Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-5975
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HUMANA INC. (Exact name of registrant as specified in its charter) |
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Delaware | | 61-0647538 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ý | | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ | | Smaller reporting company | ¨ |
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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 pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
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Class of Common Stock | Outstanding at March 31, 2018 |
$0.16 2/3 par value | 137,682,171 shares |
Humana Inc.
FORM 10-Q
MARCH 31, 2018
INDEX
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Part I: Financial Information | |
Item 1. | Financial Statements (Unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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| Certifications | |
Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in millions, except share amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 8,855 |
| | $ | 4,042 |
|
Investment securities | 9,742 |
| | 9,557 |
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Receivables, less allowance for doubtful accounts of $87 in 2018 and $96 in 2017 | 1,276 |
| | 854 |
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Other current assets | 4,059 |
| | 2,949 |
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Total current assets | 23,932 |
| | 17,402 |
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Property and equipment, net | 1,595 |
| | 1,584 |
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Long-term investment securities | 2,361 |
| | 2,745 |
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Goodwill | 3,760 |
| | 3,281 |
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Other long-term assets | 1,805 |
| | 2,166 |
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Total assets | $ | 33,453 |
| | $ | 27,178 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Benefits payable | $ | 4,961 |
| | $ | 4,668 |
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Trade accounts payable and accrued expenses | 6,266 |
| | 4,069 |
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Book overdraft | 124 |
| | 141 |
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Unearned revenues | 3,706 |
| | 378 |
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Short-term debt | 398 |
| | 150 |
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Total current liabilities | 15,455 |
| | 9,406 |
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Long-term debt | 4,772 |
| | 4,770 |
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Future policy benefits payable | 2,842 |
| | 2,923 |
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Other long-term liabilities | 303 |
| | 237 |
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Total liabilities | 23,372 |
| | 17,336 |
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Commitments and contingencies (Note 14) |
| |
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Stockholders’ equity: | | | |
Preferred stock, $1 par; 10,000,000 shares authorized; none issued | — |
| | — |
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Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,585,156 shares issued at March 31, 2018 and 198,572,458 shares issued at December 31, 2017 | 33 |
| | 33 |
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Capital in excess of par value | 2,626 |
| | 2,445 |
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Retained earnings | 14,086 |
| | 13,670 |
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Accumulated other comprehensive (loss) income | (154 | ) | | 19 |
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Treasury stock, at cost, 60,902,985 shares at March 31, 2018 and 60,893,762 shares at December 31, 2017 | (6,510 | ) | | (6,325 | ) |
Total stockholders’ equity | 10,081 |
| | 9,842 |
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Total liabilities and stockholders’ equity | $ | 33,453 |
| | $ | 27,178 |
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See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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| Three months ended March 31, |
| 2018 | | 2017 |
| (in millions, except per share results) |
Revenues: | | | |
Premiums | $ | 13,811 |
| | $ | 13,398 |
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Services | 327 |
| | 253 |
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Investment income | 141 |
| | 111 |
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Total revenues | 14,279 |
| | 13,762 |
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Operating expenses: | | | |
Benefits | 11,670 |
| | 11,326 |
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Operating costs | 1,749 |
| | 1,553 |
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Merger termination fee and related costs, net | — |
| | (947 | ) |
Depreciation and amortization | 100 |
| | 92 |
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Total operating expenses | 13,519 |
| | 12,024 |
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Income from operations | 760 |
| | 1,738 |
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Interest expense | 53 |
| | 49 |
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Income before income taxes | 707 |
| | 1,689 |
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Provision for income taxes | 216 |
| | 574 |
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Net income | $ | 491 |
| | $ | 1,115 |
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Basic earnings per common share | $ | 3.56 |
| | $ | 7.54 |
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Diluted earnings per common share | $ | 3.53 |
| | $ | 7.49 |
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Dividends declared per common share | $ | 0.50 |
| | $ | 0.40 |
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See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| Three months ended March 31, |
| 2018 | | 2017 |
| (in millions) |
Net income | $ | 491 |
| | $ | 1,115 |
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Other comprehensive (loss) income: | | | |
Change in gross unrealized investment gains/losses | (203 | ) | | 38 |
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Effect of income taxes | 52 |
| | (14 | ) |
Total change in unrealized investment gains/losses, net of tax | (151 | ) | | 24 |
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Reclassification adjustment for net realized gains included in investment income | (29 | ) | | (26 | ) |
Effect of income taxes | 7 |
| | 10 |
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Total reclassification adjustment, net of tax | (22 | ) | | (16 | ) |
Other comprehensive (loss) income, net of tax | (173 | ) | | 8 |
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Comprehensive income | $ | 318 |
| | $ | 1,123 |
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See accompanying notes to condensed consolidated financial statements.
Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| For the three months ended March 31, |
| 2018 | | 2017 |
| (in millions) |
Cash flows from operating activities | | | |
Net income | $ | 491 |
| | $ | 1,115 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net realized capital gains | (29 | ) | | (26 | ) |
Stock-based compensation | 35 |
| | 26 |
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Depreciation | 109 |
| | 100 |
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Other intangible amortization | 30 |
| | 18 |
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Provision for deferred income taxes | 83 |
| | 29 |
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Changes in operating assets and liabilities, net of effect of businesses acquired and dispositions: | | | |
Receivables | (422 | ) | | (558 | ) |
Other assets | (1,164 | ) | | (415 | ) |
Benefits payable | 293 |
| | 198 |
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Other liabilities | 885 |
| | 542 |
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Unearned revenues | 3,328 |
| | 3,140 |
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Other, net | 47 |
| | 36 |
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Net cash provided by operating activities | 3,686 |
| | 4,205 |
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Cash flows from investing activities | | | |
Acquisitions, net of cash acquired | (169 | ) | | (7 | ) |
Purchases of property and equipment | (134 | ) | | (122 | ) |
Purchases of investment securities | (1,711 | ) | | (1,876 | ) |
Maturities of investment securities | 217 |
| | 284 |
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Proceeds from sales of investment securities | 1,392 |
| | 795 |
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Net cash used in investing activities | (405 | ) | | (926 | ) |
Cash flows from financing activities | | | |
Receipts from contract deposits, net | 1,401 |
| | 1,730 |
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Proceeds from issuance of senior notes, net | — |
| | 991 |
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Proceeds from issuance of commercial paper, net | 245 |
| | 169 |
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Change in book overdraft | (17 | ) | | (34 | ) |
Common stock repurchases | (51 | ) | | (1,574 | ) |
Dividends paid | (57 | ) | | (47 | ) |
Proceeds from stock option exercises and other | 11 |
| | 34 |
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Net cash provided by financing activities | 1,532 |
| | 1,269 |
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Increase in cash and cash equivalents | 4,813 |
| | 4,548 |
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Cash and cash equivalents at beginning of period | 4,042 |
| | 3,877 |
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Cash and cash equivalents at end of period | $ | 8,855 |
| | $ | 8,425 |
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Supplemental cash flow disclosures: | | | |
Interest payments | $ | 22 |
| | $ | 10 |
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Income tax payments (refunds), net | $ | 4 |
| | $ | (4 | ) |
See accompanying notes to condensed consolidated financial statements.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2017, that was filed with the Securities and Exchange Commission, or the SEC, on February 16, 2018. We refer to the Form 10-K as the “2017 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2017 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
Acquisition of a 40% Minority Interest in Kindred’s Homecare Business
On December 19, 2017, we announced that we entered into a definitive agreement to acquire a 40% minority interest in the Kindred at Home Division, or Kindred at Home, of Kindred Healthcare, Inc., or Kindred, for estimated cash consideration of approximately $800 million, including our share of transaction and related expenses, to facilitate a complete separation from the Long Term Acute Care and Rehabilitation businesses (the Specialty Hospital company). TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, collectively, the Sponsors, along with us are jointly creating a consortium to purchase all of the outstanding and issued securities of Kindred. Immediately following the closing of that transaction, Kindred at Home and the Specialty Hospital company will be separated, with the result being that the Specialty Hospital Company will be owned by the Sponsors and Kindred at Home will be owned by a joint venture owned by the Sponsors and us. We will own 40% of Kindred at Home, with the remaining 60% owned by a new entity owned by TPG and WCAS.
At the closing of the transaction, we will enter a shareholders agreement with the Sponsors that will provide for certain rights and obligations of each party concerning the newly formed joint venture that will own Kindred at Home. The shareholders agreement with the Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture starting at the end of year three and ending at the end of year four following the closing. Consideration upon exercise of the put option per the agreement would be valued at an exit multiple of 10.5 times the preceding twelve months earnings before interest, income taxes, depreciation and amortization, or EBITDA, subject to certain adjustments. In addition, the multiple is subject to adjustment up to 11.5 times EBITDA based on the achievement of certain pre-defined value-based outcomes tied to clinical metrics. The 11.5 times EBITDA exit multiple is comparable to the valuation of our acquired interest in Kindred at Home. Finally, we have a call option under which we have the right to require the Sponsors to sell their interest in the joint venture to Humana beginning at the end of year four and ending at the end of year five following the closing for cash consideration using the same valuation methodology applicable to the previously discussed put option consideration.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The above transactions, which are anticipated to close in the summer of 2018, are subject to customary state and federal regulatory approvals, as well as other customary closing conditions. On April 5, 2018, Kindred's stockholders approved the transaction. We expect to fund the transaction through the use of parent company cash and will account for the minority investment under the equity method.
Acquisition of a 40% Minority Interest in Curo Health Services
On April 23, 2018, we, along with the same Kindred at Home sponsors, TPG and WCAS, collectively referred to as the "Consortium," entered into a definitive agreement to acquire privately held Curo Health Services, or Curo, one of the nations' leading hospice operators providing care to patients at 245 locations in 22 states. The Consortium is purchasing Curo for approximately $1.4 billion, and at the closing of the transaction, we will have a 40% minority interest. The Curo transaction, which is anticipated to close during the summer of 2018, is subject to customary state and federal regulatory approvals as well as other customary closing conditions. The Curo transaction is not conditioned upon the closing of the Consortium’s separate acquisition of Kindred at Home and is expected to occur after the closing of Kindred at Home. Upon the closing of these transactions, the Consortium intends to merge Curo with the hospice business of Kindred at Home.
Sale of Closed Block of Commercial Long-Term Care Insurance Business
On November 6, 2017, we entered into a definitive agreement to sell the stock of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care insurance policies. Based on the terms of the definitive agreement we expect to record a net loss associated with the sale of KMG of approximately $350 million. The estimated loss includes a pretax loss of approximately $760 million, offset by the expected tax benefit of approximately $410 million. We will fund the transaction with approximately $203 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $150 million of statutory capital with the sale, which together should be more than offset by the estimated $410 million cash savings associated with the expected tax treatment of the sale. The KMG transaction is anticipated to close by the third quarter of 2018 subject to customary closing conditions, including South Carolina Department of Insurance approval. There can be no assurance we will obtain regulatory approvals needed to sell the business or do so under terms acceptable to us.
Workforce Optimization
During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program. These programs impacted approximately 3,600 associates, or 7.8%, of our workforce in 2017. As a result, in 2017 we recorded charges of $148 million, or $0.64 per diluted common share. At December 31, 2017, $140 million was classified as a current liability, included in our condensed consolidated balance sheet in the trade accounts payable and accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period. The remaining workforce optimization liability at March 31, 2018 was $94 million and is expected to be paid in 2018.
Aetna Merger
On February 16, 2017, under the terms of the Agreement and Plan of Merger, or Merger Agreement, with Aetna Inc., and certain wholly owned subsidiaries of Aetna Inc., which we collectively refer to as Aetna, we received a breakup fee of $1 billion from Aetna, which is included in our consolidated statement of income in the line captioned "Merger termination fee and related costs, net."
Revenue Recognition
Our revenues include premium and service revenues. Service revenues include administrative service fees that are recorded based upon established per member per month rates and the number of members for the month and are recognized as services are provided for the month. Additionally, service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
as services are provided. For more information about our revenues, refer to Note 2 to the consolidated financial statements included in our 2017 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 15 for disaggregation of revenue by segment and type.
At March 31, 2018, accounts receivable related to services were $162 million. For the three months ended March 31, 2018, we had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet at March 31, 2018.
For the three months ended March 31, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further revenue expected to be recognized in any future year related to remaining performance obligations was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations was not material.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance that amends the accounting for revenue recognition. The amendments are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. Accordingly, our premiums revenue and investment income, collectively representing approximately 98% of our consolidated external revenues for the three months ended March 31, 2018, are not included in the scope of the new guidance. We adopted the new standard effective January 1, 2018, using the modified retrospective approach. As the majority of our revenues are not subject to the new guidance and the remaining revenues’ accounting treatment did not materially differ from pre-existing accounting treatment, the adoption of the new standard did not have a material impact on our consolidated results of operations, financial condition, cash flows, or related disclosures.
In February 2016, the FASB issued new guidance related to accounting for leases which requires lessees to record
assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new guidance is effective for us beginning with annual and interim periods in 2019, with earlier adoption permitted. We are in the process of reconciling the population of lease agreements and other arrangements that may contain embedded leases for purposes of adopting the new standard. While we expect to record significant leased assets and corresponding lease obligations based on our existing population of individual leases, we continue to evaluate the impact on our results of operations, financial position and cash flows.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available-for-sale debt securities. We are currently evaluating the impact on our results of operations, financial condition, and cash flows.
In March 2017, the FASB issued new guidance that amends the accounting for premium amortization on purchased callable debt securities by shortening the amortization period. This amended guidance requires the premium to be amortized to the earliest call date instead of maturity date. The new guidance is effective for us beginning with annual and interim periods in 2019. We do not expect adoption of this guidance will have a material impact on our results of operations, financial condition and cash flows.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act. The new guidance is effective for us beginning January 1, 2019, with early adoption permitted. We early adopted this guidance in the first quarter of 2018 and it did not have a material impact on our results of operations, financial condition or cash flows.
There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.
3. ACQUISITIONS AND DIVESTITURES
On March 1, 2018 we acquired the remaining equity interest in MCCI Holdings, LLC, or MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, as well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million. This resulted in a preliminary purchase price allocation to goodwill of $479 million, other intangible assets of $80 million, and net tangible assets of $27 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 8 years. Goodwill and other intangible assets are amortizable as deductible expenses for tax purposes. The purchase price allocation is preliminary, subject to completion of valuation analyses, including for example, refining assumptions used to calculate the fair value of intangible assets.
On April 10, 2018, we acquired Family Physicians Group, or FPG, for cash considerations of approximately $190 million. FPG is one of the largest at-risk providers serving Medicare Advantage and Managed Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. The acquisition of FPG advances our strategy of helping physicians and clinicians evolve from treating health episodically to managing health holistically. This acquisition is not expected to have a material impact on our results of operations, financial condition, or cash flows.
During 2018 and 2017, we acquired other health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the respective acquisition dates. Acquisition-related costs recognized in 2018 and 2017 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at March 31, 2018 and December 31, 2017, respectively:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (in millions) |
March 31, 2018 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 505 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 501 |
|
Mortgage-backed securities | 2,308 |
| | — |
| | (56 | ) | | 2,252 |
|
Tax-exempt municipal securities | 3,549 |
| | 6 |
| | (61 | ) | | 3,494 |
|
Mortgage-backed securities: | | | | | | | |
Residential | 24 |
| | — |
| | (1 | ) | | 23 |
|
Commercial | 580 |
| | — |
| | (11 | ) | | 569 |
|
Asset-backed securities | 554 |
| | 1 |
| | (1 | ) | | 554 |
|
Corporate debt securities | 4,693 |
| | 131 |
| | (114 | ) | | 4,710 |
|
Total debt securities | $ | 12,213 |
| | $ | 139 |
| | $ | (249 | ) | | $ | 12,103 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | $ | 532 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 531 |
|
Mortgage-backed securities | 1,625 |
| | 4 |
| | (19 | ) | | 1,610 |
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Tax-exempt municipal securities | 3,884 |
| | 33 |
| | (28 | ) | | 3,889 |
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Mortgage-backed securities: | | | | | | | |
Residential | 26 |
| | — |
| | — |
| | 26 |
|
Commercial | 455 |
| | 3 |
| | (2 | ) | | 456 |
|
Asset-backed securities | 407 |
| | 1 |
| | — |
| | 408 |
|
Corporate debt securities | 5,175 |
| | 244 |
| | (37 | ) | | 5,382 |
|
Total debt securities | $ | 12,104 |
| | $ | 286 |
| | $ | (88 | ) | | $ | 12,302 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at March 31, 2018 and December 31, 2017, respectively:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) |
March 31, 2018 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 362 |
| | $ | (2 | ) | | $ | 129 |
| | $ | (3 | ) | | $ | 491 |
| | $ | (5 | ) |
Mortgage-backed securities | 1,489 |
| | (28 | ) | | 638 |
| | (28 | ) | | 2,127 |
| | (56 | ) |
Tax-exempt municipal securities | 2,409 |
| | (41 | ) | | 621 |
| | (20 | ) | | 3,030 |
| | (61 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | 18 |
| | — |
| | 3 |
| | (1 | ) | | 21 |
| | (1 | ) |
Commercial | 451 |
| | (10 | ) | | 28 |
| | (1 | ) | | 479 |
| | (11 | ) |
Asset-backed securities | 162 |
| | (1 | ) | | 7 |
| | — |
| | 169 |
| | (1 | ) |
Corporate debt securities | 2,431 |
| | (60 | ) | | 761 |
| | (54 | ) | | 3,192 |
| | (114 | ) |
Total debt securities | $ | 7,322 |
| | $ | (142 | ) | | $ | 2,187 |
| | $ | (107 | ) | | $ | 9,509 |
| | $ | (249 | ) |
| | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | | | | | |
U.S. Treasury and agency obligations | $ | 273 |
| | $ | (1 | ) | | $ | 130 |
| | $ | (1 | ) | | $ | 403 |
| | $ | (2 | ) |
Mortgage-backed securities | 581 |
| | (2 | ) | | 672 |
| | (17 | ) | | 1,253 |
| | (19 | ) |
Tax-exempt municipal securities | 1,590 |
| | (16 | ) | | 661 |
| | (12 | ) | | 2,251 |
| | (28 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | 20 |
| | — |
| | 3 |
| | — |
| | 23 |
| | — |
|
Commercial | 131 |
| | (1 | ) | | 28 |
| | (1 | ) | | 159 |
| | (2 | ) |
Asset-backed securities | 107 |
| | — |
| | 10 |
| | — |
| | 117 |
| | — |
|
Corporate debt securities | 1,297 |
| | (10 | ) | | 804 |
| | (27 | ) | | 2,101 |
| | (37 | ) |
Total debt securities | $ | 3,999 |
| | $ | (30 | ) | | $ | 2,308 |
| | $ | (58 | ) | | $ | 6,307 |
| | $ | (88 | ) |
Approximately 99% of our debt securities were investment-grade quality, with a weighted average credit rating of AA by Standard & Poor's Rating Service, or S&P, at March 31, 2018. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 9%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
equivalent weighted average S&P credit rating of AA exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 1,410 positions out of a total of approximately 2,230 positions at March 31, 2018. All issuers of securities we own that were trading at an unrealized loss at March 31, 2018 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the securities were purchased. At March 31, 2018, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at March 31, 2018.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | |
| Three months ended March 31, |
| 2018 | | 2017 |
| (in millions) |
Gross realized gains | $ | 32 |
| | $ | 27 |
|
Gross realized losses | (3 | ) | | (1 | ) |
Net realized capital gains | $ | 29 |
|
| $ | 26 |
|
There were no material other-than-temporary impairments for the three months ended March 31, 2018 or 2017.
The contractual maturities of debt securities available for sale at March 31, 2018, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | |
| Amortized Cost | | Fair Value |
| (in millions) |
Due within one year | $ | 856 |
| | $ | 854 |
|
Due after one year through five years | 2,846 |
| | 2,803 |
|
Due after five years through ten years | 2,317 |
| | 2,247 |
|
Due after ten years | 2,728 |
| | 2,801 |
|
Mortgage and asset-backed securities | 3,466 |
| | 3,398 |
|
Total debt securities | $ | 12,213 |
| | $ | 12,103 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at March 31, 2018 and December 31, 2017, respectively, for financial assets measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (in millions) |
March 31, 2018 | | | | | | | |
Cash equivalents | $ | 4,346 |
| | $ | 4,346 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 501 |
| | — |
| | 501 |
| | — |
|
Mortgage-backed securities | 2,252 |
| | — |
| | 2,252 |
| | — |
|
Tax-exempt municipal securities | 3,494 |
| | — |
| | 3,494 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | 23 |
| | — |
| | 23 |
| | — |
|
Commercial | 569 |
| | — |
| | 569 |
| | — |
|
Asset-backed securities | 554 |
| | — |
| | 554 |
| | — |
|
Corporate debt securities | 4,710 |
| | — |
| | 4,709 |
| | 1 |
|
Total debt securities | 12,103 |
| | — |
| | 12,102 |
| | 1 |
|
Total invested assets | $ | 16,449 |
| | $ | 4,346 |
| | $ | 12,102 |
| | $ | 1 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
Cash equivalents | $ | 4,564 |
| | $ | 4,564 |
| | $ | — |
| | $ | — |
|
Debt securities: | | | | | | | |
U.S. Treasury and other U.S. government corporations and agencies: | | | | | | | |
U.S. Treasury and agency obligations | 531 |
| | — |
| | 531 |
| | — |
|
Mortgage-backed securities | 1,610 |
| | — |
| | 1,610 |
| | — |
|
Tax-exempt municipal securities | 3,889 |
| | — |
| | 3,889 |
| | — |
|
Mortgage-backed securities: | | | | | | | |
Residential | 26 |
| | — |
| | 26 |
| | — |
|
Commercial | 456 |
| | — |
| | 456 |
| | — |
|
Asset-backed securities | 408 |
| | — |
| | 408 |
| | — |
|
Corporate debt securities | 5,382 |
| | — |
| | 5,381 |
| | 1 |
|
Total debt securities | 12,302 |
| | — |
| | 12,301 |
| | 1 |
|
Total invested assets | $ | 16,866 |
| | $ | 4,564 |
| | $ | 12,301 |
| | $ | 1 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
There were no material transfers between Level 1 and Level 2 during the three months ended March 31, 2018 or 2017.
Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $4,772 million at March 31, 2018 and $4,770 million at December 31, 2017. The fair value of our senior notes debt was $4,944 million at March 31, 2018 and $5,191 million at December 31, 2017. The fair value of our long-term debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There were outstanding commercial paper borrowings of $398 million as of March 31, 2018 and $150 million as of December 31, 2017.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we acquired MCCI, FPG, and other health and wellness related businesses during 2018 and 2017. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no material assets or liabilities measured at fair value on a nonrecurring basis during 2018 or 2017.
6. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described further in Note 2 to the consolidated financial statements included in our 2017 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at March 31, 2018 and December 31, 2017. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers.
|
| | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Risk Corridor Settlement | | CMS Subsidies/ Discounts | | Risk Corridor Settlement | | CMS Subsidies/ Discounts |
| (in millions) |
Other current assets | $ | 5 |
| | $ | 79 |
| | $ | 4 |
| | $ | 101 |
|
Trade accounts payable and accrued expenses | (240 | ) | | (2,509 | ) | | (255 | ) | | (1,085 | ) |
Net current liability | (235 | ) | | (2,430 | ) | | (251 | ) | | (984 | ) |
Other long-term assets | 33 |
| | — |
| | — |
| | — |
|
Other long-term liabilities | (78 | ) | | — |
| | (28 | ) | | — |
|
Net long-term liability | (45 | ) | | — |
| | (28 | ) | | — |
|
Total net liability | $ | (280 | ) | | $ | (2,430 | ) | | $ | (279 | ) | | $ | (984 | ) |
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization programs effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs, applicable to certain of our commercial medical insurance products, are further discussed in Note 2 to our 2017 Form 10-K. The temporary programs were only applicable for years 2014 through 2016. As a result of our exit from our individual commercial medical business effective January 1, 2018, the permanent risk adjustment program is currently only applicable to our commercial small group health insurance business.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under the Health Care Reform Law, for years 2014, 2015 and 2016.
The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Risk Adjustment Settlement | | Reinsurance Recoverables | | Risk Adjustment Settlement | | Reinsurance Recoverables |
| (in millions) |
Prior Coverage Years | | | | | | | |
Premiums receivable | $ | 65 | | | $ | — |
| | $ | 62 | | | $ | — |
|
Other current assets | — | | | — |
| | — | | | 44 |
|
Trade accounts payable and accrued expenses | (79 | ) | | — |
| | (80 | ) | | — |
|
Net current (liability) asset | (14 | ) | | — |
| | (18 | ) | | 44 |
|
Other long-term assets | — | | | — |
| | 5 | | | — |
|
Total prior coverage years' net (liability) asset | (14 | ) | | — |
| | (13 | ) | | 44 |
|
Current Coverage Year | | | | | | | |
Other long-term assets | 1 | | | — |
| | — | | | — |
|
Other long-term liabilities | (11 | ) | | — |
| | — | | | — |
|
Net long-term liability | (10 | ) | | — |
| | — | | | — |
|
Total 2018 coverage year net liability | (10 | ) | | — |
| | — | | | — |
|
Total net (liability) asset | $ | (24 | ) | | $ | — |
| | $ | (13 | ) | | $ | 44 |
|
Net collections under the 3R's associated with prior coverage years were $46 million during the three months ended March 31, 2018 and were $62 million during the three months ended March 31, 2017.
In September 2018, we expect to pay the federal government $1.05 billion for our portion of the annual health insurance industry fee attributed to calendar year 2018 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for 2017 when the fee was suspended, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost was recorded in operating cost expense of approximately $263 million for the three months ended March 31, 2018, resulting from the amortization of the 2018 annual health insurance industry fee.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The annual health insurance industry fee was suspended for calendar year 2017, and is also suspended for calendar year 2019.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for our reportable segments for the three months ended March 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Total |
| (in millions) |
Balance at January 1, 2018 | $ | 1,059 |
| | $ | 261 |
| | $ | 1,961 |
| | $ | 3,281 |
|
Acquisitions | 360 |
| | — |
| | 119 |
| | 479 |
|
Balance at March 31, 2018 | $ | 1,419 |
| | $ | 261 |
| | $ | 2,080 |
| | $ | 3,760 |
|
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2018 | | December 31, 2017 |
| Weighted Average Life | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| | | ($ in millions) |
Other intangible assets: | | | | | | | | | | | | | |
Customer contracts/ relationships | 9.6 years | | $ | 646 |
| | $ | 414 |
| | $ | 232 |
| | $ | 566 |
| | $ | 401 |
| | $ | 165 |
|
Trade names and technology | 6.5 years | | 83 |
| | 78 |
| | 5 |
| | 104 |
| | 84 |
| | 20 |
|
Provider contracts | 11.9 years | | 68 |
| | 32 |
| | 36 |
| | 68 |
| | 30 |
| | 38 |
|
Noncompetes and other | 8.1 years | | 32 |
| | 29 |
| | 3 |
| | 32 |
| | 29 |
| | 3 |
|
Total other intangible assets | 9.4 years | | $ | 829 |
| | $ | 553 |
| | $ | 276 |
| | $ | 770 |
| | $ | 544 |
| | $ | 226 |
|
For the three months ended March 31, 2018 and 2017, amortization expense for other intangible assets was approximately $30 million and $18 million, respectively. Amortization expense for the three months ended March 31, 2018 included $12 million associated with the write-off of a trade name value reflecting the re-branding of certain provider assets. The following table presents our estimate of amortization expense for 2018 and each of the five next succeeding years:
|
| | | |
| (in millions) |
For the years ending December 31, | |
2018 | $ | 84 |
|
2019 | 63 |
|
2020 | 61 |
|
2021 | 27 |
|
2022 | 24 |
|
2023 | 16 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 4,668 |
| | $ | 4,563 |
|
Less: Reinsurance recoverables | | (70 | ) | | (76 | ) |
Balances, beginning of period, net | | 4,598 |
| | 4,487 |
|
Incurred related to: | | | | |
Current year | | 11,947 |
| | 11,580 |
|
Prior years | | (267 | ) | | (231 | ) |
Total incurred | | 11,680 |
| | 11,349 |
|
Paid related to: | | | | |
Current year | | (7,775 | ) | | (7,695 | ) |
Prior years | | (3,619 | ) | | (3,451 | ) |
Total paid | | (11,394 | ) | | (11,146 | ) |
Reinsurance recoverable | | 77 |
| | 71 |
|
Balances, end of period | | $ | 4,961 |
| | $ | 4,761 |
|
Amounts incurred related to prior periods 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).
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant.
Benefits expense excluded from the previous table was as follows for the three months ended March 31, 2018 and 2017.
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
Future policy benefits: | | | | |
Individual Commercial | | $ | (16 | ) | | $ | (33 | ) |
Other Businesses | | 6 |
| | 10 |
|
Total future policy benefits | | $ | (10 | ) | | $ | (23 | ) |
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail, Group and Specialty, and Individual Commercial segments as of March 31, 2018 and 2017, net of reinsurance, and the total of IBNR included within the net incurred claims amounts.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 3,963 |
| | $ | 3,507 |
|
Less: Reinsurance recoverables | | (70 | ) | | (76 | ) |
Balances, beginning of period, net | | 3,893 |
| | 3,431 |
|
Incurred related to: | | | | |
Current year | | 10,739 |
| | 10,255 |
|
Prior years | | (187 | ) | | (204 | ) |
Total incurred | | 10,552 |
| | 10,051 |
|
Paid related to: | | | | |
Current year | | (7,119 | ) | | (7,014 | ) |
Prior years | | (3,082 | ) | | (2,572 | ) |
Total paid | | (10,201 | ) | | (9,586 | ) |
Reinsurance recoverable | | 77 |
| | 71 |
|
Balances, end of period | | $ | 4,321 |
| | $ | 3,967 |
|
At March 31, 2018, benefits payable for our Retail segment included IBNR of approximately $2.8 billion, primarily associated with claims incurred in 2018.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 568 |
| | $ | 578 |
|
Incurred related to: | | | | |
Current year | | 1,307 |
| | 1,306 |
|
Prior years | | (34 | ) | | (20 | ) |
Total incurred | | 1,273 |
| | 1,286 |
|
Paid related to: | | | | |
Current year | | (802 | ) | | (824 | ) |
Prior years | | (463 | ) | | (493 | ) |
Total paid | | (1,265 | ) | | (1,317 | ) |
Balances, end of period | | $ | 576 |
| | $ | 547 |
|
At March 31, 2018, benefits payable for our Group and Specialty segment included IBNR of approximately $502 million, primarily associated with claims incurred in 2018.
Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | |
| | For the three months ended March 31, |
| | 2018 | | 2017 |
| | (in millions) |
Balances, beginning of period | | $ | 101 |
| | $ | 454 |
|
Incurred related to: | | | | |
Current year | | — |
| | 195 |
|
Prior years | | (44 | ) | | (6 | ) |
Total incurred | | (44 | ) | | 189 |
|
Paid related to: | | | | |
Current year | | — |
| | (59 | ) |
Prior years | | (29 | ) | | (363 | ) |
Total paid | | (29 | ) | | (422 | ) |
Balance, end of period | | $ | 28 |
| | $ | 221 |
|
At March 31, 2018, benefits payable for our Individual Commercial segment included IBNR of approximately $19 million, associated with claims incurred in 2017 and prior.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Reconciliation to Consolidated
The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated
statement of financial position is as follows:
|
| | | | |
| Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance |
|
| | March 31, |
| | 2018 |
| Net outstanding liabilities | |
| Retail | $ | 4,244 |
|
| Group and Specialty | 576 |
|
| Individual Commercial | 28 |
|
| Other Businesses | 36 |
|
| Benefits payable, net of reinsurance | 4,884 |
|
| | |
| Reinsurance recoverable on unpaid claims | |
| Retail | 77 |
|
| Total reinsurance recoverable on unpaid claims | 77 |
|
| | |
| Total benefits payable, gross | $ | 4,961 |
|
10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three months ended March 31, 2018 and 2017:
|
| | | | | | | |
| Three months ended March 31, |
| 2018 | | 2017 |
| (dollars in millions, except per common share results; number of shares in thousands) |
Net income available for common stockholders | $ | 491 |
| | $ | 1,115 |
|
Weighted average outstanding shares of common stock used to compute basic earnings per common share | 137,903 |
| | 147,824 |
|
Dilutive effect of: | | | |
Employee stock options | 213 |
| | 199 |
|
Restricted stock | 714 |
| | 849 |
|
Shares used to compute diluted earnings per common share | 138,830 |
| | 148,872 |
|
Basic earnings per common share | $ | 3.56 |
| | $ | 7.54 |
|
Diluted earnings per common share | $ | 3.53 |
| | $ | 7.49 |
|
Number of antidilutive stock options and restricted stock excluded from computation | 645 |
| | 938 |
|
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
11. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 2017 and 2018 under our Board approved quarterly cash dividend policy:
|
| | | | | | | | | | |
Record Date | | Payment Date | | Amount per Share | | Total Amount |
| | | | | | (in millions) |
2017 payments | | | | | | |
1/12/2017 | | 1/27/2017 | | $ | 0.29 |
| | $ | 43 |
|
3/31/2017 | | 4/28/2017 | | $ | 0.40 |
| | $ | 58 |
|
6/30/2017 | | 7/31/2017 | | $ | 0.40 |
| | $ | 58 |
|
9/29/2017 | | 10/27/2017 | | $ | 0.40 |
| | $ | 57 |
|
2018 payments | | | | | | |
12/29/2017 | | 1/26/2018 | | $ | 0.40 |
| | $ | 55 |
|
3/30/2018 | | 4/27/2018 | | $ | 0.50 |
| | $ | 69 |
|
On April 19, 2018, the Board declared a cash dividend of $0.50 per share payable on July 27, 2018, to stockholders of record on June 29, 2018.
Stock Repurchases
On December 14, 2017, our Board of Directors authorized the repurchase of up to $3.0 billion of our common shares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.
On December 21, 2017, we entered into an accelerated stock repurchase agreement, the December 2017 ASR, with Bank of America, N.A., or BofA, to repurchase $1.0 billion of our common stock as part of the $3.0 billion share repurchase program authorized on December 14, 2017. On December 22, 2017, we made a payment of $1.0 billion to BofA from available cash on hand and received an initial delivery of 3.28 million shares of our common stock from BofA based on the then current market price of Humana common stock. The payment to BofA was recorded as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 3.28 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflected the value of stock held back by BofA pending final settlement of the December 2017 ASR. Upon settlement of the ASR on March 26, 2018, we received an additional 0.46 million shares as determined by the average daily volume weighted-average share price of our common stock during the term of the ASR Agreement of $267.55, bringing the total shares received under this program to 3.74 million. In addition, upon settlement we reclassified the $200 million value of stock initially held back by BofA from capital in excess of par value to treasury stock.
Our remaining repurchase authorization was approximately $2 billion as of May 1, 2018.
In connection with employee stock plans, we acquired 0.19 million common shares for $51 million and 0.35 million common shares for $74 million during the three months ended March 31, 2018 and 2017, respectively.
Treasury Stock Reissuance
We reissued 0.63 million shares of treasury stock during the three months ended March 31, 2018 at a cost of $66 million associated with restricted stock unit vestings and option exercises.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included net unrealized losses, net of tax, on our investment securities of $110 million at March 31, 2018 and net unrealized gains, net of tax, on our investment securities of $125 million at December 31, 2017. In addition, accumulated other comprehensive income included $44 million, net of tax, at March 31, 2018 and $106 million, net of tax, at December 31, 2017 for an additional liability that would exist on our closed block of long-term care insurance policies if unrealized gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current yields. Refer to Note 18 to the consolidated financial statements in our 2017 Form 10-K for further discussion of our long-term care insurance policies.
12. INCOME TAXES
The effective income tax rate was 30.7% for the three months ended March 31, 2018, compared to 34.0% for the three months ended March 31, 2017 primarily due to the tax reform law enacted on December 22, 2017 (the "Tax Reform Law"), partially offset by the impact of the reinstatement of the non-deductible health insurance industry fee in 2018. The income tax rate for the three months ended March 31, 2017 included previously non-deductible transaction costs that, as a result of the termination of the Merger Agreement, became deductible for tax purposes. The Tax Reform Law reduced the statutory federal corporate income tax rate to 21 percent from 35 percent, beginning in 2018. The accounting for certain income tax effects of the Tax Reform Law is provisional. Revisions to prior estimates are recorded as additional analysis is completed using information available at each measurement date during 2018, with adjustments to the income tax provision recorded as new information becomes known. Revisions to our prior estimates for the income tax effects of the Tax Reform Law decreased our tax expense for the three months ended March 31, 2018 by $6.6 million.
13. DEBT
The carrying value of long-term debt outstanding, net of unamortized debt issuance costs, was as follows at March 31, 2018 and December 31, 2017:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in millions) |
Senior notes: | | | |
$400 million, 2.625% due October 1, 2019 | $ | 399 |
| | $ | 399 |
|
$400 million, 2.50% due December 15, 2020
| 397 |
| | 397 |
|
$400 million, 2.90% due December 15, 2022
| 396 |
| | 396 |
|
$600 million, 3.15% due December 1, 2022 | 596 |
| | 595 |
|
$600 million, 3.85% due October 1, 2024 | 596 |
| | 595 |
|
$600 million, 3.95% due March 15, 2027 | 595 |
| | 594 |
|
$250 million, 8.15% due June 15, 2038 | 263 |
| | 263 |
|
$400 million, 4.625% due December 1, 2042 | 396 |
| | 396 |
|
$750 million, 4.95% due October 1, 2044 | 739 |
| | 739 |
|
$400 million, 4.80% due March 15, 2047 | 395 |
| | 396 |
|
Total long-term debt | $ | 4,772 |
| | $ | 4,770 |
|
Senior Notes
In March 2017, we issued $600 million of 3.95% senior notes due March 15, 2027 and $400 million of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, our senior notes contain a change of control provision that may require us to purchase the notes under certain circumstances.
Credit Agreement
In May 2017 we amended and restated our previous 5-year $1.0 billion unsecured revolving credit agreement expiring July 2018 with a 5-year $2.0 billion unsecured revolving credit agreement which expires May 2022. Under the credit agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. The LIBOR spread, currently 110.0 basis points, varies depending on our credit ratings ranging from 91.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, may fluctuate between 9.0 and 25.0 basis points, depending upon our credit ratings. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option.
The terms of the credit agreement include standard provisions related to conditions of borrowing, including a customary material adverse effect clause which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth of $9.5 billion at March 31, 2018 and a maximum leverage ratio of 3.0:1. We are in compliance with the financial covenants, with actual net worth of $10.1 billion and an actual leverage ratio of 1.4:1 as measured in accordance with the credit agreement as of March 31, 2018. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the credit agreement to a maximum of $2.5 billion, through a $500.0 million incremental loan facility.
At March 31, 2018, we had no borrowings and no letters of credit outstanding under the credit agreement. Accordingly, as of March 31, 2018, we had $2.0 billion of remaining borrowing capacity (which excludes the uncommitted $500 million incremental loan facility under the credit agreement), none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Commercial Paper
We previously entered into a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers. On June 15, 2017, we increased the size of the commercial paper program to permit the issuance of the commercial notes with the aggregate face or principal amount outstanding under the program at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the three months ended March 31, 2018 was $442 million. There were outstanding borrowings of $398 million at March 31, 2018 and $150 million at December 31, 2017.
14. GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare products, which accounted for approximately 81% of our total premiums and services revenue for the three months ended March 31, 2018, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. Our bids for the 2019 calendar year are due by June 4, 2018.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to reflect the health status of our enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment model. These compliance efforts include the internal contract level audits described in more detail below, as well as ordinary course reviews of our internal business processes.
CMS is phasing-in the process of calculating risk scores using diagnoses data from the Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter Data System, or EDS. The RAPS process requires MA plans to apply a filter logic based on CMS guidelines and only submit claims that satisfy those guidelines. For submissions through EDS, CMS requires MA plans to submit all the encounter data and CMS will apply the risk adjustment filtering logic to determine the risk scores. For 2017, 25% of the risk score was calculated from claims data submitted through EDS. CMS has revised the pace of the phase-in and, for 2018 and 2019, 15% and 25%, respectively, of the risk score will be calculated from claims data submitted through EDS. The phase-in from RAPS to EDS could result in different risk scores from each dataset as a result of plan processing issues, CMS processing issues, or filtering logic differences between RAPS and EDS, and could have a material adverse effect on our results of operations, financial position, or cash flows.
CMS is continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.
In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provides that, in calculating the economic impact of audit results for an MA contract, if any, the results of the RADV audit sample will be extrapolated to the entire MA contract after a comparison of the audit results to a similar audit of Medicare FFS (we refer to the process of accounting for errors in FFS claims as the "FFS Adjuster"). This comparison of RADV audit results to the FFS error rate is necessary to determine the economic impact, if any, of RADV audit results because the government used the Medicare FFS program data set, including any attendant errors that are present in that data set, to estimate the costs of various health status conditions and to set the resulting adjustments to MA plans’ payment rates. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the Medicare FFS program dataset).
The final RADV extrapolation methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to RADV contract level audits conducted for contract year 2011 and subsequent years. CMS is currently conducting RADV contract level audits for contract years 2011, 2012, and 2013 in which two, five and five of our Medicare Advantage plans are being audited, respectively. Per CMS guidance, selected MA contracts will be notified of an audit at some point after the close of the final reconciliation for the payment year being audited.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For Service business which we used to represent a proxy of the FFS Adjuster which has not yet been released. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. We report the results of these internal contract level audits to CMS, including identified overpayments, if any. However, as indicated, we are awaiting additional guidance from CMS regarding the FFS Adjuster. Accordingly, we cannot determine whether such RADV audits will have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, as part of our internal compliance efforts, we routinely perform ordinary course reviews of our internal business processes related to, among other things, our risk coding and data submissions in connection with the risk adjustment model. These reviews may also result in the identification of errors and the submission of corrections to CMS, that may, either individually or in the aggregate, be material. As such, the result of these reviews may have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, CMS' comments in formalized guidance regarding “overpayments” to MA plans appear to be inconsistent with CMS' prior RADV audit guidance. These statements, contained in the preamble to CMS’ final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015, appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without reconciliation to the principles underlying the FFS Adjuster referenced above. We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.
At March 31, 2018, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the three months ended March 31, 2018, primarily consisted of the T2017 TRICARE East Region contract. The T2017 East Region contract is a consolidation of the former T3 North and South Regions, comprising thirty-two states and approximately six million TRICARE beneficiaries, under which delivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 of each year during its term at the government's option.
Our state-based Medicaid business accounted for approximately 4% of our total premiums and services revenue for the three months ended March 31, 2018. In addition to our state-based Temporary Assistance for Needy Families, or TANF, Medicaid contracts in Florida and Kentucky, we have contracts in Florida for Long Term Support Services (LTSS), and in Illinois for stand-alone dual eligible demonstration programs serving individuals dually eligible for both the federal Medicare program and the applicable state-based Medicaid program.
The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory restrictions on profitability, including by comparison of our Medicare Advantage profitability to our non-Medicare Advantage business profitability and a requirement that they remain within certain ranges of each other, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Legal Proceedings and Certain Regulatory Matters
As previously disclosed, the Civil Division of the United States Department of Justice provided us with an information request in December 2014, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We continue to cooperate with and voluntarily respond to the information requests from the Department of Justice. These matters are expected to result in additional qui tam litigation.
As previously disclosed, on January 19, 2016, an individual filed a qui tam suit captioned United States of America ex rel. Steven Scott v. Humana, Inc., in United States District Court, Central District of California, Western Division. The complaint alleges certain civil violations by us in connection with the actuarial equivalence of the plan benefits under Humana’s Basic PDP plan, a prescription drug plan offered by us under Medicare Part D. The action seeks damages and penalties on behalf of the United States under the False Claims Act. The court ordered the qui tam action unsealed on September 13, 2017, so that the relator could proceed, following notice from the U.S. Government that it was not intervening at that time. On January 29, 2018, the suit was transferred to the United States District Court, Western District of Kentucky, Louisville Division. We take seriously our obligations to comply with applicable CMS requirements and actuarial standards of practice, and we are vigorously defending against these allegations.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016. We have not recognized revenue, nor have we recorded a receivable, for any amount due from the federal government for unpaid risk corridor payments as of March 31, 2018. We have fully recognized all liabilities due to the federal government that we have incurred under the risk corridor program, and have paid all amounts due to the federal government as required. There is no assurance that we will prevail in the lawsuit.
Other Lawsuits and Regulatory Matters
Our current and past business practices are subject to review or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance, health care delivery and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, statutory capital requirements, provider contracting, risk adjustment, competitive practices, commission payments, privacy issues, utilization management practices, pharmacy benefits, access to care, and sales practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.
We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business operations, certain of which may be styled as class-action lawsuits. Among other matters, this litigation may include employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate and payment disputes, including disputes over reimbursement rates required by statute, general contractual matters, intellectual property matters, and challenges to subrogation practices. For example, a number of hospitals and other providers have asserted that, under their network provider contracts, we are not entitled to reduce Medicare Advantage payments to these providers in connection with changes in Medicare payment systems and in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985, as amended (commonly referred to as “sequestration”). Those challenges have led and could lead to arbitration demands or other litigation. Also, under state guaranty assessment laws, including those related to state cooperative failures in the industry, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
As a government contractor, we may also be subject to qui tam litigation brought by individuals who seek to sue
on behalf of the government, alleging that the government contractor submitted false claims to the government including, among other allegations, those resulting from coding and review practices under the Medicare risk adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the lawsuit is unsealed, and the individual may continue to prosecute the action on his or her own, on behalf of the government. We also are subject to other allegations of non-performance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.
A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extra contractual damages, care delivery malpractice, and claims arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.
We record accruals for the contingencies discussed in the sections above to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings, which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.
The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting judgments, penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities or as a result of actions by third parties. Nevertheless, it is reasonably possible that any such outcome of litigation, judgments, penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.
15. SEGMENT INFORMATION
We manage our business with four reportable segments: Retail, Group and Specialty, Healthcare Services and Individual Commercial. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles. These segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health and voluntary insurance benefits and financial protection products, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health. The Individual Commercial segment consisted of our individual commercial fully-insured medical health insurance benefits. We report under the category of Other Businesses those businesses that do not align with the reportable segments described above, primarily our closed-block long-term care insurance policies.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions®, or HPS, and includes the operations of Humana Pharmacy, Inc., our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, contracting with retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in the arrangement on behalf of members in our other segments. As principal, our Healthcare Services segment reports revenues on a gross basis, including co-share amounts from members collected by third party retail pharmacies at the point of service.
In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based and non-risk-based managed care agreements with our health plans. Under risk based agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services. Under non risk-based agreements, our health plans retain the economic risk of funding the assigned members' healthcare services. Our Healthcare Services segment reports provider services revenues associated with risk-based agreements on a gross basis, whereby capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services. Provider services revenues associated with non-risk-based agreements are presented net of associated healthcare costs.
We present our consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of $2.9 billion and $3.0 billion for the three months ended March 31, 2018 and 2017, respectively. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our provider services and pharmacy operations, are included with benefits expense. The amount of this expense was $39 million and $26 million for the three months ended March 31, 2018 and 2017, respectively.
Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our 2017 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail, Group and Specialty, and Individual Commercial segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations in the tables presenting segment results below.
Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Our segment results were as follows for the three months ended March 31, 2018 and 2017: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Retail | | Group and Specialty | | Healthcare Services | | Individual Commercial | | Other Businesses | | Eliminations/ Corporate | | Consolidated |
| (in millions) |
Three months ended March 31, 2018 | | | | | | | | | | | | |
Revenues - external customers | | | | | | | | | | | | |
Premiums: | | | | | | | | | | | | | |
Individual Medicare Advantage | $ | 8,970 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,970 |
|
Group Medicare Advantage | 1,524 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,524 |
|
Medicare stand-alone PDP | 896 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 896 |
|
Total Medicare | 11,390 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,390 |
|
Fully-insured | 125 |
| | 1,392 |
| | — |
| | (5 | ) | | — |
| | — |
| | 1,512 |
|
Specialty | — |
| | 347 |
| | — |
| | — |
| | — |
| | — |
| | 347 |
|
Medicaid and other | 553 |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 562 |
|
Total premiums | 12,068 |
| | 1,739 |
| | — |
| | (5 | ) | | 9 |
| | — |
| | 13,811 |
|
Services revenue: | | | | | | | | | | | | | |
Provider | — |
| | — |
| | 65 |
| | — |
| | — |
| | — |
| | 65 |
|
ASO and other | 2 |
| | 219 |
| | — |
| | — |
| | 2 |
| | — |
| | 223 |
|
Pharmacy | — |
| | — |
| | 39 |
| | — |
| | — |
| | — |
| | 39 |
|
Total services revenue | 2 |
| | 219 |
| | 104 |
| | — |
| | 2 |
| | — |
| | 327 |
|
Total revenues - external customers | 12,070 |
| | 1,958 |
| | 104 |
| | (5 | ) | | 11 |
| | — |
| | 14,138 |
|
Intersegment revenues | | | | | | | | | | | | | |
Services | — |
| | 5 |
| | 4,018 |
| | — |
| | — |
| | (4,023 | ) | | — |
|
Products | — |
| | — |
| | 1,535 |
| | — |
| | — |
| | (1,535 | ) | | — |
|
Total intersegment revenues | — |
| | 5 |
| | 5,553 |
| | — |
| | — |
| | (5,558 | ) | | — |
|
Investment income | 37 |
| | 7 |
| | 6 |
| | — |
| | 35 |
| | 56 |
| | 141 |
|
Total revenues | 12,107 |
| | 1,970 |
| | 5,663 |
| | (5 | ) | | 46 |
| | (5,502 | ) | | 14,279 |
|
Operating expenses: | | | | | | | | | | | | | |
Benefits | 10,552 |
| | 1,273 |
| | — |
| | (60 | ) | | 26 |
| | (121 | ) | | 11,670 |
|
Operating costs | 1,222 |
| | 463 |
| | 5,441 |
| | 2 |
| | 2 |
| | (5,381 | ) | | 1,749 |
|
Depreciation and amortization | |