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HUMANA INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For discussion of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this 2022 10-K and were not impacted by our segment realignment, refer to "Item 7. - Management Discussion and Analysis of Financial Condition and Results of Operations" found in our Form 10-K for the year endedDecember 31, 2021 , that was filed with theSecurities and Exchange Commission onFebruary 17, 2022 .
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 wellbeing and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as inhome care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective. The health benefits 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.
Sale of Hospice and Personal Care Divisions
OnAugust 11, 2022 , we completed the sale of a 60% interest in Humana's Kindred atHome Hospice subsidiary, orKAH Hospice , toClayton , Dubilier & Rice, or CD&R, for cash proceeds of approximately$2.7 billion , net of cash disposed, including debt repayments fromKAH Hospice to Humana of $1.9 billion . In connection with the sale we recognized a pre-tax gain, net of transaction costs, of$237 million which is reported as a gain on sale ofKAH Hospice in the accompanying consolidated statements of income for the year endedDecember 31, 2022 . 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 andWelsh, Carson, Anderson & Stowe , two private equity funds, for an enterprise value of$8.2 billion , which includes our equity value of$2.4 billion associated with our 40% minority ownership interest. The remeasurement to fair value of our previously held 40% equity method investment with a carrying value of approximately$1.3 billion , resulted in a$1.1 billion gain recognized in "Other (income) expense, net". KAH has locations in 40 states, providing extensive geographic coverage with approximately 65% overlap with our individual Medicare Advantage membership. 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.
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 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
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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 2020 and 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 2020 and 2021.
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, we recorded charges of$473 million included within operating costs in the consolidated statement of income for the year endedDecember 31, 2022 . These charges primarily relate to$248 million in asset impairments, including software and abandonment, and$116 million of severance charges in connection with workforce optimization. The remainder of the charges primarily relate to external consulting fees. These charges were recorded at the corporate level and not allocated to the segments.
Business Segments
DuringDecember 2022 , we realigned our businesses into two distinct segments: Insurance and CenterWell. The Insurance segment includes the businesses that were previously included in theRetail and Group and Specialty segments, as well as the Pharmacy Benefit Manager, or PBM, business which was previously included in the Healthcare Services segment. The CenterWell segment (formerly Healthcare Services) represents our payor-agnostic healthcare services offerings, including pharmacy dispensing services, provider services, and home services. In addition to the new segment classifications being utilized to assess performance and allocate resources, we believe this simpler structure will create greater collaboration across the Insurance and CenterWell businesses and will accelerate work that is underway to centralize and integrate operations within the organization. Prior period segment financial information has been recast to conform to the 2022 presentation. For a recast of prior period segment financial information, refer to Note 18 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. Our two reportable segments, Insurance and CenterWell, 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. For segment financial information, refer to Note 18 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. The Insurance segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts, as well as our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible demonstration, andLong-Term Support Services benefits, which we refer to collectively as our state-based contracts. This segment also includes products consisting 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. In addition, our Insurance segment includes our military services business, primarily ourT-2017 East Region contract, as well as the operations of our PBM business. The CenterWell segment includes our pharmacy, provider services, and home solutions operations. The segment also includes our strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers, as well as our minority ownership interest in hospice operations. Services offered by this segment are designed to enhance the overall healthcare experience. These services may lead to lower utilization associated with improved member health and/or lower drug costs. 42 -------------------------------------------------------------------------------- The results of each segment are measured by income before income taxes and equity in net (losses) earnings from equity method investments, or segment earnings. Transactions between reportable segments primarily consist of sales of services rendered by our CenterWell segment, primarily pharmacy, provider, and home services, to our Insurance 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. At the same time, 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 Insurance segment is Medicare stand-alone prescription drug plans, or PDP, under the Medicare Part D program. Our quarterly Insurance 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. The Insurance segment also experiences seasonality in the fully-insured product offering. The effect on the Insurance's segment benefit ratio is opposite of the Medicare stand-alone PDP impact, with the benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.
In addition, the Insurance 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.
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. AtDecember 31, 2022 , approximately 3,175,500 members, or 70%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 3,009,600 members, or 68%, atDecember 31, 2021 . 43 -------------------------------------------------------------------------------- •OnFebruary 1, 2023 ,Centers for Medicare & Medicaid Services , or CMS, issued its preliminary 2024 Medicare Advantage and Part D payment rates and proposed policy changes, collectively, the Advance Notice. CMS has invited public comment on the Advance Notice before publishing final rates on or beforeApril 3, 2023 , or the Final Notice. In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 2.27% decrease in benchmark funding based on proposals included therein. As indicated by CMS, its estimate excludes the impact of fee-for-service county rebasing/re-pricing since the related impact is dependent upon finalization of certain data, which will be available with the publication of the Final Notice. Further the benchmark decrease excludes MA risk score trend as individual plans' experience will vary. Based on the company's preliminary analysis using the same factors CMS included in its estimate, the components of which are detailed on CMS's website, we anticipate the proposals in the Advance Notice would result, on average, in a change relatively in line with CMS' estimate, with the exception of Humana's Medicare Star Ratings for bonus year 2024, which led the company's peers, as well as the Risk Model Revision and Normalization Adjustment, which the company continues to analyze. With respect to the Risk Model Revision and Normalization adjustment, CMS provided detail to the company indicating an average impact to Humana relatively in line with the average negative 3.12% industry impact. The company continues to analyze the Advance Notice, including CMS' estimate of the Humana specific impact related to the Risk Model Revision and Normalization adjustment, which is likely to have a more negative impact on individual plans and specific membership cohorts with greater risk score trend, and will be drawing upon its program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact on Medicare beneficiaries' quality of care and service to its members through the Medicare Advantage program. •Net income was$2.8 billion , or$22.08 per diluted common share, and$2.9 billion , or$22.67 per diluted common share, in 2022 and 2021, respectively. This comparison was significantly impacted by the gain on KAH equity method investment recognized inAugust 2021 , put/call valuation adjustments associated with non-consolidating minority interest investments, transaction and integration costs, the change in the fair value of publicly-traded equity securities, charges associated with productivity initiatives related to previously disclosed$1 billion value creation plan, and the net gain on the sale ofKAH Hospice . The impact of these adjustments to our consolidated income before income taxes and equity in net (losses) earnings and diluted earnings per common share was as follows for the 2022 and 2021 periods: 44 -------------------------------------------------------------------------------- 2022 2021 (in millions) Consolidated income before income taxes and equity in net (losses) earnings: Gain on Kindred at Home equity method investment $ -$ (1,129) Gain on sale of KAH Hospice (237) -
Charges associated with productivity initiatives related to the
previously disclosed
473 -
Put/call valuation adjustments associated with our non consolidating
minority interest investments
68 597
Transaction and integration costs 105 128
Change in the fair value of publicly-traded equity securities 123 341
$ 532 $ (63)
2022 2021
Diluted earnings per common share:
Gain on Kindred at Home equity method investment $ - $ (8.73)
Gain on sale of KAH Hospice (1.86) -
Charges associated with productivity initiatives related to the
previously disclosed
3.72 -
Put/call valuation adjustments associated with our non consolidating
minority interest investments
0.53 4.62
Transaction and integration costs 0.83 0.99
Change in the fair value of publicly-traded equity securities 0.97 2.63
Tax impact of all transactions (1.52) (1.93)
$ 2.67 $ (2.42)
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Health Care Reform
We are and will continue to be regularly subject to new laws and regulations, changes to existing laws and regulations, and judicial determinations that impact the interpretation and applicability of those laws and regulations. The Health Care Reform Law, the Families First Act, the CARES Act, and the Inflation Reduction Act, and related regulations, are examples of laws which have enacted significant reforms to various aspects of theU.S. health insurance industry, including, 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, and changes to the Part D prescription drug benefit design. It is reasonably possible that these laws and regulations, as well as other current or future legislative, judicial or regulatory changes (including further 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 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 CenterWell segment, primarily pharmacy, provider services, and home solutions, to our Insurance segment customers and are described in Note 18 to the audited Consolidated Financial Statements included in Item 8. - Financial Statements and Supplementary Data in this 2022 Form 10-K. 46
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Comparison of Results of Operations for 2022 and 2021
Certain financial data on a consolidated basis and for our segments was as
follows for the years ended
Consolidated
Change
2022 2021 Dollars Percentage
(dollars in millions, except per
common share results)
Revenues:
Premiums:
Insurance $ 87,712 $ 79,822 $ 7,890 9.9 %
Total premiums revenue 87,712 79,822 7,890 9.9 %
Services:
Insurance 850 853 (3) (0.4) %
CenterWell 3,926 2,202 1,724 78.3 %
Total services revenue 4,776 3,055 1,721 56.3 %
Investment income 382 187 195 104.3 %
Total revenues 92,870 83,064 9,806 11.8 %
Operating expenses:
Benefits 75,690 69,199 6,491 9.4 %
Operating costs 12,671 10,121 2,550 25.2 %
Depreciation and amortization 709 596 113 19.0 %
Total operating expenses 89,070 79,916 9,154 11.5 %
Income from operations 3,800 3,148 652 20.7 %
Gain on sale of KAH Hospice (237) - 237 100.0 %
Interest expense 401 326 75 23.0 %
Other expense (income), net 68 (532) 600 112.8 %
Income before income taxes and equity in net
(losses) earnings 3,568 3,354 214 6.4 %
Provision for income taxes 762 485 277 57.1 %
Equity in net (losses) earnings (4) 65 (69) (106.2) %
Net income $ 2,802 $ 2,934 $ (132) (4.5) %
Diluted earnings per common share $ 22.08 $ 22.67 $ (0.59) (2.6) %
Benefit ratio (a) 86.3 % 86.7 % (0.4) %
Operating cost ratio (b) 13.7 % 12.2 % 1.5 %
Effective tax rate 21.4 % 14.2 % 7.2 %
(a)Represents total benefits expense as a percentage of premiums revenue.
(b)Represents total operating costs, excluding depreciation and amortization, as
a percentage of total revenues less investment income.
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Premiums Revenue
Consolidated premiums revenue increased$7.9 billion , or 9.9%, from$79.8 billion in the 2021 period to$87.7 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage and commercial fully-insured medical premiums, partially offset by declining year-over-year membership associated with the group commercial medical products and the phase-out of COVID-19 sequestration relief in the 2022 period.
Services Revenue
Consolidated services revenue increased$1.7 billion , or 56.3%, from$3.1 billion in the 2021 period to$4.8 billion in the 2022 period primarily due to the impact of our home solutions revenues which reflect the acquisition of the remaining 60% interest in KAH duringAugust 2021 partially offset by the divestiture of the 60% ownership interest inKAH Hospice duringAugust 2022 .
Investment Income
Investment income increased$195 million , or 104.3%, from$187 million in the 2021 period to$382 million in the 2022 period primarily due to lower mark to market losses on our publicly traded equity securities during the 2022 period compared to the 2021 period.
Benefits Expense
Consolidated benefits expense increased$6.5 billion , or 9.4%, from$69.2 billion in the 2021 period to$75.7 billion in the 2022 period. The consolidated benefit ratio decreased 40 basis points from 86.7% in the 2021 period to 86.3% in the 2022 period primarily due to higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business. These factors were partially offset by lower favorable prior-period medical claims reserve development. Further, the 2022 period ratio reflects a shift in line of business mix, with continued growth in certain government programs, which carry a higher benefits expense ratio, combined with a decline in Medicare stand-alone PDP, which has a lower benefits expense ratio. Consolidated benefits expense included$415 million of favorable prior-period medical claims reserve development in the 2022 period and$825 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 50 basis points in the 2022 period and decreased the consolidated benefit ratio by approximately 100 basis points in the 2021 period. 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$2.6 billion , or 25.2%, from$10.1 billion in the 2021 period to$12.7 billion in the 2022 period. The consolidated operating cost ratio increased 150 basis points from 12.2% in the 2021 period to 13.7% in the 2022 period. The ratio increase was primarily due to the impact of the consolidation of KAH operations, which have a significantly higher operating cost ratio than our historical consolidated operating cost ratio, the net impact of charges associated with initiatives undertaken associated with our value creation initiatives, as well as the impact of higher marketing spend in 2022 to support individual Medicare Advantage growth. These increases were partially offset by scale efficiencies associated with growth in individual Medicare Advantage membership. 48
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Depreciation and Amortization
Depreciation and amortization increased
million
capital expenditures.
Interest Expense
Interest expense increased
period to
borrowings outstanding partially offset by lower interest rates.
Income Taxes
Our effective tax rate during 2022 was 21.4% compared to the effective tax rate of 14.2% in 2021. The year-over-year increase in the effective income tax rates is primarily due to the impact of theAugust 2021 acquisition of the remaining 60% interest in KAH. In that period, we recognized a$1.1 billion mark-to-market gain related to our previously held 40% investment in KAH. This unrealized gain was not taxable, thereby reducing the effective income tax rate for the 2021 period. The increase is partially offset by theAugust 2022 disposition of our 60% interest inKAH Hospice , which resulted in an increase to our tax basis in both the shares sold and the shares retained, thereby reducing the effective income tax rate for the 2022 period. For a complete reconciliation of the federal statutory rate to the effective tax rate, refer to Note 12 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. 49
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Insurance Segment
Change
2022 2021 Members %
Membership:
Individual Medicare Advantage 4,565,600 4,409,100 156,500 3.5 %
Group Medicare Advantage 565,100 560,600 4,500 0.8 %
Medicare stand-alone PDP 3,551,300 3,606,200 (54,900) (1.5) %
Total Medicare 8,682,000 8,575,900 106,100 1.2 %
Medicare Supplement 313,600 331,900 (18,300) (5.5) %
Commercial fully-insured 556,300 674,600 (118,300) (17.5) %
Total fully-insured 869,900 1,006,500 (136,600) (13.6) %
Medicaid and other 1,137,300 940,100 197,200 21.0 %
Military services 5,959,900 6,049,000 (89,100) (1.5) %
ASO 430,100 495,500 (65,400) (13.2) %
Total Medical Membership 17,079,200 17,067,000 12,200 0.1 %
Total Specialty Membership 5,194,800 5,294,300 (99,500) (1.9) %
Change
2022 2021 $ %
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage
Group Medicare Advantage 7,297 6,955
342 4.9 %
Medicare stand-alone PDP 2,269 2,371
(102) (4.3) %
Total Medicare 75,157 67,980 7,177 10.6 %
Medicare Supplement 743 731 12 1.6 %
Commercial fully-insured 3,733 4,271
(538) (12.6) %
Total fully-insured 4,476 5,002 (526) (10.5) %
Medicaid and other 6,376 5,109 1,267 24.8 %
Specialty 1,703 1,731 (28) (1.6) %
Total premiums revenue 87,712 79,822 7,890 9.9 %
Services revenue 850 853 (3) (0.4) %
Total premiums and services revenue
Income from operations$ 3,022 $ 2,412 $ 610 25.3 % Benefit ratio 86.6 % 87.2 % (0.6) % Operating cost ratio 10.4 % 10.3 % 0.1 % Income from operations Insurance segment income from operations increased$0.6 billion , or 25.3%, from$2.4 billion in the 2021 period to$3.0 billion in the 2022 period primarily due to the same factors impacting the segment's lower benefit ratio offset by the same factors impacting the segment's higher operating cost ratio as more fully described below. 50
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Enrollment
Individual Medicare Advantage membership increased 156,500 members, or 3.5%, from 4,409,100 members as ofDecember 31, 2021 to 4,565,600 members as ofDecember 31, 2022 primarily due to membership additions associated with the 2022 Annual Election Period, or AEP. The year-over-year growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, membership. Individual Medicare Advantage membership includes 668,900 D-SNP members as ofDecember 31, 2022 , a net increase of 92,800 members, or 16.1%, from 576,100 members as ofDecember 31, 2021 . For the full year 2023, we anticipate a net membership growth in our individual Medicare Advantage offerings of at least 625,000 members. Group Medicare Advantage membership increased 4,500 members, or 0.8%, from 560,600 members as ofDecember 31, 2021 to 565,100 members as ofDecember 31, 2022 reflecting smaller account sales and organic growth in concurrent accounts with no large accounts won or lost for the period. For the full year 2023, we anticipate a net membership decline in our group Medicare Advantage offerings of approximately 60,000 members. Medicare stand-alone PDP membership decreased 54,900 members, or 1.5%, from 3,606,200 members as ofDecember 31, 2021 to 3,551,300 members as ofDecember 31, 2022 primarily due to continued intensified competition for Medicare stand-alone PDP offerings. For the full year 2023, we anticipate a net membership decline in our Medicare stand-alone PDP offerings of approximately 800,000 members. Medicaid and other membership increased 197,200 members, or 21.0%, from 940,100 members as ofDecember 31, 2021 to 1,137,300 members as ofDecember 31, 2022 reflecting the suspension of state eligibility redetermination efforts due to the currently enacted public health emergency, or PHE. For the full year 2023, we anticipate a net membership growth in our state-based contracts of approximately 25,000 to 100,000 members.
Commercial fully-insured medical membership decreased 118,300 members, or 17.5%,
from 674,600 members as of
COVID-19 and improve profitability.
ASO commercial medical membership decreased 65,400 members, or 13.2%, from 495,500 members as ofDecember 31, 2021 to 430,100 members as ofDecember 31, 2022 reflecting continued intensified competition for small group accounts, partially offset by strong retention among large group accounts. For the full year 2023, we anticipate a net membership decline in our group commercial medical offerings, which includes fully-insured and ASO, of approximately 300,000 members. Military services membership decreased 89,100 members, or 1.5%, from 6,049,000 members as ofDecember 31, 2021 to 5,959,900 members as ofDecember 31, 2022 . Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the currentTRICARE East Region contract. Specialty membership decreased 99,500 members, or 1.9%, from 5,294,300 members as ofDecember 31, 2021 to 5,194,800 members as ofDecember 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
Insurance segment premiums revenue increased$7.9 billion , or 9.9%, from$79.8 billion in the 2021 period to$87.7 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage and commercial fully-insured medical premiums, partially offset by declining year-over-year membership associated with the group commercial medical products and the phase-out of COVID-19 sequestration relief in the 2022 period. 51 --------------------------------------------------------------------------------
Services revenue
Insurance segment services revenue decreased
million
Benefits expense
The Insurance segment benefit ratio decreased 60 basis points from 87.2% in the 2021 period to 86.6% in the 2022 period primarily due to higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business. These factors were partially offset by lower favorable prior-period medical claims reserve development. Further, the 2022 period ratio reflects a shift in line of business mix, with continued growth in certain government programs, which carry a higher benefits expense ratio, combined with a decline in Medicare stand-alone PDP, which has a lower benefits expense ratio. The Insurance segment benefits expense included$415 million of favorable prior-period medical claims reserve development in the 2022 period and$825 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development decreased the Insurance's segment benefit ratio by approximately 50 basis points in the 2022 period and decreased the Insurance's segment benefit ratio by approximately 100 basis points in the 2021 period.
Operating costs
The Insurance segment operating cost ratio increased 10 basis points from 10.3%
in the 2021 period to 10.4% in the 2022 period primarily due to strategic
investments to position the segment for long-term success, including the impact
of higher marketing spend in the 2022 period to support individual Medicare
Advantage growth. These factors were partially offset by scale efficiencies
associated with growth in the individual Medicare Advantage membership.
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CenterWell Segment
Change
2022 2021 Dollars Percentage
(in millions)
Revenues:
Services:
Home solutions $ 2,333 $ 1,166 $ 1,167 100.1 %
Pharmacy 1,025 623 402 64.5 %
Provider services 568 413 155 37.5 %
Total services revenue 3,926 2,202 1,724 78.3 %
Intersegment revenues:
Home solutions 553 352 201 57.1 %
Pharmacy 9,841 9,024 817 9.1 %
Provider services 2,979 2,476 503 20.3 %
Total intersegment revenues 13,373 11,852 1,521 12.8 %
Total services and intersegment revenues $ 17,299 14,054 3,245 23.1 %
Income from operations $ 1,291 $ 938 $ 353 37.6 %
Operating cost ratio 91.5 % 92.3 % (0.8) %
Income from operations
CenterWell segment income from operations increased $353 million , or 37.6%, from
$938 million in the 2021 period to $1.3 billion in the 2022 period primarily due
primarily due to the same factors impacting the increase in services revenue and
intersegment revenues as well as the same factors impacting the segment's lower
operating cost ratio in the 2022 period as more fully described below.
Services revenue
CenterWell segment services revenue increased$1.7 billion , or 78.3%, from$2.2 billion in the 2021 period to$3.9 billion in the 2022 period primarily due to the impact of our home solutions revenues which reflect the acquisition of the remaining 60% interest in KAH duringAugust 2021 partially offset by the divestiture of the 60% ownership interest inKAH Hospice duringAugust 2022 .
Intersegment revenues
CenterWell segment intersegment revenues increased$1.5 billion , or 12.8%, from$11.9 billion in the 2021 period to$13.4 billion in the 2022 period primarily due to individual Medicare Advantage membership growth, combined with the impact of greater mail-order pharmacy penetration for Medicare Advantage members, which lead to higher pharmacy revenues, as well as higher revenues associated with growth in our provider business.
Operating costs
The CenterWell segment operating cost ratio decreased 80 basis points from 92.3% in the 2021 period to 91.5% in the 2022 period primarily represents the consolidation of KAH operations for the entire 2022 period compared to the partial 2021 period due to timing of the previously disclosed transaction. The KAH operations have a lower operating cost ratio than other businesses within the segment. The year-over-year favorability was further impacted by our pharmacy operations partially offset by investments in KAH to abate the pressures of the current nursing labor environment as well as the divestiture of the 60% interest inKAH Hospice duringAugust 2022 . 53 --------------------------------------------------------------------------------
Comparison of Results of Operations for 2021 and 2020
Certain financial data on a consolidated basis and for our segments reflect our segment realignment and are recast as follows for the years endedDecember 31, 2021 and 2020: Consolidated Change 2021 2020 Dollars Percentage (dollars in millions, except per common share results) Revenues: Premiums: Insurance$ 79,822 $ 73,584 $ 6,238 8.5 % Corporate - 602 (602) (100.0) % Total premiums revenue 79,822 74,186 5,636 7.6 % Services: Insurance 853 813 40 4.9 % CenterWell 2,202 1,002 1,200 119.8 % Total services revenue 3,055 1,815 1,240 68.3 % Investment income 187 1,154 (967) (83.8) % Total revenues 83,064 77,155 5,909 7.7 % Operating expenses: Benefits 69,199 61,628 7,571 12.3 % Operating costs 10,121 10,052 69 0.7 % Depreciation and amortization 596 489 107 21.9 % Total operating expenses 79,916 72,169 7,747 10.7 % Income from operations 3,148 4,986 (1,838) (36.9) % Interest expense 326 283 43 15.2 % Other (income) expense, net (532) 103 635 616.5 % Income before income taxes and equity in net earnings 3,354 4,600 (1,246) (27.1) % Provision for income taxes 485 1,307 (822) (62.9) % Equity in net earnings 65 74 (9) (12.2) % Net income$ 2,934 $ 3,367 $ (433) (12.9) % Diluted earnings per common share$ 22.67 $ 25.31 $ (2.64) (10.4) % Benefit ratio (a) 86.7 % 83.1 % 3.6 % Operating cost ratio (b) 12.2 % 13.2 % (1.0) % Effective tax rate 14.2 % 28.0 % (13.8) %
(a)Represents total benefits expense as a percentage of premiums revenue.
(b)Represents total operating costs, excluding depreciation and amortization, as
a percentage of total revenues less investment income.
54
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Premiums Revenue
Consolidated premiums increased$5.6 billion , or 7.6%, from$74.2 billion in the 2020 period to$79.8 billion in the 2021 period primarily due to higher premium revenues from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment (MRA) headwinds resulting from COVID-19 related utilization disruption in 2020, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020. These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership, as well as the 2020 impact of the receipt of commercial risk corridor receivables previously written off.
Services Revenue
Consolidated services revenue increased$1.2 billion , or 68.3%, from$1.8 billion in the 2020 period to$3.1 billion in the 2021 period primarily due to higher home solutions revenues associated with consolidation of Kindred at Home earnings. Investment Income Investment income decreased$967 million , or 83.8%, from$1.2 billion in the 2020 period to$187 million in the 2021 period primarily due to a significant decrease in the fair value of our publicly-traded equity securities investments.
Benefits Expense
Consolidated benefits expense increased$7.6 billion , or 12.3%, from$61.6 billion in the 2020 period to$69.2 billion in the 2021 period. The consolidated benefit ratio increased 360 basis points from 83.1% in the 2020 period to 86.7% in the 2021 period. These increases reflect the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, and COVID-19 impacts, including the impact of the deferral of non-essential care, net of meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020. The year over year increase further reflects the 2020 impact of the receipt of commercial risk corridor receivables that were previously written off, and the 2021 impact associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development in 2021. The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 100 basis points in the 2021 period versus approximately 40 basis points in the 2020 period. 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$0.07 billion , or 0.7%, from$10.05 billion in the 2020 period to$10.12 billion in the 2021 period. The consolidated operating cost ratio decreased 100 basis points from 13.2% in the 2020 period to 12.2% in the 2021 period. The ratio decrease was primarily due to the termination of the non-deductible health insurance industry fee in 2021, as well as lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. The decrease was 55 -------------------------------------------------------------------------------- further impacted by scale efficiencies associated with growth in our individual Medicare Advantage membership, operating cost efficiencies in 2021 from previously implemented productivity initiatives, as well as the impact of a$200 million contribution to theHumana Foundation in the first half of 2020 to support communities served by the Company, particularly those with social and health disparities. These factors were partially offset by the consolidation of Kindred at Home operations as the business has a significantly higher operating cost ratio than our historical consolidated operating cost ratio, continued strategic and technology modernization investments made to position us for long-term success, transaction and integration costs associated with the Kindred at Home transaction, as well as the 2020 impact of the receipt of the commercial risk corridor receivables that were previously written off. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 period.
Depreciation and Amortization
Depreciation and amortization increased
million
capital expenditures.
Interest Expense
Interest expense increased
period to
acquisition.
Income Taxes
Our effective tax rate during 2021 was 14.2% compared to the effective tax rate of 28.0% in 2020. The change was primarily due to the non-taxable gain we recognized on our previously held Kindred at Home equity method investment from our acquisition of the remaining ownership interest in the business inAugust 2021 and the termination of the non-deductible health insurance industry fee in 2021. 56
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Insurance Segment
Change
2021 2020 Members %
Membership:
Individual Medicare Advantage 4,409,100 3,962,700 446,400 11.3 %
Group Medicare Advantage 560,600 613,200 (52,600) (8.6) %
Medicare stand-alone PDP 3,606,200 3,866,700 (260,500) (6.7) %
Total Medicare 8,575,900 8,442,600 133,300 1.6 %
Medicare Supplement 331,900 335,600 (3,700) (1.1) %
Commercial fully-insured 674,600 777,400 (102,800) (13.2) %
Total fully-insured 1,006,500 1,113,000 (106,500) (9.6) %
Medicaid and other 940,100 772,400 167,700 21.7 %
Military services 6,049,000 5,998,700 50,300 0.8 %
ASO 495,500 504,900 (9,400) (1.9) %
Total Medical Membership 17,067,000 16,831,600 235,400 1.4 %
Total Specialty Membership 5,294,300 5,310,300 (16,000) (0.3) %
Change
2021 2020 $ %
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage
Group Medicare Advantage 6,955 7,774
(819) (10.5) %
Medicare stand-alone PDP 2,371 2,742
(371) (13.5) %
Total Medicare 67,980 62,213 5,767 9.3 %
Medicare Supplement 731 688 43 6.3 %
Commercial fully-insured 4,271 4,761
(490) (10.3) %
Total fully-insured 5,002 5,449 (447) (8.2) %
Medicaid and other 5,109 4,223 886 21.0 %
Specialty 1,731 1,699 32 1.9 %
Total premiums revenue 79,822 73,584 6,238 8.5 %
Services revenue 853 813 40 4.9 %
Total premiums and services revenue
Income from operations$ 2,412 $ 3,120 $
(708) (22.7) %
Benefit ratio 87.2 % 84.1 % 3.1 %
Operating cost ratio 10.3 % 12.3 % (2.0) %
Income from operations
Insurance segment income from operations decreased $0.7 billion , or 22.7%, from
$3.1 billion in the 2020 period to $2.4 billion in the 2021 period primarily due
to the same factors impacting the segment's higher benefit ratio offset by the
same factors impacting the segment's lower operating cost ratio as more fully
described below.
57
--------------------------------------------------------------------------------
Enrollment
Individual Medicare Advantage membership increased 446,400 members, or 11.3%, from 3,962,700 members as ofDecember 31, 2020 to 4,409,100 members as ofDecember 31, 2021 primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. 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. The OEP sales period, which ran fromJanuary 1 to March 31, 2021 added approximately 36,000 members compared to the 2020 OEP that added approximately 30,000 members. Individual Medicare Advantage membership includes 576,100 D-SNP members as ofDecember 31, 2021 , a net increase of 170,000 members, or 42%, from 406,100 members as ofDecember 31, 2020 . Group Medicare Advantage membership decreased 52,600 members, or 8.6%, from 613,200 members as ofDecember 31, 2020 to 560,600 members as ofDecember 31, 2021 primarily due to the net loss of certain large accounts inJanuary 2021 , partially offset by continued growth in small group accounts.
Medicare stand-alone PDP membership decreased 260,500 members, or 6.7%, from
3,866,700 members as of
Walmart Value plan no longer being the low cost leader in 2021.
Medicaid and other membership increased 167,700 members, or 21.7%, from 772,400 members as ofDecember 31, 2020 to 940,100 members as ofDecember 31, 2021 primarily reflecting additional enrollment as a result of the suspension of state eligibility redetermination efforts due to the currently-enacted Public Health Emergency, as well as our acquisition of the remaining 50% ownership interest inWisconsin health care company iCare. Commercial fully-insured medical membership decreased 102,800 members, or 13.2%, from 777,400 members as ofDecember 31, 2020 to 674,600 members as ofDecember 31, 2021 reflecting lower small group quoting activity and sales attributable to depressed economic activity from the COVID-19 pandemic, partially offset by higher retention of existing customers, particularly in larger groups. The portion of commercial fully-insured medical membership in small group accounts was approximately 50% atDecember 31, 2021 and 54% atDecember 31, 2020 . ASO commercial medical membership decreased 9,400 members, or 1.9%, from 504,900 members as ofDecember 31, 2020 to 495,500 members as ofDecember 31, 2021 . Small group membership comprised 43% of ASO commercial medical membership atDecember 31, 2021 and 45% atDecember 31, 2020 . The membership change reflects intensified competition for small group accounts, partially offset by strong retention among large group accounts. Military services membership increased 50,300 members, or 0.8%, from 5,998,700 members as ofDecember 31, 2020 to 6,049,000 members as ofDecember 31, 2021 . Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the currentTRICARE East Region contract. Specialty membership decreased 16,000 members, or 0.3%, from 5,310,300 members as ofDecember 31, 2020 to 5,294,300 members as ofDecember 31, 2021 primarily due to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of commercial fully-insured medical membership described above. The decrease also reflects the impact of the economic downturn driven by the COVID-19 pandemic. Premiums revenue Insurance segment premiums increased$6.2 billion , or 8.5%, from$73.6 billion in the 2020 period to$79.8 billion in the 2021 period primarily due to higher premium revenues from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment (MRA) headwinds resulting from COVID-19 related 58 --------------------------------------------------------------------------------
utilization disruption in 2020, as well as the additional quarter impact of
Medicare sequestration relief in 2021 that was not enacted until the second
quarter of 2020. These increases were partially offset by declining Medicare
stand-alone PDP, commercial fully insured, and group Medicare Advantage
membership.
Services revenue
Insurance segment services revenue increased$40 million , or 4.9%, from$813 million in the 2020 period to$853 million in the 2021 period primarily due to higher TRICARE services revenue partially offset by lower ASO membership described previously.
Benefits expense
The Insurance segment benefit ratio increased 310 basis points from 84.1% in the 2020 period to 87.2% in the 2021 period. This increase reflects the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, and COVID-19 impacts, including the impact of the deferral of non-essential care, net of meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020. The year over year increase further reflects the 2021 impact associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development in 2021. The Insurance segment benefits expense included$825 million of favorable prior-period medical claims reserve development in the 2021 period and$313 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development decreased the Insurance's segment benefit ratio by approximately 100 basis points in the 2021 period and decreased the Insurance's segment benefit ratio by approximately 40 basis points in the 2020 period. The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic.
Operating costs
The Insurance segment operating cost ratio decreased 200 basis points from 12.3%
in the 2020 period to 10.3% in the 2022 period primarily due to the termination
of the non-deductible health insurance industry fee in 2021, lower COVID-19
related administrative costs, as previously discussed, scale efficiencies
associated with growth in our individual Medicare Advantage membership, as well
as operating cost efficiencies driven by previously implemented productivity
initiatives. These improvements were partially offset by continued strategic
investments made in 2021 to position us for long-term success. The
non-deductible health insurance industry fee impacted the operating cost ratio
by 160 basis points in the 2020 period.
59
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CenterWell Segment
Change
2021 2020 Dollars Percentage
(in millions)
Revenues:
Services:
Home solutions $ 1,166 $ 107 $ 1,059 989.7 %
Pharmacy 623 567 56 9.9 %
Provider services 413 328 85 25.9 %
Total services revenue 2,202 1,002 1,200 119.8 %
Intersegment revenues:
Home solutions 352 279 73 26.2 %
Pharmacy 9,024 7,928 1,096 13.8 %
Provider services 2,476 2,268 208 9.2 %
Total intersegment revenues 11,852 10,475 1,377 13.1 %
Total services and intersegment revenues 14,054 11,477 2,577 22.5 %
Income from operations $ 938 $ 624 $ 314 50.3 %
Operating cost ratio 92.3 % 93.3 % (1.0) %
Income from operations
CenterWell segment income from operations increased $314 million , or 50.3%, from
$624 million in the 2020 period to $938 million in the 2021 period primarily due
to consolidation of Kindred at Home earnings, individual Medicare Advantage and
state-based contracts membership growth leading to higher pharmacy revenues,
higher revenues associated with growth in our provider business, as well as the
factors that drove the segment declining operating cost ratio as more fully
described below.
Services revenue
CenterWell segment services revenue increased$1.2 billion , or 119.8%, from$1.0 billion in the 2020 period to$2.2 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings. The 2021 period further reflects higher revenue from growth in the number of primary care clinics serving third party payors, and additional pharmacy revenues associated with the acquisition of Enclara which was closed during the first quarter of 2020.
Intersegment revenues
CenterWell segment intersegment revenues increased$1.4 billion , or 13.1%, from$10.5 billion in the 2020 period to$11.9 billion in the 2021 period primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher revenues associated with our provider business. These increases were partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP and group Medicare Advantage membership as previously discussed. 60 --------------------------------------------------------------------------------
Operating costs
The CenterWell segment operating cost ratio decreased 100 basis points from 93.3% in the 2020 period to 92.3% in the 2021 period primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the 2020 impact associated with COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and home solutions teams who continued to provide services to members throughout the crisis, as well as operational improvements in our provider services business, largely related toConviva , along with operating cost efficiencies driven by previously implemented productivity initiatives in 2021. The decrease further reflects the impact of additional investments in the segment's provider business during 2020 related to marketing and AEP initiatives. These decreases were partially offset by increased administrative costs in the pharmacy operations as a result of incremental spend to accelerate growth within the business, increased utilization levels in our provider business in 2021 compared to levels in 2020 amid the COVID-19 pandemic, as well as increased pharmacy labor-related overtime costs due to weather disruptions occurring in the first quarter of 2021.
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 CenterWell segment, is generally not restricted by state departments of insurance (or comparable state regulators).
For additional information on our liquidity risk, please refer to Item 1A. -
Risk Factors in this 2022 Form 10-K.
Cash and cash equivalents increased to$5.1 billion atDecember 31, 2022 from$3.4 billion atDecember 31, 2021 . The change in cash and cash equivalents for the years endedDecember 31, 2022 , 2021 and 2020 is summarized as follows: 2022 2021
2020
(in
millions)
Net cash provided by operating activities$ 4,587 $ 2,262 $ 5,639 Net cash used in investing activities (1,006) (6,556) (3,065) Net cash (used in) provided by financing activities (1,914) 3,015
(1,955)
Increase (decrease) in cash and cash equivalents
61 --------------------------------------------------------------------------------
Cash Flow from Operating Activities
Cash flows provided by operations of$4.6 billion in the 2022 period increased$2.3 billion from cash flows provided by operations of$2.3 billion in the 2021 period primarily due to higher earnings in 2022, exclusive of the gain on the sale ofKAH Hospice recognized in the 2022 period and the gain on the KAH equity method investment recognized in the 2021 period, combined with positive working capital impacts in 2022, and the 2021 period impact associated with the pay down of claims inventory and capitation for provider surplus amounts earned in 2020 and additional provider support. The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. Benefits expense includes claim payments, capitation payments, pharmacy costs net of rebates, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well as estimates of future payments to hospitals and others for medical care and other supplemental benefits provided on or prior to the balance sheet date. For additional information regarding our benefits payable and benefits expense recognition, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. The detail of total net receivables was as follows atDecember 31, 2022 , 2021 and 2020: Change 2022 2021 2020 2022 2021 (in millions) Medicare$ 1,260 $ 1,214 $ 928 $ 46 $ 286 Commercial and other 383 579 122 (196) 457 Military services 101 104 160 (3) (56) Allowance for doubtful accounts (70) (83) (72) 13 (11) Total net receivables$ 1,674 $ 1,814 $ 1,138 (140) 676
Reconciliation to cash flow statement:
Change in receivables from disposition (acquisition) of
business
194 (396) Change in receivables per cash flow statement resulting in cash used by operations$ 54 $ 280 The changes in Medicare receivables for both the 2022 period and the 2021 period 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. The decrease in Commercial and other receivables and the allowance for doubtful accounts for 2022 primarily relates to theKAH Hospice disposition. The increase in Commercial and other receivables in 2021 primarily relates to the Kindred at Home acquisition.
Cash Flow from Investing Activities
During 2022, we acquired various businesses totaling to approximately
million
During 2021, we acquired Kindred at Home and other primary care businesses for
cash consideration of approximately
During 2020, we acquired
provider, for cash consideration of approximately
received.
During 2022, we completed the sale of a 60% interest in Humana's Kindred atHome Hospice subsidiary, orKAH Hospice , toClayton , Dubilier & Rice, or CD&R, for cash proceeds of approximately$2.7 billion , net of cash disposed, including debt repayments fromKAH Hospice to Humana of $1.9 billion . In connection with the sale, we recognized a pre-tax gain, net of transaction costs, of$237 million which is reported as a gain on sale ofKAH Hospice in the accompanying consolidated statement of income for the year endedDecember 31, 2022 . 62 -------------------------------------------------------------------------------- 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$1.1 billion ,$1.3 billion and$964 million in the 2022, 2021 and 2020 periods, respectively.
Net purchases of investment securities were
billion
Cash Flow from Financing Activities
Our financing cash flows are significantly impacted by the timing of claims payments and the related receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. Settlement of the reinsurance and low-income cost subsidies is based on a reconciliation made approximately 9 months after the close of each calendar year. Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claim payments by$2 billion in the 2022 period and claim payments were higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk by$261 million and$938 million in the 2021 and 2020 periods, respectively. Our net payable from CMS for subsidies and brand name prescription drug discounts was$540 million atDecember 31, 2022 compared to a net receivable of$1.4 billion atDecember 31, 2021 . Under our administrative services only TRICARE contract, reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by$25 million in the 2022 period and health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by$45 million and$1 million in the 2021 and 2020 periods, respectively.
In
3.150% senior notes due on their maturity date of
million
maturity date of
InNovember 2022 , we issued$500 million of 5.750% unsecured senior notes dueMarch 1, 2028 and$750 million of 5.875% unsecured senior notes dueMarch 1, 2033 . Our net proceeds, reduced for the underwriters' discounts and commissions paid, were$1.2 billion .
In
23, 2029
commissions paid, were
InAugust 2021 , we issued$1.5 billion of 0.650% unsecured senior notes dueAugust 3, 2023 ,$750 million of 1.350% unsecured senior notes dueFebruary 3, 2027 and$750 million of 2.150% unsecured senior notes dueFebruary 3, 2032 . Our net proceeds, reduced for the underwriters' discounts and commissions paid, were$2,984 million .
In
2.500% senior notes due on their maturity date of
InMarch 2020 , we issued$600 million of 4.500% senior notes dueApril 1, 2025 and$500 million of 4.875% senior notes dueApril 1, 2030 . Our net proceeds, reduced for the underwriters' discounts and commissions and offering expenses paid, were$1,088 million .
In
without a prepayment penalty due.
InOctober 2021 , we entered into a$2.0 billion term loan agreement and applied the proceeds to finance the repayment in full of the outstanding assumed Kindred at Home debt. 63 --------------------------------------------------------------------------------
In
agreement, which was used, in combination with other debt financing, to fund the
approximate
In
time, which was repaid in
We entered into a commercial paper program inOctober 2014 . Net repayments from issuance of commercial paper were$376 million in 2022 and the maximum principal amount outstanding at any one time during 2022 was$1.5 billion . Net proceeds from the issuance of commercial paper were$352 million in 2021 and the maximum principal amount outstanding at any one time during 2021 was$1.2 billion . Net proceeds from issuance of commercial paper were$295 million in 2020 and the maximum principal amount outstanding at any one time during 2020 was$600 million . We repurchased common shares for$2.10 billion ,$79 million and$1.82 billion in 2022, 2021 and 2020, respectively, under share repurchase plans authorized by the Board of Directors and in connection with employee stock plans.
We paid dividends to stockholders of
and
The remainder of the cash used in or provided by financing activities in 2022, 2021, and 2020 primarily resulted from debt issuance costs, proceeds from stock option exercises and the change in book overdraft.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 16 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 16 to the
audited Consolidated Financial Statements included in Part II, Item 8,
"Financial Statements and Supplementary Data" of this Form 10-K.
Debt
For a detailed discussion of our debt, including our senior notes, term loans, credit agreement and commercial paper program, please refer to Note 13 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
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 atDecember 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$1 million , up to a maximum 100 basis points, or annual interest expense by$3 million . 64 -------------------------------------------------------------------------------- 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 decreased to$0.9 billion atDecember 31, 2022 from$1.3 billion atDecember 31, 2021 . This decrease primarily reflects common stock repurchases, repayment of theOctober 2021 Term Loan Agreement, repayment of maturing senior notes, capital expenditures, repayment of borrowings under the commercial paper program, capital contributions to certain subsidiaries, cash dividends to shareholders and acquisitions, partially offset by net proceeds from the senior notes, proceeds from the sale of investment securities, dividends from insurance subsidiaries, and cash from certain non-insurance subsidiaries within our CenterWell segment. Our use of operating cash derived from our non-insurance subsidiaries, such as our CenterWell segment, is generally not restricted by regulators. Our regulated insurance subsidiaries paid dividends to our parent company of$1.3 billion in 2022,$1.6 billion in 2021, and$1.3 billion in 2020. Subsidiary capital requirements from significant premium growth has impacted the amount of regulated subsidiary dividends over the last two years. Refer to our parent company financial statements and accompanying notes in Schedule I - Parent Company Financial Information. The amount of ordinary dividends that may be paid to our parent company in 2023 is approximately$1.8 billion , in the aggregate. Actual dividends paid may vary due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.
Regulatory Requirements
For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to our parent, please refer to Note 16 to the to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , we were not involved in any special purpose entity, or SPE, transactions. For a detailed discussion of off-balance sheet arrangements, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Guarantees and Indemnifications
For a detailed discussion of our guarantees and indemnifications, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Government Contracts
For a detailed discussion of our government contracts, including our Medicare, Military, and Medicaid and state-based contracts, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements and accompanying notes requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We continuously evaluate our estimates and those critical accounting policies primarily related to benefits expense and revenue recognition as well as accounting for impairments related to our investment securities, goodwill, indefinite-lived and long-lived assets. These estimates are based on knowledge of current events and anticipated future events and, accordingly, actual results ultimately may differ from those estimates. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements. 65 --------------------------------------------------------------------------------
Benefits Expense Recognition
Benefits expense is recognized in the period in which services are provided and includes an estimate of the cost of services which have been incurred but not yet reported, or IBNR. Our reserving practice is to consistently recognize the actuarial best point estimate within a level of confidence required by actuarial standards. For further discussion of our reserving methodology, including our use of completion and claims per member per month trend factors to estimate IBNR, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. The completion and claims per member per month trend factors are the most significant factors impacting the IBNR estimate. The portion of IBNR estimated using completion factors for claims incurred prior to the most recent two months is generally less variable than the portion of IBNR estimated using trend factors. The following table illustrates the sensitivity of these factors assuming moderately adverse experience and the estimated potential impact on our operating results caused by reasonably likely changes in these factors based onDecember 31, 2022 data: Completion Factor (a): Claims Trend Factor (b): Factor Decrease in Factor Decrease in Change (c) Benefits Payable Change (c) Benefits Payable (dollars in millions) 0.90%$588 3.50%$479 0.80%$522 3.25%$445 0.70%$457 3.00%$411 0.60%$392 2.75%$376 0.50%$326 2.50%$342 0.40%$261 2.25%$308 0.30%$196 2.00%$274 0.20%$131 1.75%$239 0.10%$65 1.50%$205 0.05%$33 1.25%$171 0.03%$16 1.00%$137 (a)Reflects estimated potential changes in benefits payable atDecember 31, 2022 caused by changes in completion factors for incurred months prior to the most recent two months.
(b)Reflects estimated potential changes in benefits payable at
caused by changes in annualized claims trend used for the estimation of per
member per month incurred claims for the most recent two months.
(c)The factor change indicated represents the percentage point change.
The following table provides a historical perspective regarding the accrual and payment of our benefits payable. Components of the total incurred claims for each year include amounts accrued for current year estimated benefits expense as well as adjustments to prior year estimated accruals. Refer to Note 11 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for information about incurred and paid claims development as ofDecember 31, 2022 , net of reinsurance, as well as cumulative claim frequency and the total of IBNR included within the net incurred claims amounts. 66 --------------------------------------------------------------------------------
2022 2021 2020
(in millions)
Balances at January 1 $ 8,289 $ 8,143 $ 6,004
Less: Reinsurance recoverables - - (68)
Balances at January 1, net 8,289 8,143 5,936
Acquisitions - 42 -
Incurred related to:
Current year 76,105 70,024 61,941
Prior years (415) (825) (313)
Total incurred 75,690 69,199 61,628
Paid related to:
Current year (67,287) (62,149) (54,003)
Prior years (7,428) (6,946) (5,418)
Total paid (74,715) (69,095) (59,421)
Reinsurance recoverable - - -
Balances at December 31 $ 9,264 $ 8,289 $ 8,143
The following table summarizes the changes in estimate for incurred claims
related to prior years attributable to our key assumptions. As previously
described, our key assumptions consist of trend and completion factors estimated
using an assumption of moderately adverse conditions. The amounts below
represent the difference between our original estimates and the actual benefits
expense ultimately incurred as determined from subsequent claim payments.
2022 2021 2020
Factor Factor Factor
Amount Change (a) Amount Change (a) Amount Change (a)
(dollars in millions)
Trend factors$ (387) (0.6) %$ (361) (3.3) %$ (167) (1.9) % Completion factors (28) - % (464) (0.9) % (146) (0.3) % Total$ (415) $ (825) $ (313)
(a)The factor change indicated represents the percentage point change.
As previously discussed, our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant. We experienced favorable medical claims reserve development related to prior fiscal years of$415 million in 2022,$825 million in 2021, and$313 million in 2020. The favorable medical claims reserve development for 2022, 2021, and 2020 primarily reflects the consistent application of trend and completion factors estimated using an assumption of moderately adverse conditions. In addition, the higher prior year favorable development for the year endedDecember 31, 2021 was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic. Our favorable development for each of the years presented above is discussed further in Note 11 to the audited Consolidated Financial Statements included in Item 8. - Financial Statements and Supplementary Data. We continually adjust our historical trend and completion factor experience with our knowledge of recent events that may impact current trends and completion factors when establishing our reserves. Because our reserving practice is to consistently recognize the actuarial best point estimate using an assumption of moderately adverse 67 -------------------------------------------------------------------------------- conditions as required by actuarial standards, there is a reasonable possibility that variances between actual trend and completion factors and those assumed in ourDecember 31, 2022 estimates would fall towards the middle of the ranges previously presented in our sensitivity table.
Revenue Recognition
We generally establish one-year commercial membership contracts with employer
groups, subject to cancellation by the employer group on 30-day written notice.
Our Medicare contracts with CMS renew annually. Our military services contracts
with the federal government and certain contracts with various state Medicaid
programs generally are multi-year contracts subject to annual renewal
provisions.
We receive monthly premiums from the federal government and various states
according to government specified payment rates and various contractual terms.
We bill and collect premiums from employer groups and members in our Medicare
and other individual products monthly. Changes in premium revenues resulting
from the periodic changes in risk-adjustment scores derived from medical
diagnoses for our membership are estimated by projecting the ultimate annual
premium and recognized ratably during the year with adjustments each period to
reflect changes in the ultimate premium.
Premiums revenue is estimated by multiplying the membership covered under the
various contracts by the contractual rates. Premiums revenue is recognized as
income in the period members are entitled to receive services, and is net of
estimated uncollectible amounts, retroactive membership adjustments, and
adjustments to recognize rebates under the minimum benefit ratios required under
the Health Care Reform Law. We estimate policyholder rebates by projecting
calendar year minimum benefit ratios for the small group and large group
markets, as defined by the Health Care Reform Law using a methodology prescribed
by HHS, separately by state and legal entity. Medicare Advantage products are
also subject to minimum benefit ratio requirements under the Health Care Reform
Law. Estimated calendar year rebates recognized ratably during the year are
revised each period to reflect current experience. Retroactive membership
adjustments result from enrollment changes not yet processed, or not yet
reported by an employer group or the government. We routinely monitor the
collectability of specific accounts, the aging of receivables, historical
retroactivity trends, estimated rebates, as well as prevailing and anticipated
economic conditions, and reflect any required adjustments in current operations.
Premiums received prior to the service period are recorded as unearned revenues.
68
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Medicare Risk-Adjustment Provisions
CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to account for certain demographic characteristics and health status of our enrolled members. Under the risk-adjustment methodology, all MA plans must collect from providers and submit the necessary diagnosis code information to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data, collected from providers, to calculate the health status-related risk-adjusted premium payment to MA plans, which CMS further adjusts for coding pattern differences between the health plans and the government fee-for-service (FFS) program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our health status-adjusted payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment model. For additional information, refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" and Part I, Item 1A, "Risk Factors" of this Form 10-K.
Investment securities totaled$14.3 billion , or 33% of total assets atDecember 31, 2022 , and$14.0 billion , or 31% of total assets atDecember 31, 2021 . The investment portfolio was primarily comprised of debt securities, detailed below, atDecember 31, 2022 andDecember 31, 2021 . The fair value of investment securities were as follows atDecember 31, 2022 and 2021: Percentage Percentage 12/31/2022 of Total 12/31/2021 of Total (dollars in millions)
corporations and agencies: U.S. Treasury and agency obligations$ 1,039 7.3 %$ 602 4.3 % Mortgage-backed securities 3,230 22.6 % 3,229 23.1 % Tax-exempt municipal securities 728 5.1 % 841 6.0 % Mortgage-backed securities: Residential 401 2.8 % 367 2.6 % Commercial 1,399 9.8 % 1,410 10.1 % Asset-backed securities 1,731 12.2 % 1,348 9.6 % Corporate debt securities 5,726 40.2 % 5,700 40.8 % Total debt securities 14,254 100.0 % 13,497 96.6 % Common stock 7 - % 475 3.4 % Total investment securities$ 14,261 100.0 %$ 13,972 100.0 % Approximately 96% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by S&P atDecember 31, 2022 . Most of the debt securities that were below investment-grade were rated BB-, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities inthe United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified acrossthe United States with no individual 69 -------------------------------------------------------------------------------- state exceeding 1% of our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types. Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows atDecember 31, 2022 : Less than 12 months 12 months or more Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (in millions)
corporations and agencies: U.S. Treasury and agency obligations$ 512 $ (5) $ 397 $ (50) $ 909 $ (55) Mortgage-backed securities 1,231 (104) 1,683 (367) 2,914 (471) Tax-exempt municipal securities 64 (2) 615 (36) 679 (38) Mortgage-backed securities: Residential 124 (16) 274 (60) 398 (76) Commercial 243 (13) 1,157 (142) 1,400 (155) Asset-backed securities 620 (32) 1,011 (46) 1,631 (78) Corporate debt securities 1,625 (98) 3,825 (730) 5,450 (828) Total debt securities$ 4,419 $ (270) $ 8,962 $ (1,431) $ 13,381 $ (1,701) Beginning onJanuary 1, 2020 , we adopted the new current expected credit losses, or CECL, model which retained many similarities from the previous other-than-temporary impairment model except eliminating from consideration in the impairment analysis the length of time over which the fair value had been less than cost. Also, under the CECL model, expected losses on available for sale debt securities are recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. For debt securities whose fair value is less than their amortized cost which we do not intend to sell or are not required to sell, we evaluate the expected cash flows to be received as compared to amortized cost and determine if an expected credit loss has occurred. In the event of an expected credit loss, only the amount of the impairment associated with the expected credit loss is recognized in income with the remainder, if any, of the loss recognized in other comprehensive income. To the extent we have the intent to sell the debt security or it is more likely than not we will be required to sell the debt security before recovery of our amortized cost basis, we recognize an impairment loss in income in an amount equal to the full difference between the amortized cost basis and the fair value. Potential expected credit loss impairment is considered using a variety of factors, including the extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a debt security; changes in the quality of the debt security's credit enhancement; payment structure of the debt security; changes in credit rating of the debt security by the rating agencies; failure of the issuer to make scheduled principal or interest payments on the debt security and changes in prepayment speeds. For debt securities, we take into account expectations of relevant market and economic data. For example, with respect to mortgage and asset-backed securities, such data includes underlying loan level data and structural features such as seniority and other forms of credit enhancements. We estimate the amount of the expected credit loss component of a debt security as the difference between the amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at the date of purchase. The expected credit loss cannot exceed the full difference between the amortized cost basis and the fair value. The risks inherent in assessing the impairment of an investment include the risk that market factors may differ from our expectations, facts and circumstances factored into our assessment may change with the passage of time, or 70 -------------------------------------------------------------------------------- we may decide to subsequently sell the investment. The determination of whether a decline in the value of an investment is related to a credit event requires us to exercise significant diligence and judgment. The discovery of new information and the passage of time can significantly change these judgments. The status of the general economic environment and significant changes in the national securities markets influence the determination of fair value and the assessment of investment impairment. There is a continuing risk that declines in fair value may occur and additional material realized losses from sales or expected credit loss impairments may be recorded in future periods. All issuers of debt securities we own that were trading at an unrealized loss atDecember 31, 2022 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the debt securities were purchased. AtDecember 31, 2022 , we did not intend to sell any debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these debt securities before recovery of their amortized cost basis. Additionally, we did not record any material credit allowances for debt securities that were in an unrealized loss position atDecember 31, 2022 , 2021 or 2020.
AtDecember 31, 2022 , goodwill, indefinite-lived and other long-lived assets represented 33% of total assets and 92% of total stockholders' equity, compared to 38% and 104%, respectively, atDecember 31, 2021 . The decrease in goodwill, indefinite-lived and other long-lived assets is primarily attributable to ourAugust 2022 sale ofKAH Hospice . For goodwill, we are required to test at least annually for impairment at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A reporting unit either is our operating segments or one level below the operating segments, referred to as a component, which comprise our reportable segments. A component is considered a reporting unit if the component constitutes a business for which discrete financial information is available that is regularly reviewed by management. We are required to aggregate the components of an operating segment into one reporting unit if they have similar economic characteristics.Goodwill is assigned to the reporting unit that is expected to benefit from a specific acquisition. We perform a quantitative assessment to review goodwill for impairment to determine both the existence and amount of goodwill impairment, if any. Our strategy, long-range business plan, and annual planning process support our goodwill impairment tests. These tests are performed, at a minimum, annually in the fourth quarter, and are based on an evaluation of future discounted cash flows. We rely on this discounted cash flow analysis to determine fair value. However outcomes from the discounted cash flow analysis are compared to other market approach valuation methodologies for reasonableness. We use discount rates that correspond to a market-based weighted-average cost of capital and terminal growth rates that correspond to long-term growth prospects, consistent with the long-term inflation rate. Key assumptions in our cash flow projections, including changes in membership, premium yields, medical and operating cost trends, and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. If these assumptions differ from actual, including the impact of the Health Care Reform Law or changes in government reimbursement rates, the estimates underlying our goodwill impairment tests could be adversely affected. The fair value of our reporting units with significant goodwill exceeded carrying amounts by a substantial margin. However, unfavorable changes in key assumptions or combinations of assumptions including a significant increase in the discount rate, decrease in the long-term growth rate or substantial reduction in our underlying cash flow assumptions, including revenue growth rates, medical and operating cost trends, and projected operating income could have a significant negative impact on the estimated fair value of our home solutions and provider reporting units, which accounted for$4.3 billion and$1.1 billion of goodwill, respectively. Impairment tests completed for 2022, 2021, and 2020 did not result in an impairment loss.
Indefinite-lived intangible assets relate to Certificate of Needs (CON) and
Medicare licenses acquired in connection with our
with a carrying value of
71
--------------------------------------------------------------------------------
goodwill, we are required to test at least annually for impairment and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. These tests are performed, at a minimum, annually in the fourth quarter. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of indefinite-lived intangible assets are determined based on the income approach. Impairment tests completed for 2022 did not result in a material impairment loss. These charges reflect the amount by which the carrying value exceeded its estimated fair value. Impairment tests completed for 2021 did not result in an impairment loss. The fair values of the assets were measured using Level 3 inputs, such as projected revenues and operating cash flows. Long-lived assets consist of property and equipment and other definite-lived intangible assets. These assets are depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating depreciation or amortization for these assets. Other than the$248 million of asset impairment charges as a result of our value creation initiatives as described in Footnote 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K, there were no other impairment losses in the last three years.
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