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, 1999
OR
[ ] 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
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 Number)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrants' 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, 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 October 31, 1999
$0.16 2/3 par value 167,522,960 shares
1 of 35
Humana Inc.
September 30, 1999
Form 10-Q
<TABLE>
INDEX
Page
Part I: Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the quarters and
nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Part II: Other Information
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
Exhibit 10 - Severance Policy
Exhibit 12 - Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
</TABLE>
2
Humana Inc.
Condensed Consolidated Statements of Operations
For the quarters and nine months ended September 30, 1999 and 1998
Unaudited
(Dollars in millions, except per share results)
<TABLE>
Quarters Ended Nine Months Ended
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Revenues:
Premiums $ 2,527 $ 2,421 $ 7,416 $ 7,170
Interest and other income 30 43 123 142
Total revenues 2,557 2,464 7,539 7,312
Operating expenses:
Medical 2,148 2,081 6,378 6,031
Selling, general and
administrative 338 351 992 1,001
Depreciation and amortization 30 32 91 97
Asset write-downs and other charges 34 34
Total operating expenses 2,516 2,498 7,461 7,163
Income (loss) from operations 41 (34) 78 149
Interest expense 7 13 25 35
Income (loss) before income taxes 34 (47) 53 114
Provision (benefit) for income taxes 12 (17) 19 42
Net income (loss) $ 22 $ (30) $ 34 $ 72
Basic earnings (loss) per
common share $ 0.13 $ (0.18) $ 0.20 $ 0.43
Earnings (loss) per common share
- assuming dilution $ 0.13 $ (0.18) $ 0.20 $ 0.43
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
Humana Inc.
Condensed Consolidated Balance Sheets
Unaudited at September 30, 1999
(Dollars in millions, except share amounts)
<TABLE>
<S> <C> <C>
September 30, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 482 $ 913
Marketable securities 1,530 1,594
Premiums receivable, less allowance for
doubtful accounts of $62 at September
30, 1999 and December 31, 1998 315 276
Other 354 336
Total current assets 2,681 3,119
Long-term marketable securities 277 305
Property and equipment, net 440 433
Cost in excess of net assets acquired 1,180 1,188
Other 373 451
Total assets $ 4,951 $ 5,496
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical and other expenses payable $ 1,395 $ 1,470
Trade accounts payable and accrued expenses 437 395
Book overdraft 216 234
Unearned premium revenues 72 294
Short-term debt 250
Total current liabilities 2,120 2,643
Long-term medical and other expenses payable 351 438
Long-term debt 667 573
Professional liability and other obligations 122 154
Total liabilities 3,260 3,808
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; authorized 10,000,000
shares; none issued
Common stock, $0.16 2/3 par; authorized
300,000,000 shares; issued and outstanding
167,522,960 shares at September 30, 1999
and 167,515,362 shares at December 31, 1998 28 28
Capital in excess of par value 897 894
Retained earnings 787 753
Accumulated other comprehensive (loss) income (21) 13
Total stockholders' equity 1,691 1,688
Total liabilities and stockholders' equity $ 4,951 $ 5,496
See accompanying notes to condensed consolidated financial statements.
4
Humana Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
Unaudited
(Dollars in millions)
1999 1998
Net cash used in operating activities $ (232) $ (251)
Cash flows from investing activities:
Acquisition, net of cash acquired (14)
Purchases of marketable securities (653) (769)
Maturities and sales of marketable securities 694 927
Purchases of property and equipment (65) (84)
Dispositions of property and equipment 27
Other (10) (21)
Net cash (used in) provided by investing activities (21) 53
Cash flows from financing activities:
Repayment of line of credit (93) (300)
Net commercial paper (repayments) borrowings (63) 317
Proceeds from the exercise of stock options 34
Change in book overdraft (18) 64
Other (4) (2)
Net cash (used in) provided by financing activities (178) 113
Decrease in cash and cash equivalents (431) (85)
Cash and cash equivalents at beginning of period 913 779
Cash and cash equivalents at end of period $ 482 $ 694
Supplemental cash flow information:
Interest payments $ 25 $ 34
Income tax (refunds) payments, net $ (57) $ 69
Details of business acquired in purchase transaction:
Fair value of assets acquired $ 20
Cash paid for acquired business (14)
Liabilities assumed $ 6
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 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 generally accepted accounting principles or those
normally made in an Annual Report on Form 10-K. For further information,
the reader of this Form 10-Q may wish to refer to the Form 10-K of Humana
Inc. (the "Company" or "Humana") for the year ended December 31, 1998
filed with the Securities and Exchange Commission on March 31, 1999.
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 reported
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 are of a normal and recurring nature.
(B) Medical and Selling, General and Administrative Expenses
A discussion of various items included in medical expenses in the condensed
consolidated statements of operations follows:
Premium Deficiencies
As a result of management's assessment of the profitability of its
contracts for providing health care services to its members, the Company
recorded provisions for probable future losses (premium deficiencies) of
$50 million in the first quarter of 1999 ("the 1999 premium deficiency")
and $46 million in the third quarter of 1998 ("the 1998 premium deficiency").
Generally, a premium deficiency is required when projected or estimated
health care costs exceed future premiums. Ineffective provider risk-sharing
contracts and the impact of the March 31, 1999 Columbia/HCA Healthcare
Corporation ("Columbia/HCA") hospital agreement on current and projected
future medical costs contributed to the 1999 premium deficiency. The loss
of synergies expected to be realized from the merger with UnitedHealth
Group Company ("United") contributed to the 1998 premium deficiency.
The beneficial effect of the premium deficiencies recorded during the
quarter and nine months ended September 30, 1999 approximated $15 million
and $50 million, respectively. The beneficial effect of the premium
deficiencies recorded during the quarter and nine months ended
September 30, 1998 approximated $6 million.
6
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
Reserve Strengthening
During the first quarter of 1999, the Company recorded a medical claim
reserve strengthening of $35 million. The reserve strengthening was necessary
due to prior period adverse claims developments identified by the Company's
analysis of February and March 1999 claims payments.
Provider Costs
The Company recorded medical expenses of $5 million in the first quarter
of 1999 and $27 million in the third quarter of 1998 related to its
contractual relationships with providers. The $5 million settled contractual
issues associated with the March 31, 1999 Columbia/HCA agreement. The $27
million related to receivables from financially troubled physician groups,
including certain bankrupt providers, which were written-off.
The following item was included in selling, general and administrative
expenses in the condensed consolidated statements of operations.
Other Costs
During the third quarter of 1998, the Company recorded a one-time
incentive of $16 million paid to non-officer employees and a $9 million
settlement related to a third party pharmacy processing contract.
(C) Asset Write-Downs and Other Charges
On August 10, 1998, the Company and United announced their mutual
agreement to terminate the previously announced Agreement and Plan of Merger,
dated May 27,1998. The planned merger, among other things, was expected to
improve the operating results of the Company's products and markets.
Following the merger's termination, the Company conducted a strategic
evaluation, which included assessing the Company's competitive market
positions and profit potential. As a result, the Company recognized
charges of $34 million during the third quarter of 1998. The charges
included costs associated with exiting five markets ($15 million),
losses on disposals of non-strategic assets ($12 million), and
merger dissolution costs ($7 million).
The costs associated with the market exits of $15 million included
severance, lease termination costs as well as write-offs of equipment and
uncollectible provider receivables. The planned market exits were Sarasota
and Treasure Coast, Florida, Springfield and Jefferson City, Missouri and
Puerto Rico. Severance costs were estimated based upon the Company's
pre-existing employee benefit plans. The plan to exit these markets was
expected to reduce the Company's workforce, primarily in Puerto Rico,
by approximately 470 employees. The market exits were expected to be
completed by June 30, 1999. In the second quarter of 1999, the Company
reversed $2 million of severance and lease discontinuance liabilities
after the Health Insurance Administration in Puerto Rico extended
the Company's Medicaid contract, with advantageous terms, for two years.
In accordance with the Company's policy on impairment of long-lived assets,
equipment in the exited markets was written down to its fair value after an
evaluation of undiscounted future cash flow in the markets. The fair value
of equipment was based upon discounted cash flows for the same markets.
Following the write-down, the equipment was fully depreciated.
All cash charges were paid, and all market exit activities were completed,
before the end of the second quarter of 1999.
7
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
(D) Acquisition
Effective June 1, 1999, the Company reached an agreement with FPA Medical
Management, Inc. ("FPA"), FPA's lenders and a federal bankruptcy court
under which the Company acquired the operations of 50 medical centers
from FPA for approximately $20 million. These medical centers serve
approximately 121,000 Humana members. This acquisition was recorded using
the purchase method of accounting. Cost in excess of net tangible and
identifiable intangible assets recorded in connection with the acquisition
was $17 million and is being amortized over six years.
The Company has subsequently reached agreements with fourteen provider
groups to assume operating responsibility for 38 of the 50 acquired medical
centers under long-term provider agreements with the Company. These agreements
cover approximately 67,400 members of the Company. The Company intends to
enter into similar agreements with other providers regarding the remaining
members in the near future.
(E) Contingencies
The Company's Medicare HMO contracts with the federal government are
renewed for a one-year term each December 31, unless terminated 90 days prior
thereto. Legislative proposals are being considered which may revise the
Medicare program's current support of the use of managed health care for
Medicare beneficiaries and future reimbursement rates thereunder. Management
is unable to predict the outcome of these proposals or the impact they may
have on the Company's financial position, results of operations or cash
flows. The Company's Medicaid contracts are annual contracts with various
states except for the two-year contract with the Health Insurance
Administration in Puerto Rico. Additionally, the Company's TRICARE contract
is a one-year contract renewable on July 1, 2000, for one additional year.
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. In addition, the Company continually contracts and seeks
to renew contracts with providers at rates designed to ensure adequate
profitability. To the extent the Company is unable to obtain such rates,
its financial position, results of operations and cash flows could be
adversely impacted.
The Company reached an agreement in principle, during the first quarter of
1999, with the United States Department of Justice and the Department of
Health and Human Services on a settlement relating to Medicare premium
overpayments. The settlement, totaling $15 million, arose out of the
erroneous designation of certain Medicare enrollees as eligible for Medicaid,
resulting in higher payments to the Company by the federal government related,
in large part, to the years 1991 and 1992. The settlement is expected to be
paid sometime during 2000. The Company had previously established adequate
liabilities for the resolution of these issues and, therefore, the
settlement did not have a material impact on the Company's financial position
or its results of operations.
During the ordinary course of its business, the Company is or may become
subject to pending or threatened litigation or other legal actions. Such
actions may be as a result of disputes between the Company and its customers,
providers or vendors or as a result of audits or investigations by
governmental agencies. Recently, several lawsuits have been brought against
companies in the managed care industry (including one against the Company
- - see Legal Proceedings) which
8
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
purport to represent classes of insureds injured under various theories of
liability. Management of the Company does not believe that any of these
actions will have a material adverse effect on the Company's financial
position or results of operations.
(F) Earnings Per Common Share
Basic earnings per common share is computed on the basis of the weighted
average number of common shares outstanding. Earnings per common share -
assuming dilution is computed on the basis of the weighted average number
of common shares outstanding plus the dilutive effect of outstanding stock
options using the "treasury stock" method.
There were no adjustments required to be made to net income for purposes of
computing basic earnings per common share and earnings per common share -
assuming dilution. Options whose exercise price is greater than the average
market price of common shares are antidilutive and, therefore, have been
excluded from the computation of earnings per common share - assuming
dilution. Reconciliations of the average number of common shares outstanding
used in the calculation of basic earnings per common share and earnings
per common share - assuming dilution for the quarters and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
Quarters Ended Nine Months Ended
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Shares used to compute
basic earnings per
common share 167,570,888 167,023,422 167,568,726 166,160,332
Dilutive effect of common
stock options 458,959 757,674 1,992,625
Shares used to compute
earnings per common share
- assuming dilution 168,029,847 167,023,422 168,326,400 168,152,957
Number of antidilutive common
stock options 7,782,619 10,112,842 8,796,353 1,522,276
</TABLE>
9
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
(G) Comprehensive Income (Loss)
Detail supporting the computation of comprehensive income (loss) for the
quarters and nine months ended September 30, 1999 and 1998 follows
(in millions):
<TABLE>
Quarters Ended Nine Months Ended
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Net income (loss) $ 22 $ (30) $ 34 $ 72
Net unrealized investment
(losses) gains, net of tax (8) 8 (34) 3
Comprehensive income (loss),
net of tax $ 14 $ (22) $ $ 75
</TABLE>
(H) Long-Term Debt
The Company maintains a revolving credit agreement (the "Credit Agreement")
which provides liquidity under a line of credit of up to $1.5 billion. The
Company also maintains a commercial paper program and issues debt
securities thereunder. Commercial paper borrowings outstanding at September
30, 1999 were $667 million and are backed by the Credit Agreement. The Credit
Agreement contains usual and customary covenants including, but not limited
to,financial tests for interest coverage and leverage ratios. As of September
30, 1999, the Company was in compliance with these covenants.
The Company is currently negotiating an amendment to the Credit Agreement,
which would reduce the line of credit to $1 billion and modify certain
financial covenants for enhanced flexibility with regards to possible future
asset purchases and sales and other adjustments. The average interest rate on
commercial paper borrowings was 5.6 percent and 5.4 percent for the quarter
and nine months ended September 30, 1999, respectively. Borrowings under
both the Credit Agreement and commercial paper program have been classified
as long-term based on management's ability and intent to refinance borrowings
on a long-term basis.
(I) Segment Information
In the third quarter of 1999, the Company realigned its organizational and
managerial structure to achieve greater accountability and focus for
various of the Company's lines of business. As a result of this realignment,
the Company organized into two business units: the Health Plan segment and
the Small Group segment. The Health Plan segment includes the Company's large
group commercial (100 employees and over), Medicare HMO, Medicaid,
administrative services, workers' compensation and military or TRICARE
business. The Small Group segment includes small group commercial (under
100 employees) and its specialty benefit lines, including dental, life and
short-term disability. Results of each segment are measured based upon
income (loss) before income taxes. The Company allocates administrative
costs, interest income and interest expense, but no assets, to the segments.
Members served by the two segments generally utilize the same medical
provider networks, enabling the Company to obtain more favorable contract
terms with providers. As a result, the profitability of each segment is
somewhat interdependent. In addition, premium revenue pricing to large
group employers has historically been more competitive than that to small
group employers. Costs to distribute products to small group
employers are higher compared to large group employers resulting in Small
Group's higher administrative expense ratio.
10
Humana Inc.
Notes to Condensed Consolidated Financial Statements, continued
Unaudited
The following table presents financial information for the Company's two
segments for the quarters and nine months ended September 30, 1999 and 1998
(in millions):
<TABLE>
Quarters Ended Nine Months Ended
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Premium revenues:
Health Plan $ 1,735 $ 1,694 $ 5,105 $ 5,043
Small Group 792 727 2,311 2,127
Total premium revenues $ 2,527 $ 2,421 $ 7,416 $ 7,170
Underwriting margin:
Health Plan $ 234 $ 205 $ 625 $ 712
Small Group 145 135 413 427
Total underwriting margin $ 379 $ 340 $ 1,038 $ 1,139
Income (loss) before income taxes:
Health Plan $ 41 $ (19) $ 72 $ 118
Small Group (7) (28) (19) (4)
Total income (loss) before
income taxes $ 34 $ (47) $ 53 $ 114
</TABLE>
(J) Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). In general, SFAS
No. 133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet at their fair value, and sets forth the
manner in which gains or losses thereon are to be recorded. The treatment of
such gains or losses is dependent upon the type of exposure, if any, for
which the derivative is designated as a hedge. As amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," this standard is effective for the
Company's financial statements beginning January 1, 2001, with early
adoption permitted. Management of the Company anticipates that the adoption
of SFAS No. 133 will not have a material impact on the Company's results of
operations or its financial position.
(K) Reclassifications
Certain reclassifications have been made to the prior year's condensed
consolidated financial statements to conform with the current year
presentation.
11
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, 1998, could adversely affect the Company's
ability to obtain these results. These include the success of the Company's
improvement initiatives, the Company's ability to renegotiate its Credit
Agreement, the effects of either federal or state health care reform or
other legislation, including the Norwood-Dingell Bill, any expanded right
to sue managed care companies, changes in the Medicare reimbursement system,
medical and pharmacy cost trends, the ability of health care providers
(including physician practice management companies) to comply with current
contract terms, class action litigation directed against the managed care
industry, renewal of the Company's Medicare contracts with the federal
government, renewal of the Company's contract with the federal government
to administer the TRICARE program and renewal of the Company's Medicaid
contracts with various state governments and the Health Insurance
Administration in Puerto Rico. Such factors also include the
effects of other general business conditions, including but not limited to,
compliance with debt covenants, changes in the Company's debt rating and its
ability to borrow under its commercial paper program, the Company's ability
to integrate its acquisitions and appropriately address the "Year 2000"
computer system issue, government regulation, competition, premium rate and
yield changes, retrospective premium adjustments relating to federal
government contracts, changes in commercial and Medicare HMO membership,
operating subsidiary capital requirements, the effect of provider contract
rate negotiations, 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 is a health services company that facilitates the delivery of
health care services through networks of providers to its approximately 6.0
million medical members. The Company's products are marketed primarily through
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs") that encourage or require the use of contracted providers. HMOs and
PPOs control health care costs by various means, including pre-admission
approval for hospital inpatient services, pre-authorization of outpatient
surgical procedures and risk-sharing arrangements with providers. These
providers may share medical cost risk or have other incentives to deliver
quality medical services in a cost-effective manner. The Company also offers
various specialty products to employers, including dental, group life,
workers' compensation, and administrative services ("ASO") to those who
self-insure their employee health plans. In total, the Company's products
are licensed in 48 states, the District of Columbia and Puerto Rico, with
approximately 21 percent of its membership in the state of Florida.
12
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
In the third quarter of 1999, the Company realigned its organizational and
managerial structure to achieve greater accountability and focus for
various of the Company's lines of business. As a result of this realignment,
the Company organized into two business units: the Health Plan segment and
the Small Group segment. The Health Plan segment includes the Company's large
group commercial (100 employees and over), Medicare, Medicaid, administrative
services, workers' compensation and military or TRICARE business. The Small
Group segment includes small group commercial (under 100 employees) and its
specialty benefit lines, including dental, life and short-term disability.
Results of each segment are measured based upon income (loss) before income
taxes. The Company allocates administrative costs, interest income and
interest expense, but no assets, to the segments. Members served by the two
segments generally utilize the same medical provider networks, enabling the
Company to obtain more favorable contract terms with providers. As a result,
the profitability of each segment is somewhat interdependent. In addition,
premium revenue pricing to large group employers has historically been more
competitive than that to small group employers, resulting in less favorable
underwriting margins for large groups. Costs to distribute products to small
group employers are higher compared to large group employers resulting in
Small Group's higher administrative expense ratio.
Medical and Selling, General and Administrative Expenses
A discussion of various items included in medical expenses in the condensed
consolidated statements of operations follows:
Premium Deficiencies
As a result of management's assessment of the profitability of its contracts
for providing health care services to its members, the Company recorded
provisions for probable future losses (premium deficiencies) of $50 million in
the first quarter of 1999 ("the 1999 premium deficiency") and $46 million in
the third quarter of 1998 ("the 1998 premium deficiency"). Generally, a premium
deficiency is required when projected or estimated health care costs exceed
future premiums. Ineffective provider risk-sharing contracts and the impact of
the March 31, 1999 Columbia/HCA Healthcare Corporation ("Columbia/HCA") hospital
agreement on current and projected future medical costs contributed to the
1999 premium deficiency. The loss of synergies expected to be
realized from the merger with UnitedHealth Group Company ("United") contributed
to the 1998 premium deficiency.
The beneficial effect of the premium deficiencies recorded during the quarter
and nine months ended September 30, 1999 approximated $15 million and $50
million, respectively. The beneficial effect of the premium deficiencies
recorded during the quarter and nine months ended September 30, 1998
approximated $6 million.
Reserve Strengthening
During the first quarter of 1999, the Company recorded a medical claim reserve
strengthening of $35 million. The reserve strengthening was necessary due to
prior period adverse claims developments identified by the Company's analysis
of February and March 1999 claims payments.
13
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Provider Costs
The Company recorded medical expenses of $5 million in the first quarter of
1999 and $27 million in the third quarter of 1998 related to its contractual
relationships with providers. The $5 million settled contractual issues
associated with the March 31, 1999 Columbia/HCA agreement. The $27 million
related to receivables from financially troubled physician groups, including
certain bankrupt providers, which were written-off.
The following item was included in selling, general and administrative
expenses in the condensed consolidated statements of operations.
Other Costs
During the third quarter of 1998, the Company recorded a one-time incentive of
$16 million paid to non-officer employees and a $9 million settlement related
to a third party pharmacy processing contract.
Asset Write-Downs and Other Charges
On August 10, 1998, the Company and United announced their mutual agreement to
terminate the previously announced Agreement and Plan of Merger, dated May 27,
1998. The planned merger, among other things, was expected to improve the
operating results of the Company's products and markets. Following the merger's
termination, the Company conducted a strategic evaluation, which included
assessing the Company's competitive market positions and profit potential.
As a result, the Company recognized charges of $34 million during the third
quarter of 1998. The charges included costs associated with exiting five
markets ($15 million), losses on disposals of non-strategic assets
($12 million), and merger dissolution costs ($7 million).
The costs associated with the market exits of $15 million included severance,
lease termination costs as well as write-offs of equipment and uncollectible
provider receivables. The planned market exits were Sarasota and Treasure Coast,
Florida, Springfield and Jefferson City, Missouri and Puerto Rico. Severance
costs were estimated based upon the Company's pre-existing employee benefit
plans. The plan to exit these markets was expected to reduce the Company's
workforce, primarily in Puerto Rico, by approximately 470 employees. The market
exits were expected to be completed by June 30, 1999. In the second quarter
of 1999, the Company reversed $2 million of severance and lease discontinuance
liabilities after the Health Insurance Administration in Puerto Rico extended
the Company's Medicaid contract, with advantageous terms, for two years. In
accordance with the Company's policy on impairment of long-lived assets,
equipment in the exited markets was written down to its fair value after an
evaluation of undiscounted future cash flow in the markets. The fair value of
equipment was based upon discounted cash flows for the same markets. Following
the write-down, the equipment was fully depreciated.
All cash charges were paid, and all market exit activities were completed,
before the end of the second quarter of 1999.
14
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Acquisition
Effective June 1, 1999, the Company reached an agreement with FPA Medical
Management, Inc. ("FPA"), FPA's lenders and a federal bankruptcy court under
which the Company acquired the operations of 50 medical centers from FPA for
approximately $20 million. These medical centers serve approximately 121,000
Humana members. This acquisition was recorded using the purchase method of
accounting. Cost in excess of net tangible and identifiable intangible assets
recorded in connection with the acquisition was $17 million and is being
amortized over six years.
The Company has subsequently reached agreements with fourteen provider groups
to assume operating responsibility for 38 of the 50 acquired medical centers
under long-term provider agreements with the Company. These agreements cover
approximately 67,400 members of the Company. The Company intends to enter
into similar agreements with other providers regarding the remaining members
in the near future.
Quarters Ended September 30, 1999 and 1998
Comparison of Results of Operations
To enhance comparability as well as to provide a baseline against which
historical and prospective periods can be measured, the following discussion
comparing results for the quarters ended September 30, 1999 (the "1999 quarter")
and 1998 (the "1998 quarter"), excludes the previously described, premium
deficiencies, provider and other costs, and asset write-downs and other charges
recorded in the 1998 quarter, but does include the beneficial effect of the
reversal of such items on operating results for the periods shown. The
following table reconciles the results reported on the condensed consolidated
statements of operations ("Reported Results") to the results contained in the
following discussion ("Discussion Results") for the 1998 quarter (in millions,
except per share data):
<TABLE>
1998 Quarter
Reported Excluded Discussion
Results Items (a) Results
Adjustment to statement of operations
caption items:
Operating expenses:
<S> <C> <C> <C>
Medical $ 2,081 $ (73) $ 2,008
Selling, general and administrative 351 (25) 326
Depreciation and amortization 32 32
Asset write-downs and other charges 34 (34)
Total operating expenses 2,498 (132) 2,366
(Loss) income from operations (34) 132 98
(Loss) income before income taxes (47) 132 85
Net (loss) income $ (30) $ 84 $ 54
Basic (loss) earnings per share $ (0.18) $ 0.50 $ 0.32
(Loss) earnings per share -
assuming dilution $ (0.18) $ 0.50 $ 0.32
15
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
1998 Quarter
Reported Excluded Discussion
Results Items (a) Results
Medical expense ratios:
Health Plan 87.9% (3.6)% 84.3%
Small Group 81.5% (1.8)% 79.7%
Totals 85.9% (3.0)% 82.9%
Administrative expense ratios:
Health Plan 13.2% (0.7)% 12.5%
Small Group 21.9% (1.7)% 20.2%
Totals 15.8% (1.0)% 14.8%
(a) The items excluded from 1998 medical expenses are the $46 million of premium
deficiency and $27 million of provider costs. The items excluded from
1998 administrative expenses are $16 million related to a one-time
incentive paid to non-officer employees and $9 million of other costs.
</TABLE>
Income before income taxes totaled $34 million for the 1999 quarter, compared
to $85 million for the 1998 quarter. Net income was $22 million, or $0.13 per
diluted share, in the 1999 quarter, compared to $54 million, or $0.32 per
diluted share, for the 1998 quarter. The earnings decline is attributable to
higher medical cost trends. The Company has implemented five initiatives to
mitigate the effect of these higher medical cost trends. The initiatives
include pricing products commensurate with the higher medical costs,
rationalizing markets and products, rehabilitating the large group
commercial business, re-contracting with providers, and cost management
improvements focused mainly on medical and claims cost management disciplines.
The Company's premium revenues increased 4.4 percent to $2.5 billion for the
1999 quarter, compared to $2.4 billion for the 1998 quarter. Higher premium
revenues resulted from increased premium yields of 6.7 percent and 4.0 percent
for the Company's commercial and Medicare HMO products, respectively. This
increase was partially offset by a decline in commercial membership of 104,600,
resulting from the Company pricing its products commensurate with the higher
medical cost trends.
The Company's medical expense ratio for the 1999 quarter was 85.0 percent,
compared to 82.9 percent for the 1998 quarter. The increase was the result of
higher medical costs in the Company's commercial products exceeding premium
increases.
Offsetting the impact of the increasing commercial medical costs was the
continued favorable claim liability development in the Company's run-off
workers' compensation business acquired in connection with its acquisition of
Physician Corporation of America ("PCA"). After evaluating the workers'
compensation claim liabilities against claim payments and file closings, the
Company reduced these liabilities by $8 million ($5 million after tax, or $0.03
per diluted share) during the 1999 quarter.
The administrative expense ratio improved during the 1999 quarter to 14.6
percent from 14.8 percent in the 1998 quarter. The year-over-year improvement
in the administrative expense ratio reflects continued rationalization of
staffing levels commensurate with membership levels.
Interest income totaled $29 million and $35 million for the 1999 and 1998
quarters, respectively. This decrease resulted from lower average invested
balances partially offset by higher investment
16
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
yields. The tax equivalent yield on invested assets approximated 6.9 percent
and 6.7 percent for the 1999 and 1998 quarters, respectively. Other income
declined $7 million from the 1998 quarter, due to the reduction of income from
ancillary businesses the Company sold in 1998 as well as a lower contribution
from the Company's ASO business. Interest expense declined $6 million during
the 1999 quarter as a result of lower average outstanding borrowings and a
decline in the average interest rate.
Business Segment Information for the Quarters Ended September 30, 1999 and 1998
The following table sets forth certain financial data for the Company's two
segments for the 1999 quarter and 1998 quarter (in millions):
<TABLE>
<S> <C> <C>
1999 1998(a)
Premium revenues:
Health Plan $ 1,735 $ 1,694
Small Group 792 727
$ 2,527 $ 2,421
Income (loss) before income taxes:
Health Plan $ 41 $ 77
Small Group (7) 8
$ 34 $ 85
Medical expense ratios:
Health Plan 86.6% 84.3%
Small Group 81.7% 79.7%
85.0% 82.9%
Administrative expense ratios:
Health Plan 12.1% 12.5%
Small Group 20.1% 20.2%
14.6% 14.8%
(a) Excludes $73 million ($60 million Health Plan and $13 million Small
Group) of 1998 medical expense related to premium deficiency and
provider costs, $25 million ($13 million Health Plan and $12 million
Small Group) of 1998 administrative expense related to a one-time
incentive paid to non-officer employees and other costs, and $34
million ($23 million Health Plan and $11 million Small Group) of 1998
asset write-downs and other charges.
</TABLE>
Health Plan
Income before income taxes totaled $41 million for the 1999 quarter compared
to $77 million for the 1998 quarter. The earnings decline is attributable to the
higher medical costs in the 1999 quarter. Initiatives to mitigate these higher
medical costs include significant large group commercial rate increases,
re-contracting with, or eliminating certain risk-sharing providers, implementing
three-tier pharmacy benefits, instituting Medicare HMO member premium and
benefit changes and exiting various Medicare markets. Various of these
initiatives occur January 1, 2000 when a majority of Health Plan's commercial
and government customer contracts renew.
The Health Plan segment's premium revenues increased 2.4 percent to $1.7 billion
for the 1999 quarter as a result of premium yield increases, partially offset
by a decline in membership. Large
17
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
group commercial premiums decreased 1.9 percent to $581 million during the 1999
quarter from $592 million in the 1998 quarter. This decline resulted from the
decrease in commercial membership of 119,400 members partially offset by a
premium yield increase of 5.0 percent. Medicare HMO premiums increased slightly
to $738 million in the 1999 quarter from $732 million during the 1998 quarter.
This increase resulted from a Medicare premium yield of 4.0 percent partially
offset by a reduction in 13,500 members primarily from the exit of the Treasure
Coast and Sarasota, Florida markets. Medicaid premiums increased 11.3 percent
to $158 million for the 1999 quarter from $142 million in the 1998 quarter.
This increase resulted from the more favorable rates obtained from the renewal
of the Company's contract with the Health Insurance Administration in Puerto
Rico in the second quarter of 1999. TRICARE premium revenues increased 15.1
percent from the 1998 quarter to $236 million in the 1999 quarter from an annual
contractual rate increase and additional premiums recorded related to TRICARE's
risk-sharing arrangement with the government.
The Health Plan segment's medical expense ratio for the 1999 quarter was 86.6
percent, increasing from 84.3 percent in the 1998 quarter. The medical expense
ratio increase was the result of large group commercial and Medicare HMO cost
trends of 7.7 percent and 5.0 percent, exceeding premium yields of 5.0 percent
and 4.0 percent, all respectively. The large group commercial medical cost
trend was primarily the result of a 6.4 percent increase in inpatient costs, a
8.2 percent increase in outpatient costs and a 19.6 percent increase in pharmacy
costs. The Medicare HMO medical cost trend was attributable to a 6.9 percent
increase in inpatient hospital costs and a 9.6 percent increase in pharmacy
costs.
Higher medical cost trends are primarily attributable to the inability of
certain risk-sharing providers to effectively manage medical costs within
their contractual arrangements, higher pharmacy utilization resulting mainly
from increased advertising in the pharmacy industry, the effect of the March 31,
1999 agreement with Columbia/HCA and generally higher medical cost trends
across the industry.
The administrative expense ratio improved 40 basis points from the 1998 quarter
to 12.1 percent, reflecting the continued rationalization of staffing levels
commensurate with membership levels.
Small Group
The Small Group segment's losses before income taxes were $7 million for the
1999 quarter. This loss and decline from the 1998 quarter's income before
income taxes of $8 million is also attributable to higher medical costs
combined with the Company not adequately pricing its products to recognize
these higher medical costs trends. To mitigate the effect of higher medical
costs, the Small Group segment's improvement initiatives include significant
premium rate increases, improving claim payment processes, provider
re-contracting, rationalizing markets and products and implementing
three-tier pharmacy benefits.
The Small Group segment's 1999 quarter premium revenues increased 8.9 percent
compared to the 1998 quarter to $792 million. This increase was the product of
the small group commercial premium yield increase of 8.0 percent, as well as an
increase in membership of approximately 14,800 members to 1.7 million at
September 30, 1999.
18
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
The Small Group segment's medical expense ratio for the 1999 quarter was 81.7
percent, increasing from 79.7 percent for the 1998 quarter. The increase was
the result of small group commercial cost trend of 10.6 percent exceeding 8.0
percent premium yields. Medical cost trends were noted in inpatient and
outpatient hospital costs as well as pharmacy costs which increased 7.3 percent,
14.2 percent and 22.4 percent, respectively. These higher medical cost trends
were the result of rapid growth of the Company's more costly open access
products, higher pharmacy utilization resulting mainly from increased
advertising in the pharmacy industry and the impact of the Health Insurance
Portability and Accountability Act ("HIPAA" or "Small Group Reform") and its
guarantee issue requirements.
Small Group's administrative expense ratio improved during the 1999 quarter to
20.1 percent from 20.2 percent.
Nine Months Ended September 30, 1999 and 1998
Comparison of Results of Operations
To enhance comparability as well as to provide a baseline against which
historical and prospective periods can be measured, the following discussion
comparing results for the nine months ended September 30, 1999 (the "1999
period") and 1998 (the "1998 period"), excludes the previously described
premium deficiencies, reserve strengthening, provider and other costs, and
asset write-downs and other charges recorded in the 1999 and 1998 periods,
but does include the beneficial effect of the reversal of such items on
operating results for the periods shown. The following table reconciles the
results reported on the condensed consolidated statements of operations
("Reported Results") to the results contained in the following discussion
("Discussion Results") for the 1999 period and the 1998 period (in millions,
except per share data):
<TABLE>
Reported Excluded Discussion
Results Items Results
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1999(a) 1998(b) 1999 1998
Adjustment to statements of
operations caption items:
Operating expenses:
Medical $ 6,378 $ 6,031 $ (90) $ (73) $ 6,288 $ 5,958
Selling, general and
administrative 992 1,001 (25) 992 976
Depreciation and
amortization 91 97 91 97
Asset write-downs
and other charges 34 (34)
Total operating expenses 7,461 7,163 (90) (132) 7,371 7,031
Income from operations 78 149 90 132 168 281
Income before income taxes 53 114 90 132 143 246
Net income $ 34 $ 72 $ 57 $ 84 $ 91 $ 156
Basic earnings per share $ 0.20 $ 0.43 $ 0.34 $ 0.50 $ 0.54 $ 0.93
Earnings per share -
assuming dilution $ 0.20 $ 0.43 $ 0.34 $ 0.50 $ 0.54 $ 0.93
19
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Reported Excluded Discussion
Results Items Results
1999 1998 1999(a) 1998(b) 1999 1998
Medical expense ratios:
Health Plan 87.8% 85.9% (1.3)% (1.2)% 86.5% 84.7%
Small Group 82.1% 79.9% (1.0)% (0.6)% 81.1% 79.3%
Total 86.0% 84.1% (1.2)% (1.0)% 84.8% 83.1%
Administrative expense ratios:
Health Plan 12.1% 13.0% (0.3)% 12.1% 12.7%
Small Group 20.0% 20.9% (0.6)% 20.0% 20.3%
Total 14.6% 15.3% (0.3)% 14.6% 15.0%
(a) The items excluded from 1999 medical expenses are the $50 million
premium deficiency, $35 million reserve strengthening and $5 million
provider costs.
(b) The items excluded from 1998 medical expenses are the $46 million
premium deficiency and $27 million of provider costs. The items excluded
from 1998 administrative expenses are $16 million related to a one-time
incentive paid to non-officer employees and $9 million of other costs.
</TABLE>
Income before income taxes totaled $143 million for the 1999 period, compared
to $246 million for the 1998 period. Net income was $91 million, or $0.54 per
diluted share in the 1999 period compared to $156 million, or $0.93 per diluted
share, in the 1998 period. The earnings decline was primarily the result of
medical cost increases exceeding premium yields.
The Company's premium revenues increased 3.4 percent to $7.4 billion for the
1999 period compared to $7.2 billion in the 1998 period. Higher premium
revenues resulted from increased premium yields on the Company's commercial and
Medicare HMO products partially offset by a decline of membership.
The Company's medical expense ratio increased to 84.8 percent during the 1999
period compared to 83.1 percent in the 1998 period. The higher medical expense
ratio results from medical cost increases exceeding premium increases on the
Company's commercial and Medicare HMO products.
Offsetting the effect of the increasing medical cost trends is the continued
favorable claim liability development in the Company's run-off workers'
compensation business acquired in connection with its acquisition of PCA.
After evaluating the workers' compensation claim liabilities against claim
payments and file closings, the Company reduced these liabilities by $23 million
($15 million after tax, or $0.09 per diluted share) during the 1999 period.
The administrative expense ratio was 14.6 percent and 15.0 percent for the
1999 and 1998 periods, respectively. The year-over-year improvement in the
administrative expense ratio reflects continued rationalization of staffing
levels commensurate with membership levels.
Interest income totaled $103 million in the 1999 period, compared to $115
million in the 1998 period. This decrease resulted from a decrease in net
realized investment gains, lower average invested balances and lower investment
yields. Net realized investment gains during the 1999 period were approximately
$13 million compared to $19 million in the 1998 period. The tax equivalent
yield on invested assets approximated 7.2 percent and 8.0 percent for the 1999
and 1998 periods, respectively. Other income declined $7 million from the 1998
period, due to the
20
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
reduction of income from ancillary businesses the Company sold in 1998 and a
lower net contribution from the Company's ASO business. The other income
reductions were offset by a $12 million gain on the sale of a tangible asset
in the first quarter of 1999. Interest expense declined $10 million during
the 1999 period as a result of lower average borrowings and a decline in the
average interest rate.
<TABLE>
Business Segment Information for the Nine Months Ended September 30, 1999 and 1998
The following table sets forth certain financial data for the Company's two
segments for the 1999 period and the 1998 period (in millions):
<S> <C> <C>
1999(a) 1998(b)
Premium revenues:
Health Plan $ 5,105 $ 5,043
Small Group 2,311 2,127
$ 7,416 $ 7,170
Income before income taxes:
Health Plan $ 139 $ 214
Small Group 4 32
$ 143 $ 246
Medical expense ratios:
Health Plan 86.5% 84.7%
Small Group 81.1% 79.3%
84.8% 83.1%
Administrative expense ratios:
Health Plan 12.1% 12.7%
Small Group 20.0% 20.3%
14.6% 15.0%
(a) Excludes $90 million ($66 million Health Plan and $24 million Small
Group) of 1999 medical expense related to premium deficiency, reserve
strengthening and provider costs.
(b) Excludes $73 million ($60 million Health Plan and $13 million Small
Group) of 1998 medical expense related to premium deficiency and
provider costs, $25 million ($13 million Health Plan and $12 million
Small Group) of 1998 administrative expense related to a one-time
incentive paid to non-officer employees and other costs, and $34
million ($23 million Health Plan and $11 million Small Group) of 1998
asset write-downs and other charges.
</TABLE>
Health Plan
Income before income taxes totaled $139 million for the 1999 period compared to
$214 million for the 1998 period. The earnings decline is attributable to the
higher medical costs in the 1999 period. Initiatives to mitigate these higher
medical costs include significant large group commercial rate increases,
re-contracting with, or eliminating certain risk-sharing providers, implementing
three-tier pharmacy benefits, instituting Medicare HMO member premium and
benefit changes and exiting various Medicare markets. Various of these
initiatives occur January 1, 2000 when a majority of Health Plan's commercial
and government customer contracts renew.
21
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
The Health Plan segment's premium revenues increased 1.2 percent to $5.1 billion
for the 1999 period. Large group commercial and Medicare HMO premiums remained
unchanged at $1.8 billion and $2.2 billion, respectively. Higher premium yields
of 5.1 percent and 3.0 percent for the large group commercial and Medicare HMO
lines, respectively were offset by membership reductions. Large group commercial
membership decreased 119,400 from the 1998 period reflecting the effects of the
Company's commercial premium pricing actions intended to maintain profitability.
Medicare HMO membership decreased 13,500 members from the exit of the Treasure
Coast and Sarasota, Florida markets. The Company's Medicaid premiums increased
8.9 percent to $451 million for the 1999 period compared to $414 million in the
1998 period. This increase resulted from the more favorable rates obtained from
the renewal of the Company's contract with the Health Insurance Administration
in Puerto Rico in the second quarter of 1999. TRICARE premium revenues increased
6.3 percent to $638 million in the 1999 period from $600 million in the 1998
period resulting from an annual contract rate increase and additional premiums
recorded related to TRICARE's risk-sharing arrangement with the government.
The Health Plan segment's medical expense ratio for the 1999 period was 86.5
percent, increasing from 84.7 percent in the 1998 period. The increase was the
result of large group commercial and Medicare HMO medical costs exceeding
premium increases. These higher medical cost trends were attributable to
the inability of certain risk-sharing providers to effectively manage medical
costs within their contractual arrangements, higher pharmacy utilization
resulting mainly from increased advertising in the pharmacy industry, the
effect of the March 31, 1999 agreement with Columbia/HCA and generally higher
medical cost trends across the industry.
The administrative expense ratio improved 60 basis points from the 1998 period
to 12.1 percent, the result of the continued rationalization of staffing levels
commensurate with membership levels.
Small Group
The Small Group segment's income before income taxes was $4 million for the
1999 period compared to $32 million for the 1998 period. This decline is
attributable to higher medical costs combined with the Company not adequately
pricing its products to recognize these higher medical costs trends. To
mitigate the effect of higher medical costs, the Small Group segment's
improvement initiatives include significant premium rate increases, improving
claim payment processes, provider re-contracting, rationalizing markets and
products and implementing three-tier pharmacy benefits.
The Small Group segment's premium revenues increased 8.7 percent for the 1999
period to $2.3 billion from $2.1 billion for the 1998 period. This increase
was the result of the growth in small group commercial premiums of $159 million
to $2.1 billion for the 1999 period. This premium growth was due to increased
premium yields and a growth in membership of 14,800 members comparing the 1999
with the 1998 period.
The Small Group segment's medical expense ratio for the 1999 period was 81.1
percent, increasing from 79.3 percent for the 1998 period. The medical expense
ratio increase was the result of small group commercial medical
costs exceeding the premium yields. Increased medical cost trends were noted
in inpatient and outpatient hospital medical cost trends as well as pharmacy
costs. These higher medical cost trends were the result of the rapid growth
of the
22
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Company's more costly open access products, higher pharmacy utilization
resulting mainly from increased advertising in the pharmacy industry and the
impact of HIPAA and its guarantee issue requirements.
The administrative expense ratio improved during the 1999 period to 20.0
percent from 20.3 percent.
Liquidity and Capital Resources
Cash used by the Company's operations was $232 million and $251 million for
the nine months ended September 30, 1999 and 1998, respectively. This net
cash used by the Company's operations during the 1999 period and the 1998
period can be attributed to the following (in millions):
<TABLE>
1999 1998
<S> <C> <C>
Cash used by operating activities $ (232) $ (251)
Timing of Medicare and TRICARE premium receipts 234 235
Funded workers' compensation claim payments 92 98
Pro forma cash flows provided by
operating activities $ 94 $ 82
</TABLE>
The Company's subsidiaries operate in states that require minimum 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' ability to obtain regulatory
approval to pay dividends.
The National Association of Insurance Commissioners has recommended that states
adopt a risk-based capital ("RBC") formula for companies established as HMO
entities, similar to the current requirement for insurance companies. The RBC
provisions may require new minimum capital and surplus levels for some of the
Company's HMO subsidiaries. Many states have not yet determined when they will
adopt the RBC formula or if they will allow a phase-in to the required levels
of capital and surplus. However, the Company does not anticipate adoption in
1999 by any of the states in which it does business.
The Company currently maintains approximately $800 million of capital and
surplus in its insurance and HMO entities, compared to the minimum statutory
required capital and surplus levels of approximately $550 million. If the states
in which the Company conducts business adopt the proposed RBC formula, without
a phase-in provision, the Company estimates it would be required to fund
additional capital into its various subsidiaries of approximately $30 million.
After this capital infusion, the Company would have $210 million of capital and
surplus above the required RBC level.
The Company maintains a revolving credit agreement (the "Credit Agreement")
which provides liquidity under a line of credit of up to $1.5 billion. The
Company also maintains a commercial paper program and issues debt securities
thereunder. Commercial paper borrowings outstanding at September 30, 1999 were
$667 million and are backed by the Credit Agreement. The Credit Agreement
contains usual and customary covenants including, but not limited to, financial
tests for interest coverage and leverage ratios. As of September 30, 1999, the
Company was in compliance with these covenants and projects that it would remain
in compliance during the remainder of 1999
23
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
and for 2000. The Company is currently negotiating an amendment to the Credit
Agreement, which would reduce the line of credit to $1 billion and modify
certain financial covenants for enhanced flexibility with regards to possible
future asset purchases and sales and other adjustments. The average interest
rate on commercial paper borrowings was 5.6 percent and 5.4 percent for the
quarter and nine months ended September 30, 1999, respectively. Borrowings
under both the Credit Agreement and 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 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 fund
capital requirements.
The Company's ongoing capital expenditures are primarily attributable to
administrative facilities and related information systems necessary for
activities such as claims processing, billing and collections, medical
utilization review and customer service. Planned capital spending for the
remainder of 1999 will approximate $20 million to $25 million for the
expansion and improvement of these items. The Company anticipates a higher
level of capital spending in 2000 as it enhances its information technology and
Internet capabilities.
The Company's Year 2000 Readiness Disclosure Statement
The Year 2000 issue is the result of two potential malfunctions that may have
an impact on the Company's systems and equipment. The first potential
malfunction is the result of computers being programmed to use two rather than
four digits to define the applicable year. The second potential malfunction
arises where embedded microchips and micro-controllers have been designed using
two rather than four digits to define the applicable year. As a result, certain
of the Company's date-sensitive computer programs, building infrastructure
components and medical devices, may recognize a date using "00" as the year 1900
rather than the year 2000. If uncorrected, the problem may result in computer
system and program failures or equipment malfunctions that could result in a
disruption of business operations.
The Company's application systems are largely developed and maintained in-house
by a staff of 400 application programmers who are versed in the utilization
of state-of-the-art technology. All application systems are fully integrated
and automatically pass data through various system processes. The Company's
primary data center and the majority of its programming and support staff are
located at the Company's corporate offices in Louisville, Kentucky. In order
to create the necessary internal focus surrounding the Year 2000 problem, the
Company has established a centralized Year 2000 Program Management Office (PMO)
which is charged with overall coordination of enterprise wide Y2K initiatives
and regular progress reporting to the Company's senior management. The Company's
Year 2000 initiatives are focused on four key areas of operation:
Information Technology (IT) - software essential for day-to-day operations
including both internally developed software and third party software, which
interfaces therewith.
IT Infrastructure - mainframe, network, telecommunications interfaces and
self-contained operating systems.
24
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Third party business partners and intermediaries - entities on which the
Company relies for transmission and receipt of claims, and encounter,
membership and payment information, including federal and state governmental
agencies such as the Health Care Financing Administration.
Non-IT Infrastructure - telecommunications equipment, elevators, public safety
equipment (i.e., security and fire), medical equipment and heating and air
conditioning systems.
The Company commenced its assessment of Year 2000 exposures in early 1996.
In December 1998, the Company was 100 percent complete with the remediation
of its core business systems. As of September 30, 1999, the Company had
remediated 99 percent of its business application systems. The remediated
systems are currently operating in the company's production environment
utilizing the updated Year 2000 logic. The Company's plan is to have all
production applications fully remediated during the fourth quarter of 1999.
In addition, the Company is in the process of contacting vendors, third party
business partners and intermediaries in an effort to ascertain their Year 2000
readiness. The Company anticipates completing, in all material respects, its
Year 2000 project during the fourth quarter of 1999. The Company's efforts are
currently progressing on plan.
The Year 2000 project is currently estimated to have a minimum total cost of
approximately $27.5 million. Project to date costs total $25.8 million,
including $1.9 million during the quarter ended September 30, 1999. Year 2000
expenses are projected to represent approximately 6.6 percent of the
Information Technology budget during 1999. Year 2000 costs are expensed as
incurred and funded through operating cash flows.
The extent and magnitude of the Year 2000 project, as it will affect the
Company both before and for some period after January 1, 2000, are difficult
to predict or quantify. In order to mitigate these risks, the Company has chosen
to develop business continuity and contingency plans. These plans would be
enacted if the Company's Year 2000 project is not completed in an accurate or
timely manner, or if third party constituents have failures due to the
millennium change. The Company has identified six major functional areas
encompassing 22 operational subdivisions that require contingency plan
development. The six major functional areas are: providers, service centers,
suppliers and vendors, customers and brokers, banking and finance, and legal
services. The Company's business continuity and contingency planning efforts,
which are inclusive of alternate operating procedures, were finalized during
the second quarter of 1999 and are anticipated to be implemented during the
fourth quarter of 1999.
While the Company presently believes that the timely completion of its Year
2000 project will limit exposure so that the Year 2000 will not pose material
operational problems, the Company recognizes that it does not control third
party systems. The Company continues to work with its third parties to verify
their readiness; however, at this juncture the Company has not received
assurances that all third parties and/or their key interfaces will be converted
in a timely manner. If these organizations do not accomplish their Year 2000
initiatives in a timely manner and/or fail to properly implement appropriate
contingency plans, Year 2000 failures may result. These failures could
potentially have a material adverse impact on the Company's results of
operations or its financial position.
The costs of the Year 2000 project and the date on which the Company plans to
complete Year 2000 modifications are based on management's best estimates,
considering assumptions of future
25
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
events including the continued availability of certain resources and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from plan. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and the ability of the Company's
significant suppliers, customers and others with which it conducts business,
including federal and state governmental agencies, to identify and resolve their
own Year 2000 issues.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). In general, SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities in the balance
sheet at their fair value, and sets forth the manner in which gains or losses
thereon are to be recorded. The treatment of such gains or losses is dependent
upon the type of exposure, if any, for which the derivative is designated as a
hedge. As amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," this standard is effective for the
Company's financial statements beginning January 1, 2001, with early adoption
permitted. Management of the Company anticipates that the adoption of SFAS No.
133 will not have a material impact on the Company's results of operations or
its financial position.
26
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
<TABLE>
<S> <C> <C>
Quarterly Membership 1999 1998
Health Plan:
Large Group Commercial members at:
March 31 1,495,500 1,575,100
June 30 1,478,300 1,566,600
September 30 1,424,400 1,543,800
December 31 1,559,700
Medicare HMO members at:
March 31 480,700 495,800
June 30 484,800 501,000
September 30 489,300 502,800
December 31 502,000
TRICARE members at:
March 31 1,085,700 1,103,500
June 30 1,064,600 1,096,300
September 30 1,065,500 1,090,400
December 31 1,085,700
Administrative Services members at:
March 31 617,900 682,200
June 30 636,700 693,400
September 30 641,000 673,900
December 31 646,200
Medicaid and other members at:
March 31 704,300 696,800
June 30 707,200 692,000
September 30 695,000 696,500
December 31 700,400
Total Health Plan members at:
March 31 4,384,100 4,553,400
June 30 4,371,600 4,549,300
September 30 4,315,200 4,507,400
December 31 4,494,000
Small Group:
Small Group Commercial members at:
March 31 1,676,200 1,674,400
June 30 1,695,700 1,694,100
September 30 1,706,800 1,692,000
December 31 1,701,800
Total medical members at:
March 31 6,060,300 6,227,900
June 30 6,067,300 6,243,400
September 30 6,022,000 6,199,400
December 31 6,195,800
Specialty members at:
March 31 2,771,900 2,647,800
June 30 2,837,600 2,477,800
September 30 2,890,100 2,597,800
December 31 2,633,300
</TABLE>
27
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Operations (Unaudited)
(Dollars in millions, except per share results)
<TABLE>
1999
<S> <C> <C> <C> <C>
First (a) Second Third Total
Revenues:
Premiums by segment:
Health Plan $ 1,677 $ 1,693 $ 1,735 $ 5,105
Small Group 751 768 792 2,311
Total premiums 2,428 2,461 2,527 7,416
Interest and other income 49 44 30 123
Total revenues 2,477 2,505 2,557 7,539
Operating expenses:
Medical 2,136 2,094 2,148 6,378
Selling, general and administrative 325 329 338 992
Depreciation and amortization 31 30 30 91
Total operating expenses 2,492 2,453 2,516 7,461
(Loss) income from operations (15) 52 41 78
Interest expense 10 8 7 25
(Loss) income before income taxes (25) 44 34 53
(Benefit) provision for income taxes (9) 16 12 19
Net (loss) income $ (16) $ 28 $ 22 $ 34
Basic (loss) earnings per
common share $ (0.10) $ 0.17 $ 0.13 $ 0.20
(Loss) earnings per common share -
assuming dilution $ (0.10) $ 0.17 $ 0.13 $ 0.20
Medical expense ratios:
Health Plan 90.1% 86.6% 86.6% 87.8%
Small Group 83.2% 81.6% 81.7% 82.1%
Totals 88.0% 85.1% 85.0% 86.0%
Administrative expense ratios:
Health Plan 12.3% 12.2% 12.1% 12.1%
Small Group 20.0% 19.9% 20.1% 20.0%
Totals 14.7% 14.6% 14.6% 14.6%
(a) Includes $90 million of 1999 medical expense related to premium deficiency,
reserve strengthening and provider costs.
28
Humana Inc.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Operations (Unaudited)
(Dollars in millions, except per share results)
1998
First Second Third(a) Fourth Total
Revenues:
Premiums by segment:
Health Plan $ 1,660 $ 1,690 $ 1,694 $ 1,691 $ 6,735
Small Group 692 707 727 736 2,862
Total premiums 2,352 2,397 2,421 2,427 9,597
Interest and other income 50 49 43 42 184
Total revenues 2,402 2,446 2,464 2,469 9,781
Operating expenses:
Medical 1,955 1,995 2,081 2,010 8,041
Selling, general and administrative 324 326 351 327 1,328
Depreciation and amortization 32 33 32 31 128
Asset write-downs and other charges 34 34
Total operating expenses 2,311 2,354 2,498 2,368 9,531
Income (loss) from operations 91 92 (34) 101 250
Interest expense 12 10 13 12 47
Income (loss) before income taxes 79 82 (47) 89 203
Provision (benefit) for
income taxes 29 30 (17) 32 74
Net income (loss) $ 50 $ 52 $ (30) $ 57 $ 129
Basic earnings (loss) per
common share $ 0.30 $ 0.31 $ (0.18) $ 0.34 $ 0.77
Earnings (loss) per common
share - assuming dilution $ 0.30 $ 0.31 $ (0.18) $ 0.34 $ 0.77
Medical expense ratios:
Health Plan 85.0% 84.8% 87.9% 83.6% 85.3%
Small Group 78.6% 79.7% 81.5% 80.9% 80.2%
Totals 83.1% 83.3% 85.9% 82.8% 83.8%
Administrative expense ratios:
Health Plan 13.0% 12.7% 13.2% 12.4% 12.8%
Small Group 20.3% 20.4% 21.9% 20.2% 20.7%
Totals 15.2% 15.0% 15.8% 14.7% 15.2%
(a) Includes $73 million of 1998 medical expense related to premium
deficiency and provider costs, $25 million of 1998 administrative
expense related to a one-time incentive paid to non-officer employees
and other costs, and $34 million of 1998 asset write-down and other
charges.
</TABLE>
29
Humana Inc.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Since the date of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, no material changes have occurred in the Company's
exposure to market risk associated with the Company's investments in market
risk sensitive financial instruments, as set forth in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in such Form 10-K.
30
Humana Inc.
Part II: Other Information
Item 1: Legal Proceedings
In re Humana Inc. Securities Litigation
Six purported class action complaints have been filed in the United States
District Court for the Western District of Kentucky at Louisville, by purported
stockholders of the Company against the Company and certain of its current and
former directors and officers. The six complaints contain the same or
substantially similar allegations; namely, that the Company and the individual
defendants knowingly or recklessly made false or misleading statements in press
releases and public filings concerning the Company's financial condition,
primarily with respect to the impact of the negotiations over renewal of the
Company's contract with Columbia/HCA which took effect April 1, 1999. The
complaints allege violations of Section 10(b) of the Securities Exchange Act
of 1934 (the "1934 Act") and SEC Rule 10b-5, and Section 20(a) of the 1934 Act
and seek certification of a class of stockholders who purchased shares of
Humana common stock starting either (in four complaints) in late October 1998
or (in two complaints) on February 9, 1999 and ending (in all six complaints)
on April 8, 1999. All seek money damages in unspecified amounts, plus (in
certain of the complaints) pre-judgment and post-judgment interest, and costs
and expenses including attorney and expert fees. Plaintiffs have moved for
consolidation of the actions, to be styled In re Humana Inc. Securities
Litigation, Civ. Act. No. 3:99CV-398-S, and intend to file a Consolidated
Complaint. The Company believes the allegations in the above complaints are
without merit and intends to pursue the defense of the actions vigorously.
In re Physician Corporation of America Securities Litigation
In late 1997, three purported class action complaints were filed in the United
States District Court for the Southern District of Florida by former
stockholders of Physician Corporation of America ("PCA") against PCA and certain
of its former directors and officers. The three actions were consolidated into
a single action entitled In re Physician Corporation of America Securities
Litigation, Civil Action No. 97-3678 (S.D. Fla.) (Middlebrooks, J.). The
Consolidated Complaint alleges that PCA and the individual defendants knowingly
or recklessly made false and misleading statements in press releases and
public filings with respect to the financial and regulatory difficulties of
PCA's workers' compensation business. Count I alleges violations of Section
10(b) of the Securities and Exchange Act of 1934 (the "1934 Act") and SEC Rule
10b-5, and Count II alleges violations of Section 20(a) of the 1934 Act.
Plaintiffs have moved for certification of a class of stockholders who purchased
shares of PCA common stock from March 31, 1996 through March 31, 1997, as well
as money damages plus prejudgment interest in an unspecified amount, and costs
and expenses including attorneys fees. On February 19, 1999, the U.S. District
Court denied PCA's motion to dismiss. On May 5, 1999, plaintiffs moved for
certification of the purported class. On June 28, 1999, defendants moved for
partial summary judgment and filed papers opposing the motion for class
certification. Both motions are currently pending. Discovery is proceeding and
the action has been set for trial beginning January 2001. The Company believes
that the allegations in the Consolidated Complaint are without merit and
intends to pursue the defense of the consolidated action vigorously.
31
Humana Inc.
Part II: Other Information, continued
Price v. Humana Inc.
On October 4, 1999, a purported class action complaint was filed in the United
States District Court for the Southern District of Florida by five named
plaintiffs who seek to represent a class consisting of present and former
Humana subscribers but excluding persons insured by Medicare or Medicaid. An
additional three named plaintiffs were added to the complaint, by amendment on
November 9, 1999. In the case, styled Price v. Humana Inc., the plaintiffs seek
a recovery (including statutory treble damages) under Racketeer Influenced and
Corrupt Organizations Act ("RICO") for all persons who are or were Humana
subscribers at any time between October 4, 1995, and the present. In addition,
through the five named plaintiffs who are or were employed by private employers,
plaintiffs purport to represent a subclass of policyholders who purchased
their Humana coverage through their employers' health benefits plans governed
by the Employee Retirement Income Security Act ("ERISA"), and who are or were
Humana subscribers at any time between October 4, 1993, and the present.
The plaintiffs' complaint alleges that Humana intentionally concealed from its
members information concerning the various ways Humana decides what claims will
be paid, what procedures will be deemed medically necessary, and what criteria
and procedures are used to determine the extent and type of their coverage.
Plaintiffs also allege that Humana concealed from members the existence of
direct financial incentives to treating physicians and other health care
providers to deny coverage.
Plaintiffs claim that Humana used undisclosed cost-based criteria to evaluate
claims by members who had been told that their requests for coverage would be
evaluated based on their medical necessity and that Humana provided undisclosed
claim denial incentives to encourage individuals responsible for reviewing
claims to deny claims without regard to medical necessity.
The plaintiffs do not allege that any of the alleged practices resulted in any
named plaintiff, or any other specific member, being denied coverage for
services that should have been covered but, instead, claim that Humana provided
the purported class with health insurance benefits of lesser value than
promised.
Plaintiffs' RICO claim asserts that, through mail and wire fraud, Humana
operated and managed a national health care network, as well as state and
local health care networks, that were designed to induce putative class members
to subscribe to health care policies that were worth less than the value of
the policies described by Humana in its various promotional materials, summary
plan descriptions, and certificates of coverage.
Plaintiffs' ERISA claims allege that Humana breached disclosure obligations
under ERISA and that Humana violated a fiduciary duty by failing to act solely
in the interest of plan participants as a result of maintaining a claims review
process described above and failing to discharge its duties in accordance with
plan documents for the same reasons. Plaintiffs also allege that Humana breached
a fiduciary duty by materially misleading subscribers, and failing to disclose
material information to subscribers, concerning the nature of coverage Humana
provided and, further, that Humana failed to provide benefits due under ERISA
plans.
32
Humana Inc.
Part II: Other Information, continued
The Company believes the allegations are without merit and intends to pursue
the defense of the action vigorously.
Mary Forsyth, et al v. Humana Inc., et al,
A class action lawsuit styled Mary Forsyth, et al v. Humana Inc., et al, Case
No. CV-5-89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United States
District Court for the District of Nevada involving claims arising out of the
method of calculation of coinsurance for Nevada insureds prior to 1988, and
an antitrust claim. The District Court granted the Company's motion for summary
judgment on most of the claims on July 22, 1993. The District Court granted
summary judgment in favor of plaintiffs on the claim under ERISA. On appeal,
the Court of Appeals for the Ninth Circuit reinstated certain claims, including
the claim under RICO on behalf of a class of insureds who paid coinsurance at
Humana hospitals (the "Co-Payer Class"), and the antitrust claim. The Ninth
Circuit also ruled that the damages in the Co-Payer Class's RICO claim, before
any trebling, were correctly limited to the amount of overpayment of the
coinsurance, which totaled approximately $1.6 million plus interest. On August
18, 1997, the Company filed a Petition for Writ of Certiorari in the United
States Supreme Court requesting the Supreme Court to reverse the part of the
Ninth Circuit ruling reinstating the RICO claim of the Co-Payer Class. In
January 1999, the Supreme Court ruled that the plaintiffs could pursue their
RICO claim. The Company requested summary judgment in the District Court on
the reinstated antitrust claim on October 6, 1997, and upon reconsideration,
the motion was granted. On October 1, 1997, the plaintiffs filed a motion in
the District Court for leave to file a Fifth Amended Complaint reasserting an
ERISA claim and adding new RICO and antitrust claims. The Company opposed the
motion, and the motion was denied. The trial on the remaining RICO and antitrust
claims was scheduled to begin on October 6, 1999.
The parties have entered into a settlement agreement resolving all outstanding
claims. The terms are subject to the approval of the District Court. The
District Court granted preliminary approval and scheduled a hearing on November
30, 1999 for final approval of the settlement. The Company had previously
established adequate liabilities for the resolution of this matter and,
therefore, the settlement is not expected to have a material impact on the
Company's financial position or its results of operations.
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.
During the ordinary course of its business, the Company is or may become
subject to pending or threatened litigation or other legal actions. Management
does not believe that any pending and threatened legal actions against the
Company or audits by agencies will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
33
Humana Inc.
Part II: Other Information, continued
Item 2: Changes in Securities
None.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 10 Severance Policy Dated September 9, 1999,
filed herewith.
Exhibit 12 Statement re: Computation of Ratio of Earnings to
Fixed Charges, filed herewith.
Exhibit 27 Financial Data Schedule, filed herewith.
(b) Other than the Form 8-K filed on August 3, 1999, and referenced in
the June 30, 1999 Form 10-Q, there were no other reports filed on
Form 8-K.
34
Humana Inc.
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.
(Registrant)
Date: November 15, 1999 By: /s/ James E. Murray
James E. Murray
Chief Financial Officer
(Principal Accounting Officer)
Date: November 15, 1999 By: /s/ Arthur P. Hipwell
Arthur P. Hipwell
Senior Vice President and
General Counsel
35
SEVERANCE POLICY
ADOPTED 9/9/99
Severance policy for elected officers without employment
contracts who are involuntarily terminated without good
cause.
A. For executive and senior vice presidents - Upon
employment, one year's base salary plus one additional
month's base salary for each of the first six full years of
service to a maximum of eighteen months base pay.
B. For other elected officers - Upon employment, six
months base salary, plus one additional month's base salary
after each of the seventh through twelfth months of
employment, to a maximum of twelve months base pay.
C. In all cases, the officer shall remain eligible to
receive prorated incentive compensation to be paid at the
normal time after year end for such payments, provided plan
targets were met.
D. Severance payments shall require agreements containing
certain covenants regarding non-competition, non-
disparagement and specific enforcement.
Exhibit 12
Ratio of Earnings to Fixed Charges
Humana Inc.
For the quarters and nine months ended September 30, 1999 and 1998
(Unaudited)
(Dollars in millions)
<TABLE>
Quarters Ended Nine Months Ended
<S> <C> <C> <C> <C>
1999 1998 (b) 1999 (a) 1998 (b)
Earnings:
Income (loss) before
income taxes $ 34 $ (47) $ 53 $ 114
Fixed charges 11 15 36 43
$ 45 $ (32) $ 89 $ 157
Fixed charges:
Interest charged to expense $ 7 $ 13 $ 25 $ 35
One-third of rent expense 4 2 11 8
$ 11 $ 15 $ 36 $ 43
Ratio of earnings to
fixed charges 4.0 2.4 3.6
The one-third of rent expense included in fixed charges is that proportion
deemed representative of the interest portion.
(a) Exclusive of $90 million 1999 medical expense related to premium deficiency,
reserve strengthening and provider costs, the ratio of earnings to fixed
charges for the nine months ended September 30, 1999 would have been 5.0.
(b) Exclusive of $73 million of 1998 medical expense related to premium
deficiency and provider costs, $25 million of 1998 administrative
expense related to a one-time incentive paid to non-officer employees
and other costs, and $34 million of 1998 asset write-downs and other
charges, the ratio of earnings to fixed charges for the quarter and
nine months ended September 30, 1998, would have been 6.5 and 6.7,
respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the accompanying financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-START> JAN-01-1999
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 482
<SECURITIES> 1,530
<RECEIVABLES> 377
<ALLOWANCES> 62
<INVENTORY> 4
<CURRENT-ASSETS> 2,681
<PP&E> 845
<DEPRECIATION> 405
<TOTAL-ASSETS> 4,951
<CURRENT-LIABILITIES> 2,787
<BONDS> 667
0
0
<COMMON> 28
<OTHER-SE> 1,663
<TOTAL-LIABILITY-AND-EQUITY> 4,951
<SALES> 7,416
<TOTAL-REVENUES> 7,539
<CGS> 6,378
<TOTAL-COSTS> 7,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 53
<INCOME-TAX> 19
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
