false0000049071 0000049071 2019-11-06 2019-11-06

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

                

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 6, 2019 (November 6, 2019)

Humana Inc.

(Exact name of registrant as specified in its charter)

Delaware	1-5975	61-0647538
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

500 West Main Street Louisville, KY 40202

(Address of principal executive offices, including zip code)

502-580-1000

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	HUM	New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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Item 2.02	Results of Operations and Financial Condition.

Item 7.01	Regulation FD Disclosure.

Humana Inc. (the "Company") issued a press release this morning reporting financial results for the quarter ended September 30, 2019, and posted a detailed earnings release related to the same period to the Investor Relations portion of the Company’s website at www.humana.com. A copy of each release is attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and each release is incorporated herein by reference.

Item 9.01	Financial Statements and Exhibits.

(d)	Exhibits:

Exhibit No.	Description
99.1	Press Release
99.2	Earnings Release and Statistical Pages
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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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 hereunto duly authorized.

HUMANA INC.
BY:	/s/ Cynthia H. Zipperle
	Cynthia H. Zipperle
	Senior Vice President, Chief Accounting Officer and Controller
	(Principal Accounting Officer)

Dated: November 6, 2019

•	3Q19 earnings per diluted common share (EPS) of $5.14 on a GAAP basis, $5.03 on an Adjusted basis

•	2019 EPS guidance raised to approximately $18.32 on a GAAP basis, approximately $17.75 on an Adjusted basis, representing 22 percent growth in 2019

•	Retail segment continues strong performance, exceeding management's expectations, resulting in improvement in the segment's full year 2019 benefit ratio guidance by 30 basis points at the midpoint

•	Increased expected full-year individual Medicare Advantage membership growth to approximately 530,000 members from the previous range of 480,000 to 500,000 members, representing approximately 17 percent growth in 2019

•	92 percent of the company's Medicare Advantage members currently enrolled in 4-Star and above contracts for 2020, including 1.3 million members in 4.5 Star contracts and a 5-Star rated contract in Florida

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•	Amortization expense for identifiable intangibles of approximately $17 million pretax income, or $0.10 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $82 million, or $0.47 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Expense associated with involuntary workforce reduction of approximately $46 million pretax, or $0.26 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

•	Amortization expense for identifiable intangibles of approximately $19 million pretax, or $0.11 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $11 million, or $0.06 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Gain of approximately $4 million pretax, or $0.02 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG). GAAP measures affected in this release include consolidated pretax and EPS.

•	Segment earnings of $5 million, or $0.03 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, and consolidated benefit ratio.

•	Adjustment of $0.19 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law. The only GAAP measure affected in this release is EPS.

•	Amortization expense for identifiable intangibles of approximately $53 million pretax income, or $0.29 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $217 million, or $1.23 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

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•	Expense associated with involuntary workforce reduction of approximately $46 million pretax, or $0.26 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

•	Amortization expense for identifiable intangibles of approximately $70 million pretax, or $0.39 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $11 million, or $0.06 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Loss of approximately $786 million pretax, or $2.57 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG). GAAP measures affected in this release include consolidated pretax and EPS.

•	Segment earnings of approximately $76 million, or $0.42 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, and consolidated benefit ratio.

•	Adjustment of $0.28 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law. The only GAAP measure affected in this release is EPS.

•	Amortization expense for identifiable intangibles of approximately $0.40 per diluted common share.

•	Put/call valuation adjustments of approximately $1.23 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. FY19 GAAP EPS guidance excludes the impact of future value changes of the Kindred at Home put/call option, which cannot be estimated.

•	Expense associated with involuntary workforce reduction of approximately $0.26 per diluted common share.

•	Amortization expense for identifiable intangibles of approximately $90 million pretax, or $0.49 per diluted common share.

•	Put/call valuation adjustments of approximately $33 million, or $0.18 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home.

•	Loss of approximately $786 million pretax, or $2.41 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG).

•	Segment earnings of approximately $74 million, or $0.41 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed.

•	Adjustment of $0.28 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law.

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•	Form 10-K for the year ended December 31, 2018;

•	Form 10-Q for the quarter ended March 31, 2019; June 30, 2019; and

•	Form 8-Ks filed during 2019.

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•	Annual reports to stockholders

•	Securities and Exchange Commission filings

•	Most recent investor conference presentations

•	Quarterly earnings news releases and conference calls

•	Calendar of events

•	Corporate Governance information

•	3Q19 earnings per diluted common share (EPS) of $5.14 on a GAAP basis, $5.03 on an Adjusted basis

•	2019 EPS guidance raised to approximately $18.32 on a GAAP basis, approximately $17.75 on an Adjusted basis, representing 22 percent growth in 2019

•	Retail segment continues strong performance, exceeding management's expectations, resulting in improvement in the segment's full year 2019 benefit ratio guidance by 30 basis points at the midpoint

•	Increased expected full-year individual Medicare Advantage membership growth to approximately 530,000 members from the previous range of 480,000 to 500,000 members, representing approximately 17 percent growth in 2019

•	92 percent of the company's Medicare Advantage members currently enrolled in 4-Star and above contracts for 2020, including 1.3 million members in 4.5 Star contracts and a 5-Star rated contract in Florida

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•	the suspension of the HIF in 2019 which was contemplated in the pricing and benefit design of the company's products,

•	the significant unfavorable impact in 3Q19 related to weekday seasonality,

•	lower favorable prior period medical claims reserve development (Prior Period Development),

•	an increase in the Group and Specialty benefit ratio year over year as discussed in the segment highlights that follow, and

•	the shift in Medicare membership mix due to the loss of stand-alone PDP members and significant growth in Medicare Advantage members. The benefit ratio for stand-alone PDP members generally decreases as the year progresses.

•	engaging the company's Medicare Advantage members in clinical programs, as well as ensuring they are appropriately documented under the CMS risk-adjustment model; and

•	lower than expected medical costs as compared to the assumptions used in the pricing of the company's individual Medicare Advantage business for 2019.

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•	the suspension of the HIF for 2019, which increased the company's 3Q18 GAAP operating cost ratio by approximately 180 basis points,

•	scale efficiencies associated with growth in the company's Medicare Advantage membership, and

•	significant operating cost efficiencies in 2019 driven by previously implemented productivity initiatives.

•	strategic investments in the company's integrated care delivery model,

•	the impact of higher compensation expense accruals in 3Q19 for the AIP offered to employees across all levels of the company. The higher accruals resulted from the continued strong performance of the company, including improved customer satisfaction as measured by its net promoter score, along with higher than anticipated individual Medicare Advantage membership and Adjusted EPS growth, and

•	charges associated with workforce optimization.

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At September 30, 2019, the company had cash, cash equivalents, and investment securities of $16.36 billion, up $1.18 billion, or 8 percent, from $15.18 billion at June 30, 2019. The increase primarily reflects strong operating cash flows partially offset by the impact of net financing activities which included the net proceeds from the senior note issuance in August 2019 as discussed more fully below, the repayment of a term loan, and common stock repurchases associated with the previously disclosed accelerated share repurchase (ASR) program. Additional changes are outlined in the company’s consolidated statement of cash flows on pages S-6 and S-7 of the statistical supplement included in this release.

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At September 30, 2019, cash and short-term investments held at the parent company of $1.67 billion decreased approximately $200 million, or 11 percent, from $1.87 billion at June 30, 2019 primarily resulting from common stock repurchases associated with the previously disclosed ASR program, repayment of a term loan, and capital expenditures. These declines were significantly offset by the net proceeds from the senior notes debt issuance, dividends received from subsidiaries, non-regulated subsidiary earnings, and the timing of working capital benefits between the parent and the company's subsidiaries.

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•	Days in claims payable (DCP) of 42.8 days at September 30, 2019, increased by 2.9 days from 39.9 days at June 30, 2019 and increased 1.7 days from 41.1 days at September 30, 2018. Changes are outlined in the DCP rollforward on page S-19 of the statistical supplement included in this release.

•	Debt-to-total capitalization at September 30, 2019 was 34.3 percent, up 180 basis points from 32.5 percent at June 30, 2019 primarily resulting from the impact of the company's $1.00 billion senior debt offering in the quarter and share repurchases under the previously announced ASR program, partially offset by the $650 million repayment of a term loan and the net impact of 3Q19 earnings.

•	GAAP cash flows provided by operations of $2.44 billion in 3Q19 favorably compared to cash flows used in operations of $1.06 billion in 3Q18. The year-over-year comparison of GAAP cash flows was favorably impacted by the following factors:

◦	the timing of the monthly premium payment from CMS (3Q19 cash flows included the standard three monthly payments as compared to only two monthly payments in 3Q18 as a result of the July 2018 remittance of $3.31 billion being received early during the second quarter of 2018),

◦	higher earnings in 3Q19 as compared to 3Q18, and

◦	other favorable working capital changes, including an increase in incurred but not reported (IBNR) claims primarily resulting from strong Medicare Advantage membership growth and an increase in the amount of processed but unpaid claims due to month-end cutoff.

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For YTD 2019, GAAP cash flows provided by operations totaled $4.77 billion versus $2.51 billion of GAAP cash flows provided by operations during YTD 2018, a increase of $2.27 billion year over year. The strong operating cash flows for YTD 2019 reflect the significant impact of increasing premiums and enrollment, as premiums generally are collected in advance of claim payments by a period of up to several months. The year-over-year comparison was further impacted by the timing of working capital changes, higher earnings in 2019 versus 2018, and the negative impact on 2018 cash flows resulting from the funding of reinsurance transactions in connection with the sale of KMG.

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In July 2019, Humana's Board of Directors approved a $3.00 billion share repurchase authorization with an expiration date of June 30, 2022. The company subsequently entered into an agreement with a third-party financial institution on July 31, 2019 to effect a $1.00 billion ASR program under the authorization. During 3Q19, under the terms of this program, the company repurchased approximately 2,695,900 shares. The actual number of shares repurchased under the July 2019 ASR agreement will be determined based on a volume-weighted average price of the company's common stock during the purchase period. Settlement of approximately $200 million of repurchases under the ASR remains pending, and the company expects final settlement in the fourth quarter of 2019.

•	As of November 5, 2019, the company has a remaining repurchase authorization of $2.00 billion.

•	The company paid cash dividends to its stockholders of $74 million in 3Q19 versus $69 million in 3Q18. Cash dividends of $216 million were paid to the company’s stockholders during YTD 2019 compared to $195 million in YTD 2018. The increases primarily reflect an increase in the per share dividend amount in 2019 to $0.55 from $0.50 per share in 2018, as previously disclosed.

•	In October 2019, the company's Board of Directors declared a cash dividend to stockholders of $0.55 per share, payable on January 31, 2020, to stockholders of record on December 31, 2019.

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The 3Q19 revenues for the Retail segment were $14.09 billion, an increase of $2.02 billion, or 17 percent, from $12.07 billion in 3Q18 primarily reflecting Medicare Advantage membership growth and higher per member premiums, as well as increased state-based contracts membership. These favorable items were partially offset by the decline in membership in the company's stand-alone PDP offerings. The year-over-year membership changes are further discussed below.

•	The YTD 2019 revenues for the Retail segment were $42.26 billion, up $6.04 billion, or 17 percent, from $36.22 billion in YTD 2018, primarily reflecting the same factors impacting the year-over-year third quarter comparison.

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Individual Medicare Advantage membership was 3,552,500 as of September 30, 2019, a net increase of 508,700 or 17 percent, from 3,043,800 as of September 30, 2018, and up 488,500, or 16 percent, from 3,064,000 as of December 31, 2018. These increases were primarily due to membership additions associated with the previous Annual Election Period (AEP) and Open Election Period (OEP) for Medicare beneficiaries. The OEP sales period, which ran from January 1 to March 31, added approximately 43,700 members. Since March 31, 2019, enrollment has continued to increase due to strong sales to age-ins and those eligible for Dual Eligible Special Need Plans (D-SNP).

•	Group Medicare Advantage membership was 523,900 as of September 30, 2019, a net increase of 27,100, or 5 percent, from 496,800 at September  30, 2018, and up 26,100, or 5 percent, from 497,800 as of December 31, 2018. The increases primarily resulted from net membership additions associated with the previous AEP for Medicare beneficiaries.

•

Membership in the company’s stand-alone PDP offerings was 4,379,800 as of September 30, 2019, a net decrease of 636,100, or 13 percent, from 5,015,900 as of September 30, 2018, and down 624,500, or 12 percent, from 5,004,300 as of December 31, 2018, reflecting net declines during the previous AEP for Medicare beneficiaries. These anticipated declines were primarily due to the competitive nature of the industry and the pricing discipline the company has employed, which resulted in it no longer being the low cost plan in any market for 2019.

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State-based contracts membership (including dual-eligible demonstration members) was 469,000 as of September 30, 2019, a net increase of 145,200, or 45 percent, from 323,800 at September 30, 2018, and up 127,900, or 37 percent, from 341,100 as of December 31, 2018. The increases primarily resulted from the statewide award of a comprehensive contract under the Managed Medical Assistance (MMA) program in Florida.

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•	The 3Q19 benefit ratio for the Retail segment of 85.9 percent increased 270 basis points from 83.2 percent in 3Q18. The year-over-year increase was primarily the result of the following factors:

◦	the suspension of the HIF in 2019 which was contemplated in the pricing and benefit design of the company's products,

◦	the significant unfavorable impact in 3Q19 related to weekday seasonality,

◦	lower favorable Prior Period Development in the segment in 3Q19, and

◦	the shift in Medicare membership mix due to the loss of stand-alone PDP members and significant growth in Medicare Advantage members. The benefit ratio for stand-alone PDP members generally decreases as the year progresses.

◦	engaging the company's Medicare Advantage members in clinical programs, as well as ensuring they are appropriately documented under the CMS risk-adjustment model; and

◦	lower than expected medical costs as compared to the assumptions used in the pricing of the company's individual Medicare Advantage business for 2019.

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The YTD 2019 benefit ratio for the Retail segment of 86.4 percent was 100 basis points higher than the YTD 2018 ratio of 85.4 percent. Excluding the impact of weekday seasonality, the year-over-year increase in the benefit ratio primarily reflected the same factors that affected the third quarter comparison described above. These increases were partially offset by a less severe flu season in YTD 2019.

•	The Retail segment's favorable Prior Period Development, as noted in the table below, lowered the segment benefit ratio by 40 basis points in 3Q19 and by 100 basis points in 3Q18. Prior Period Development lowered the YTD 2019 ratio by 90 basis points and lowered the YTD 2018 benefit ratio by 100 basis points.

•	The Retail segment’s operating cost ratio of 9.3 percent in 3Q19 decreased 190 basis points from 11.2 percent in 3Q18. The year-over-year comparison was positively impacted by the following:

◦	the suspension of the HIF in 2019, which increased the Retail segment’s operating cost ratio by approximately 190 basis points in 3Q18,

◦	scale efficiencies associated with growth in the company's Medicare Advantage membership, and

◦	significant operating cost efficiencies in 2019 driven by previously implemented productivity initiatives.

◦	strategic investments in the company's integrated care delivery model in 3Q19; and

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◦	the impact of higher compensation expense accruals in 3Q19 for the AIP as a result of the continued strong performance of the company.

•	The Retail segment’s YTD 2019 operating cost ratio of 8.7 percent decreased 180 basis points from 10.5 percent in YTD 2018 primarily reflecting the same factors that impacted the year-over-year comparison for the third quarter. The HIF impacted the segment’s YTD 2018 operating cost ratio by approximately 190 basis points.

•	The Retail segment’s GAAP segment earnings of $639 million in 3Q19 increased $5 million, or 1 percent, from GAAP segment earnings of $634 million in 3Q18. The year-over-year favorable comparison was impacted by the same factors that resulted in the segment's operating cost ratio improvement, partially offset by the higher benefit ratio.

•	For YTD 2019, GAAP segment earnings for the Retail segment of $1.96 billion increased $566 million, or 41 percent, from $1.39 billion in YTD 2018. The year-over-year increase primarily reflects the lower operating cost ratio in YTD 2019, which was partially offset by the segment's higher benefit ratio in YTD 2019 as described above.

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As expected, the company's higher-than-anticipated individual Medicare Advantage membership growth during the previous AEP had a muted impact on the segment's earnings in YTD 2019. While new Medicare Advantage members increase revenues, on average, they have a breakeven impact on segment earnings in the first year as they were not previously engaged in clinical programs or appropriately documented under the CMS risk-adjustment model, and accordingly, carry a higher benefit ratio.

•	The 3Q19 revenues for the Group and Specialty segment were $1.89 billion, down $5 million year over year. This decrease was primarily due to the following factors:

◦	a decline in the company's fully-insured group commercial and specialty membership; and

◦	the impact of certain contractual incentives and adjustments related to the previous TRICARE contract received in 3Q18, which did not recur in 3Q19.

◦	higher stop-loss revenues related to the company's level-funded ASO accounts resulting from membership growth in this product as more fully described below,

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◦	higher per member premiums across the fully-insured business, and

◦	a lower unfavorable commercial risk adjustment (CRA) payable estimate in 3Q19 as compared to 3Q18 which resulted in higher small group fully-insured commercial revenues year-over-year.

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The YTD 2019 revenues for the Group and Specialty segment were $5.65 billion, down $120 million, or 2 percent, from $5.77 billion in YTD 2018, primarily reflecting the same factors that impacted the year-over-year third quarter comparison. The year-over-year YTD comparison was also further negatively impacted by the reduction in YTD 2019 premium revenues related to the company's workplace voluntary benefits (WVB) and financial protection products (FPP) lines of business due to the exit of these businesses in connection with Humana's divestiture of KMG during the second quarter of 2018.

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Group fully-insured commercial medical membership was 927,400 at September 30, 2019, a decrease of 101,700, or 10 percent, from 1,029,100 at September 30, 2018, and down 77,300, or 8 percent, from 1,004,700 at December 31, 2018. These anticipated declines primarily reflect lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products in 2019, as well as the loss of certain large group accounts due to the competitive pricing environment. The portion of group fully-insured commercial medical membership in small group accounts (2-99 sized employer groups) was approximately 60 percent at September 30, 2019, 61 percent at December 31, 2018, and 62 percent at September 30, 2018.

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Group ASO commercial medical membership was 516,800 at September 30, 2019, an increase of 66,900, or 15 percent, from 449,900 at September 30, 2018, and up 34,900, or 7 percent, from 481,900 at December 31, 2018. These increases primarily reflect more small group accounts selecting level-funded ASO products, partially offset by the loss of certain large group accounts due to continued discipline in pricing of services for self-funded accounts amid a highly competitive environment. Small group membership comprised 39 percent of group ASO medical membership at September 30, 2019 versus 21 percent at September 30, 2018 and 26 percent at December 31, 2018.

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Military services membership was 5,998,700 at September 30, 2019, an increase of 71,300, or 1 percent, from 5,927,400 at September 30, 2018, and up 70,100, or 1 percent, versus 5,928,600 at December 31, 2018. Membership includes military service members, retirees, and their families to whom the company is providing healthcare services under the current TRICARE East Region contract. The current contract, which covers 32 states, became effective on January 1, 2018.

•	Membership in specialty products(i) was 5,411,400 at September 30, 2019, a decrease of 704,900, or 12 percent, from 6,116,300, at September 30, 2018, and down 660,900, or 11 percent, from 6,072,300 at December 31, 2018. The decreases resulted from the loss of certain group accounts, including one jumbo account, offering stand-alone dental and vision products.

•	The 3Q19 benefit ratio for the Group and Specialty segment was 86.3 percent, an increase of 560 basis points from 80.7 percent for 3Q18. The year-over-year increase in the benefit ratio is primarily due to the impact of the following factors:

◦	the significant unfavorable impact in 3Q19 related to weekday seasonality,

◦	the impact of the suspension of the HIF in 2019 which was contemplated in the pricing of the company's products,

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◦	the meaningful impact of the continued migration of fully-insured group members to level-funded ASO products in 2019 resulting in a membership mix transformation,

◦	the impact of adjustments to dental network contracted rates resulting from dental network re-contracting and expansion to position the business for the future, and

◦	lower Prior Period Development.

•	The YTD 2019 benefit ratio for the segment of 83.0 percent was 500 basis points higher than the YTD 2018 ratio of 78.0 percent. Excluding the impact of weekday seasonality, the year-to-date comparison was primarily impacted by the same factors affecting the third quarter comparison.

•	Prior Period Development for the Group and Specialty segment, as noted in the table below, lowered the 3Q19 segment benefit ratio by 10 basis points and lowered the 3Q18 ratio by 40 basis points. Prior Period Development increased the YTD 2019 segment benefit ratio by 70 basis points while lowering the YTD 2018 ratio by 80 basis points.

•	The Group and Specialty segment’s operating cost ratio was 21.9 percent in 3Q19, a decrease of 170 basis points from 23.6 percent in 3Q18 primarily reflecting the following factors:

◦	suspension of the HIF in 2019, which increased the segment's 3Q18 GAAP operating cost ratio by approximately 160 basis points; and

◦	significant operating cost efficiencies in 2019 driven by previously implemented productivity initiatives.

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The Group and Specialty segment’s operating cost ratio of 21.9 percent for YTD 2019 was down 170 basis points compared to 23.6 percent for YTD 2018. The year-over-year decrease was primarily impacted by the same factors influencing the third quarter comparison. The YTD comparison further benefited from the exit of the WVB and FPP lines of business in connection with the KMG divestiture during second quarter 2018, which carried a higher operating cost ratio.

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The Group and Specialty segment’s GAAP segment earnings of $4 million in 3Q19 compared to GAAP segment earnings of $81 million in 3Q18, a decrease of $77 million, or 95 percent. The decrease primarily reflects the same factors resulting in the segment's higher benefit ratio, along with lower military services business earnings. Earnings comparisons related to the military services business were unfavorably impacted by the receipt of certain contractual incentives and adjustments in 3Q18 related to the previous TRICARE contract which did not recur in 3Q19. These declines were partially offset by the improvement of the operating cost ratio in 3Q19 compared to 3Q18.

•	The Group and Specialty segment’s GAAP segment earnings of $174 million in YTD 2019 compared to GAAP segment earnings of $372 million in YTD 2018, a decrease of $198 million, or 53 percent. The decrease primarily reflects the same factors impacting the third quarter GAAP comparison.

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Revenues of $6.60 billion in 3Q19 for the Healthcare Services segment increased by $636 million, or 11 percent, from $5.97 billion in 3Q18. The year-over-year comparison was favorably impacted by the company's strong Medicare Advantage membership growth, while being partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP membership as previously discussed.

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YTD 2019 revenues for the Healthcare Services segment were $19.09 billion, an increase of $1.47 billion, or 8 percent, from $17.62 billion in YTD 2018 primarily due to the same factors affecting the year-over-year comparison for the third quarter, as well as higher revenues associated with the company's provider services business reflecting the previously disclosed acquisitions of MCCI Holdings, LLC (MCCI) and Family Physicians Group (FPG).

•	The Healthcare Services segment’s operating cost ratios of 96.2 percent and 96.3 percent in 3Q19 and YTD 2019, respectively, were relatively unchanged from 96.1 percent and 96.2 percent in 3Q18 and YTD 2018, respectively.

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Primary care providers in value-based (shared risk and path to risk) relationships of 60,200 at September 30, 2019 increased 15 percent from 52,300 at September 30, 2018, and increased 13 percent from 53,400 at December 31, 2018. The percentage of the company’s individual Medicare Advantage members in value-based relationships was 66 percent as of September 30, 2019 and at September 30, 2018, versus 67 percent as of December 31, 2018. The year-to-date decline was impacted by the strong results of the previous AEP and OEP

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Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program (j) was 882,800 at September 30, 2019, up 24 percent from 713,300 at September 30, 2018 and up 23 percent from 716,000 at December 31, 2018. The increases were driven by the company's improved process for identifying and enrolling members in the appropriate program at the right time, coupled with growth in Special Needs Plans (SNP) membership.

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Pharmacy script volume on an adjusted 30-day equivalent basis of 116 million for 3Q19 increased 5 percent compared to 110 million for 3Q18. Pharmacy script volume of 339 million for YTD 2019 increased 3 percent compared to 328 million for YTD 2018. These increases primarily were driven by higher individual Medicare Advantage membership, partially offset by the decline in stand-alone PDP membership.

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The Healthcare Services segment’s 3Q19 GAAP segment earnings decreased $3 million, or 1 percent, to $212 million compared to GAAP segment earnings of $215 million in 3Q18. The decrease primarily resulted from additional investments in clinical assets associated with the company's provider services business and slightly lower earnings from Kindred at Home operations. These declines were partially offset by the following factors:

•	The Healthcare Services segment’s GAAP segment earnings in YTD 2019 increased $17 million, or 3 percent, to $611 million compared to GAAP segment earnings of $594 million in YTD 2018 primarily reflecting the following factors:

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•	Amortization expense for identifiable intangibles of approximately $17 million pretax income, or $0.10 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $82 million, or $0.47 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Expense associated with involuntary workforce reduction of approximately $46 million pretax, or $0.26 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

•	Amortization expense for identifiable intangibles of approximately $19 million pretax, or $0.11 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $11 million, or $0.06 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Gain of approximately $4 million pretax, or $0.02 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG). GAAP measures affected in this release include consolidated pretax and EPS.

•	Segment earnings of $5 million, or $0.03 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, and consolidated benefit ratio.

•	Adjustment of $0.19 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law. The only GAAP measure affected in this release is EPS.

•	Amortization expense for identifiable intangibles of approximately $53 million pretax income, or $0.29 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

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•	Put/call valuation adjustments of approximately $217 million, or $1.23 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Expense associated with involuntary workforce reduction of approximately $46 million pretax, or $0.26 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and consolidated operating cost ratio.

•	Amortization expense for identifiable intangibles of approximately $70 million pretax, or $0.39 per diluted common share; GAAP measures affected in this release include consolidated pretax, EPS, and segment earnings (for respective amortization expense for the Retail and Group and Specialty segments).

•	Put/call valuation adjustments of approximately $11 million, or $0.06 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home. GAAP measures affected in this release include consolidated pretax and EPS.

•	Loss of approximately $786 million pretax, or $2.57 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG). GAAP measures affected in this release include consolidated pretax and EPS.

•	Segment earnings of approximately $76 million, or $0.42 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed. GAAP measures affected in this release include consolidated pretax income, EPS, consolidated revenues, and consolidated benefit ratio.

•	Adjustment of $0.28 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law. The only GAAP measure affected in this release is EPS.

•	Amortization expense for identifiable intangibles of approximately $0.40 per diluted common share.

•	Put/call valuation adjustments of approximately $1.23 per diluted common share, associated with Humana’s 40% minority interest in Kindred at Home. FY19 GAAP EPS guidance excludes the impact of future value changes of the Kindred at Home put/call option, which cannot be estimated.

•	Expense associated with involuntary workforce reduction of approximately $0.26 per diluted common share.

•	Amortization expense for identifiable intangibles of approximately $90 million pretax, or $0.49 per diluted common share.

•	Put/call valuation adjustments of approximately $33 million, or $0.18 per diluted common share, associated with Humana's 40% minority interest in Kindred at Home.

•	Loss of approximately $786 million pretax, or $2.41 per diluted common share, associated with the company's sale of its wholly-owned subsidiary, KMG America Corporation (KMG).

•	Segment earnings of approximately $74 million, or $0.41 per diluted common share, for the company’s Individual Commercial segment given the company’s exit on January 1, 2018, as previously disclosed.

•	Adjustment of $0.28 per diluted common share related to provisional estimates for the income tax effects related to the Tax Reform Law.

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If Humana does not design and price its products properly and competitively, if the premiums Humana receives are insufficient to cover the cost of healthcare services delivered to its members, if the company is unable to implement clinical initiatives to provide a better healthcare experience for its members, lower costs and appropriately document the risk profile of its members, or if its estimates of benefits expense are inadequate, Humana’s profitability could be materially adversely affected. Humana estimates the costs of its benefit expense payments, and designs and prices its products accordingly, using actuarial methods and assumptions based upon, among other relevant factors, claim payment patterns, medical cost inflation, and historical developments such as claim inventory levels and claim receipt patterns. The company continually reviews estimates of future payments relating to benefit expenses for services incurred in the current and prior periods and makes necessary adjustments to its reserves, including premium deficiency reserves, where appropriate. These estimates, however, involve extensive judgment, and have considerable inherent variability because they are extremely sensitive to changes in claim payment patterns and medical cost trends, so any reserves the company may establish, including premium deficiency reserves, may be insufficient.

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If Humana fails to effectively implement its operational and strategic initiatives, particularly its Medicare initiatives and state-based contract strategy, the company’s business may be materially adversely affected, which is of particular importance given the concentration of the company’s revenues in these products. In addition, there can be no assurances that the company will be successful in maintaining or improving its Star ratings in future years.

•	If Humana fails to properly maintain the integrity of its data, to strategically implement new information systems, to protect Humana’s proprietary rights to its systems, or to defend against cyber-security attacks, the company’s business may be materially adversely affected.

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Humana is involved in various legal actions, or disputes that could lead to legal actions (such as, among other things, provider contract disputes and qui tam litigation brought by individuals on behalf of the government), governmental and internal investigations, and routine internal review of business processes any of which, if resolved unfavorably to the company, could result in substantial monetary damages or changes in its business practices. Increased litigation and negative publicity could also increase the company’s cost of doing business.

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As a government contractor, Humana is exposed to risks that may materially adversely affect its business or its willingness or ability to participate in government healthcare programs including, among other things, loss of material government contracts, governmental audits and investigations, potential inadequacy of government determined payment rates, potential restrictions on profitability, including by comparison of profitability of the company’s Medicare Advantage business to non-Medicare Advantage business, or other changes in the governmental programs in which Humana participates. Changes to the risk-adjustment model utilized by CMS to adjust premiums paid to Medicare Advantage, or MA, plans according to the health status of covered members, including proposed changes to the methodology used by CMS for risk adjustment data validation audits that fail to address adequately the statutory requirement of actuarial equivalence, if implemented, could have a material adverse effect on our operating results, financial position and cash flows.

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The Healthcare Reform Law, including The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, could have a material adverse effect on Humana’s results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, restricting the company’s ability to expand into new markets, increasing the company’s medical and operating costs by, among other things, requiring a minimum benefit ratio on insured products, lowering the company’s Medicare payment rates and increasing the company’s expenses associated with a non-deductible health insurance industry fee and other assessments; the company’s financial position, including the company’s ability to maintain the value of its goodwill; and the company’s cash flows. Additionally, potential legislative or judicial changes, including activities to invalidate, repeal or replace, in whole or in part, the Health Care Reform Law, creates uncertainty for Humana’s business, and when, or in what form, such legislative or judicial changes may occur cannot be predicted with certainty.

•	Humana’s business activities are subject to substantial government regulation. New laws or regulations, or changes in existing laws or regulations or their manner of application could increase the company’s cost of doing business and may adversely affect the company’s business, profitability and cash flows.

•	Humana’s failure to manage acquisitions, divestitures and other significant transactions successfully may have a material adverse effect on the company’s results of operations, financial position, and cash flows.

•	If Humana fails to develop and maintain satisfactory relationships with the providers of care to its members, the company’s business may be adversely affected.

•	Humana’s pharmacy business is highly competitive and subjects it to regulations in addition to those the company faces with its core health benefits businesses.

•	Changes in the prescription drug industry pricing benchmarks may adversely affect Humana’s financial performance.

•	If Humana does not continue to earn and retain purchase discounts and volume rebates from pharmaceutical manufacturers at current levels, Humana’s gross margins may decline.

•	Humana’s ability to obtain funds from certain of its licensed subsidiaries is restricted by state insurance regulations.

•	Downgrades in Humana’s debt ratings, should they occur, may adversely affect its business, results of operations, and financial condition.

•	The securities and credit markets may experience volatility and disruption, which may adversely affect Humana’s business.

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•	Form 10-K for the year ended December 31, 2018;

•	Form 10-Q for the quarter ended March 31, 2019; June 30, 2019; and

•	Form 8-Ks filed during 2019.

•	Annual reports to stockholders

•	Securities and Exchange Commission filings

•	Most recent investor conference presentations

•	Quarterly earnings news releases and conference calls

•	Calendar of events

•	Corporate Governance information

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(A)	Put/call valuation adjustments associated with Humana’s 40% minority interest ownership in Kindred at Home

(B)	Net earnings associated with the company’s 40% minority interest ownership in Kindred at Home

(C)	Humana exited the individual commercial fully-insured medical health insurance business beginning January 1, 2018, as well as exited certain other business, and therefore no longer report separately the Individual Commercial segment and the Other Businesses category in 2019.

(D)	The Medicaid and other category includes premiums associated with the company’s Medicaid business, as well as the closed block of long-term care insurance policies in 2018.

(E)	The ASO and other category is primarily comprised of Administrative Services Only (ASO) fees and other ancillary services fees, including military services unless separately disclosed.

(F)	Includes Medicaid Temporary Assistance for Needy Families (TANF), dual-eligible demonstration, and Long-Term Support Services (LTSS) from state-based contracts.

(G)	Other supplemental benefits include group life policies.

(H)

In certain circumstances, the company contracts with providers to accept financial risk for a defined set of Medicare Advantage membership. In transferring this risk, the company prepays these providers a monthly fixed-fee per member to coordinate substantially all of the medical care for their Medicare Advantage members assigned or attributed to their provider panel, including some health benefit administrative functions and claims processing. For these capitated Shared Risk arrangements, the company generally agrees to payment rates that target a benefit expense ratio. The result is a high level of engagement on the part of the provider.

(I)

A Path to Risk provider is one who has a high level of engagement and participates in one of Humana’s pay-for-performance programs (Model Practice or Medical Home) or has a risk contract in place with a trigger (future date or membership threshold) which has not yet been met. In addition to earning incentives, these providers may also have a shared savings component by which they can share in achieved surpluses when the actual cost of the medical services provided to patients assigned or attributed to their panel is less than the agreed upon medical expense target.

(J)	The amounts primarily reflect services revenues under the TRICARE East Region contract which generally are contracted on a per-member basis.

(K)	Computed based on average membership for the period (i.e., monthly ending membership during the period divided by the number of months in the period).

(L)

Includes Medicare Advantage (including Special Needs Plans (SNP)) and dual-eligible demonstration program members enrolled in one of Humana’s chronic care programs. These members may be enrolled in Humana At Home Chronic Care Program (HCCP), Humana At Home Remote Monitoring, or an Advance Illness Support program. Members included in these programs may not be unique to each program since members have the ability to enroll in multiple programs. In addition, the members in the HCCP program may receive varying levels of care management based on their health status and needs, ranging from active care management to ongoing monitoring.

(M)

Reflects discharges enrolled in Humana’s 30-day care management services, which supports members after they are discharged home from a hospital or other facility. The program is aimed at individuals at high-risk for re-hospitalization. Care managers visit and call members at home to ensure they have and understand correct prescriptions, their doctors are informed about members’ changed status, and that members are either self-managing adequately or are referred to appropriate ongoing services.

(N)	Script volume is presented on an adjusted 30-day equivalent basis. This includes all scripts processed by the Humana pharmacy benefit manager (PBM).

(O)	Represents reinsurance recoverables associated with the company’s state-based Medicaid contract in Kentucky.

(P)

Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development). There were no changes in the approach used to determine the company’s estimate of medical claim reserves during the quarter.

(Q)	Future policy benefit expense has a related liability classified as a long-term liability on the balance sheet.

(R)	A common metric for monitoring benefits payable levels relative to benefits expense is days in claims payable (DCP). The company calculates DCP using the quarterly reported benefits expense and benefits payable balances as presented within the company’s consolidated financial statements.

(S)

DCP fluctuates due to a number of factors, the more significant of which are detailed in this rollforward. Growth in certain product lines can also impact DCP for the quarter since a provision for claims would not have been recorded for members that had not yet enrolled earlier in the quarter, yet those members would have a provision and corresponding medical claims reserve recorded upon enrollment later in the quarter.

(T)	Provider accruals represent portions of capitation payments set aside to pay future settlements for capitated providers. Related settlements generally happen over a 12-month period.

(U)	Represents medical and specialty claims incurred but not reported (IBNR) for non-pharmacy fully-insured products.

(V)	Represents pharmacy claims expense including payments to the company’s pharmacy benefit manager for prescription drugs filled on behalf of Humana’s members, as well as government subsidized programs from Medicare Part D such as low income cost and reinsurance subsidies, as well as coverage gap discount programs.

(W)	Includes processed claims that are in the post claim adjudication process, which consists of operating functions such as audit, check batching and check handling. These claims are included in IBNR lags, but have not yet been mailed or released from Humana.

(X)	Includes non-lagged reserves such as ASO stop loss, life reserves, and accidental death and dismemberment/accident and health. Also includes an explicit provision for uncertainty (also called a provision for adverse deviation) intended to ensure the unpaid claim liabilities are adequate under moderately adverse conditions.