UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5975
HUMANA INC.
(Exact name of registrant as specified in its charter)
Delaware 61-0647538
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 580-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90
days.
YES X NO
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Outstanding at
Class of Common Stock November 1, 1997
$.16 2/3 par value 163,841,313 shares
1 of 21
Humana Inc.
Form 10-Q
September 30, 1997
Page of
Form 10-Q
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
for the quarters and nine months ended
September 30, 1997 and 1996 3
Condensed Consolidated Balance Sheet at
September 30, 1997 and December 31, 1996 4
Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30, 1997
and 1996 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-19
Part II: Other Information
Items 1 to 6 20-21
Exhibits
Ratio of Earnings to Fixed Charges
Financial Data Schedule
2
Humana Inc.
Condensed Consolidated Statement of Operations
For the quarters and nine months ended September 30, 1997 and 1996
Unaudited
(Dollars in millions except per share results)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Nine months
1997 1996 1997 1996
Revenues:
Premiums $ 1,935 $ 1,756 $ 5,543 $ 4,894
Interest 29 25 82 75
Other income 4 3 11 8
Total revenues 1,968 1,784 5,636 4,977
Operating expenses:
Medical costs 1,596 1,460 4,567 4,149
Selling, general
and administrative 274 249 793 680
Depreciation and
amortization 26 25 75 74
Asset write-downs and
other unusual charges 81
Total operating
expenses 1,896 1,734 5,435 4,984
Income (loss) from operations 72 50 201 (7)
Interest expense 3 2 7 10
Income (loss) before
income taxes 69 48 194 (17)
Income tax provision (benefit)25 16 69 (7)
Net income (loss) $ 44 $ 32 $ 125 $ (10)
Earnings (loss) per
common share .27 $ .20 $ .76 $ (.06)
Shares used in earnings
(loss) per common
share computation (000) 163,705 162,579 163,222 162,471
</TABLE>
See accompanying notes.
3
Humana Inc.
Condensed Consolidated Balance Sheet
<TABLE>
Unaudited
(Dollars in millions)
September 30, December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 156 $ 322
Marketable securities 1,559 1,262
Premiums receivable, less
allowance for doubtful accounts
$51 - September 30, 1997 and
$38 - December 31, 1996 291 211
Deferred income taxes 68 94
Other 213 113
Total current assets 2,287 2,002
Long-term marketable securities 550 143
Property and equipment, net 421 371
Cost in excess of net assets acquired 988 488
Reinsurance and other recoverables
on unpaid losses 217
Other 271 149
Total assets $ 4,734 $ 3,153
Liabilities and Common Stockholders' Equity
Current liabilities:
Medical and other costs payable $ 1,402 $ 1,099
Trade accounts payable
and accrued expenses 433 369
Income taxes payable 13 32
Total current liabilities 1,848 1,500
Long-term medical and other costs payable 626
Long-term debt 616 225
Other long-term obligations 190 136
Total liabilities 3,280 1,861
Contingencies
Common stockholders' equity:
Common stock, $.16 2/3 par; authorized
300,000,000 shares; issued and out-
standing 163,806,127 shares -
September 30, 1997 and
162,681,123 shares -
December 31, 1996 27 27
Other 1,427 1,265
Total common stockholders' equity 1,454 1,292
Total liabilities and common
stockholders' equity $ 4,734 $ 3,153
See accompanying notes.
4
Humana Inc.
Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 1997 and 1996
Unaudited
(Dollars in millions)
1997 1996
Cash flows from operating
activities:
Net income (loss) $ 125 $ (10)
Adjustments to reconcile
net income (loss) to net cash
provided by operating activities:
Asset write-downs 70
Depreciation and amortization 75 74
Deferred income taxes 19 (33)
Changes in operating assets and
liabilities (157) 189
Other 3 (19)
Net cash provided by
operating activities 65 271
Cash flows from investing activities:
Purchases and dispositions of property
and equipment, net (48) (54)
Acquisition of health plan assets (456) (6)
Purchases, sales and maturities of
marketable securities, net (132) (55)
Other 5 (14)
Net cash used in investing activities (631) (129)
Cash flows from financing activities:
Repayment of credit revolver (250)
Change in commercial paper 390 200
Other 10 2
Net cash provided by
(used in) financing activities 400 (48)
Increase (decrease) in cash
and cash equivalents (166) 94
Cash and cash equivalents
at beginning of period 322 182
Cash and cash equivalents
at end of period $ 156 $ 276
Interest payments, net $ 2 $ 10
Income tax payments, net $ 5 $ 33
See accompanying notes.
</TABLE>
5
Humana Inc.
Notes To Condensed Consolidated Financial Statements
Unaudited
(A) Basis of Presentation
The accompanying condensed consolidated financial statements are presented
in accordance with the requirements of Form 10-Q and consequently do not
include all of the disclosures normally required by generally accepted
accounting principles or those normally made in an annual report on
Form 10-K. Accordingly, for further information, the reader of this
Form 10-Q may wish to refer to the Form 10-K of Humana Inc. (the "Company")
for the year ended December 31, 1996.
The preparation of the Company's condensed consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect (a) the reported
amounts of assets and liabilities, (b) disclosure of contingent assets and
liabilities at the date of the financial statements and (c) reported amounts
of revenues and expenditures during the reporting period. Actual results
could differ from those estimates.
The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion of
management, the information presented reflects all adjustments necessary
for a fair statement of interim results. All such adjustments, with the
exception of the special charges described below, are of a normal and
recurring nature.
(B) Contingencies
The Company's Medicare risk contracts with the federal government are renewed
for one-year terms each December 31 unless terminated 90 days prior.
The Balanced Budget Act of 1997 includes modifications of future
reimbursement rates under the Medicare program and encourages the
use of managed health care by Medicare beneficiaries. Management is unable
to predict the impact it may have on the Company's financial position,
results of operations, or cash flows. The Company also maintains a contract
with the United States Department of Defense under the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") which is in its second
year, and is renewable annually for up to three additional years. Finally,
the Company maintains annual contracts with various states and a two-year
contract with the Commonwealth of Puerto Rico to provide health care to
Medicaid eligible individuals. The loss of these contracts or significant
changes in these programs as a result of legislative action, including
reductions in payments or increases in benefits without corresponding
increases in payments, would have a material adverse effect on the revenues,
profitability and business prospects of the Company.
Resolution of various loss contingencies, including litigation pending
against the Company in the ordinary course of business, is not expected to
have a material adverse effect on the Company's financial position, results
of operations, or cash flows.
6
Humana Inc.
Notes To Condensed Consolidated Financial Statements, continued
(C) Special Charges
During the second quarter of 1996, the Company recognized special charges
of $200 million before tax ($130 million after tax or $.80 per share).
The special charges included provisions for expected future losses on
insurance contracts ($105 million) as well as estimated costs to be incurred
in restructuring the Washington, D.C., health plan (which was sold
January 31, 1997) and discontinuing operations or product lines in 16
market areas. The special charges also included the write-off of
miscellaneous assets, alitigation settlement, and other costs.
During the quarter ended September 30, 1997, the beneficial effect
of these charges was approximately $6 million before tax ($4 million after
tax or $.02 per share). Approximately $25 million (of the original $105
million) of the liability for expected future losses on insurance contracts
and approximately $3 million of other liabilities remain at
September 30, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or $.06
per share). This charge included severance and facility costs related to
planned workforce reductions, scheduled to be completed throughout 1997.
Approximately $6 million of this liability remains at September 30, 1997.
(D) Long-Term Debt
In August 1997, the Company entered into a five-year revolving credit
agreement ("Credit Agreement") which provides a line of credit of up to
$1.5 billion. The Credit Agreement replaced an existing $600 million
revolving line of credit. Principal amounts outstanding under the Credit
Agreement bear interest at rates ranging from LIBOR plus 12 basis points
to LIBOR plus 30 basis points depending on the ratio of debt to debt plus
net worth. The Credit Agreement, under which there were no outstanding
borrowings at September 30, 1997, contains customary covenants and events
of default.
The Company maintains a commercial paper program and issues debt securities
thereunder. At September 30, 1997, borrowings under the commercial paper
program totaled $616 million, with an average interest rate during the
quarter of 5.8 percent. The commercial paper program is backed by the
Credit Agreement. Borrowings under the commercial paper program have been
classified as long-term based on management's ability and intent to refinance
borrowings on a long-term basis.
(E) Acquisition and Dispositions
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for a total consideration of $411 million in cash, consisting
primarily of $7 per share for PCA's outstanding common stock and the
assumption of $121 million in debt. The purchase was funded with borrowings
under the Company's commercial paper program. PCA serves approximately 1.1
million medical members and provides comprehensive health care services
through its health maintenance organizations ("HMOs") in Florida, Texas and
Puerto Rico and administrative management services through its workers'
compensation third-party administration services. Prior to November 1996,
PCA also was a direct writer of workers'compensation insurance in Florida.
7
Humana Inc.
Notes To Consolidated Financial Statements, continued
Unaudited
Long-term medical costs payable in the accompanying condensed consolidated
balance sheet primarily includes the long-term portion of workers'
compensation liabilities related to this business. This transaction was
recorded using the purchase method of accounting. The information
contained herein includes the results of operations of PCA for the period
from September 9, 1997 through September 30, 1997, which resulted in no
significant impact on third quarter net income.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million cash. This transaction,
which was recorded using the purchase method of accounting, added
approximately 50,000 medical members to the Company's Chicago membership.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations to PrimeHealth of Alabama, Inc. The Alabama sale excluded the
Company's small group business and CHAMPUS operations. These transactions,
which did not have a material impact on the Company's financial position,
results of operations, or cash flows, reduced total medical membership by
approximately 141,000.
(F) Future Changes in Generally Accepted Accounting Principles
Currently, earnings per share is computed using guidelines included in
Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
("APB No. 15"). In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS No. 128"), which supersedes APB No. 15 and its
related interpretations. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and will be
effective for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. If applied on a pro forma basis, there
would be no difference between earnings per share computed using SFAS No. 128
or using APB No. 15, for the quarters and nine months ended September 30, 1997
and 1996.
(G) Other Events
On October 17, 1997, the Company acquired ChoiceCare Corporation
("ChoiceCare") for approximately$250 million in cash or $16.38 per share of
ChoiceCare's outstanding common stock. The purchase was funded with
borrowings under the Company's commercial paper program. ChoiceCare serves
more than 247,000 members, offering HMO, point-of-service and administrative
service products in the Greater Cincinnati, Ohio area. This transaction will
be recorded using the purchase method of accounting.
On October 31, 1997, the Company sold its California HMO ("HMO California")
which had approximately 6,000 members in Southern California.
On October 31, 1997, the Company also sold The Lexington Hospital in
Lexington, Ky. to Jewish Hospital Healthcare Services, Inc. These
transactions did not have a material impact on the Company's financial
position, results of operations, or cash flows.
8
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This discussion and analysis contains both historical and forward-looking
information. The forward-looking statements may be significantly impacted
by risks and uncertainties, and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There
can be no assurance that anticipated future results will be achieved because
actual results may differ materially from those projected in the forward-
looking statements. Readers are cautioned that a number of factors, which
are described herein and in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, could adversely affect the Company's ability to
obtain these results. These include the effects of either federal or state
health care reform or other legislation, renewal of the Company's Medicare
risk contracts with the federal government, renewal of the Company's CHAMPUS
contract with the federal government, renewal of the Company's Medicaid
contracts with various state governments and Puerto Rico, and the effects
of other general business conditions, including but not limited to,
the Company's abililty to integrate its acquisitions, government regulation,
competition, premium rate changes, retrospective premium adjustments
relating to federal government contracts, medical cost
trends, changes in Commercial and Medicare risk membership, capital
requirements, general economic conditions, and the retention of key
employees. In addition, past financial performance is not necessarily
a reliable indicator of future performance and investors should not use
historical performance to anticipate results or future period trends.
Introduction
The Company offers managed health care products that integrate medical
management with the delivery of health care services through a network of
providers. This network of providers may share financial risk or have
incentives to deliver quality medical services in a cost-effective manner.
These products are marketed primarily through health maintenance
organizations ("HMOs") and preferred provider organizations ("PPOs") that
require or encourage the use of contracting providers. HMOs and PPOs
control health care costs by various means, including pre-admission
approval for hospital inpatient services and pre-authorization of outpatient
surgical procedures. The Company also offers various specialty and
administrative service products including dental, group life, and the
health insurance component of workers'compensation.
The Company's HMO and PPO products are marketed primarily to employers and
other groups ("Commercial") as well as Medicare and Medicaid-eligible
individuals. The products marketed to Medicare-eligible individuals are
either HMO products ("Medicare risk") or indemnity insurance policies that
supplement Medicare benefits ("Medicare supplement"). The Medicare risk
product provides managed care services that include all Medicare benefits
and, in certain circumstances, additional managed care services. The Company
also maintains annual contracts with various states and a two-year contract
with the Commonwealth of Puerto Rico to provide health care to Medicaid-
eligible individuals. The Company also offers administrative services
("ASO") to employers who self-insure their employee health plans.
9
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
The Company is in the second year of its contract with the United States
Department of Defense under the Civilian Health and Medical Program of
the Uniformed Services ("CHAMPUS"). Under the CHAMPUS contract, which is
renewable annually for up to three additional years, the Company provides
managed care services to the beneficiaries of active military personnel and
retired military personnel and their beneficiaries located in the
southeastern United States.
In June 1997, the Company was awarded a contract by the Department of Defense
to administer a dental program for military reservists. This contract began
on October 1, 1997 and is renewable annually for up to five years.
Special Charges
During the second quarter of 1996, the Company recognized special charges of
$200 million before tax ($130 million after tax or $.80 per share). The
special charges included provisions for expected future losses on insurance
contracts ($105 million) as well as estimated costs to be incurred in
restructuring the Washington, D.C., health plan (which was sold
January 31, 1997) and discontinuing operations or product lines in 16 market
areas. The special charges also included the write-off of miscellaneous
assets, a litigation settlement, and other costs. During the quarter ended
September 30, 1997, the beneficial effect of these charges was approximately
$6 million before tax ($4 million after tax or $.02 per share). Approximately
$25 million (of the original $105 million) of the liability for expected
future losses on insurance contracts and approximately $3 million of other
liabilities remain at September 30, 1997.
During the fourth quarter of 1996, the Company recognized an additional
special charge of $15 million before tax ($10 million after tax or $.06 per
share). This charge included severance and facility costs related to planned
workforce reductions, scheduled to be completed throughout 1997.
Approximately $6 million of the liability remains at September 30, 1997.
The following discussions comparing the quarter ended September 30, 1997 to
September 30, 1996, and the nine months ended September 30, 1997, to the
corresponding nine-month period ended September 30, 1996, exclude the special
charges described above. The beneficial effect of these charges for the
quarters ended September 30, 1997 and 1996, was approximately $.02 and $.04
per share, respectively. The beneficial effect of these charges for the nine
months ended September 30, 1997 and 1996, was approximately $.08 per share.
The beneficial effect consists primarily of charges against liabilities for
losses on insurance contracts and amounts related to depreciation and
amortization on asset write-downs.
10
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Future Changes in Generally Accepted Accounting Principles
Currently, earnings per share is computed using guidelines included in
Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
("APB No. 15"). In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS No. 128"), which supersedes APB No. 15 and its
related interpretations. SFAS No. 128 specifies the computation, presentation,
and disclosure requirements for earnings per share and will be effective for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. If applied on a pro forma basis, there would
be no difference between earnings per share computed using SFAS No. 128 or
using APB No. 15, for the quarters and nine months ended September 30, 1997
and 1996.
Acquisition and Dispositions
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for $411 million in cash, consisting primarily of $7 per share for
PCA's outstanding common stock and the assumption of $121 million in debt.
The purchase was funded with borrowings under the Company's commercial paper
program. PCA serves approximately 1.1 million medical members and provides
comprehensive health services through its HMOs in Florida, Texas and Puerto
Rico and administrative management services through its workers' compensation
third-party administration services. Prior to November 1996, PCA also was a
direct writer of workers' compensation insurance in Florida. Long-term
medical and other costs payable in the accompanying condensed consolidated
balance sheet primarily includes the long-term portion of workers'
compensation liabilities related to this business. This transaction was
recorded using the purchase method of accounting. The information
contained herein includes the results of operations of PCA for the period
from September 9, 1997 through September 30, 1997, which resulted in no
significant impact on third quarter net income.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million cash. This transaction,
which was recorded using the purchase method of accounting, added
approximately 50,000 medical members to the Company's Chicago membership.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations to PrimeHealth of Alabama, Inc. The Alabama sale excluded the
Company's small group business and CHAMPUS operations. These transactions,
which did not have a material impact on the Company's financial position,
results of operations, or cash flows, reduced total medical membership by
approximately 141,000.
Results of Operations
Quarters Ended September 30, 1997 and 1996
The Company's premium revenues increased 10 percent to $1.9 billion for the
quarter ended September 30, 1997, compared to $1.8 billion for the same
period in 1996. Premium revenues increased primarily due to the acquisition
11
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
of PCA and premium rate increases in the Company's Commercial and Medicare
risk products. Commercial and Medicare risk premium rates increased 5.2
percent and 4.2 percent, respectively, for the quarter ended September 30,
1997. For 1997, excluding the impact of any acquisitions or dispositions,
Commercial and Medicare risk premium rates are expected to increase
approximately 4 to 5 percent.
Same-plan Commercial membership increased 11,700 members during the quarter
ended September 30, 1997, compared to a decrease of 5,800 members for the
same period in 1996. Given the competitive large group Commercial pricing
environment, the year to date impact of the Company's pricing discipline and
the closing of certain markets, management expects same-plan Commercial
membership to be down approximately 3 percent for 1997. Same-plan Medicare
risk membership increased 18,800 members during the quarter compared to an
increase of 13,000 members for the same period in 1996. The higher Medicare
risk growth rate during the first nine months of 1997 was primarily the
result of sales in new Medicare markets. Same-plan Medicare risk membership
is expected to increase approximately 20 percent for 1997. Same-plan
Medicaid membership declined 12,300 members during the quarter ended
September 30, 1997, compared to an increase of 300 members for the same
period in 1996.
In addition to the same-plan membership increases discussed above, the PCA
acquisition added 454,000 Commercial members, 54,000 Medicare risk members
and 599,000 Medicaid members. Same-plan membership results also exclude the
sale of the Washington, D.C. health plan and the Company's Alabama operations.
At September 30, 1997, the Company has over 5.9 million medical product
members.
The medical loss ratio for the quarter ended September 30, 1997 was 82.5
percent compared to 83.1 percent for the same period in 1996. The improvement
was primarily the result of premium rate increases, favorable physician cost
trends (compared to premium rate increases) in the Company's Commercial
products and an overall improvement in hospital utilization. These medical
cost improvements were partially offset by higher than anticipated medical
costs in the Company's new Medicare risk markets (where a large portion of
Medicare growth is occurring) and increased pharmacy costs system wide.
The administrative cost ratio was 15.5 percent and 15.6 percent for the
quarters ended September 30, 1997 and 1996, respectively. Management
anticipates continuing improvement in the administrative cost ratio during
the fourth quarter of 1997.
Interest income totaled $29 million and $25 million for the quarters ended
September 30, 1997 and 1996, respectively. The increase was primarily
attributable to increased levels of cash, cash equivalents and marketable
securities. The tax equivalent yield on invested assets approximated
8 percent for each of the quarters ended September 30, 1997 and 1996.
The Company's income before income taxes totaled $69 million for the quarter
ended September 30, 1997, compared to $48 million for the quarter ended
September 30, 1996. Net income was $44 million or $.27 per share and $32
million or $.20 per share for each of the quarters ended September 30, 1997
and 1996, respectively.
12
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Nine months Ended September 30, 1997 and 1996
The Company's premium revenues increased 13 percent to $5.5 billion for the
nine months ended September 30, 1997, compared to $4.9 billion for the same
period in 1996. Premium revenues increased primarily due to premium revenues
from the Company's CHAMPUS contract which began on July 1, 1996 and the
acquisition of PCA. Premium revenues also increased as a result of premium
rate increases in the Company's Commercial and Medicare risk products. For
the nine months ended September 30, 1997, Commercial and Medicare risk
premium rates increased 3.9 percent and 4.4 percent, respectively.
Same-plan Commercial membership decreased 98,700 members during the nine
months ended September 30, 1997, compared to a decrease of 18,700 for the
same period 1996. This same-plan membership decline, which excludes the sale
of the Company's Alabama operations (18,600 members), sale of the
Washington, D.C., health plan (92,500 members), purchase of Health Direct
(22,100 members) and the purchase of PCA (454,000 members), was due to the
Company's more disciplined product pricing begun in the fall of 1996 and
withdrawal from certain unprofitable markets.
Same-plan Medicare risk membership increased 49,300 members during the nine
months ended September 30, 1997, compared to a same-plan increase of 32,400
members for the same period in 1996. The higher Medicare risk growth rate
during the first nine months of 1997 was primarily the result of sales in new
Medicare markets. The same-plan membership increase excludes the Company's
Washington, D.C., health plan (9,700 members), purchase of Health Direct
(4,200 members) and the purchase of PCA (54,000 members).
Same-plan Medicaid membership declined 16,500 members during the nine months
ended September 30, 1997, compared to an increase of 3,500 for the same period
1996. This same-plan membership decline excludes the purchase of PCA
(599,000 members).
The medical loss ratio was 82.4 and 82.6 percent for the nine months ended
September 30, 1997 and 1996, respectively. Increases in premium rates,
favorable physician cost trends (compared to premium rate increases) in the
Company's Commercial products and an overall improvement in hospital
utilization were partially offset by higher than anticipated medical costs
in new Medicare risk markets (where a large portion of Medicare growth is
occurring) and increased pharmacy costs system wide.
The administrative cost ratio was 15.7 percent and 15.2 percent for the nine
months ended September 30, 1997 and 1996, respectively. The increase was due
to spending relative to core processes necessary for long-term improvements
in the areas of medical management, customer service, and information systems.
13
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Interest income totaled $82 million and $75 million for the nine months ended
September 30, 1997 and 1996, respectively. The increase was primarily
attributable to increased levels of cash, cash equivalents and marketable
securities. The tax equivalent yield on invested assets approximated
8 percent for each of the nine months ended September 30, 1997 and 1996.
The Company's income before income taxes totaled $194 million for the nine
months ended September 30, 1997, compared to $183 million for the nine months
ended September 30, 1996. Net income was $125 million or $.76 per share and
$120 million or $.74 per share for each of the nine months ended
September 30, 1997 and 1996, respectively.
Liquidity
Cash provided by the Company's operations totaled $65 million and $271
million for the nine months ended September 30, 1997 and 1996, respectively.
The decrease in net cash provided by operations was due to changes in
operating assets and liabilities relating to the timing of receipts and
disbursements for premiums receivable, medical costs and other liabilities.
The Company's subsidiaries operate in states which require certain levels of
equity and regulate the payment of dividends to the parent company. As a
result, the Company's ability to use operating subsidiaries' cash flows is
restricted to the extent of the subsidiaries' abilities to obtain regulatory
approval to pay dividends.
In August 1997, the Company entered into a five-year revolving credit
agreement ("Credit Agreement") which provides a line of credit of up to
$1.5 billion. The Credit Agreement replaced an existing $600 million
revolving line of credit. Principal amounts outstanding under the Credit
Agreement bear interest at rates ranging from LIBOR plus 12 basis points to
LIBOR plus 30 basis points depending on the ratio of debt to debt plus net
worth. The Credit Agreement, under which there were no outstanding
borrowings at September 30, 1997, contains customary covenants and events
of default.
The Company maintains a commercial paper program and issues debt securities
thereunder. At September 30, 1997, borrowings under the commercial paper
program totaled $616 million, with an average interest rate during the
quarter of 5.8 percent. The commercial paper program is backed by the
Credit Agreement. Borrowings under the commercial paper program have been
classified as long-term based on management's ability and intent to refinance
borrowings on a long-term basis.
Management believes that existing working capital, future operating cash
flows, and funds available under the existing revolving Credit Agreement and
commercial paper program are sufficient to meet future liquidity needs.
Management also believes the aforementioned sources of funds are adequate to
allow the Company to pursue strategic acquisition and expansion opportunities,
as well as fund capital requirements.
14
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
Capital Resources
The Company's ongoing capital expenditures relate primarily to medical care
facilities used by either employed or affiliated physicians, as well as
administrative facilities and related information systems necessary for
activities such as claims processing, billing and collections, medical
utilization review and customer service.
Excluding acquisitions, planned capital spending in 1997 will be approximately
$70 to $80 million for the expansion and improvement of medical care
facilities, administrative facilities, and related information systems.
15
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
<TABLE>
1997 1996
Quarterly Membership
<S> <C> <C>
Commercial members at:
March 31 2,577,800 2,811,300
June 30 2,577,600 2,809,700
September 30 3,056,400 2,793,900
December 31 2,759,600
Medicare risk members at:
March 31 374,200 322,300
June 30 389,600 332,900
September 30 462,400 347,400
December 31 364,500
CHAMPUS members at:
March 31 1,103,100
June 30 1,107,300
September 30 1,107,300 1,075,300
December 31 1,103,000
Medicaid members at:
March 31 53,200 51,600
June 30 51,000 52,200
September 30 638,400 52,500
December 31 55,200
Medicare supplement members at:
March 31 93,500 109,600
June 30 74,600 106,000
September 30 71,200 101,800
December 31 97,700
Administrative services members at:
March 31 566,300 444,700
June 30 555,000 447,900
September 30 584,500 458,300
December 31 471,000
Total medical members at:
March 31 4,768,100 3,739,500
June 30 4,755,100 3,748,700
September 30 5,920,200 4,829,200
December 31 4,851,000
16
Humana Inc.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, continued
1997 1996
Quarterly Membership
Specialty members at:
March 31 2,172,900 1,811,300
June 30 2,127,200 1,863,800
September 30 2,358,200 1,895,900
December 31 1,884,200
17
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Income (Unaudited)
(Dollars in millions except per share results)
<TABLE> 1997
First Second Third Total
<S> <C> <C> <C> <C>
Revenues:
Premiums:
Commercial $ 1,028 $ 1,013 $ 1,074 $ 3,115
Medicare risk 550 571 610 1,731
CHAMPUS 183 184 185 552
Medicaid 19 18 47 84
Medicare supplement 23 19 19 61
Total premiums 1,803 1,805 1,935 5,543
Interest 26 27 29 82
Other income 3 4 4 11
Total revenues 1,832 1,836 1,968 5,636
Operating expenses:
Medical costs 1,484 1,487 1,596 4,567
Selling, general and
administrative 261 258 274 793
Depreciation and amortization 24 25 26 75
Total operating expenses 1,769 1,770 1,896 5,435
Income from operations 63 66 72 201
Interest expense 3 1 3 7
Income before income taxes 60 65 69 194
Provision for income taxes 21 23 25 69
Net income $ 39 $ 42 $ 44 $ 125
Earnings per common share $ .24 $ .25 $ .27 $ .76
Medical loss ratio 82.3% 82.3% 82.5% 82.4%
Administrative cost ratio 15.8% 15.7% 15.5% 15.7%
18
</TABLE>
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Income (Unaudited)
(Dollars in millions except per share results)
<TABLE> 1996
First Second(a) Third Fourth (b) Total
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums:
Commercial $ 1,065 $ 1,070 $ 1,061 $ 1,059 $ 4,255
Medicare risk 454 466 484 503 1,907
CHAMPUS 170 181 351
Medicaid 17 18 18 18 71
Medicare supplement 24 24 23 22 93
Total premiums 1,560 1,578 1,756 1,783 6,677
Interest 25 25 25 26 101
Other income 3 2 3 2 10
Total revenues 1,588 1,605 1,784 1,811 6,788
Operating expenses:
Medical costs 1,274 1,415 1,460 1,476 5,625
Selling, general
and administrative 203 228 249 260 940
Depreciation and
amortization 25 24 25 24 98
Asset write-downs and
unusual charges 81 15 96
Total operating
expenses 1,502 1,748 1,734 1,775 6,759
Income (loss) from
operations 86 (143) 50 36 29
Interest expense 5 3 2 1 11
Income (loss) before
income taxes 81 (146) 48 35 18
Income tax provision
(benefit) 28 (51) 16 13 6
Net income (loss) $ 53 $ (95) $ 32 $ 22 $ 12
Earnings (loss) per
common share $ .32 $ (.58) $ .20 $ .13 $ .07
Medical loss ratio 81.7% 89.7% 83.1% 82.8% 84.3%
Administrative cost ratio 14.7% 16.0% 15.6% 15.8% 15.5%
(a) Includes special charges of $200 million before tax ($130 million after
tax or $.80 per share) related to the restructuring of the Washington,
D.C., health plan, provision for expected future losses on insurance
contracts, discontinuing operations or product lines in 16 market areas,
and a litigation settlement.
(b) Includes a special charge of $15 million before tax ($10 million after
tax or $.06 per share) related to planned workforce reductions.
19
</TABLE>
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
A class action lawsuit styled Mary Forsyth, et al v. Humana Inc., et al,
Case #CV-5-89-249-PMP (L.R.L.), (now restyled Mariettta Cade, et al v.
Humana Health Insurance of Nevada, Inc., et al) was filed on March 29,
1989, in the United States District Court for the District of Nevada
(the "Forsyth" case. On August 18, 1997, the Company filed a Petition
for Writ of Certiorari in the United States Supreme Court ("Petition")
requesting the Supreme Court to Reverse part of a ruling by the Court
of Appeals for the Ninth Circuit which had reinstated certain claims
that had been dismissed by the U.S. District Court in Nevada in the
case involving claims arising out of the method of calculation of
coinsurance for Nevada insureds prior to 1988. The Petition requested
the Supreme Court to reverse the Ninth Circuit's decision to reinstate
a claim under the Racketeer Influenced and Corrupt Organizations Act
("RICO") on behalf of a class of insureds who paid coinsurance at
Humana hospitals (the "Co-Payer Class"). In its decision on May 23,
1997, in response to the Company's Petition for Reconsideration on
Rehearing En Banc following its original November 4, 1996 decision,
the Court of Appeals ruled that the damages in the Co-Payer Class's
RICO claim were correctly limited to the amount of overpayment of
the co-insurance, which totalled approximately $1.6 million plus
interest. The Ninth Circuit also reinstated an antitrust claim
that had been dismissed by the District Court. The Company
requested summary judgment in the District Court on that claim
on September 30, 1997. The trial of any remaining claims is
scheduled for February 23, 1998.
Damages for claims for personal injuries and medical benefit denials
are usual in the Company's business. Personal injury claims are
covered by insurance from the Company's wholly-owned captive
insurance subsidiary and excess carriers, except to the extent that
claimants seek punitive damages, which may not be covered by
insurance if awarded. Punitive damages generally are not paid
where claims are settled and generally are awarded only where a
court determines there has been a willful act or omission to act.
Management does not believe that any pending legal actions will have
a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Items 2 - 5: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 12 - Statement re: Computation of Ratio of Earnings to
Fixed Charges
(b) On September 23, 1997, the Company filed a report on Form 8-K
regarding the pro-forma financial statements in connection
with the acquisition of Physician Corporation of America.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUMANA INC.
Date: November 14, 1997 /s/ James E. Murray
James E. Murray
Chief Financial Officer
(Principal Accounting Officer)
Date: November 14, 1997 /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
21
<TABLE>
Humana Inc.
Exhibit 12
Ratio of Earnings to Fixed Charges
For the quarters and nine months ended September 30, 1997 and 1996
Unaudited
(Dollars in millions)
Quarter Ended Nine months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Earnings:
Income (loss) before
income taxes $ 69 $ 48 $ 194 $ (17)
Fixed charges 5 4 14 15
$ 74 $ 52 $ 208 $ (2)
Fixed charges:
Interest charged to expense $ 3 $ 2 $ 7 $ 10
One-third of rent expense 2 2 6 5
$ 5 $ 4 $ 13 $ 15
Ratio of earnings to
fixed charges 14.1 11.9 15.2 (a)
For the purpose of determining earnings in the calculation of the ratio
of earnings to fixed charges (the "Ratio"), earnings have been increased
by the provision for income taxes and fixed charges. Fixed charges consist
of interest expense on borrowings and one-third (the proportion deemed
representative of the interest portion) of rent expense.
(a) Exclusive of the special charges of $200 million before income taxes,
the Ratio for the nine months ended September 30, 1996 would have
been 12.8.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM HUMANA INC.'S FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 156
<SECURITIES> 1,559
<RECEIVABLES> 342
<ALLOWANCES> 51
<INVENTORY> 7
<CURRENT-ASSETS> 2,287
<PP&E> 777
<DEPRECIATION> 356
<TOTAL-ASSETS> 4,734
<CURRENT-LIABILITIES> 1,848
<BONDS> 616
<COMMON> 27
0
0
<OTHER-SE> 1,427
<TOTAL-LIABILITY-AND-EQUITY> 4,734
<SALES> 5,543
<TOTAL-REVENUES> 5,636
<CGS> 4,567
<TOTAL-COSTS> 5,435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 194
<INCOME-TAX> 69
<INCOME-CONTINUING> 125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
