UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements
for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each
of the issuer's classes of common stock, as of
the latest practicable date.
Outstanding at
Class of Common Stock November 11, 1996
$.16 2/3 par value 162,632,014 shares
1 of 18
HUMANA INC.
FORM 10-Q
September 30, 1996
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement
of Operations for the quarters and
nine months ended September
30, 1996 and 1995 3
Condensed Consolidated Balance Sheet
at September 30, 1996 and December 31,
1995 4
Condensed Consolidated Statement of
Cash Flows for the nine months ended
September 30, 1996 and 1995 5
Notes to Condensed Consolidated
Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9-16
Part II: Other Information
Items 1 to 6 17-18
Exhibits
Ratio of Earnings to Fixed Charges 19
Financial Data Schedule 20
2
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
For the quarters and nine months ended
September 30,1996 and 1995
Unaudited
(Dollars in millions except per share results)
Quarter Nine months
1996 1995 1996 1995
Revenues:
Premiums $ 1,756 $ 1,072 $ 4,894 $ 3,145
Interest 25 20 75 58
Other income 3 2 8 9
Total revenues 1,784 1,094 4,977 3,212
Operating expenses:
Medical costs 1,460 885 4,149 2,571
Selling, general
and administrative 249 126 680 376
Depreciation and
amortization 25 16 74 46
Asset write-downs
and other unusual
charges 81
Total operating
expenses 1,734 1,027 4,984 2,993
Income (loss) from
operations 50 67 (7) 219
Interest expense 2 2 10 6
Income (loss) before
income taxes 48 65 (17) 213
Provision (benefit)
for income taxes 16 22 (7) 72
Net income (loss) $ 32 $ 43 $ (10) $ 141
Earnings (loss) per
common share $ .20 $ .27 $ (.06) $ .87
Shares used in earnings
per common share
computation (000)162,579 162,334 162,471 162,210
See accompanying notes.
3
HUMANA INC.
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(Dollars in millions except per share amounts)
September 30, December 31,
1996 1995
Assets
Current assets:
Cash and cash
equivalents $ 276 $ 182
Marketable securities 1,237 1,156
Premiums receivable,
less allowance for
doubtful accounts of $36
for September 30, 1996
and December 31, 1995 190 131
Other 155 124
Total current assets 1,858 1,593
Long-term marketable
securities 132 180
Property and equipment, net 373 382
Cost in excess of net
tangible assets acquired 491 536
Other 184 187
Total assets $ 3,038 $ 2,878
Liabilities and Common
Stockholders' Equity
Current liabilities:
Medical costs payable $ 1,075 $ 866
Trade accounts payable
and accrued expenses 331 291
Income taxes payable 26 35
Total current liabilities 1,432 1,192
Long-term debt 203 250
Professional liability and
other obligations 135 149
Total liabilities 1,770 1,591
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3
par; authorized 300,000,000
shares; issued and out-
standing 162,617,214 shares -
September 30, 1996 and
162,099,403 shares -
December 31, 1995 27 27
Other 1,241 1,260
Total common stock-
holders' equity 1,268 1,287
Total liabilities and
common stockholders'
equity $ 3,038 $ 2,878
See accompanying notes.
4
HUMANA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
Unaudited
(Dollars in millions)
1996 1995
Cash flows from operating
activities:
Net income (loss) $ (10) $ 141
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Asset write-downs 70
Depreciation and amorti-
zation 74 46
Deferred income taxes (33) 2
Changes in operating assets
and liabilities 189 68
Other (19)
Net cash provided by
operating activities 271 257
Cash flows from investing activities:
Purchase and disposition of
property and equip-
ment, net (54) (36)
Acquisition of health plan
assets (6) (3)
Purchases, sales, and
maturities of marketable
securities, net (55) 147
Other (14) (19)
Net cash provided by
(used for) investing
activities (129) 89
Cash flows from financing activities:
Change in commercial paper 200
Repayment of credit revolver (250)
Other 2 4
Net cash provided by
(used for) financing
activities (48) 4
Increase in cash and cash
equivalents 94 350
Cash and cash equivalents
at beginning of period 182 272
Cash and cash equivalents at
end of period $ 276 $ 622
Interest payments $ 10 $ 3
Income tax payments, net $ 33 $ 63
See accompanying notes.
5
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated financial
statements are presented in accordance with the
requirements of Form 10-Q and consequently do not
include all of the disclosures normally required
by generally accepted accounting principles or
those normally made in an annual report on Form
10-K. Accordingly, for further information, the
reader of this Form 10-Q may wish to refer to the
Form 10-K of Humana Inc. (the "Company") for the
year ended December 31, 1995.
The preparation of the Company's condensed
consolidated financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and
assumptions that affect the (a) reported amounts
of assets and liabilities, (b) disclosure of
contingent assets and liabilities at the date of
the financial statements and (c) reported amounts
of revenues and expenditures during the reporting
period. Actual results could differ from those
estimates.
The financial information has been prepared in
accordance with the Company's customary
accounting practices and has not been audited.
In the opinion of management, the information
presented reflects all adjustments necessary for
a fair statement of interim results. All such
adjustments, with the exception of the special
charges described below, are of a normal and
recurring nature.
(B) Special Charges
During the second quarter of 1996, the Company
recognized special charges of $200 million pretax
($130 million after tax or $.80 per share). The
special charges included provisions for expected
future losses on insurance contracts ($105
million) as well as an estimate of the costs to
be incurred in restructuring the Washington D.C.
health plan and closing markets or discontinuing
product lines in 16 market areas. The special
charges also include the write-off of
miscellaneous assets, a litigation settlement
and other costs. Approximately $85 million (of
the original $105 million) for expected future
losses on insurance contracts remains at
September 30, 1996.
The special charges included $70 million of asset
write-downs, related to long-lived assets,
primarily associated with the Company's
Washington, D.C. health plan. In accordance with
Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed
Of ", the Company conducted a review of the
carrying value of its Washington, D.C. health
plan's long-lived assets. This review was
initiated because the health plan was
experiencing significant operating losses. A
forecast of expected undiscounted future cash
flows was prepared to determine whether an
impairment existed and fair values were used to
measure the amount of the impairment. As a
result of the review, the Washington, D.C.
health plan's long-lived assets were written down
to their estimated fair value.
6
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, continued
Unaudited
(B) Special Charges, continued
The special charges have been included in the
accompanying condensed consolidated statement of
operations for the nine months ended September
30, 1996, as follows: the provision for expected
future losses on insurance contracts ($105
million ) has been included in medical costs;
asset write-downs, restructuring, market closing
and product discontinuance costs have been
included in asset write-downs and other unusual
charges ($81 million); and litigation and certain
other costs have been included in selling,
general and administrative expenses ($14
million).
(C) Long-Term Debt
During April 1996, the Company implemented a
commercial paper program and began issuing debt
securities thereunder. At September 30, 1996,
borrowings under the commercial paper program
totaled approximately $200 million. The average
interest rate for the quarter ended September 30,
1996, and since the inception of the commercial
paper program through September 30, 1996, was 5.5
percent. The commercial paper program is backed
by the Company's existing $600 million revolving
line of credit, which expires in September 2000.
Borrowings under the commercial paper program
have been classified as long-term debt based on
management's ability and intent to refinance
borrowings on a long-term basis through the
continued use of the commercial paper program
backed by the revolving credit agreement.
(D) Contingencies
The Company's Medicare risk contracts with the
federal government are renewed for a one-year
term each December 31 unless terminated 90 days
prior thereto. Management anticipates continued
legislative actions which may include
modification of future reimbursement rates under
the Medicare program and actions which encourage
the use of managed health care for Medicare
beneficiaries. Management is unable to predict
the outcome of these actions or the impact they
may have on the Company's financial position,
results of operations or cash flows. The loss of
these contracts or significant changes in the
Medicare risk program as a result of legislative
action, including reductions in payments or
increases in benefits without corresponding
increases in payments, would have a material
adverse affect on the revenues, profitability and
business prospects of the Company. Effective
January 1, 1997, the average rate of increase
(weighted for the members and markets served)
under these contracts will approximate 6 percent,
a portion of which is expected to be paid to the
Company's providers. Over the last five years,
annual increases realized by the Company have
ranged from as low as 3 percent in January 1994
to as high as 12 percent in January 1993, with an
average of approximately 7 percent.
7
HUMANA INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, continued
Unaudited
(D) Contingencies, continued
The Company began providing managed health care
services to approximately 1.1 million eligible
beneficiaries on July 1, 1996 pursuant to a five-year
contract (a one-year contract renewable
annually for up to four additional years) with
the United States Department of Defense under the
Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS"). The use of
managed health care under CHAMPUS is a new
program and this is the Company's first endeavor
operating under the United States Department of
Defense guidelines. Management is unable to
determine the Company's future degree of success
in managing the implementation and delivery of
services under the CHAMPUS contract, and what
effect, if any, this contract may have on the
Company's results of operations, financial
position or cash flows.
Resolution of various loss contingencies,
including litigation pending against the Company
in the ordinary course of business, is not
expected to have a material adverse effect on the
Company's results of operations, financial
position or cash flows.
(E) Asset Disposition
On October 29, 1996, the Company entered into an
Asset Sale and Purchase Agreement (the
"Agreement") providing for the sale of certain
assets of its Washington, D.C. health plan to
Kaiser Foundation Health Plan of the Mid-Atlantic
States, Inc. The Agreement includes various
conditions to the ultimate sale including
retention of membership, maintenance of provider
networks, and various regulatory approvals. The
disposition of the Washington, D.C. health plan,
which management anticipates occurring in the
first quarter of 1997, is not expected to have a
material impact on the Company's results of
operations, financial position or cash flows.
8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Humana Inc.
This discussion and analysis contains both
historical and forward looking information. The
forward looking statements are made pursuant to
the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
Forward looking statements may be significantly
affected by certain risks and uncertainties
described in this Form 10-Q, and in the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995. There can be no assurance
that the Company can duplicate its past
performance or that expected future results will
be achieved.
Introduction
The Company offers managed health care products
which integrate medical management with the
delivery of health care services through a
network of providers. This network of providers
in their delivery of quality medical services,
may share financial risk or have incentives to
deliver cost-effective medical services. These
products are marketed primarily through health
maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs") that encourage or
require the use of contracting providers. HMOs
and PPOs control health care costs by various
means including pre-admission approval for
hospital inpatient services and pre-authorization
of outpatient surgical procedures.
The Company's HMO and PPO products are marketed
primarily to employer and other groups
("Commercial") as well as Medicare and Medicaid-eligible
individuals. The products marketed to
Medicare-eligible individuals are either HMO
products ("Medicare risk") or indemnity insurance
policies that supplement Medicare benefits
("Medicare supplement"). The Medicare risk
product provides managed care services which
include all Medicare benefits and, in certain
circumstances, additional managed care services
that are not included in Medicare benefits.
On July 1, 1996, the Company began providing
managed health care services to 1.1 million
eligible beneficiaries under a potential five-year
contract (a one-year contract renewable
annually for up to four additional years) with
the United States Department of Defense under the
Civilian Health and Medical Program of the
Uniformed Services ("CHAMPUS").
On October 29, 1996, the Company entered into an
Asset Sale and Purchase Agreement (the
"Agreement") providing for the sale of certain
assets of its Washington, D.C. health plan to
Kaiser Foundation Health Plan of the Mid-Atlantic
States, Inc. The Agreement includes various
conditions to the ultimate sale including
retention of membership, maintenance of provider
networks, and various regulatory approvals. The
disposition of the Washington, D.C. health plan,
which management anticipates occurring in the
first quarter of 1997, is not expected to have a
material impact on the Company's results of
operations, financial position or cash flows.
Special Charges
During the second quarter of 1996, the Company
recognized special charges of $200 million pretax
($130 million after tax or $.80 per share). The
special charges included provisions for expected
future losses on insurance contracts ($105
million) as well as an estimate of the costs to
be incurred
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Special Charges, continued
in restructuring the Washington, D.C. health plan
and closing markets or discontinuing product
lines in 16 market areas. The special charges
also include the write-off of miscellaneous
assets, a litigation settlement, and other costs.
Approximately $85 million (of the original $105
million) for expected future losses on insurance
contract remains at September 30, 1996.
The special charges have been included in the
accompanying condensed consolidated statement of
operations for the nine months ended September
30, 1996, as follows: the provision for expected
future losses on insurance contracts ($105
million) has been included in medical costs;
asset write-downs, restructuring, market closing
and product discontinuance costs have been
included in asset write-downs and other unusual
charges ($81 million); and litigation and certain
other costs have been included in selling,
general and administrative expenses ($14
million).
The following discussions comparing the nine
months ended September 30, 1996, to the
corresponding nine-month period ended September
30, 1995, exclude the special charges described
above. The quarter and nine months ended
September 30, 1996, include the beneficial effect
of these charges, which approximated $.04 per
share and $.08 per share, respectively. The
beneficial effect consists primarily of charges
against reserves for losses on insurance
contracts and amounts related to depreciation and
amortization on asset write-downs.
Results of Operations
Quarters Ended September 30, 1996 and 1995
The Company's premium revenues increased 63.9
percent to $1.8 billion for the quarter ended
September 30, 1996, compared to $1.1 billion for
the same period in 1995. This increase was due
primarily to the 1995 fourth quarter acquisition
of EMPHESYS Financial Group, Inc. ("EMPHESYS")
and premium revenues associated with the CHAMPUS
contract which began on July 1, 1996. EMPHESYS
and CHAMPUS premium revenues for the quarter
ended September 30, 1996 totaled approximately
$434 million and $170 million, respectively. In
addition to the aforementioned, premium revenues
increased as a result of Medicare risk membership
growth and premium rate increases partially
offset by Commercial membership and premium rate
declines. Commercial product same-store
membership decreased to 1,758,400 from 1,780,200
for the period between September 30, 1995 and
September 30, 1996, while Medicare risk
membership increased to 347,400 from 304,300
during the same period. The Medicare risk
premium rate increased 7.8 percent and the
Commercial premium rate decreased 0.6 percent.
The weighted average Medicare risk premium rate
increase for all of 1996 will approximate 8
percent while the weighted average Commercial
premium rate will decline approximately 0.5
percent. The Medicare risk premium rate
increases for 1997 should approximate 5 to 6
percent and the Commercial premium rate increase
should approximate 2 to 3 percent.
10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Membership in the Company's Commercial products
decreased 15,500 during the third quarter ended
September 30, 1996 compared to an increase of
60,900 for the same period in 1995. The decrease
is primarily the result of management's decision
to exit 13 markets and discontinue certain
products in 3 other markets. In addition, the
introduction of new pricing disciplines for
various of the Company's products is the reason for
the remainder of the membership losses. As a
result of the same factors which influenced the
third quarter declines, management anticipates a
fourth quarter decline in Commercial membership
similar to that of the third quarter and a
decline in the first quarter of 1997
approximating 250,000 to 300,000. Medicare risk
members increased by 14,500 during the third
quarter compared to 7,700 for the same period in
1995. Medicare risk membership growth is
primarily the result of sales in certain core
markets and new Medicare markets.
The medical loss ratio for the quarter ended
September 30, 1996 was 83.1 percent compared to
82.6 percent for the same period in 1995. The
increase is attributable to increases in
utilization of both Commercial and Medicare risk
outpatient services and physician costs, as well
as utilization and unit cost increases in
pharmacy costs. Medical cost increases in these
areas were partially offset by improvement in
Commercial and Medicare risk days per thousand
trends.
The administrative cost ratio was 15.6 percent
and 13.3 percent for the quarters ended September
30, 1996 and 1995, respectively. The increase
was due to higher administrative costs associated
with EMPHESYS' small group business and the
severance payments made during the quarter
related to the Company's recent reorganization.
Management anticipates the fourth quarter 1996
and the first quarter 1997 administrative cost
ratio will remain flat with that of the third
quarter as a result of planned increases in
spending for customer service, information
systems and areas designed to reduce the
disenrollment of the Company's Medicare risk
membership.
Interest income totaled $25 million and $20
million for the quarters ended September 30, 1996
and 1995, respectively. The increase is
primarily attributable to increased levels of
cash, cash equivalents and marketable securities
and the addition of EMPHESYS' portfolio. The tax
equivalent yield on invested assets approximated
8 percent for each of the quarters ended
September 30, 1996 and 1995.
The Company's income before income taxes totaled
$48 million for the quarter ended September 30,
1996, compared to $65 million for the quarter
ended September 30, 1995. Net income was $32
million or $.20 per share and $43 million or $.27
per share for each of the quarters ended
September 30, 1996 and 1995, respectively.
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Nine Months Ended September 30, 1996 and 1995
The Company's premium revenues increased 55.7
percent to $4.9 billion for the nine months ended
September 30, 1996, compared to $3.1 billion for
the same period in 1995. This increase was due
primarily to the 1995 fourth quarter acquisition
of EMPHESYS and premium revenues associated with
the CHAMPUS contract which began on July 1, 1996.
EMPHESYS and CHAMPUS premium revenues for the
nine months ended September 30, 1996 totaled
approximately $1.3 billion and $170 million,
respectively. In addition to the aforementioned,
premium revenues increased as a result of
Medicare risk membership growth and premium rate
increases partially offset by year-to-date
Commercial membership and premium rate declines.
The Medicare risk premium rate increased
approximately 8.0 percent but was partially
offset by Commercial premium rate reductions of
1.0 percent.
Membership in the Company's Commercial products
decreased 37,500 during the nine months ended
September 30, 1996 compared to an increase of
251,900 for the same period in 1995. The
decrease is primarily the result of the first
quarter 1996 loss of 50,000 members related to
one customer group, market sales and closures,
product discontinuances and the new pricing
disciplines. Medicare risk members increased by
37,000 during the nine months ended September 30,
1996, compared to 16,900 for the same period in
1995. Medicare risk membership growth is
primarily the result of sales in certain core
markets and new Medicare markets.
The medical loss ratio for the nine months ended
September 30, 1996 was 82.6 percent (excluding
the effect of the special charges) compared to
81.8 percent for the same period in 1995. The
increase is attributable to increases in
utilization of both Commercial and Medicare risk
outpatient services and physician costs, as well
as utilization and unit increases in pharmacy
costs. Medical cost increases in these areas
were partially offset by improvement in year-to-date
Commercial and Medicare risk days per
thousand trends.
The administrative cost ratio was 15.2 percent
and 13.5 percent (excluding the effect of the
special charges) for the nine months ended
September 30, 1996 and 1995, respectively. The
increase was due to higher administrative costs
associated with EMPHESYS' small group business.
Interest income totaled $75 million and $58
million for the nine months ended September 30,
1996 and 1995, respectively. The increase is
primarily attributable to increased levels of
cash, cash equivalents and marketable securities
and the addition of EMPHESYS' portfolio. The tax
equivalent yield on invested assets approximated
8 percent for each of the nine months ended
September 30, 1996 and 1995.
Excluding the special charges, the Company's
income before income taxes totaled $183 million
for the nine months ended September 30, 1996,
compared to $213 million for the nine months
ended September 30, 1995. Also excluding the
special charges, net income was $120 million or
$.74 per share and $141 million or
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
$.87 per share for the nine months ended
September 30, 1996 and 1995, respectively.
Liquidity
Cash provided by the Company's operations totaled
$271 million and $257 million for the nine months
ended September 30, 1996 and 1995, respectively.
The receipt of Medicare risk premiums increased
cash provided by operations by $116 million for
the nine months ended September 30, 1995.
Excluding the effect of the timing of advanced
Medicare risk premiums, cash provided by
operations was $271 million and $141 million for
the nine months ended September 30, 1996 and
1995, respectively. The increase in cash
provided by operations was primarily attributable
to premium receipts under the new CHAMPUS
contract ahead of the related disbursements
and the timing of payments for medical costs and
other payables.
At September 30, 1996, the Company had borrowed
approximately $200 million under its commercial
paper program.
The Company's subsidiaries operate in states
which require certain levels of equity and
regulate the payment of dividends to the parent
company. As a result, the Company's ability to
use operating subsidiaries' cash flows is
restricted to the extent that the subsidiaries'
ability to pay dividends to their parent company
requires regulatory approval.
Management believes that existing working
capital, future operating cash flows, and the
availability of the Company's commercial paper
program and revolving credit agreement are
sufficient to meet future liquidity needs, allow
the Company to pursue acquisition and expansion
opportunities and fund capital requirements.
Capital Resources
The Company's ongoing capital expenditures relate
primarily to the addition or expansion of medical
care facilities used by either employed or
affiliated physicians as well as administrative
facilities and related computer information
systems necessary for activities such as claims
processing, billing and collections, medical
utilization review and customer service.
Excluding acquisitions, planned capital spending
in 1996 will approximate $70 million compared to
$54 million in 1995. Capital expenditures
generally relate to computer equipment, medical
care facilities and administrative facilities.
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Quarterly Medical Membership
1996 1995
Commercial members at:
March 31 2,862,900 1,664,600
June 30 2,861,900 1,719,300
September 30 2,846,400 1,780,200
December 31 2,883,900
Medicare risk members at:
March 31 322,300 292,500
June 30 332,900 296,600
September 30 347,400 304,300
December 31 310,400
CHAMPUS eligible members at:
September 30 1,075,300
Medicare supplement members at:
March 31 109,600 126,100
June 30 106,000 121,900
September 30 101,800 119,100
December 31 115,000
Administrative services members at:
March 31 444,700 228,400
June 30 447,900 264,400
September 30 458,300 262,800
December 31 495,100
Total medical members at:
March 31 3,739,500 2,311,600
June 30 3,748,700 2,402,200
September 30 4,829,200 2,466,400
December 31 3,804,400
14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Supplemental Consolidated Statement of Quarterly Income (Unaudited)
(Dollars in millions except per share results)
1996
First Second Third Total
Revenues:
Premiums:
Commercial $ 1,082 $ 1,088 $ 1,079 $ 3,249
Medicare risk 454 466 484 1,404
CHAMPUS 170 170
Medicare
supplement 24 24 23 71
Total premiums 1,560 1,578 1,756 4,894
Interest 25 25 25 75
Other income 3 2 3 8
Total revenues 1,588 1,605 1,784 4,977
Operating expenses:
Medical costs 1,274 1,308 1,460 4,042
Selling, general
and administrative 203 216 249 668
Depreciation and
amortization 25 24 25 74
Total operating
expenses 1,502 1,548 1,734 4,784
Income from operations 86 57 50 193
Interest expense 5 3 2 10
Income before income
taxes 81 54 48 183
Provision for
income taxes 28 19 16 63
Net income $ 53 $ 35 $ 32 $ 120
Earnings per
common share $ .32 $ .22 $ .20 $ .74
Medical loss ratio 81.7% 82.9% 83.1% 82.6%
Administrative
cost ratio 14.7% 15.2% 15.6% 15.2%
Note: Second quarter and year-to-date results exclude
special charges of $200 million pretax ($130 million
after tax or $.80 per share) related primarily to the
restructuring of the Company's Washington, D.C. health
plan, provision for expected future losses on
insurance contracts, closing 13 service areas,
discontinuing unprofitable products in three markets,
and the provision for a litigation settlement.
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Humana Inc.
Supplemental Consolidated Statement of Quarterly Income
(Unaudited)
(Dollars in millions except per share results)
1995
First Second Third Fourth Total
Revenues:
Premiums:
Commercial $ 614 $ 633 $ 652 $ 1,035 $ 2,934
Medicare risk 384 389 395 401 1,569
Medicare supplement 27 26 25 24 102
Total premiums 1,025 1,048 1,072 1,460 4,605
Interest 19 19 20 29 87
Other income 4 3 2 1 10
Total revenues 1,048 1,070 1,094 1,490 4,702
Operating expenses:
Medical costs 826 860 885 1,191 3,762
Selling, general and administrative 125 125 126 195 571
Depreciation and amortization 15 15 16 24 70
Total operating expenses 966 1,000 1,027 1,410 4,403
Income from operations 82 70 67 80 299
Interest expense 2 2 2 5 11
Income before income taxes 80 68 65 75 288
Provision for income taxes 27 23 22 26 98
Net income $ 53 $ 45 $ 43 $ 49 $ 190
Earnings per common share $ .32 $ .28 $ .27 $ .30 $ 1.17
Medical loss ratio 80.6% 82.1% 82.6% 81.5% 81.7%
Administrative cost ratio 13.7% 13.4% 13.3% 14.9% 13.9%
16
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
On October 15, 1996, final approval was given
to the settlement of a class action lawsuit
filed against Humana Insurance Company on
September 11, 1995, styled Del Bruns v. Humana
Insurance Company. The settlement would
resolve all similar claims involving Humana
Insurance Company's parents, subsidiaries,
affiliates and predecessors.
The settlement agreement requires Humana
Insurance Company to contribute $7,525,000
(which was paid on October 29, 1996) to a class
settlement fund, where class members who submit
timely claims, can receive up to two times the
difference between co-insurance payments
calculated using discounted and non-discounted
hospital charges. The settlement excludes
residents of Florida and Nevada, whose claims
have already been addressed in other proceedings.
The accrual for this settlement was provided
for in the second quarter of 1996.
On November 5, 1996, the Ninth Circuit Court
of Appeals reinstated certain claims in
Forsyth vs. Humana Inc. et al, that had been dismissed
by the U.S. District Court in Nevada. This case involved
claims arising out of the method of calculation of
coinsurance for Nevada insureds prior to 1988. The
lower court dismissed all claims except a claim for
benefits under the Employee Retirement Income
Security Act ("ERISA"), resulting in a
judgment of $1.6 million, plus prejudgment
interest and reasonable attorneys' fees.
The Court of Appeals affirmed the ERISA ruling,
but found that the plaintiffs were entitled
to a trial on their Sherman Act antitrust claim
and reinstated a claim by the Co-Payor Class under
the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). The Appeals Court
stated that the calculation of damages for RICO
purposes would be the same as under ERISA.
The Company plans to seek
reconsideration of the Court's ruling.
Pursuant to an Assumption of Liabilities and
Indemnification Agreement entered into at the time
of the separation of the Company's hospital
and health plan businesses in March of 1993, the
Company is responsible for 39 percent and
Columbia/HCA Healthcare Corporation
(through its acquisition of Galen Health Care,
Inc.) is responsible for 61 percent of all
liabilities, costs and expenses arising from the
Forsyth litigation.
Management does not believe that any pending
actions will have a material adverse effect on the
Company's consolidated results of
operations, financial position or cash flows.
Items 2 - 5:
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Statement re: Computation of
Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HUMANA INC.
Date: November 14, 1996 /s/ James E. Murray
James E. Murray
Vice President -Finance
(Principal Accounting
Officer)
Date: November 14, 1996 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President
and General Counsel
18
Exhibit 12
Humana Inc.
Ratio of Earnings to Fixed Charges
For the quarters and nine months ended September 30,
1996 and 1995
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Earnings:
Income before
income taxes $ 48 $ 65 $ (17) $ 213
Fixed charges 4 3 15 10
$ 52 $ 68 $ (2) $ 223
Fixed charges:
Interest charged
to expense $ 2 $ 2 $ 10 $ 6
One-third of
rent expense 2 1 5 4
$ 4 $ 3 $ 15 $ 10
Ratio of earnings
to fixed charges 11.9 21.7 (a) 22.9
For the purpose of determining earnings in the calculation of
the ratio of earnings to fixed charges (the "Ratio"), earnings
have been increased by the provision for income taxes and
fixed charges. Fixed charges consist of interest expense on
borrowings and one-third (the proportion deemed representative
of the interest portion) of rent expense.
(a) Exclusive of the special charges of $200 million
before income taxes, the ratio of earnings to fixed
charges for the nine months ended September 30, 1996,
would have been 12.8.
5
