 %
Other Businesses 372 1,241 (869 ) (70.0 )%
Total premiums 9,166 8,849 317 3.6 %
Services:
Retail 5 4 1 25.0 %
Employer Group 89 87 2 2.3 %
Health and Well-Being Services 249 225 24 10.7 %
Other Businesses 91 28 63 225.0 %
Total services 434 344 90 26.2 %
Investment income 99 91 8 8.8 %
Total revenues 9,699 9,284 415 4.5 %
Operating expenses:
Benefits 7,652 7,269 383 5.3 %
Operating costs 1,384 1,193 191 16.0 %
Depreciation and amortization 73 68 5 7.4 %
Total operating expenses 9,109 8,530 579 6.8 %
Income from operations 590 754 (164 ) (21.8 )%
Interest expense 26 28 (2 ) (7.1 )%
Income before income taxes 564 726 (162 ) (22.3 )%
Provision for income taxes 208 266 (58 ) (21.8 )%
Net income $ 356 $ 460 $ (104 ) (22.6 )%
Diluted earnings per common share $ 2.16 $ 2.71 $ (0.55 ) (20.3 )%
Benefit ratio(a) 83.5 % 82.1 % 1.4 %
Operating cost ratio(b) 14.4 % 13.0 % 1.4 %
Effective tax rate 36.8 % 36.6 % 0.2 %
(a) Represents total benefit expenses as a percentage of premiums revenue.
(b) Represents total operating costs as a percentage of total revenues less
investment income.
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For the six months ended
June 30, Change
2012 2011 Dollars Percentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail $ 12,307 $ 10,701 $ 1,606 15.0 %
Employer Group 5,051 4,443 608 13.7 %
Other Businesses 1,583 2,472 (889 ) (36.0 )%
Total premiums 18,941 17,616 1,325 7.5 %
Services:
Retail 11 7 4 57.1 %
Employer Group 178 180 (2 ) (1.1 )%
Health and Well-Being Services 486 442 44 10.0 %
Other Businesses 109 50 59 118.0 %
Total services 784 679 105 15.5 %
Investment income 193 180 13 7.2 %
Total revenues 19,918 18,475 1,443 7.8 %
Operating expenses:
Benefits 16,002 14,614 1,388 9.5 %
Operating costs 2,767 2,449 318 13.0 %
Depreciation and amortization 143 134 9 6.7 %
Total operating expenses 18,912 17,197 1,715 10.0 %
Income from operations 1,006 1,278 (272 ) (21.3 )%
Interest expense 52 55 (3 ) (5.5 )%
Income before income taxes 954 1,223 (269 ) (22.0 )%
Provision for income taxes 350 448 (98 ) (21.9 )%
Net income $ 604 $ 775 $ (171 ) (22.1 )%
Diluted earnings per common share $ 3.65 $ 4.57 $ (0.92 ) (20.1 )%
Benefit ratio(a) 84.5 % 83.0 % 1.5 %
Operating cost ratio(b) 14.0 % 13.4 % 0.6 %
Effective tax rate 36.7 % 36.6 % 0.1 %
(a) Represents total benefit expenses as a percentage of premiums revenue.
(b) Represents total operating costs as a percentage of total revenues less
investment income.
Summary
Net income was $356 million, or $2.16 per diluted common share, in the 2012
quarter compared to $460 million, or $2.71 per diluted common share, in the 2011
quarter. Net income was $604 million, or $3.65 per diluted common share, in the
2012 period compared to $775 million, or $4.57 per diluted common share, in the
2011 period. The decreases primarily were due to lower operating results in the
Retail segment as well as Other Businesses, partially offset by improved
operating results in the Health and Well-Being Services segment. During the 2012
quarter and period, we experienced a significant increase in the Retail segment
benefit ratio primarily associated with our individual Medicare Advantage
products primarily due to a planned increase in the target benefit ratio
associated with positioning for Health Insurance Reform Legislation funding
changes and minimum benefit ratio requirements and a higher benefit ratio
experienced on new membership than the assumptions used in our 2012 Medicare
bids. Our diluted earnings per common share for the 2012 quarter and period
included $0.18 per diluted common share for benefit expenses related to the
settlement of a litigation matter associated with our Military
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services business. In addition, our diluted earnings per common share included
the beneficial impact of favorable prior-year medical claims reserve development
of approximately $0.15 per diluted common share for the 2012 quarter compared to
$0.12 per diluted common share for the 2011 quarter. For the 2012 period, our
diluted earnings per common share included the beneficial impact of favorable
prior-year medical claims reserve development of approximately $0.18 per diluted
common share compared to $0.44 per diluted common share for the 2011 period.
Premiums
Consolidated premiums increased $317 million, or 3.6%, from the 2011 quarter to
$9.2 billion for the 2012 quarter, and increased $1.3 billion, or 7.5%, from the
2011 period to $18.9 billion for the 2012 period. These increases primarily were
due to increases in both Retail and Employer Group segment premiums primarily
driven by higher average individual and group Medicare Advantage membership,
partially offset by lower premiums for our Other Businesses due to the
transition to the new TRICARE South Region contract. As discussed previously, on
April 1, 2012, we began delivering services under the new TRICARE South Region
contract that the TMA awarded to us on February 25, 2011. We account for
revenues under the new contract net of estimated healthcare costs similar to an
administrative services fee only agreement, and as such there are no premiums
recognized under the new contract. Average membership is calculated by summing
the ending membership for each month in a period and dividing the result by the
number of months in a period. Premiums revenue reflects changes in membership
and increases in average per member premiums. Items impacting average per member
premiums include changes in premium rates as well as changes in the geographic
mix of membership, the mix of product offerings, and the mix of benefit plans
selected by our membership.
Services Revenue
Consolidated services revenue increased $90 million, or 26.2%, from the 2011
quarter to $434 million for the 2012 quarter, and increased $105 million, or
15.5%, from the 2011 period to $784 million for the 2012 period. These increases
primarily were due to increased services revenue for our Other Businesses due to
the transition to the new TRICARE South Region contract on April 1, 2012
discussed above, and an increase in primary care services revenue in our Health
and Well-Being Services segment from growth in our Concentra operations.
Investment Income
Investment income totaled $99 million for the 2012 quarter, an increase of $8
million from the 2011 quarter. For the 2012 period, investment income totaled
$193 million, an increase of $13 million, or 7.2%, from the 2011 period. These
increases primarily reflect capital gains realized in the 2012 quarter and
period.
Benefit Expenses
Consolidated benefit expenses were $7.7 billion for the 2012 quarter, an
increase of $383 million, or 5.3%, from the 2011 quarter. For the 2012 period,
consolidated benefit expenses were $16.0 billion, an increase of $1.4 billion,
or 9.5%, from the 2011 period. These increases primarily were due to an $883
million, or 20.1%, increase in Retail segment benefit expenses from the 2011
quarter to the 2012 quarter, and a $1.6 billion, or 18.1%, increase in Retail
segment benefit expenses from the 2011 period to the 2012 period, primarily
driven by an increase in the average number of individual Medicare members.
These increases were partially offset by a decrease in benefit expenses for
Other Businesses primarily due to the transition to the new administrative
services only TRICARE South Region contract on April 1, 2012. We do not record
benefit expenses under the new contract.
The consolidated benefit ratio for the 2012 quarter was 83.5%, a 140 basis point
increase from the 2011 quarter. The consolidated benefit ratio for the 2012
period was 84.5%, a 150 basis point increase from the 2011 period. These
increases primarily were due to increases in both the Retail and Employer Group
segments benefit ratios as described further in our segment results discussion
that follows. Year-over-year quarter and period comparisons of the consolidated
benefit ratio were favorably impacted by 30 basis points due to the continued
growth of our Health & Well-Being segment and the related savings realized on a
consolidated basis from providing these services directly to our members at fair
market value rather than through a third party.
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.
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Consolidated operating costs increased $191 million, or 16.0%, during the 2012
quarter compared to the 2011 quarter, and increased $318 million, or 13.0%,
during the 2012 period compared to the 2011 period. The increases primarily were
due to an increase in operating costs in our Retail Segment as a result of
Medicare Advantage growth.
The consolidated operating cost ratio for the 2012 quarter was 14.4%, increasing
140 basis points from the 2011 quarter. For the 2012 period the consolidated
operating cost ratio was 14.0%, increasing 60 basis points from the 2011 period.
These increases primarily reflect the impact of the new TRICARE South Region
contract being accounted for as an administrative services fee only arrangement.
Depreciation and Amortization
Depreciation and amortization for the 2012 quarter totaled $73 million, an
increase of $5 million, or 7.4%, from the 2011 quarter. For the 2012 period,
depreciation and amortization of $143 million increased $9 million, or 6.7%,
from the 2011 period. These increases primarily were due to increased
amortization expense in the 2012 quarter and period as a result of the
acquisitions of Anvita in the fourth quarter of 2011 and Arcadian in the first
quarter of 2012.
Interest Expense
Interest expense was $26 million for the 2012 quarter compared to $28 million
for the 2011 quarter. Interest expense was $52 million for the 2012 period
compared to $55 million for the 2011 period. In March 2012, we repaid $36
million of junior subordinated debt that carried a higher interest rate than our
senior notes.
Income Taxes
Our effective tax rate during the 2012 quarter was 36.8%, comparable to the
effective tax rate of 36.6% in the 2011 quarter. For the 2012 period, our
effective tax rate was 36.7%, comparable to the effective tax rate of 36.6% in
the 2011 period.
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Retail Segment
June 30, Change
2012 2011 Members Percentage
Membership:
Medical membership:
Individual Medicare Advantage 1,895,800 1,602,500 293,300 18.3 %
Individual Medicare stand-alone PDP 2,896,800 2,408,700 488,100 20.3 %
Total individual Medicare 4,792,600 4,011,200 781,400 19.5 %
Individual commercial 514,300 456,600 57,700 12.6 %
Total individual medical members 5,306,900 4,467,800 839,100 18.8 %
Individual specialty membership (a) 906,200 680,500 225,700 33.2 %
(a) Specialty products include dental, vision, and other supplemental health and
financial protection products. 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
June 30, Change
2012 2011 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage $ 5,308 $ 4,555 $ 753 16.5 %
Individual Medicare stand-alone PDP 672 601 71 11.8 %
Total individual Medicare 5,980 5,156 824 16.0 %
Individual commercial 250 206 44 21.4 %
Individual specialty 42 30 12 40.0 %
Total premiums 6,272 5,392 880 16.3 %
Services 5 4 1 25.0 %
Total premiums and services revenue $ 6,277 $ 5,396 $ 881 16.3 %
Income before income taxes $ 367 $ 503 $ (136 ) (27.0 )%
Benefit ratio 84.1 % 81.4 % 2.7 %
Operating cost ratio 10.0 % 9.1 % 0.9 %
For the six months ended
June 30, Change
2012 2011 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage $ 10,401 $ 9,080 $ 1,321 14.5 %
Individual Medicare stand-alone PDP 1,332 1,158 174 15.0 %
Total individual Medicare 11,733 10,238 1,495 14.6 %
Individual commercial 494 407 87 21.4 %
Individual specialty 80 56 24 42.9 %
Total premiums 12,307 10,701 1,606 15.0 %
Services 11 7 4 57.1 %
Total premiums and services revenue $ 12,318 $ 10,708 $ 1,610 15.0 %
Income before income taxes $ 482 $ 720 $ (238 ) (33.1 )%
Benefit ratio 85.8 % 83.6 % 2.2 %
Operating cost ratio 10.2 % 9.6 % 0.6 %
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Pretax Results
• Retail segment pretax income was $367 million in the 2012 quarter, a decrease
of $136 million, or 27.0%, compared to $503 million in the 2011 quarter.
Retail segment pretax income was $482 million in the 2012 period, a decrease
of $238 million, or 33.1%, compared to $720 million in the 2011 period. These
decreases were primarily driven by year-over-year increases in both the
Retail segment's benefit ratio and operating cost ratio for the 2012 quarter
and period, both described below.
Enrollment
• Individual Medicare Advantage membership increased 293,300 members, or 18.3%,
from June 30, 2011 to June 30, 2012 primarily due to the annual enrollment
period associated with the 2012 plan year. We acquired approximately 62,600
members with Arcadian effective March 31, 2012 and 12,100 members with
another acquisition effective December 30, 2011. As discussed previously, we
expect to divest approximately 12,600 members acquired with Arcadian
effective January 1, 2013 in accordance with our agreement with the United
States Department of Justice.
• Individual Medicare stand-alone PDP membership increased 488,100 members, or
20.3%, from June 30, 2011 to June 30, 2012 primarily from growth in our
low-price-point Humana Walmart-Preferred Rx Plan offering.
• Individual commercial medical membership increased 57,700 members, or 12.6%,
from June 30, 2011 to June 30, 2012.
• Individual specialty membership increased 225,700 members, or 33.2%, from
June 30, 2011 to June 30, 2012 primarily driven by increased sales in dental
offerings.
Premiums
• Retail segment premiums increased $880 million, or 16.3%, from the 2011
quarter to the 2012 quarter and increased $1.6 billion, or 15.0%, from the
2011 period to the 2012 period. The increases primarily were due to an 18.2%
and 16.8% increase for the 2012 quarter and period, respectively, in average
individual Medicare Advantage membership compared to the 2011 quarter and
period. Individual Medicare Advantage per member premiums decreased
approximately 1% and 2% in the 2012 quarter and period, respectively,
compared to the 2011 quarter and period primarily driven by lower per member
premiums on membership from the Arcadian acquisition effective March 31, 2012
and a higher percentage of members that aged-in that generally carry a lower
risk score than other members and accordingly a lower premium per member. In
addition, individual Medicare stand-alone PDP premiums revenue increased $71
million, or 11.8%, from the 2011 quarter to the 2012 quarter and increased
$174 million, or 15.0%, from the 2011 period to the 2012 period. These
increases primarily were due to a 20.7% and 21.4% increase for the 2012
quarter and period, respectively, in average individual PDP membership
compared to the 2011 quarter and period.
Benefit expenses
• The Retail segment benefit ratio increased 270 basis points from 81.4% in the
2011 quarter to 84.1% in the 2012 quarter. The Retail segment benefit ratio
increased 220 basis points from 83.6% in the 2011 period to 85.8% in the 2012
period. During the 2012 quarter and period, we experienced a significant
increase in the benefit ratio for our individual Medicare Advantage products
primarily due to a planned increase in the target benefit ratio associated
with positioning for Health Insurance Reform Legislation funding changes and
minimum benefit ratio requirements, a higher benefit ratio experienced on new
membership than the assumptions used in our 2012 Medicare bids, increased
utilization for both new and existing members, and a year-over-year increase
in clinicians and other health care quality expenditures given our continuing
growth in membership. The increase in the benefit ratio on new individual
Medicare Advantage membership primarily was due to geographic expansion into
counties that generally carry higher benefit ratios than existing counties, a
higher percentage of members that aged-in to individual Medicare Advantage
plans, and a modest increase in utilization, primarily in our preferred
provider organization, or PPO, plans. Generally members that age-in to
individual Medicare Advantage plans carry a lower risk score than other
members and accordingly a lower premium per member and higher benefit ratio
for the first 12 to 24 months. We experienced increasing age-in enrollment in
2011 and 2012. We believe that increased outpatient hospital utilization
experienced in our PPO plans partially was a result of messaging campaigns by
us and by CMS promoting wellness and physical exams that we believe drive
quality outcomes for our members.
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• The Retail segment's benefit expenses included the beneficial effect of an
estimated $24 million in favorable prior-year medical claims reserve
development in the 2012 quarter and $32 million in the 2011 quarter.
Favorable reserve development decreased the Retail segment benefit ratio by
approximately 40 basis points in the 2012 quarter and 60 basis points in the
2011 quarter. For the 2012 period, the Retail segment's benefit expenses
included the beneficial effect of an estimated $57 million in favorable
prior-year medical claims reserve development versus $72 million in the 2011
period. Favorable reserve development decreased the Retail segment benefit
ratio by approximately 50 basis points in the 2012 period and 70 basis points
in the 2011 period.
Operating costs
• The Retail segment operating cost ratio of 10.0% for the 2012 quarter
increased 90 basis points from 9.1% for the 2011 quarter. The Retail segment
operating cost ratio of 10.2% for the 2012 period increased 60 basis points
from 9.6% for the 2011 period. These increases primarily reflect higher
year-over-year clinical, provider and technological infrastructure spending.
Employer Group Segment
June 30, Change
2012 2011 Members Percentage
Membership:
Medical membership:
Fully-insured commercial group 1,196,900 1,186,200 10,700 0.9 %
ASO 1,228,800 1,313,600 (84,800 ) (6.5 )%
Group Medicare Advantage 360,500 282,000 78,500 27.8 %
Medicare Advantage ASO 27,900 27,700 200 0.7 %
Total group Medicare Advantage 388,400 309,700 78,700
25.4 %
Group Medicare stand-alone PDP 4,400 4,100 300 7.3 %
Total group Medicare 392,800 313,800 79,000 25.2 %
Total group medical members 2,818,500 2,813,600 4,900 0.2 %
Group specialty membership (a) 6,957,800 6,669,600 288,200
4.3 %
(a) Specialty products include dental, vision, and other supplemental health and
financial protection products. Members included in these products may not be
unique to each product since members have the ability to enroll in multiple
products.
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For the three months ended
June 30, Change
2012 2011 Dollars Percentage
(inmillions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group $ 1,247 $ 1,217 $ 30 2.5 %
Group Medicare Advantage 1,011 764 247 32.3 %
Group Medicare stand-alone PDP 2 2 0 0.0 %
Total group Medicare 1,013 766 247 32.2 %
Group specialty 262 233 29 12.4 %
Total premiums 2,522 2,216 306 13.8 %
Services 89 87 2 2.3 %
Total premiums and services revenue $ 2,611 $ 2,303 $ 308 13.4 %
Income before income taxes $ 114 $ 108 $ 6 5.6 %
Benefit ratio 82.2 % 81.2 % 1.0 %
Operating cost ratio 15.9 % 16.8 % (0.9 )%
For the six months ended
June 30, Change
2012 2011 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group $ 2,489 $ 2,416 $ 73 3.0 %
Group Medicare Advantage 2,036 1,560 476 30.5 %
Group Medicare stand-alone PDP 4 4 0 0.0 %
Total group Medicare 2,040 1,564 476 30.4 %
Group specialty 522 463 59 12.7 %
Total premiums 5,051 4,443 608 13.7 %
Services 178 180 (2 ) (1.1 )%
Total premiums and services revenue $ 5,229 $ 4,623
$ 606 13.1 %
Income before income taxes $ 235 $ 247 $ (12 ) (4.9 )%
Benefit ratio 81.9 % 79.9 % 2.0 %
Operating cost ratio 16.1 % 17.5 % (1.4 )%
Pretax Results
• Employer Group segment pretax income increased $6 million, or 5.6%, from the
2011 quarter to $114 million in the 2012 quarter. Employer Group segment
pretax income was $235 million in the 2012 period, a decrease of $12 million,
or 4.9%, compared to $247 million in the 2011 period primarily due to an
increase in the benefit ratio partially offset by improvement in the
operating cost ratio as described below.
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Enrollment
• Fully-insured commercial group medical membership increased 10,700 members,
or 0.9%, from June 30, 2011 to June 30, 2012 primarily due to growth in small
group membership partially offset by declines in large group business.
• Fully-insured group Medicare Advantage membership increased 78,500 members,
or 27.8%, from June 30, 2011 to June 30, 2012 primarily due to the January
2012 addition of a new large group account.
• Group ASO commercial medical membership decreased 84,800 members, or 6.5%,
from June 30, 2011 to June 30, 2012 primarily due to continued pricing
discipline in a highly competitive environment for self-funded accounts.
• Group specialty membership increased 288,200 members, or 4.3%, from June 30,
2011 to June 30, 2012 as continued cross-selling of these products to
employer groups and growth in stand-alone specialty product sales more than
offset the loss of a large dental ASO account.
Premiums
• Employer Group segment premiums increased $306 million, or 13.8%, from the
2011 quarter to $2.5 billion for the 2012 quarter and increased $608 million,
or 13.7%, from the 2011 period to $5.1 billion for the 2012 period primarily
due to higher average group Medicare Advantage membership. In addition, the
2012 quarter and period included the beneficial effect of approximately $12
million and $25 million, respectively associated with updating estimates
regarding calculations of 2011 premium rebates payable associated with
minimum benefit ratios required under the Health Insurance Reform
Legislation. This change in estimate was attributable to the refinement of
the state-level calculations based on the run out of claims during 2012.
Benefit expenses
• The Employer Group segment benefit ratio increased 100 basis points from
81.2% in the 2011 quarter to 82.2% in the 2012 quarter. The Employer Group
segment benefit ratio increased 200 basis points from 79.9% in the 2011
period to 81.9% in the 2012 period. Excluding the impact of prior-year
medical claims reserve development discussed below, these increases were
primarily due to higher membership in our group Medicare Advantage products
which generally carry a higher benefit ratio than our fully-insured
commercial group products, partially offset by a reduction in prior-year
premium rebate estimates discussed above.
• The Employer Group segment's benefit expenses included the beneficial effect
of an estimated $12 million in favorable prior-year medical claims reserve
development in the 2012 quarter and the negative impact of an estimated $8
million in unfavorable prior-year medical claims reserve development in the
2011 quarter. Favorable development decreased the Employer Group segment
benefit ratio by approximately 50 basis points in the 2012 quarter while
unfavorable development increased the segment's benefit ratio by
approximately 40 basis points in the 2011 quarter. The Employer Group
segment's benefit expenses included the negative impact of an estimated $18
million in unfavorable prior-year medical claims reserve development in the
2012 period and the beneficial effect of an estimated $33 million in
favorable prior-year medical claims reserve development in the 2011 period.
In the 2012 period, we experienced unfavorable prior-year medical claims
reserve development primarily as a result of the timing of certain claims
processing changes and a plan design change for one group Medicare Advantage
account. The unfavorable development increased the Employer Group segment
benefit ratio by approximately 40 basis points in the 2012 period. Favorable
development decreased the Employer Group segment benefit ratio by
approximately 80 basis points in the 2011 period.
Operating costs
• The Employer Group segment operating cost ratio of 15.9% for the 2012 quarter
decreased 90 basis points from 16.8% for the 2011 quarter. The Employer Group
segment operating cost ratio of 16.1% for the 2012 period decreased 140 basis
points from 17.5% for the 2011 period. These decreases primarily reflect
growth in our group Medicare Advantage products which generally carry a lower
operating cost ratio than our fully-insured commercial group products and
continued savings as a result of our operating cost reduction initiatives.
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Health and Well-Being Services Segment
For the three months ended
June 30, Change
2012 2011 Dollars Percentage
(in millions)
Revenues:
Services:
Primary care services $ 243 $ 220 $ 23 10.5 %
Integrated wellness services 2 2 0 0.0 %
Pharmacy solutions 4 3 1 33.3 %
Total services revenues 249 225 24 10.7 %
Intersegment revenues:
Pharmacy solutions 2,829 2,403 426 17.7 %
Primary care services 49 45 4 8.9 %
Integrated wellness services 48 42 6 14.3 %
Home care services 42 18 24 133.3 %
Total intersegment revenues 2,968 2,508 460 18.3 %
Total services and intersegment
revenues $ 3,217 $ 2,733 $ 484 17.7 %
Income before income taxes $ 131 $ 88 $ 43 48.9 %
Operating cost ratio 95.2 % 96.0 % (0.8 )%
For the six months ended
June 30, Change
2012 2011 Dollars Percentage
(in millions)
Revenues:
Services:
Primary care services $ 474 $ 432 $ 42 9.7 %
Integrated wellness services 4 5 (1 ) (20.0 )%
Pharmacy solutions 8 5 3 60.0 %
Total services revenues 486 442 44 10.0 %
Intersegment revenues:
Pharmacy solutions 5,758 4,858 900 18.5 %
Primary care services 99 88 11 12.5 %
Integrated wellness services 103 84 19 22.6 %
Home care services 78 34 44 129.4 %
Total intersegment revenues 6,038 5,064 974 19.2 %
Total services and intersegment
revenues $ 6,524 $ 5,506 $ 1,018 18.5 %
Income before income taxes $ 263 $ 185 $ 78 42.2 %
Operating cost ratio 95.3 % 95.9 % (0.6 )%
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Pretax results
• Health and Well-Being Services segment pretax income increased $43 million,
or 48.9%, from the 2011 quarter to $131 million for the 2012 quarter and
increased $78 million, or 42.2%, from the 2011 period to $263 million for the
2012 period. These increases primarily were due to growth in our pharmacy
solutions business, including higher utilization of our mail-order pharmacy
by our members.
Script Volume
• Script volumes for the Retail and Employer Group segment membership increased
to approximately 59 million in the 2012 quarter, up approximately 15% versus
scripts of approximately 51 million in the 2011 quarter. For the 2012 period,
script volumes for the Retail and Employer Group segment membership increased
to approximately 117 million, up approximately 16% versus scripts of
approximately 101 million in the 2011 period. The year-over-year increase
primarily reflects growth associated with higher average medical membership
for the 2012 quarter and period than in the 2011 quarter and period.
Services revenue
• Primary care services revenue increased $23 million, or 10.5%, from the 2011
quarter to $243 million for the 2012 quarter and increased $42 million, or
9.7% from the 2011 period to $474 million for the 2012 period. These
increases primarily reflect growth in our Concentra operations.
Intersegment revenues
• Intersegment revenues increased $460 million, or 18.3%, from the 2011 quarter
to $3.0 billion for the 2012 period and increased $974 million, or 19.2%,
from the 2011 period to $6.0 billion for the 2012 period. These increases
were primarily due to growth in our pharmacy solutions business as it serves
our growing membership, particularly Medicare stand-alone PDP.
Operating costs
• The Health and Well-Being Services segment operating cost ratio of 95.2% for
the 2012 quarter decreased 80 basis points from 96.0% for the 2011 quarter.
The segment's operating cost ratio of 95.3% for the 2012 period decreased 60
basis points from 95.9% for the 2011 period. These decreases primarily
reflect scale efficiencies associated with growth in our pharmacy solutions
business and improved wholesale drug costs associated with higher script
volumes in our mail-order pharmacy business.
Other Businesses
Pretax loss for our Other Businesses of $55 million for the 2012 quarter
compares to pretax income of $19 million for the 2011 quarter. For the 2012
period, pretax loss of $38 million for our Other Businesses compares to pretax
income of $54 million for the 2011 period. The pretax losses in the 2012 quarter
and period primarily relate to costs in connection with a litigation settlement
associated with our Military services business.
Liquidity
Our primary sources of cash include receipts of premiums, services revenues, 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 include
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. The use of operating cash flows may be limited by regulatory
requirements 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.
For additional information on our liquidity risk, please refer to the section
entitled "Risk Factors" in this report and in our 2011 Form 10-K.
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Cash and cash equivalents increased to $3.9 billion at June 30, 2012 from $1.4
billion at December 31, 2011. The change in cash and cash equivalents for the
six months ended June 30, 2012 and 2011 is summarized as follows:
2012 2011
(in millions)
Net cash provided by operating activities $ 3,052$ 957
Net cash used in investing activities (339 )
(859 )
Net cash used in financing activities (221 )
(203 )
Increase (decrease) in cash and cash equivalents $ 2,492 $ (105 )
Cash Flow from Operating Activities
Our operating cash flows for the 2012 period were significantly impacted by the
early receipt of the Medicare premium remittance for July 2012 of $2,133 million
in June 2012 because the payment date of July 1, 2012 fell on a weekend.
Generally, when the first day of a month falls on a weekend or holiday, with the
exception of January 1 (New Year's Day), we receive this payment at the end of
the previous month. Therefore, the 2012 period included seven monthly Medicare
payments compared to only six monthly Medicare payments during the 2011 period.
This also resulted in an increase to unearned revenues in our condensed
consolidated balance sheet at June 30, 2012.
Excluding the impact from the timing of the Medicare premium receipt, the
decrease in operating cash flows from the 2011 period to the 2012 period
primarily results from lower earnings and the timing of working capital items.
Comparisons of our operating cash flows also are impacted by other changes in
our working capital. The most significant drivers of changes in our working
capital are typically the timing of payments of benefit expenses and receipts
for premiums. We illustrate these changes with the following summaries of
benefits payable and receivables.
The detail of benefits payable was as follows at June 30, 2012 and December 31,
2011:
2012 2011
June 30, December 31, Period Period
2012 2011 Change Change
(in millions)
IBNR (1) $ 2,441 $ 2,056 $ 385 $ 6
Military services benefits payable (2) 77 339 (262 ) 77
Reported claims in process (3) 522 376 146 280
Other benefits payable (4) 954 983 (29 ) 121
Total benefits payable $ 3,994 $ 3,754 240 484
Reconciliation to cash flow statement:
Payables from acquisition (70 ) 0
Change in benefits payable per cash
flow statement resulting in cash from
operations $ 170 $ 484
(1) IBNR represents an estimate of benefits payable for claims incurred but not
reported (IBNR) at the balance sheet date. 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 (i.e. a shorter time span
results in a lower IBNR).
(2) Military services benefits payable primarily represents the run-out of the
claims liability associated with our previous TRICARE South Region contract
that expired on March 31, 2012. A corresponding receivable for reimbursement
by the federal government is included in the Military services receivable in
the receivables table that follows.
(3) 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.
(4) Other benefits payable include amounts owed to providers under capitated and
risk sharing arrangements.
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The increase in benefits payable from December 31, 2011 to June 30, 2012
primarily was due to an increase in IBNR, primarily as a result of Medicare
Advantage membership growth, and an increase in the amount of processed but
unpaid claims which fluctuate due to month-end cutoff. These increases were
partially offset by a $262 million decrease in the Military services benefits
payable due to the run-out of claims under the previous TRICARE South Region
contract that expired on March 31, 2012. Under the new contract effective
April 1, 2012, the federal government retains the risk of the cost of health
benefits and related benefit obligation as further described in Note 1 to the
condensed consolidated financial statements. The increase in benefits payable
from December 31, 2010 to June 30, 2011 primarily was due to an increase in the
amount of processed but unpaid claims, including amounts due to our pharmacy
benefit administrator, which fluctuate due to month-end cutoff as well as an
increase in amounts owed to providers under capitated and risk sharing
arrangements primarily due to Medicare Advantage membership growth.
The detail of total net receivables was as follows at June 30, 2012 and
December 31, 2011:
2012 2011
June 30, December 31, Period Period
2012 2011 Change Change
(in millions)
Medicare 476 336 140 509
Commercial and other 343 315 28 47
Military services 168 468 (300 ) 60
Allowance for doubtful accounts (89 ) (85 ) (4 ) (29 )
Total net receivables $ 898 $ 1,034 (136 ) 587
Reconciliation to cash flow statement:
Receivables from acquisition (41 ) 0
Change in receivables per cash flow
statement resulting in cash from
operations $ (177 ) $ 587
Medicare receivables are impacted by the timing of accruals and related
collections associated with the CMS risk-adjustment model. In the 2012 period,
we received the mid-year Medicare risk-adjustment payment early in June 2012 due
to the early receipt of the July 2012 CMS payment as discussed previously,
reducing our receivable balance. This early receipt impacts the comparison of
the 2012 period change in Medicare receivables of $140 million to the 2011
period change of $509 million in the table above.
Military services receivables consist of estimated claims owed from the federal
government for health care services provided to beneficiaries and underwriting
fees under our previous TRICARE South Region contract that expired on March 31,
2012. The $300 million decrease in Military services receivables from
December 31, 2011 to June 30, 2012 primarily resulted from the transition to our
new TRICARE South Region contract which we account for similar to an
administrative services fee only agreement. As such, beginning April 1, 2012,
payments of the federal government's claims and related reimbursements are
classified with receipts (withdrawals) from contract deposits as a financing
item in our condensed consolidated statements of cash flows.
In addition to the timing of receipts for premiums and services fees and
payments of benefit expenses, other working capital items impacting operating
cash flows primarily resulted from changes in the timing of the collection of
pharmacy rebates and the timing of payments for the Medicare Part D risk
corridor provisions of our contracts with CMS.
Cash Flow from Investing Activities
We reinvested a portion of our operating cash flows in investment securities,
primarily investment-grade fixed income securities, totaling $78 million in the
2012 period and $719 million in the 2011 period. Our ongoing capital
expenditures primarily relate to our information technology initiatives, support
of services in our Concentra and other medical facilities and administrative
facilities necessary for activities such as claims processing, billing and
collections, wellness solutions, care coordination, regulatory compliance and
customer service. Total capital expenditures, excluding acquisitions, were $185
million in the 2012 period and $129 million in the 2011 period reflecting
increased spending associated with growth in our primary care services and
pharmacy businesses in our Health and Well-Being Services segment. Excluding
acquisitions, we expect total capital expenditures in 2012 of approximately $375
million, comparable to $346 million for the full year 2011. Cash consideration
paid for acquisitions, net of cash acquired, of $76 million in the 2012 period
primarily relates to the acquisition of Arcadian.
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Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we
do not assume risk were $208 million higher than claims payments during the 2012
period and $188 million higher than claim payments during the 2011 period. Under
our new administrative services only TRICARE South Region contract that began
April 1, 2012, health care cost payments for which we do not assume risk
exceeded reimbursements from the federal government by $56 million during the
2012 period.
In March 2012, we repaid, without penalty, junior subordinated long-term debt of
$36 million.
We repurchased 2.73 million shares for $226 million during the 2012 period
compared to 3.37 million shares for $253 million during the 2011 period under
share repurchase plans authorized by the Board of Directors. We also acquired
0.6 million common shares in connection with employee stock plans for an
aggregate cost of $52 million during the 2012 period compared to 0.7 million
common shares for an aggregate cost of $48 million in the 2011 period.
During the 2012 period, we paid dividends to stockholders of $82 million as
discussed further below. No dividends were paid during the 2011 period.
The remainder of the cash used in or provided by financing activities in the
2012 and 2011 quarters primarily resulted from proceeds from stock option
exercises.
Future Sources and Uses of Liquidity
Dividends
In April 2011, our Board of Directors approved the initiation of a quarterly
cash dividend policy. Declaration and payment of future quarterly dividends is
at the discretion of the Board and may be adjusted as business needs or market
conditions change.
The following table provides details of our dividend payments in 2012:
Record Payment Amount Total
Date Date per Share Amount
(in millions)
12/30/2011 1/31/2012 $ 0.25 $ 41
3/30/2012 4/27/2012 $ 0.25 $ 41
6/29/2012 7/27/2012 $ 0.26 $ 42
Stock Repurchase Authorization
In April 2012, the Board of Directors replaced its previously approved share
repurchase authorization of up to $1 billion with a new authorization for
repurchases of up to $1 billion of our common shares exclusive of shares
repurchased in connection with employee stock plans. The new authorization will
expire June 30, 2014. Under this share repurchase authorization, shares may be
purchased from time to time at prevailing prices in the open market, by block
purchases, or in privately-negotiated transactions, subject to certain
regulatory restrictions on volume, pricing, and timing. As of July 31, 2012, the
remaining authorized amount under the new authorization totaled $874 million.
Senior Notes
We previously issued $500 million of 6.45% senior notes due June 1, 2016, $500
million of 7.20% senior notes due June 15, 2018, $300 million of 6.30% senior
notes due August 1, 2018, and $250 million of 8.15% senior notes due June 15,
2038. The 7.20% and 8.15% senior notes are subject to an interest rate
adjustment if the debt ratings assigned to the notes are downgraded (or
subsequently upgraded) and contain a change of control provision that may
require us to purchase the notes under certain circumstances. All four series of
our senior notes, which are unsecured, may be redeemed at our option at any time
at 100% of the principal amount plus accrued interest and a specified make-whole
amount.
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Credit Agreement
In November 2011, we amended and restated our 3-year $1.0 billion unsecured
revolving credit agreement which was set to expire in December 2013 and replaced
it with a 5-year $1.0 billion unsecured revolving agreement expiring November
2016. Under the new credit agreement, at our option, we can borrow on either a
competitive advance basis or a revolving credit basis. The revolving credit
portion bears interest at either LIBOR plus a spread or the base rate plus a
spread. The LIBOR spread, currently 120 basis points, varies depending on our
credit ratings ranging from 87.5 to 147.5 basis points. We also pay an annual
facility fee regardless of utilization. This facility fee, currently 17.5 basis
points, may fluctuate between 12.5 and 27.5 basis points, depending upon our
credit ratings. The competitive advance portion of any borrowings will bear
interest at market rates prevailing at the time of borrowing on either a fixed
rate or a floating rate based on LIBOR, at our option.
The terms of the new credit agreement include standard provisions related to
conditions of borrowing, including a customary material adverse effect clause
which could limit our ability to borrow additional funds. In addition, the new
credit agreement contains customary restrictive and financial covenants as well
as customary events of default, including financial covenants regarding the
maintenance of a minimum level of net worth of $6.3 billion at June 30, 2012 and
a maximum leverage ratio of 3.0:1. We are in compliance with the financial
covenants, with actual net worth of $8.5 billion and actual leverage ratio of
0.7:1, as measured in accordance with the new credit agreement as of June 30,
2012. In addition, the new credit agreement includes an uncommitted $250 million
incremental loan facility.
At June 30, 2012, we had no borrowings outstanding under the new credit
agreement. We have outstanding letters of credit of $11 million secured under
the new credit agreement. No amounts have been drawn on these letters of credit.
Accordingly, as of June 30, 2012, we had $989 million of remaining borrowing
capacity under the new credit agreement, none of which would be restricted by
our financial covenant compliance requirement. We have other customary,
arms-length relationships, including financial advisory and banking, with some
parties to the credit agreement.
Other Long-Term Borrowings
In March 2012, we called, without penalty, junior subordinated debt of $36
million. Prior to repayment, the junior subordinated debt bore a fixed annual
interest rate of 8.02% payable quarterly until 2012, and then payable at a
floating rate based on LIBOR plus 310 basis points.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and
funds available under our credit agreement or from other public or private
financing sources, taken together, provide adequate resources to fund ongoing
operating and regulatory requirements, 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 June 30, 2012 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 $750
million of our senior notes. Successive one notch downgrades increase the
interest rate an additional 25 basis points, or annual interest expense by $2
million, up to a maximum 100 basis points, or annual interest expense by $8
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
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company were $1.3 billion at June 30, 2012 compared to $494 million at
December 31, 2011 primarily reflecting the payment of dividends to our parent
company from our operating subsidiaries, discussed below, partially offset by
share repurchases, the acquisition of Arcadian, and the payment of dividends to
stockholders. As described in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations under the section titled "Health
Insurance Reform," in December 2011, the NAIC issued proposed guidance
indicating the insurance industry premium-based assessment may require accrual
and associated subsidiary funding consideration in 2013 instead of 2014. This
proposed NAIC guidance is contradictory to final GAAP guidance issued by the
FASB in July 2011, which requires accrual of the insurance industry
premium-based assessment beginning in 2014, the year in which it is payable. In
June 2012, the NAIC's SAP Working Group deferred issuing guidance that would
have required accrual and associated subsidiary funding consideration related to
the insurance industry premium-based assessment beginning in 2013.
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of
dividends, loans, or other cash transfers to Humana 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 to Humana Inc. by these
subsidiaries, without prior approval by state regulatory authorities, is limited
based on the entity's level of statutory income and statutory capital and
surplus. 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 can vary
significantly at the state level. Based on the most recently filed statutory
financial statements as of March 31, 2012, our state regulated subsidiaries had
aggregate statutory capital and surplus of approximately $5.1 billion, which
exceeded aggregate minimum regulatory requirements. The amount of dividends that
were paid to our parent company in the 2012 period were approximately $1.2
billion, an increase of $170 million compared to dividends that were paid for
the full year 2011 of approximately $1.1 billion.
