HUMANA INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed consolidated financial statements of Humana Inc. in this document
present the Company's financial position, results of operations and cash flows,
and should be read in conjunction with the following discussion and analysis.
References to "we," "us," "our," "Company," and "Humana" mean Humana Inc. and
its subsidiaries. This discussion includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
filings with the Securities and Exchange Commission, or SEC, in our press
releases, investor presentations, and in oral statements made by or with the
approval of one of our executive officers, the words or phrases like "believes,"
"expects," "anticipates," "intends," "likely will result," "estimates,"
"projects" or variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties and
assumptions, including, among other things, information set forth in Item 1A. -
Risk Factors in our 2021 Form 10-K, as modified by any changes to those risk
factors included in this document and in other reports we filed subsequent to
February 17, 2022, in each case incorporated by reference herein. In making
these statements, we are not undertaking to address or update such
forward-looking statements in future filings or communications regarding our
business or results. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this document might not occur. There may
also be other risks that we are unable to predict at this time. Any of these
risks and uncertainties may cause actual results to differ materially from the
results discussed in the forward-looking statements.

Executive Overview

General

Humana Inc., headquartered in Louisville, Kentucky, is a leading health and
well-being company committed to helping our millions of medical and specialty
members achieve their best health. Our successful history in care delivery and
health plan administration is helping us create a new kind of integrated care
with the power to improve health and well being and lower costs. Our efforts are
leading to a better quality of life for people with Medicare, families,
individuals, military service personnel, and communities at large. To accomplish
that, we support physicians and other health care professionals as they work to
deliver the right care in the right place for their patients, our members. Our
range of clinical capabilities, resources and tools, such as in home care,
behavioral health, pharmacy services, data analytics and wellness solutions,
combine to produce a simplified experience that makes health care easier to
navigate and more effective.

Our industry relies on two key statistics to measure performance. The benefit
ratio, which is computed by taking
total benefits expense as a percentage of premiums revenue, represents a
statistic used to measure underwriting profitability. The operating cost ratio,
which is computed by taking total operating costs, excluding depreciation and
amortization, as a percentage of total revenue less investment income,
represents a statistic used to measure administrative spending efficiency.

Kindred at Home Acquisition

On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home,
or KAH, the nation's largest home health and hospice provider, from TPG Capital,
or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, two private equity funds
for an enterprise value of $8.2 billion, which included our equity value of
$2.4 billion associated with our 40% minority ownership interest. We paid the
approximate $5.8 billion transaction price (net of our existing equity stake)
through a combination of debt financing, the assumption of existing KAH
indebtedness and parent company cash.










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Sale of Hospice and Personal Care Divisions

On August 11, 2022, we completed the sale of a 60% interest of Humana's Kindred
at Home Hospice subsidiary, or KAH Hospice, to Clayton, Dubilier & Rice, or
CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed,
including debt repayments from KAH Hospice to Humana of $1.9 billion. In
connection with the sale we recognized a pre-tax gain, net of transaction costs,
of $240 million which is reported as a gain on sale of KAH Hospice in the
accompanying condensed consolidated statements of income for the three and nine
months ended September 30, 2022.

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 significant disruption in
utilization during 2020 also impacted our ability to implement clinical
initiatives to manage health care costs and chronic conditions of our members,
and appropriately document their risk profiles, and, as such, significantly
affected our 2021 revenue under the risk adjustment payment model for Medicare
Advantage plans. Finally, changes in utilization patterns and actions taken in
2021 as a result of the COVID-19 pandemic, including the suspension of certain
financial recovery programs for a period of time and shifting the timing of
claim payments and provider capitation surplus payments, impacted our claim
reserve development and operating cash flows for 2021.

Value Creation Initiatives

During 2022, in order to create capacity to fund growth and investment in our
Medicare Advantage business and further expansion of our Healthcare Services
capabilities in 2023, we committed to drive additional value for the enterprise
through cost saving, productivity initiatives, and value acceleration from
previous investments. As a result of these initiatives, during the three and
nine months ended September 30, 2022, we recorded charges of $82 million and
$285 million, respectively, primarily related to asset and software impairment
and abandonment in the amount of $4 million and $144 million for the three and
nine months ended September 30, 2022, respectively. Also included in this charge
was $44 million and $65 million for the three and nine months ended September
30, 2022, respectively, in future severance payments in connection with the
optimization of our workforce to increase speed, agility, and the pace at which
Humana must work as a large, integrated healthcare organization. We expect this
liability to be primarily paid within the next 12 months and classified it as a
current liability, included in trade accounts payable and accrued expenses.
These charges are included within operating costs in the condensed consolidated
statements of income for the three and nine months ended September 30, 2022, and
were recorded at the corporate level and not allocated to the segments. We
anticipate additional charges in the remainder of the year across these same
categories as additional cost saving, productivity initiatives, and value
acceleration opportunities are identified.

Business Segments

We manage our business with three reportable segments: Retail, Group and
Specialty, and Healthcare Services. The reportable segments are based on a
combination of the type of health plan customer and adjacent businesses centered
on well-being solutions for our health plans and other customers, as described
below. These segment groupings are consistent with information used by our Chief
Executive Officer, the Chief Operating Decision Maker, to assess performance and
allocate resources.

The Retail segment consists of Medicare benefits, marketed to individuals or
directly via group Medicare accounts. In addition, the Retail segment also
includes our contract with CMS to administer the Limited Income Newly Eligible
Transition, or LI-NET, prescription drug plan program and contracts with various
states to provide Medicaid, including Temporary Assistance for Needy Families,
or TANF, dual eligible demonstration, and Long-

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Term Support Services benefits, which we refer to collectively as our
state-based contracts. The Group and Specialty segment consists of employer
group commercial fully-insured medical and specialty health insurance benefits
marketed to individuals and employer groups, including dental, vision, and other
supplemental health benefits, as well as administrative services only, or ASO
products. In addition, our Group and Specialty segment includes our military
services business, primarily our TRICARE T2017 East Region contract. The
Healthcare Services segment includes pharmacy, provider, and home services,
along with other services and capabilities to promote wellness and advance
population health. The segment also includes the company's strategic
partnerships with WCAS to develop and operate senior-focused, payor-agnostic,
primary care centers. 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.

The results of each segment are measured by segment earnings, and for our Retail
and Healthcare Services segments, also include equity in net earnings from our
equity method investees. Transactions between reportable segments primarily
consist of sales of services rendered by our Healthcare Services segment,
primarily pharmacy, provider, and home solutions services, to our Retail and
Group and Specialty segment customers. Intersegment sales and expenses are
recorded at fair value and eliminated in consolidation. Members served by our
segments often use the same provider networks, enabling us in some instances to
obtain more favorable contract terms with providers. Our segments also share
indirect costs and assets. As a result, the profitability of each segment is
interdependent. We allocate most operating expenses to our segments. Assets and
certain corporate income and expenses are not allocated to the segments,
including the portion of investment income not supporting segment operations,
interest expense on corporate debt, and certain other corporate expenses. These
items are managed at a corporate level. These corporate amounts are reported
separately from our reportable segments and are included with intersegment
eliminations.

Seasonality

COVID-19 disrupted the pattern of our quarterly earnings and operating cash
flows largely due to the temporary deferral of non-essential care which resulted
in reductions in non-COVID-19 hospital admissions and lower overall healthcare
system utilization during higher levels of COVID-19 hospital admissions.
Likewise, during periods of increased incidences of COVID-19, COVID-19 treatment
and testing costs increase. Similar impacts and seasonal disruptions from either
higher or lower utilization are expected to persist as we respond to and recover
from the COVID-19 global health crisis.

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

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

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

2022 Highlights

•Our strategy offers our members affordable health care combined with a positive
consumer experience in growing markets. At the core of this strategy is our
integrated care delivery model, which unites quality care, high member
engagement, and sophisticated data analytics. Our approach to primary,
physician-

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directed care for our members aims to provide quality care that is consistent,
integrated, cost-effective, and member-focused, provided by both employed
physicians and physicians with network contract arrangements. The model is
designed to improve health outcomes and affordability for individuals and for
the health system as a whole, while offering our members a simple, seamless
healthcare experience. We believe this strategy is positioning us for long-term
growth in both membership and earnings. We offer providers a continuum of
opportunities to increase the integration of care and offer assistance to
providers in transitioning from a fee-for-service to a value-based arrangement.
These include performance bonuses, shared savings and shared risk relationships.
At September 30, 2022, approximately 3,145,200 members, or 69%, of our
individual Medicare Advantage members were in value-based relationships under
our integrated care delivery model, as compared to 2,979,800 members, or 68%, at
September 30, 2021.

•In October 2022, the Centers for Medicare and Medicaid Services, or CMS,
published its updated Medicare Star Ratings for bonus year 2024 (plan year
2023). We have 4.9 million members, or 96%, of our existing Medicare Advantage
membership, in contracts rated 4-stars or higher, with more than 3.0 million
members in plans rated 4.5 stars or higher. Three of our contracts received a
5-star rating on CMS's 5-star rating system, including HMO plans in Louisiana,
Tennessee, and Kentucky, covering approximately 356,000 members. More than 99%
of retirees in our group Medicare Advantage rated plans remain in 4-star or
above contracts for 2023.

•Net income was $1.2 billion, or $9.39 per diluted common share, and $1.5
billion, or $11.84 per diluted common share, for the three months ended
September 30, 2022, and 2021, respectively. Net income was $2.8 billion, or
$22.16 per diluted common share, and $2.9 billion, or $22.77 per diluted common
share, for the nine months ended September 30, 2022, and 2021, respectively.
These comparisons were significantly impacted by the gain on KAH equity method
investment recognized in August 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
of KAH Hospice. The impact of these adjustments to our consolidated income
before income taxes and equity in net earnings and diluted earnings per common
share was as follows for the 2022 and 2021 quarter and period:

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                                                        For the three months ended           For the nine months ended
                                                              September 30,                        September 30,
                                                          2022              2021              2022              2021
Consolidated income before income taxes and equity in
net earnings:
Gain on Kindred at Home equity method investment      $       -          $ (1,129)         $      -          $ (1,129)
Put/call valuation adjustments associated with our
non consolidating minority interest investments              13                33               (16)              567
Transaction and integration costs                            17                71                70                93

Change in the fair value of publicly-traded equity
securities

                                                  (51)              174               119               197
Charges associated with productivity initiatives
related to the previously disclosed $1 billion value
creation plan                                                82                 -               285                 -
Gain on sale of KAH Hospice                                (240)                -              (240)                -
Total                                                 $    (179)         $   (851)         $    218          $   (272)

                                                        For the three months ended           For the nine months ended
                                                              September 30,                        September 30,
                                                        2022 (1)          2021 (2)          2022 (1)          2021 (2)
Diluted earnings per common share:
Gain on Kindred at Home equity method investment      $       -          $  (8.74)         $      -          $  (8.73)
Put/call valuation adjustments associated with our
non consolidating minority interest investments            0.08              0.20             (0.10)             3.38
Transaction and integration costs                          0.10              0.39              0.42              0.52

Change in the fair value of publicly-traded equity
securities

                                                (0.31)             1.04              0.72              1.18

Charges associated with productivity initiatives
related to the previously disclosed $1 billion value
creation plan

                                              0.50                 -              1.73                 -
Net gain on sale of KAH Hospice                           (3.03)                -             (1.72)                -
Total                                                 $   (2.66)         $  (7.11)         $   1.05          $  (3.65)



(1) The net gain on sale of KAH Hospice impact of $3.03 per diluted common share
and $1.72 per diluted common share for the three and nine months ended September
30, 2022, respectively, include the $240 million pretax gain recorded on sale of
KAH Hospice in August 2022 and the related income tax effects of the
transaction. The 2022 period income tax impact was $0.17 per diluted common
share, reflective of the $1.31 per diluted common share related to the
recognition of a deferred tax liability in the second quarter of 2022 in
connection with the held-for-sale classification resulting from the pending
transaction, partially offset by the $1.14 per diluted common share benefit
recognized in the third quarter of 2022 associated with the increase to our tax
basis in both the shares sold and the shares retained at the time of the
completion of the sale in August 2022. The remaining significant adjustments for
the three and nine months ended September 30, 2022 include a total cumulative
net tax benefit of approximately $0.11 per diluted common share and $0.83 per
diluted common share, respectively.

(2) The significant adjustments for the three and nine months ended September
30, 2021 include a total cumulative net tax benefit of approximately $0.53 per
diluted common share and $1.55 per diluted common share, respectively.







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Health Care Reform

The Health Care Reform Law enacted significant reforms to various aspects of the
U.S. health insurance industry. Certain significant provisions of the Health
Care Reform Law include, among others, mandated coverage requirements, mandated
benefits and guarantee issuance associated with commercial medical insurance,
rebates to policyholders based on minimum benefit ratios, adjustments to
Medicare Advantage premiums, the establishment of federally facilitated or
state-based exchanges coupled with programs designed to spread risk among
insurers, and the introduction of plan designs based on set actuarial values. In
addition, the Health Care Reform Law established insurance industry assessments,
including an annual health insurance industry fee. The annual health insurance
industry fee, which was not deductible for income tax purposes and significantly
increased our effective tax rate, was in effect for 2020, but was permanently
repealed beginning in calendar year 2021.

It is reasonably possible that the Health Care Reform Law and related
regulations, as well as other current or future legislative, judicial or
regulatory changes such as the Families First Coronavirus Response Act, or the
Families First Act, the Coronavirus Aid, Relief, and Economic Security Act, or
the CARES Act, and other legislative or regulatory action taken in response to
COVID-19 including restrictions on our ability to manage our provider network or
otherwise operate our business, or restrictions on profitability, including
reviews by regulatory bodies that may compare our Medicare Advantage
profitability to our non-Medicare Advantage business profitability, or compare
the profitability of various products within our Medicare Advantage business,
and require that they remain within certain ranges of each other, increases in
member benefits or changes to member eligibility criteria without corresponding
increases in premium payments to us, or increases in regulation of our
prescription drug benefit businesses, in the aggregate may have a material
adverse effect on our results of operations (including restricting revenue,
enrollment and premium growth in certain products and market segments,
restricting our ability to expand into new markets, increasing our medical and
operating costs, further lowering our Medicare payment rates and increasing our
expenses associated with assessments); our financial position (including our
ability to maintain the value of our goodwill); and our cash flows.

We intend for the discussion of our financial condition and results of
operations that follows to assist in the understanding of our financial
statements and related changes in certain key items in those financial
statements from year to year, including the primary factors that accounted for
those changes. Transactions between reportable segments primarily consist of
sales of services rendered by our Healthcare Services segment, primarily
pharmacy, provider, and home solutions services, to our Retail and Group and
Specialty segment customers and are described in Note 14 to the condensed
consolidated financial statements included in this report.

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