Humana Inc. Reports Financial Results for Second Quarter and First Half of 2004
Humana Inc. Reports Financial Results for Second Quarter and First Half of 2004
July 26, 2004 at 12:00 AM EDT
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* Earnings per diluted share up 16% versus the prior year's quarter * Medical cost trend moderation in the quarter * Commercial enrollment expectations revised to reflect current competitive environment * Earnings guidance raised for 2004
LOUISVILLE, Ky., July 26 /PRNewswire-FirstCall/ -- Humana Inc. (NYSE: HUM) today reported diluted earnings per common share of $0.50 for the quarter ended June 30, 2004 ("2Q04"), a 16 percent increase from $0.43 per diluted share earned in the quarter ended June 30, 2003 ("2Q03").
"The benefit of Humana's diversification among multiple lines of business is evidenced in this quarter's record results," said Michael B. McCallister, Humana's president and chief executive officer. "The continued success we are experiencing with our traditional commercial and government products, combined with favorable results from and growing acceptance of our cutting-edge consumer strategy, are leading to record earnings for 2004."
The increase in year-over-year consolidated results for 2Q04 was primarily driven by higher earnings in the company's Government segment. Medical cost trends were lower than previously anticipated.
Operating results for 2Q04 for the Commercial segment were lower year over year by $6,845,000, including expenses of $6,128,000 primarily related to severance costs. The year-over-year change also includes the planned offsetting effects of a higher medical expense ratio, and a lower selling, general, and administrative expense ratio.
Operating results for 2Q04 for the Government segment increased year over year by $25,008,000 primarily due to higher TRICARE revenues, higher Medicare membership, and lower medical cost trends in both Medicare and TRICARE.
Consolidated Highlights for 2Q04
* Consolidated revenues totaled $3,431,478,000, compared to
$3,029,958,000 in 2Q03, a 13 percent increase.
* Medical membership as of June 30, 2004 totaled 6,881,600, an increase
of 4 percent over the 6,640,900 medical members as of June 30, 2003.
This increase included approximately 185,700 members added through the
acquisition of Ochsner Health Plan of Louisiana ("Ochsner Health
Plan") on April 1, 2004.
* The medical expense ratio (medical expenses as a percent of premiums)
of 84.4 percent increased 50 basis points compared to the 2Q03 medical
expense ratio of 83.9 percent.
* The selling, general and administrative ("SG&A") expense ratio (SG&A
expenses as a percent of premiums plus administrative services fees)
of 14.4 percent decreased by 60 basis points from the 2Q03 SG&A
expense ratio of 15.0 percent.
* Consolidated pretax income of $122,353,000 increased $18,163,000, or
17 percent compared to 2Q03.
* Pretax margin of 3.6 percent increased 20 basis points from the 3.4
percent pretax margin in 2Q03.
* Net income of $80,753,000 increased 17 percent from net income of
$69,276,000 in 2Q03.
* Results for 2Q04 included $0.07 per diluted share gain on the sale of
a venture capital investment and expenses of $0.03 per diluted share
primarily for severance costs in connection with corporate
rightsizing.
* Results for 2Q03 included $0.06 per diluted share gain on the sale of
a venture capital investment.
Consolidated Highlights for the six months ended June 30, 2004 ("1H04")
* Consolidated revenues totaled $6,718,427,000, compared to
$5,961,674,000 in the six months ended June 30, 2003 ("1H03"), a
13 percent increase.
* The medical expense ratio of 84.4 percent increased 70 basis points
compared to the 1H03 medical expense ratio of 83.7 percent.
* The SG&A expense ratio for 1H04 of 14.4 percent decreased by 110 basis
points from 1H03 SG&A expense ratio of 15.5 percent.
* Consolidated pretax income of $225,126,000 increased $73,534,000, or
49 percent compared to 1H03.
* The pretax margin of 3.4 percent increased 90 basis points compared to
that for 1H03 of 2.5 percent.
* Net income of $148,583,000 increased 48 percent for 1H04 versus
$100,506,000 in 1H03.
* Diluted earnings per common share of $0.91 increased 47 percent
compared to $0.62 for 1H03.
* Results for 1H04 included $0.07 per diluted share gain on the sale of
a venture capital investment and expenses of $0.03 per diluted share
primarily for severance costs.
* Results for 1H03 included the write-down of building and equipment of
$0.07 per diluted share, gain on the sale of a venture capital
investment of $0.06 per diluted share, and software abandonment
charges of $0.05 per diluted share. The net impact of these items
reduced diluted earnings per common share by $0.05.
Commercial Segment
Humana's Commercial Segment consists of members enrolled in products marketed to employer groups and individuals. This segment includes three lines of business: fully insured medical, administrative services only, and specialty.
Commercial Segment Highlights for 2Q04
* Premiums and administrative services fees rose 10 percent to
$1,827,666,000 compared to $1,660,910,000 in 2Q03.
* Medical membership was 3,404,400 as of June 30, 2004, an increase of
383,700 members, or 13 percent from June 30, 2003. The acquisition of
Ochsner Health Plan added approximately 152,600 commercial members on
April 1, 2004.
* Per member premiums for the fully insured medical business, net of
benefit changes, increased in the range of 6 to 8 percent compared to
2Q03.
* The medical expense ratio of 84.6 percent increased 160 basis points
from 2Q03.
* The SG&A expense ratio of 16.2 percent declined 60 basis points from
2Q03.
* Pretax income of $36,912,000 compares to $43,757,000 in 2Q03.
* Pretax margin of 2.0 percent was 60 basis points lower than that for
2Q03.
* Pretax income for 2Q04 included $13,000,000 from gain on the sale of a
venture capital investment and expenses of $6,128,000 primarily for
severance costs.
* Pretax income for 2Q03 included $12,423,000 from gain on the sale of a
venture capital investment.
Commercial Segment Highlights for 1H04
* Premiums and administrative services fees rose 8 percent to
$3,572,453,000 compared to $3,306,056,000 in 1H03.
* Medical membership increased year to date by 339,200 members, or
11 percent.
* The medical expense ratio of 84.1 percent compares to 82.2 percent for
1H03.
* The SG&A expense ratio of 16.3 percent compares to 16.9 percent for
1H03.
* Pretax income of $75,998,000 decreased by $4,998,000 compared to 1H03.
* Pretax margin for the segment of 2.1 percent declined by 30 basis
points compared to the same period in the prior year.
* Pretax income for 1H04 included $13,000,000 from gain on the sale of a
venture capital investment, expenses of $6,128,000 primarily for
severance costs, and the negative impact of an additional day of
medical claims expense due to the leap year.
* Pretax income for 1H03 included the write-down of building and
equipment of $4,325,000, $12,423,000 gain on the sale of a venture
capital investment, and software abandonment charges of $13,527,000.
Government Segment
Humana's Government Segment consists of members enrolled in government- sponsored programs. This segment includes three lines of business: MedicareAdvantage, TRICARE, and Medicaid.
Government Segment Highlights for 2Q04
* Premiums and administrative services fees totaled $1,557,392,000,
18 percent higher than 2Q03 premiums and administrative services fees
of $1,324,163,000.
* MedicareAdvantage membership totaled 367,900 at June 30, 2004, an
increase of 43,700 members from June 30, 2003, or 13 percent,
including approximately 33,100 MedicareAdvantage members added through
the acquisition of Ochsner Health Plan on April 1, 2004.
* MedicareAdvantage per member premiums, net of benefit changes,
increased in the range of 8.5 to 10.5 percent compared to 2Q03.
* TRICARE membership totaled 2,642,900 at June 30, 2004 versus 2,803,300
at June 30, 2003. On June 1, 2004, approximately 271,200 members
transitioned to new administrators as part of the scheduled transition
to new Department of Defense contracts for the TRICARE program.
* TRICARE premium revenues and administrative services fees increased by
14 percent versus 2Q03.
* Medicaid membership of 466,400 at June 30, 2004 decreased by 5 percent
from June 30, 2003. Effective July 1, 2004, Humana renewed its
Medicaid contract with the Health Insurance Administration in Puerto
Rico. This contract accounts for approximately 83 percent of the
company's Medicaid membership.
* Medicaid per member premiums, net of benefit changes, increased in the
range of 13 to 15 percent versus 2Q03.
* The segment's medical expense ratio of 84.2 percent declined by 90
basis points from 2Q03.
* The segment's SG&A expense ratio of 12.3 percent declined by 40 basis
points from 2Q03.
* Pretax income of $85,441,000 compares to 2Q03 pretax income of
$60,433,000.
* Pretax margin increased to 5.5 percent from 4.5 percent in 2Q03, a 100
basis point increase.
* Pretax income for 2Q04 included $3,000,000 from gain on the sale of a
venture capital investment and expenses of $1,532,000 primarily for
severance costs.
* Pretax income for 2Q03 included $2,777,000 from gain on the sale of a
venture capital investment.
Government Segment Highlights for 1H04
* Premiums and administrative services fees totaled $3,070,023,000,
19 percent higher than the related 1H03 premiums and administrative
services fees of $2,583,102,000.
* Medical membership decreased year to date by 227,200 members, or
6 percent, driven by the scheduled transition of TRICARE membership.
* The medical expense ratio of 84.8 percent compares to 85.6 percent in
1H03.
* The SG&A expense ratio of 12.2 percent compares to 13.7 percent for
1H03.
* Pretax income of $149,128,000 increased by $78,532,000 compared to
1H03.
* Pretax margin of 4.8 percent increased by 210 basis points during 1H04
compared to the same period in the prior year.
* Pretax income for 1H04 included a gain on the sale of a venture
capital investment of $3,000,000, expenses of $1,532,000 primarily for
severance costs, and the negative impact of an additional day of
medical claims expense due to the leap year.
* Pretax income for 1H03 included the write-down of building and
equipment of $12,908,000 and gain on the sale of a venture capital
investment of $2,777,000.
Cash Flows from Operations
* Cash flows provided by operations for 2Q04 of $63,504,000 compares to
cash flows provided by operations of $161,496,000 in 2Q03. The
decline in cash flows year-over-year of $97,992,000 results from the
timing of the collection of TRICARE bid price adjustment receivables.
* Cash flows provided by operations for 1H04 of $24,855,000 compares to
cash flows provided by operations for 1H03 of $53,266,000.
Non-GAAP Financial Measures - Cash Flows from Operations
* The fixed monthly MedicareAdvantage premium payment from the Centers
for Medicare and Medicaid Services ("CMS") is due to Humana on the
first day of each month. However, if the first of the month falls on
a weekend or a holiday, the company receives that payment on the last
business day of the prior month, often resulting in a significant
impact on cash flows from operations.
* Management believes the difference in timing of this cash event
between periods may be so significant as to distort a particular
period's trend in operating cash flows. Management believes that
meaningful analysis of our financial performance requires an
understanding of the factors underlying that performance and our
judgments about the relevance of a factor to normal operating results.
In some cases, large factors or events may obscure short-term patterns
and long-term trends. When reviewing and analyzing our cash flow
position, management apportions the CMS premium payment in each month.
To do otherwise would distort a meaningful analysis of our cash flow.
Decisions such as management's forecast or business plans regarding
cash flow, therefore, use this non-GAAP financial measure.
* The following is a reconciliation of the most directly comparable
financial measures prepared in accordance with accounting principles
generally accepted in the United States, or GAAP, to certain non-GAAP
financial measures used by the company for 2Q04, 2Q03, 1H04 and 1H03.
2Q04 2Q03 1H04 1H03
(in thousands)
GAAP cash flows provided
by Operations $63,504 $161,496 $24,855 $53,266
Timing of premium payment
Receipt from CMS - - 211,899 205,755
Non-GAAP cash flows
Provided by operations $63,504 $161,496 $236,754 $259,021
* The year-over-year decline in non-GAAP cash flows from operations both
in the second quarter and the first half of the year relates to the
timing of the collection of TRICARE bid price adjustment receivables.
Amounts similar to those collected in 2Q03 are anticipated to be
collected in the third quarter of 2004, in lieu of 2Q04.
Share Repurchase Program
* In July 2003, the company announced that its Board of Directors
authorized the use of up to $100 million for the repurchase of its
common shares, exclusive of shares repurchased in connection with
employee stock plans.
* During 2Q04, the company acquired 2,167,500 of its common shares for
an aggregate price of $36,129,000, or an average cost of $16.67 per
share.
* During 1H04, the company acquired 2,853,500 of its common shares for
an aggregate price of $50,098,000, or an average cost of $17.56 per
share.
* As of July 23, 2004 the company had approximately $46,311,000
remaining on its outstanding repurchase authorization.
Guidance
The company offers the GAAP guidance detailed below for the investor community. This guidance includes the company's Ochsner Health Plan acquisition which closed April 1, 2004.
For the Quarter Ending September 30, 2004 ("3Q04")
* Diluted earnings per common share of $0.43 to $0.44 (includes expenses
of $0.02 per share for accelerated depreciation associated with
planned software abandonment)
* TRICARE membership of approximately 1.7 million during the quarter as
the membership level temporarily declines during the transition to the
new Department of Defense contracts for this program
For the Year Ending December 31, 2004
Consolidated Earnings Guidance Points
* Diluted earnings per common share of between $1.63 and $1.67 (includes
net earnings of $0.04 per share in unusual items recorded during 2Q04,
as described above, plus expenses of $0.04 per share for accelerated
depreciation associated with planned software abandonment to be
recorded in the second half of 2004)
* Revenues of approximately $13 billion
* Effective tax rate of approximately 34 percent
* Cash flows provided by operations of $475 million to $525 million
* Capital expenditures of approximately $100 million to $110 million
Commercial Segment Earnings Guidance Points
* Medical membership of between 3,300,000 and 3,350,000 by year end
(fully insured and ASO combined)
* Fully insured medical premiums, net of benefit changes, increasing in
the range of 6.5 to 8.5 percent on a per member basis
* Fully insured medical costs increasing in the range of 7 to 9 percent
on a per member basis
* SG&A expense ratio of between 16 and 17 percent
* Pretax income of approximately $140 million
Government Segment Earnings Guidance Points
* MedicareAdvantage membership of between 370,000 and 390,000 by year
end
* MedicareAdvantage premiums, net of benefit changes, increasing in the
range of 9 to 11 percent on a per member basis
* MedicareAdvantage medical costs increasing in the range of 9 to
11 percent on a per member basis
* TRICARE membership of approximately 2.75 million by year end, with
membership increasing by approximately 1 million members on
November 1, 2004
* TRICARE premiums and administrative services fees of approximately
$2 billion
* Pretax margin for the company's TRICARE business of approximately 2 to
3 percent given the impact of heightened military activity upon the
new contracts in the latter half of 2004
* SG&A expense ratio of between 11 and 12 percent
For the Year Ending December 31, 2005
* Diluted earnings per common share growth of approximately 15 percent
as compared to 2004
Conference Call
Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and earnings guidance.
All parties interested in the audio only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call.
A live virtual presentation (audio with slides) will be available and may be accessed via Humana's Investor Relations page at http://www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.
For those unable to participate in the live event, the virtual presentation archive will be available in the Presentations section of the Investor Relations page at http://www.humana.com, approximately two hours following the live web cast. An audio recording of the conference call will also be available in the Audio Archives located on the Investor Relations page at http://www.humana.com approximately two hours after the live call.
Cautionary Statement
This news release contains forward-looking statements. The forward- looking statements made in the news release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the following documents, as filed by Humana with the Securities and Exchange Commission:
* Form 10-K for the year ended December 31, 2003;
* Form 10-Q for the quarter ended March 31, 2004.
About Humana
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health benefits companies, with approximately 5.8 million medical members located primarily in 15 states and Puerto Rico. Humana offers coordinated health insurance coverage and related services -- through traditional and Internet-based plans - to employer groups, government- sponsored plans, and individuals.
More information regarding Humana is available via the Internet at http://www.humana.com, including copies of:
* Annual report to stockholders;
* Securities and Exchange Commission filings;
* Most recent investor conference presentation;
* Quarterly earnings press releases;
* Audio archive of most recent earnings release conference call;
* Calendar of events (includes upcoming earnings conference call dates,
times, and access number, as well as planned participation in investor
conferences);
* Corporate Governance Information.
Humana Inc.
In thousands
June 30, Percent
Ending Medical Membership 2004 2003 Difference Change
Commercial:
Fully insured 2,407.7 (a) 2,350.4 57.3 2.4
ASO 996.7 670.3 326.4 48.7
Total Commercial 3,404.4 3,020.7 383.7 12.7
Government:
MedicareAdvantage 367.9 (a) 324.2 43.7 13.5
Medicaid 466.4 492.7 (26.3) (5.3)
TRICARE 1,856.9 1,750.8 106.1 6.1
TRICARE ASO 786.0 1,052.5 (266.5) (25.3)
Total Government 3,477.2 3,620.2 (143.0) (4.0)
Total ending medical
membership 6,881.6 6,640.9 240.7 3.6
June 30, Percent
Ending Specialty Membership 2004 2003 Difference Change
Commercial:
Dental-fully insured 791.7 745.7 46.0 6.2
Dental-ASO 407.9 365.1 42.8 11.7
Total Dental 1,199.6 1,110.8 88.8 8.0
Group life 474.4 510.5 (36.1) (7.1)
Short-term disability 17.4 20.7 (3.3) (15.9)
Total ending specialty
membership 1,691.4 1,642.0 49.4 3.0
Three months ended Six months ended
June 30, June 30,
Premiums 2004 2003 2004 2003
Commercial:
Fully insured medical $1,700,759 $1,551,619 $3,317,879 $3,088,572
Specialty 86,139 78,935 172,110 157,538
Total Commercial 1,786,898 1,630,554 3,489,989 3,246,110
Government:
MedicareAdvantage 774,604 630,432 1,480,922 1,266,274
Medicaid 125,798 116,005 246,577 237,235
TRICARE 616,412 536,414 1,265,405 1,006,735
Total Government 1,516,814 1,282,851 2,992,904 2,510,244
Total premiums $3,303,712 $2,913,405 $6,482,893 $5,756,354
Three months ended Six months ended
Administrative June 30, June 30,
services fees 2004 2003 2004 2003
Commercial $40,768 $30,356 $82,464 $59,946
Government 40,578 41,312 77,119 72,858
Total Administrative
services fees $81,346 $71,668 $159,583 $132,804
(a) The acquisition of Ochsner Health Plan on April 1, 2004 added
152.6 thousand fully insured commercial medical members and 33.1
thousand MedicareAdvantage medical members.
Humana Inc.
Dollars in thousands, except per share results
Three months ended Six months ended
Consolidated June 30, June 30,
Statements of Income 2004 (a) 2003 (a) 2004 (a) 2003 (a)
Revenues:
Premiums $3,303,712 $2,913,405 $6,482,893 $5,756,354
Administrative
services fees 81,346 71,668 159,583 132,804
Investment income 43,863 43,228 71,317 69,045
Other income 2,557 1,657 4,634 3,471
Total revenues 3,431,478 3,029,958 6,718,427 5,961,674
Operating expenses:
Medical 2,789,740 2,444,977 5,473,256 4,816,411
Selling, general
and administrative 486,895 448,537 956,524 912,815
Depreciation 24,272 25,550 48,195 66,286
Other intangible
amortization 2,893 2,903 5,282 6,834
Total operating
expenses 3,303,800 2,921,967 6,483,257 5,802,346
Income from operations 127,678 107,991 235,170 159,328
Interest expense 5,325 3,801 10,044 7,736
Income before
income taxes 122,353 104,190 225,126 151,592
Provision for
income taxes 41,600 34,914 76,543 51,086
Net income $80,753 $69,276 $148,583 $100,506
Basic earnings per
common share $0.50 $0.44 $0.92 $0.64
Diluted earnings per
common share $0.50 $0.43 $0.91 $0.62
Shares used in computing
basic earnings per
common share (000's) 160,832 157,395 161,399 157,565
Shares used in computing
diluted earnings per
common share (000's) 162,353 161,149 163,355 160,982
Operating Results
by Segment
Commercial pretax
income $36,912 $43,757 $75,998 $80,996
Government pretax
income 85,441 60,433 149,128 70,596
Consolidated pretax
income $122,353 $104,190 $225,126 $151,592
Key Ratios
Medical expense ratio
Commercial 84.6% 83.0% 84.1% 82.2%
Government 84.2% 85.1% 84.8% 85.6%
Total 84.4% 83.9% 84.4% 83.7%
Selling, general, and
administrative expense ratio
Commercial 16.2% 16.8% 16.3% 16.9%
Government 12.3% 12.7% 12.2% 13.7%
Total 14.4% 15.0% 14.4% 15.5%
(a) Refer to the Summary of Unusual Items of these statistical pages
within this press release for detail of unusual items included in
these results of operations.
Humana Inc.
Dollars in thousands, except per share results
Summary of Unusual Items
For the six months ended June 30, 2004
Pretax Impact Diluted
Commercial Government Consolidated EPS Impact
Investment income:
Gain on sale of
venture capital
investment $13,000 $3,000 $16,000 $0.07
Selling, general, and
administrative expense:
Severance and other costs (6,128) (1,532) (7,660) (0.03)
Total unusual items $6,872 $1,468 $8,340 $0.04
Impact of unusual items
on the SG&Aexpense ratio 0.17% 0.05% 0.12%
For the six months ended June 30, 2003
Pretax Impact Diluted
Commercial Government Consolidated EPS Impact
Investment income:
Gain on sale of
venture capital
investment $12,423 $2,777 $15,200 $0.06
Selling, general, and
administrative expense:
Write-down of building
and equipment (4,325) (12,908) (17,233) (0.07)
Depreciation:
Software abandonment
expense (13,527) - (13,527) (0.05)
Total unusual items $(5,429) $(10,131) $(15,560) $(0.05)
Impact of unusual items
on the SG&A expense ratio 0.13% 0.50% 0.29%
Humana Inc.
Dollars in thousands, except per share results
June 30, December 31,
Consolidated Balance Sheets 2004 2003
Assets
Current assets:
Cash and cash equivalents $203,636 $931,404
Investment securities 2,322,282 1,676,642
Receivables, net:
Premiums 528,078 452,404
Administrative services fees 15,608 13,583
Other 334,319 247,298
Total current assets 3,403,923 3,321,331
Property and equipment, net 392,956 416,472
Other assets:
Long-term investment securities 323,667 319,167
Goodwill 813,399 776,874
Other 408,964 459,479
Total other assets 1,546,030 1,555,520
Total assets $5,342,909 $5,293,323
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $1,454,225 $1,272,156
Trade accounts payable and accrued
expenses 499,978 440,340
Book overdraft 172,062 219,054
Unearned premium revenues 109,066 333,071
Total current liabilities 2,235,331 2,264,621
Long-term debt 623,677 642,638
Other long-term liabilities 570,518 550,115
Total liabilities 3,429,526 3,457,374
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000
shares authorized; none issued - -
Common stock, $0.16 2/3 par;
300,000,000 shares authorized;
174,639,740 shares issued at
June 30, 2004 29,106 28,984
Capital in excess of par value 987,495 974,975
Retained earnings 1,098,394 949,811
Accumulated other comprehensive
income (16,756) 16,909
Unearned stock compensation (9) (754)
Treasury stock, at cost, 14,906,751
shares at June 30, 2004 (184,847) (133,976)
Total stockholders' equity 1,913,383 1,835,949
Total liabilities and
stockholders' equity $5,342,909 $5,293,323
Debt to total capitalization ratio 24.6% 25.9%
Humana Inc.
Dollars in thousands
Three months ended Six months ended
Consolidated Statements June 30, June 30,
of Cash Flows 2004 2003 2004 2003
Cash flows from operating
activities
Net income $80,753 $69,276 $148,583 $100,506
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Building and equipment
writedown - - - 17,233
Depreciation and
amortization 27,165 28,453 53,477 73,120
Provision for deferred
income taxes 17,741 7,408 29,964 11,054
Changes in operating
assets and liabilities,
excluding the effects
of an acquisition:
Receivables 5,028 68,582 (15,518) 43,233
Other assets (8,412) 20,232 (23,884) 40,240
Medical and other
expenses payable (13,622) 61,321 111,006 145,233
Other liabilities (1,150) (58,994) (32,175) (125,533)
Unearned revenues (26,320) (17,159) (228,019) (235,312)
Other (17,679) (17,623) (18,579) (16,508)
Net cash provided by
operating activities 63,504 161,496 24,855 53,266
Cash flows from investing
activities
Acquisition, net of cash
and cash equivalents
acquired (67,329) - (68,735) -
Purchases of property
and equipment (25,314) (20,871) (48,046) (42,967)
Proceeds from sales of
property and equipment 9,343 28 28,728 490
Purchases of investment
securities (749,924) (716,035) (2,241,196) (2,261,276)
Proceeds from maturities
of investment
securities 99,342 188,003 346,187 384,926
Proceeds from sales of
investment securities 529,956 576,928 1,316,824 1,897,174
Net cash (used in)
provided by investing
activities (203,926) 28,053 (666,238) (21,653)
Cash flows from financing
activities
Change in book overdraft (38,375) (5,043) (46,992) (15,346)
Proceeds from swap
exchange - 31,556 - 31,556
Common stock repurchases (35,966) (203) (48,802) (21,020)
Proceeds from stock
option exercises and
other 752 6,431 9,409 6,782
Net cash (used in) provided
by financing activities (73,589) 32,741 (86,385) 1,972
(Decrease) increase in
cash and cash
equivalents (214,011) 222,290 (727,768) 33,585
Cash and cash equivalents
at beginning of period 417,647 532,652 931,404 721,357
Cash and cash equivalents
at end of period $203,636 $754,942 $203,636 $754,942
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Commercial Segment
Fully Total
Insured ASO Segment
June 30, 2004
Capitated HMO hospital system based A 4.2% - 2.9%
Capitated HMO physician group based A 2.9% - 2.1%
Risk-sharing B 3.3% - 2.3%
All other membership 89.6% 100.0% 92.7%
Total 100.0% 100.0% 100.0%
June 30, 2003
Capitated HMO hospital system based A 6.2% - 4.8%
Capitated HMO physician group based A 3.1% - 2.4%
Risk-sharing B 2.9% - 2.2%
All other membership 87.8% 100.0% 90.6%
Total 100.0% 100.0% 100.0%
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Government Segment
Medicare
Advantage Medicaid TRICARE
June 30, 2004
Capitated HMO hospital system based A 10.5% 3.6% -
Capitated HMO physician group based A 1.2% 42.8% -
Risk-sharing B 56.7% 47.7% -
All other membership 31.6% 5.9% 100.0%
Total 100.0% 100.0% 100.0%
June 30, 2003
Capitated HMO hospital system based A 12.5% 2.6% -
Capitated HMO physician group based A 1.9% 57.5% -
Risk-sharing B 48.1% 33.8% -
All other membership 37.5% 6.1% 100.0%
Total 100.0% 100.0% 100.0%
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Government Segment Consol.
TRICARE Total Total
ASO Segment Medical
June 30, 2004
Capitated HMO hospital system based A - 1.6% 2.3%
Capitated HMO physician group based A - 5.9% 4.0%
Risk-sharing B - 12.4% 7.4%
All other membership 100.0% 80.1% 86.3%
Total 100.0% 100.0% 100.0%
June 30, 2003
Capitated HMO hospital system based A - 1.5% 3.0%
Capitated HMO physician group based A - 8.0% 5.5%
Risk-sharing B - 8.9% 5.9%
All other membership 100.0% 81.6% 85.6%
Total 100.0% 100.0% 100.0%
A - In a limited number of circumstances, we contract with hospitals and
physicians to accept financial risk for a defined set of HMO membership.
In transferring this risk, we prepay these providers a monthly fixed-fee
per member to coordinate substantially all of the medical care for their
capitated HMO membership, including some health benefit administrative
functions and claims processing. For these capitated HMO arrangements, we
generally agree to reimbursement rates that target a medical expense ratio
ranging from 82% to 89%. Providers participating in hospital-based
capitated HMO arrangements generally receive a monthly payment for all of
the services within their system for their HMO membership. Providers
participating in physician-based capitated HMO arrangements generally have
subcontracted specialist physicians and are responsible for reimbursing
such hospitals and physicians for services rendered to their HMO
membership.
B - In some circumstances, we contract with physicians under risk-sharing
arrangements whereby physicians have assumed some level of risk for all or
a portion of the medical costs of their HMO membership. Although these
arrangements do include capitation payments for services rendered, we
process substantially all of the claims under these arrangements.
Humana Inc.
Dollars in thousands
Medical Claim Reserves - Details and Statistics
Change in medical and other expenses payable:
The change in medical and other expenses payable is summarized as follows:
For the Six For the Twelve
Months Ended Months Ended
June 30, 2004 December 31, 2003
Balances at January 1 $1,272,156 $1,142,131
Acquisition 71,063 -
Incurred related to:
Current year 5,561,540 9,955,491
Prior years - non-TRICARE (1) (67,026) (33,432)
Prior years - TRICARE (2) (21,258) (42,638)
Total incurred 5,473,256 9,879,421
Paid related to:
Current year (4,312,773) (8,710,393)
Prior years (1,049,477) (1,039,003)
Total paid (5,362,250) (9,749,396)
Balances at end of period $1,454,225 $1,272,156
The impact of any change in "incurred related to prior years" claims may
be offset as we re-establish the "incurred related to current year". Our
reserving practice is to consistently recognize the actuarial best
estimate of our ultimate liability for our claims within a level of
confidence required to meet actuarial standards. Thus, only when the
release of a prior year reserve is not offset with the same level of
conservatism in estimating the current year reserve will the redundancy
reduce medical expense. We have consistently applied this methodology in
determining our best estimate for unpaid claims liability in each period.
(1) The $33.6 million increase in non-TRICARE favorable development from
$33.4 million to $67.0 million related primarily to better than
expected utilization in the latter half of 2003 for our Medicare line
of business.
(2) Changes in estimates of TRICARE incurred claims for prior years
recognized during 2003 and 2004 resulted primarily from claim costs
and utilization levels developing favorably from the levels
originally estimated for the second half of the prior year. As a
result of substantial risk-sharing provisions with the Department of
Defense and with subcontractors, any resulting impact on operations
from the change in estimates of incurred related to prior years is
substantially reduced, whether positive or negative.
Humana Inc.
Dollars in thousands
Medical and Other Expenses Payable Detail:
June 30, December 31,
2004 2003
A IBNR and other medical expenses
payable $946,942 $767,712
B TRICARE IBNR 280,372 267,146
C TRICARE other medical expenses payable 14,502 37,849
D Unprocessed claim inventories 98,100 109,700
E Processed claim inventories 71,924 74,262
F Payable to pharmacy benefit
administrator 42,385 15,487
Total medical and other
expenses payable $1,454,225 $1,272,156
A IBNR represents an estimate of medical expenses payable for claims
incurred but not reported (IBNR) at the balance sheet date. The level
of IBNR is primarily impacted by membership levels, medical claim
trends and the receipt cycle time, which represents the length of time
between when a claim is initially incurred and when the claim form is
received (i.e. a shorter time span results in lower reserves for
claims IBNR).
B TRICARE IBNR has increased primarily due to an increase in claim
inventories at our third party claim administrator.
C TRICARE other medical expense payable may include liabilities to
subcontractors and/or risk share payables to the Department of Defense.
The level of these balances may fluctuate from period to period due to
the timing of payment (cutoff) and whether or not the balances are
payables or receivables (receivables from the Department of Defense are
classified as "receivables" in our balance sheet).
D Unprocessed claim inventories represent the estimated valuation of
claims received but not yet fully processed. TRICARE claim inventories
are not included in this amount as an independent third party
administrator processes all TRICARE medical claims on our behalf.
Reserves for TRICARE claims inventory are included in TRICARE IBNR.
E Processed claim inventories represent the estimated valuation of
processed claims that are in the post claim adjudication process, which
consists of administrative functions such as audit and check batching
and handling.
F The balance due to our pharmacy benefit administrator fluctuates due to
bi-weekly payments and the month-end cutoff.
Receipt Cycle Time:
Due to increasing electronic connectivity and other efficiencies gained
by our providers with regards to the claim submission process, the
average length of time between when a claim was initially incurred and
when the claim form was received has generally shortened over the past
several years. Below is a summary:
Average # of Days from Incurred Date to Receipt Date (1)
2004 2003 Change % Change
1st Quarter Average 17.4 17.1 0.3 1.8%
2nd Quarter Average 16.7 16.7 0.0 0.0%
3rd Quarter Average - 16.6 N/A N/A
4th Quarter Average - 16.6 N/A N/A
Full Year Average 17.1 16.7 0.4 2.4%
(1) Receipt cycle time data for our 3 largest claim processing platforms
representing approximately 90% of our claims volume.
Humana Inc.
Medical Claim Reserves - Details and Statistics
Unprocessed Claim Inventories:
The estimated valuation and number of claims on hand that are yet to be
processed are as follows:
Estimated Number
Valuation Claim Item of Days
Date (000) Counts On Hand
6/30/2002 $110,300 513,100 4.8
9/30/2002 $108,800 496,200 4.8
12/31/2002 $92,300 424,200 4.5
3/31/2003 $99,000 421,700 4.4
6/30/2003 $92,100 446,600 4.7
9/30/2003 $106,800 528,400 5.8
12/31/2003 $109,700 443,000 4.9
3/31/2004 $94,800 400,900 3.9
6/30/2004 $98,100 387,000 3.7
Days in Claims Payable (Quarterly):
A common metric for monitoring medical claim reserve levels relative to
the medical claim expenses is days in claims payable, or DCP, which
represents the medical claim liabilities at the end of the period divided
by average medical expenses per day in the quarterly period. Since we
have some providers under capitation payment arrangements (which do not
require a medical claim IBNR reserve), we have also summarized this
metric excluding capitation expenses.
Days
in Claims DCP
Quarter Ended Payable Annual Excluding Annual
(DCP) Change % Change Capitation Change % Change
6/30/2002 46.8 (3.1) -6.2% 55.3 (4.7) -7.8%
9/30/2002 46.6 (2.5) -5.1% 55.3 (3.9) -6.6%
12/31/2002 45.2 (2.2) -4.6% 53.3 (3.8) -6.7%
3/31/2003 46.5 (0.7) -1.5% 54.7 (1.5) -2.7%
6/30/2003 47.9 1.1 2.4% 56.2 0.9 1.6%
9/30/2003 47.2 0.6 1.3% 54.5 (0.8) -1.4%
12/31/2003 46.2 1.0 2.2% 53.2 (0.1) -0.2%
3/31/2004 47.4 0.9 1.9% 54.3 (0.4) -0.7%
6/30/2004 47.4 (0.5) -1.0% 54.1 (2.1) -3.7%
This metric fluctuates due to all of the issues reviewed above, including
the change in the receipt cycle time, the change in medical claim
inventories, the change in TRICARE liability balances, and the timing of
our bi-weekly payment to our pharmacy benefits administrator. An annual
recap follows:
2004 2003
4th quarter-prior year 46.2 45.2
Impact of change in claim
receipt cycle time 0.2 (0.5)
Impact of change in unprocessed
claim inventories (0.5) 0.6
Impact of change in processed
claim inventories 0.0 (1.1)
Impact of changing TRICARE
reserve balances (0.3) 2.0
Impact of change in pharmacy
payment cutoff 0.9 (1.0)
All other 0.9 1.0
Year to date-current year 47.4 46.2
SOURCE Humana Inc.