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 2022 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 16, 2023, 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.

Employer Group Commercial Medical Products Business Exit

In February 2023, we announced our planned exit from the Employer Group
Commercial Medical Products business, which includes all fully insured,
self-funded and Federal Employee Health Benefit medical plans, as well as
associated wellness and rewards programs. No other Humana health plan offerings
are materially affected. Following a strategic review, we determined the
Employer Group Commercial Medical Products business was no longer positioned to
sustainably meet the needs of commercial members over the long term or support
our long-term strategic plans. The exit from this line of business will be
phased over the next 18 to 24 months.

Sale of Hospice and Personal Care Divisions

On August 11, 2022, we completed the sale of a 60% interest in Gentiva, formerly
Kindred, Hospice to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of
approximately $2.7 billion, net of cash disposed, including debt repayments from
Gentiva 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.


                                       33
--------------------------------------------------------------------------------
  Table of Contents
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.

The COVID-19 National Emergency declared in 2020 was terminated on April 10,
2023 and the Public Health Emergency is set to expire on May 11, 2023.

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 for the year-ended December 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.
We did not record any charges in the first quarter of 2022, with no recurring
charges in 2023.

Business Segments

During December 2022, we realigned our businesses into two distinct segments:
Insurance and CenterWell. The Insurance segment includes the businesses that
were previously included in the Retail 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 2023 presentation. For a recast of prior period segment financial
information, refer to Note 14 to the unaudited Consolidated Financial Statements
included in Part I, Item 1, "Financial Statements" of this Form 10-Q.

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.

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, and Long-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

                                       34
--------------------------------------------------------------------------------
  Table of Contents
health benefits, as well as administrative services only, or ASO. In addition,
our Insurance segment includes our Military business, primarily our T-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.

The results of each segment are measured by income (loss) from operations.
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 on January 1 for renewals. These
plan designs generally result in us sharing a greater portion of the
responsibility for total prescription drug costs in the early stages and less in
the latter stages. As a result, the PDP benefit ratio generally decreases as the
year progresses. In addition, the number of low income senior members as well as
year-over-year changes in the mix of membership in our standalone PDP products
affects the quarterly benefit ratio pattern.

The Insurance segment also experiences seasonality in the commercial
fully-insured product offering. The effect on the Insurance 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. The Employer Group Commercial Fully-Insured
business decreased our Insurance segment benefit ratio by 30 basis points and 20
basis points for the three months ended March 31, 2023 and 2022, respectively.
The Employer Group Commercial Fully-Insured business increased our Insurance
segment operating cost ratio by 40 basis points and 50 basis points for the
three months ended March 31, 2023 and 2022, respectively.

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.

                                       35

--------------------------------------------------------------------------------
  Table of Contents
2023 Highlights

•Our strategy offers our members affordable health care combined with a positive
consumer experience in growing markets. At the core of this strategy is our
integrated care delivery model, which unites quality care, high member
engagement, and sophisticated data analytics. Our approach to primary,
physician-directed care for our members aims to provide quality care that is
consistent, integrated, cost-effective, and member-focused, provided by both
employed physicians and physicians with network contract arrangements. The model
is designed to improve health outcomes and affordability for individuals and for
the health system as a whole, while offering our members a simple, seamless
healthcare experience. We believe this strategy is positioning us for long-term
growth in both membership and earnings. We offer providers a continuum of
opportunities to increase the integration of care and offer assistance to
providers in transitioning from a fee-for-service to a value-based arrangement.
These include performance bonuses, shared savings and shared risk relationships.
At March 31, 2023, approximately 3,505,100 members, or 68%, of our individual
Medicare Advantage members were in value-based relationships under our
integrated care delivery model, as compared to 3,053,600 members, or 67%, at
March 31, 2022.

•Net income was $1.2 billion, or $9.87 per diluted common share, and $930
million, or $7.29 per diluted common share, for the three months ended March 31,
2023, and 2022, respectively. These comparisons were significantly impacted by
put/call valuation adjustments associated with non-consolidating minority
interest investments, transaction and integration costs, and the change in the
fair value of publicly-traded equity securities. The impact of these adjustments
to our consolidated income before income taxes and equity in net earnings and
diluted earnings per common share was as follows for the 2023 and 2022 quarter:

                                                                     For the three months ended March
                                                                                    31,
                                                                          2023                2022

Consolidated income before income taxes and equity in net earnings:

Put/call valuation adjustments associated with our non consolidating
minority interest investments

                                        $        53          $     (21)
Transaction and integration costs                                            (51)                17
Change in the fair value of publicly-traded equity securities                  1                109

Total                                                                $         3          $     105

                                                                     For the three months ended March
                                                                                    31,
                                                                          2023                2022

Diluted earnings per common share:

Put/call valuation adjustments associated with our non consolidating
minority interest investments

                                        $      0.42          $   (0.16)
Transaction and integration costs                                          (0.41)              0.13
Change in the fair value of publicly-traded equity securities              (0.01)              0.85

Tax impact of all transactions                                             (0.11)             (0.18)
Total                                                                $     (0.11)         $    0.64













                                       36

--------------------------------------------------------------------------------
  Table of Contents
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 the U.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, and home services, to our Insurance segment customers and are
described in Note 14 to the condensed consolidated financial statements included
in this report.


                                       37

--------------------------------------------------------------------------------

Table of Contents