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_______________________________________________________________________________________________
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, 2000
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 (State or other jurisdiction of incorporation or organization) |
61-0647538 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 |
_______________________________________________________________________________________________
Form 10-Q
Humana Inc.
September 30, 2000
|
INDEX |
|
Item 1.
|
Financial Statements Part II: Other Information Legal Proceedings |
25 |
-2-
______________________________________________________________________________________
Condensed Consolidated Statements of Income
Quarters Ended |
Nine Months Ended |
|||||||
2000 |
1999 |
2000 |
1999 |
|||||
Revenues: |
|
|
|
|
|
|
|
|
Interest and other income |
28 |
30 |
89 |
123 |
||||
Total revenues |
2,616 |
2,557 |
7,954 |
7,539 |
||||
Operating expenses: |
|
|
|
|
||||
Selling, general and administrative |
363 |
338 |
1,079 |
992 |
||||
Total operating expenses |
2,580 |
2,516 |
7,852 |
7,461 |
||||
Income from operations |
36 |
41 |
102 |
78 |
||||
Interest expense |
7 |
7 |
22 |
25 |
||||
Income before income taxes |
29 |
34 |
80 |
53 |
||||
Provision for income taxes |
6 |
12 |
17 |
19 |
||||
Net income |
$ |
23 |
$ |
22 |
$ |
63 |
$ |
34 |
Basic earnings per common share |
$ |
0.14 |
$ |
0.13 |
$ |
0.38 |
$ |
0.20 |
Diluted earnings per common share |
$ |
0.14 |
$ |
0.13 |
$ |
0.38 |
$ |
0.20 |
See accompanying notes to condensed consolidated financial statements.
-3-
_____________________________________________________________________________________
Condensed Consolidated Balance Sheets
Humana Inc.
Unaudited at September 30, 2000
(In millions, except share amounts)
Sept. 30, |
Dec. 31, |
|||||
ASSETS Current assets: |
||||||
Cash and cash equivalents |
$ |
364 |
$ |
978 |
||
Marketable securities |
1,463 |
1,507 |
||||
Premiums receivable, less allowance for doubtful accounts |
||||||
of $65 at September 30, 2000 and $61 at December 31, 1999 |
207 |
225 |
||||
Other |
304 |
354 |
||||
Total current assets |
2,338 |
3,064 |
||||
Long-term marketable securities |
153 |
253 |
||||
Total assets |
$ |
3,916 |
$ |
4,900 |
||
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Medical and other expenses payable Trade accounts payable and accrued expenses Book overdraft Unearned premium revenues Commercial paper |
|
|
|
|
||
Total current liabilities |
2,453 |
3,164 |
||||
Long-term medical and other expenses payable |
|
324 |
||||
Total liabilities |
2,595 |
3,632 |
||||
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 169,141,623 shares at September 30, 2000 |
||||||
and 167,514,710 shares at December 31, 1999 |
28 |
28 |
||||
Capital in excess of par value |
|
922 |
|
899 |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Humana Inc.
For the nine months ended September 30, 2000 and 1999
Unaudited
(In millions)
2000 |
1999 |
|||||
Net cash used in operating activities |
$ |
(239) |
$ |
(241) |
||
Cash flows from investing activities: |
||||||
Acquisitions, net of cash and cash equivalents acquired |
(12) |
(14) |
||||
Divestitures, net of cash and cash equivalents disposed |
32 |
|||||
Purchases of marketable securities |
(732) |
(681) |
||||
Proceeds from maturities of marketable securities |
365 |
290 |
||||
Proceeds from sales of marketable securities |
260 |
441 |
||||
Purchases of property and equipment |
(99) |
(65) |
||||
Proceeds from sales of property and equipment |
14 |
27 |
||||
Other |
(12) |
(10) |
||||
Net cash used in investing activities |
(184) |
(12) |
||||
Cash flows from financing activities: Net commercial paper repayments Change in book overdraft Common stock repurchases Other |
|
|
||||
Net cash used in financing activities |
(191) |
(178) |
||||
Decrease in cash and cash equivalents |
(614) |
(431) |
||||
Cash and cash equivalents at end of period |
$ |
364 |
$ |
482 |
||
Supplemental cash flow information: |
|
|
|
|
||
Details of businesses acquired in purchase transactions: |
|
|
|
|
||
Cash paid for acquired businesses, net of cash acquired |
$ |
12 |
$ |
14 |
See accompanying notes to condensed consolidated financial statements.
-5-
______________________________________________________________________________________
Notes to Condensed Consolidated Financial Statements
Humana Inc.
Unaudited
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 should refer to the Form 10-K of Humana Inc. (the "Company" or "Humana") for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 30, 2000.
The preparation of the Company's condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on knowledge of current events and anticipated future events, actual results may ultimately 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.
Effective January 1, 2000, the Company adopted a 20 year amortization period, from the date of acquisition, for goodwill previously amortized over 40 years. The change in the amortization period of goodwill will increase amortization expense $25 million annually, while the Company's fourth quarter 1999 long-lived asset impairment expense will decrease depreciation and amortization $13 million annually.
During the first quarter of 1999, the Company recorded $90 million of additional medical expense for premium deficiency, reserve strengthening and provider costs. As a result of management's assessment of the profitability of its contracts for providing health care services to its members in certain markets, the Company recorded a provision for probable future losses (premium deficiency) of $50 million. Ineffective provider risk-sharing contracts and the impact of the March 31, 1999 HCA - The Healthcare Company, formerly Columbia/HCA Healthcare Corporation ("HCA") hospital agreement in Florida on current and projected future medical costs contributed to the premium deficiency. The beneficial effect from losses charged to the premium deficiency liability was $14 million and $32 million for the quarter and nine months ended September 30, 1999, respectively. Remaining liabilities related to premium deficiency provisions recorded in 1998 and 1999 were exhausted as of December 31, 1999 and, therefore, there was no beneficial effect from losses charged to these liabilities in the quarter or nine months ended September 30, 2000. Because the majority of the Company's customers' contracts renew annually, the Company does not anticipate the need for a premium deficiency charged to earnings in 2000, absent unanticipated adverse events or changes in circumstances.
Prior period adverse claims development primarily in the Company's PPO and Medicare products initially identified during an analysis of February and March 1999 medical claims resulted in a $35 million reserve strengthening. The Company releases or strengthens medical claims reserves when favorable or adverse development in prior periods exceed actuarial margins existing in the reserves. In addition, the Company paid HCA $5 million to settle certain contractual issues associated with the March 31, 1999 hospital agreement in Florida.
Also during the first quarter of 1999, the Company recorded a $12 million gain on the sale of a tangible asset which has been included in interest and other income in the accompanying Condensed Consolidated Statements of Income.
-6-
_____________________________________________________________________________________________
Notes to Condensed Consolidated Financial Statements, continued
Humana Inc.
Unaudited
Divestitures
Effective July 1, 2000, the Company completed transactions to reinsure its Medicare supplement business and sell its North Florida Medicaid business. On April 10, 2000 and March 31, 2000, the Company completed the sale of its workers' compensation administrative services and run-off businesses, respectively. The Company recorded an estimated $118 million loss in 1999 related to these four transactions. There was no change in the estimated loss during 2000. Cash proceeds were $101 million ($32 million net of divested subsidiary's cash) for the nine months ended September 30, 2000. Revenue and pretax results associated with these four businesses for the quarters and nine months ended September 30, 2000 and 1999 were as follows (in millions):
Quarters Ended |
Nine Months Ended |
|||||||||
2000 |
1999 |
2000 |
1999 |
|||||||
Revenues |
$ |
__ |
$ |
55 |
$ |
103 |
$ |
165 |
||
Pretax results |
$ |
__ |
$ |
(4) |
$ |
(8) |
$ |
(10) |
Acquisitions
On August 17, 2000, the Company acquired Jacobson Management Group, Inc., a hospital in-patient management services firm for approximately $5 million in cash.
On June 9, 2000, the Company acquired American Physicians Life Insurance Company, an operating shell entity for the Company's e-business for approximately $7 million in cash.
On May 10, 2000, the Company acquired Wisconsin National Life Insurance Company, an operating shell entity for the Company's dental business for approximately $12 million in cash.
On January 31, 2000, the Company acquired Memorial Sisters of Charity Health Network ("MSCHN"), a Houston based health plan for approximately $50 million in cash.
On 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 $14 million in cash. The Company has subsequently transferred operating responsibility for all acquired FPA medical centers under long-term provider agreements.
The above acquisitions were accounted for under the purchase method of accounting. In connection with these acquisitions, the Company allocated the acquisition cost to net tangible and identifiable intangible assets based upon their fair value. Identifiable intangible assets primarily relate to the cost of the acquired licenses and provider contracts. Any remaining value not assigned to net tangible or identifiable intangible assets was then allocated to cost in excess of net assets acquired, or goodwill. Goodwill and identifiable intangible assets acquired, recorded in connection with the acquisitions preliminarily, was $71 million and $17 million for the nine months ended September 30, 2000 and 1999, respectively. The identifiable intangible assets are being amortized over periods ranging from five to 20 years while goodwill is being amortized over periods ranging from six to 20 years.
-7-
______________________________________________________________________________________
Notes to Condensed Consolidated Financial Statements, continued
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 generally annual contracts with various states except for the two-year contract with the Health Insurance Administration in Puerto Rico which expires April 30, 2001. Additionally, the Company has renewed its TRICARE contract for up to two additional years, subject to annual renewal terms, beginning July 1, 2001. The loss of these contracts (other than the contract in Puerto Rico) 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.
During the ordinary course of its business, the Company is or may become subject to pending or threatened litigation or other legal actions. These include, but are not limited to, routine, regular and special audits by HCFA, state insurance departments, the Office of Personnel Management, the Office of Inspector General and other state and federal regulatory agencies. Management does not believe that any pending or 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. However, the likelihood or outcome of current or future suits cannot be accurately predicted, and they could adversely affect the Company's financial position, results of operations or cash flows. See Legal Proceedings in Part II.
Basic earnings per common share is computed on the basis of the weighted average number of unrestricted common shares outstanding. Diluted earnings per common share is computed on the basis of the weighted average number of unrestricted common shares outstanding plus the dilutive effect of outstanding employee stock options and restricted shares using the "treasury stock" method.
There were no adjustments required to be made to net income for purposes of computing basic or diluted earnings per common share. Reconciliations of the average number of unrestricted common shares outstanding used in the calculation of basic earnings per common share and diluted earnings per common share for the quarters and nine months ended September 30, 2000 and 1999 are as follows:
Quarters Ended |
Nine Months Ended |
||||||
2000 |
1999 |
2000 |
1999 |
||||
Shares used to compute basic earnings per |
|
|
|
|
|||
Effect of dilutive employee stock options and |
|
|
|
|
|||
Shares used to compute diluted earnings per |
|
|
|
|
|||
Number of antidilutive employee stock options |
|
|
|
|
-8-
______________________________________________________________________________________
Notes to Condensed Consolidated Financial Statements, continued
Details supporting the computation of comprehensive income for the quarters and nine months ended September 30, 2000 and 1999 are as follows (in millions):
Quarters Ended |
Nine Months Ended |
||||||||
2000 |
1999 |
2000 |
1999 |
||||||
Net income |
$ |
23 |
$ |
22 |
$ |
63 |
$ |
34 |
|
Net unrealized investment gains (losses), net of tax |
10 |
(8) |
11 |
(34) |
|||||
Comprehensive income |
$ |
33 |
$ |
14 |
$ |
74 |
$ |
|
The Company maintains a revolving credit agreement ("Credit Agreement") which provides a line of credit of up to $1.0 billion and expires in August 2002. Principal amounts outstanding under the Credit Agreement bear interest at either a fixed rate or a floating rate, ranging from LIBOR plus 35 basis points to LIBOR plus 80 basis points, depending on the Company's credit ratings. The Credit Agreement contains customary covenants and events of default including, but not limited to, financial tests for interest coverage and leverage. The Company was in compliance with all covenants at September 30, 2000. The Company also maintains and issues short-term debt securities under a commercial paper program, which is backed by the Credit Agreement. All borrowings outstanding at September 30, 2000 were issued under the commercial paper program. The average interest rate on commercial paper borrowings was 7.1 percent and 6.7 percent for the quarter and nine months ended September 30, 2000, respectively.
In July 2000, the Company's Board of Directors authorized the repurchase of up to five million of its common shares. This program allows the Company to repurchase the shares from time to time in open-market purchases, in negotiated transactions, or by using forward-purchase contracts. Shares repurchased under the Board of Directors' authorization are used in connection with various equity incentive plans aimed at the retention of key employees. Through September 30, 2000, the Company paid $26 million to repurchase 3.3 million of its common shares at an average cost of $7.65 per share.
In August 2000, the Company awarded 4.8 million shares of restricted stock to key employees all of which vest in August 2003. Deferred compensation under this restricted stock award is amortized ratably over the three year vesting period. In conjunction with the restricted stock grant, 1.7 million treasury shares were reissued.
The Company is 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, ASO, and
military or TRICARE business. The Small Group segment includes small group commercial (under 100 employees) and specialty benefit lines, including dental, life and short-term disability. During the second quarter of 2000, the Company refined its
allocation of administrative
-9-
______________________________________________________________________________________
Notes to Condensed Consolidated Financial Statements, continued
expenses between segments based upon improved activity-based cost studies. Prior period segment administrative expenses were reclassified to conform with the current period presentation. Financial information for the Company's Health Plan and Small Group segments for the quarters and nine months ended September 30, 2000 and 1999 is as follows (in millions):
Quarters Ended |
Nine Months Ended |
|||||||||||||||||||
2000 |
1999 |
2000 |
1999 |
|||||||||||||||||
Premium revenues: |
||||||||||||||||||||
Health Plan |
$ |
1,823 |
$ |
1,740 |
$ |
5,516 |
$ |
5,120 |
||||||||||||
Small Group |
765 |
787 |
2,349 |
2,296 |
||||||||||||||||
Total premium revenues |
$ |
2,588 |
$ |
2,527 |
$ |
7,865 |
$ |
7,416 |
||||||||||||
Underwriting margin: |
||||||||||||||||||||
Health Plan |
$ |
248 |
$ |
235 |
$ |
735 |
$ |
630 |
||||||||||||
Small Group |
161 |
144 |
466 |
408 |
||||||||||||||||
Total underwriting margin |
$ |
409 |
$ |
379 |
$ |
1,201 |
$ |
1,038 |
||||||||||||
Income before income taxes: |
||||||||||||||||||||
Health Plan |
$ |
11 |
$ |
32 |
$ |
55 |
$ |
47 |
||||||||||||
Small Group |
18 |
2 |
25 |
$ |
6 |
|||||||||||||||
Total income before income taxes |
$ |
29 |
$ |
34 |
$ |
80 |
$ |
53 |
For the nine months ended September 30, 1999, Health Plan and Small Group underwriting margin and pretax results include $66 million and $24 million, respectively, of additional medical expense recorded during the quarter ended March 31, 1999 as previously discussed in Note B.
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. 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 on January 1, 2001 will not have a material impact on the Company's financial position, results of operations or cash flows.
Certain reclassifications have been made to the prior year's condensed consolidated financial statements to conform with the current year presentation.
-10-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Humana Inc.
Cautionary Statements
The statements contained in this Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, presentations to securities analysts or investors, and in oral statements made by or with the approval of one of the Company's executive officers, the words or phrases "believes," "anticipates," "intends," "will likely result," "estimates," "projects" or similar expressions are intended to identify such forward-looking statements. Any of these forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results discussed in the forward-looking statements. Readers are cautioned that a number of factors, which are described herein, 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, including the Patients' Bill of Rights Act and the Health Insurance Portability and Accountability Act, any changes in the Medicare reimbursement system, the ability of health care providers (including physician practice management companies) to comply with current contract terms, renewal of the Company's provider contracts at favorable rates and renewal of the Company's Medicare, Medicaid and TRICARE contracts with various governmental authorities. Such factors also include the effects of other general business conditions, including but not limited to, premium rate and yield changes, retrospective premium adjustments, changes in commercial and Medicare HMO membership, medical and pharmacy cost trends, the ability to negotiate favorable rates with providers, compliance with debt covenants, changes in the Company's debt rating and its ability to borrow under its commercial paper program, operating subsidiary capital requirements, the success of the Company's improvement initiatives including its e-business strategies, competition, general economic conditions and the retention of key employees. In addition, the Company and the managed care industry as a whole are experiencing increased governmental audits, investigations and litigation, and negative publicity, including alleged class action suits challenging various managed care practices and suits seeking significant punitive damages awards. 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
Humana is one of the nation's largest publicly traded health services companies that facilitates the delivery of health care services through networks of providers to its approximately 5.4 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 and administrative services ("ASO") to those who self-insure their employee health plans. In total, the Company's products are licensed in 49 states, the District of Columbia and Puerto Rico, with approximately 19 percent of its membership in the state of Florida.
The Company is 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, ASO, and military or TRICARE business. The Small Group segment includes small group commercial (under 100 employees) and specialty benefit lines, including dental, life and short-term disability. Results of each segment are measured based upon results of operations before income taxes. The Company allocates administrative expenses, interest income and interest expense, but no assets, to the segments. Members in the same geographic area that are 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 commercial employers has historically been more competitive than that to small group commercial employers, resulting in less favorable underwriting margins for the large group commercial line of business. Costs to distribute and administer products to small group commercial employers are higher compared to large group commercial employers resulting in small group's higher administrative expense ratio.
-11-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Humana Inc.
Recent Transactions
Divestitures
Effective July 1, 2000, the Company completed transactions to reinsure its Medicare supplement business and sell its North Florida Medicaid business. On April 10, 2000 and March 31, 2000, the Company completed the sale of its workers' compensation administrative services and run-off businesses, respectively. The Company recorded an estimated $118 million loss in 1999 related to these four transactions. There was no change in the estimated loss during 2000. Cash proceeds were $101 million ($32 million net of divested subsidiary's cash) for the nine months ended September 30, 2000. Revenue and pretax results associated with these four businesses for the quarters and nine months ended September 30, 2000 and 1999 were as follows (in millions):
Quarters Ended |
Nine Months Ended |
|||||||||||
2000 |
1999 |
2000 |
1999 |
|||||||||
Revenues |
$ |
__ |
$ |
55 |
$ |
103 |
$ |
165 |
||||
Pretax results |
$ |
__ |
$ |
(4) |
$ |
(8) |
$ |
(10) |
Acquisitions
On August 17, 2000, the Company acquired Jacobson Management Group, Inc., a hospital in-patient management services firm for approximately $5 million in cash.
On June 9, 2000, the Company acquired American Physicians Life Insurance Company, an operating shell entity for the Company's e-business for approximately $7 million in cash.
On May 10, 2000, the Company acquired Wisconsin National Life Insurance Company, an operating shell entity for the Company's dental business for approximately $12 million in cash.
On January 31, 2000, the Company acquired Memorial Sisters of Charity Health Network ("MSCHN"), a Houston based health plan for approximately $50 million in cash.
On 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 $14 million in cash. The Company has subsequently transferred operating responsibility for all acquired FPA medical centers under long-term provider agreements.
The above acquisitions were accounted for under the purchase method of accounting. In connection with these acquisitions, the Company allocated the acquisition cost to net tangible and identifiable intangible assets based upon their fair value. Identifiable intangible assets primarily relate to the cost of the acquired licenses and provider contracts. Any remaining value not assigned to net tangible or identifiable intangible assets was then allocated to cost in excess of net assets acquired, or goodwill. Goodwill and identifiable intangible assets acquired, recorded in connection with the acquisitions preliminarily, was $71 million and $17 million for the nine months ended September 30, 2000 and 1999, respectively. The identifiable intangible assets are being amortized over periods ranging from five to 20 years while goodwill is being amortized over periods ranging from six to 20 years.
First Quarter 1999 Additional Medical Expense and Tangible Asset Gain
During the first quarter of 1999, the Company recorded $90 million of additional medical expense for premium deficiency, reserve strengthening and provider costs. As a result of management's assessment of the profitability of its contracts for providing health care services to its members in certain markets, the Company recorded a provision for probable future losses (premium deficiency) of $50 million. Ineffective provider risk-sharing contracts and the impact of the March 31, 1999 HCA - The Healthcare Company, formerly Columbia/HCA Healthcare Corporation ("HCA") hospital agreement in Florida on current and projected future medical costs contributed to the premium deficiency. The beneficial effect from losses charged to the premium deficiency liability was $14 million and $32
-12-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Humana Inc.
million for the quarter and nine months ended September 30, 1999, respectively. Remaining liabilities related to premium deficiency provisions recorded in 1998 and 1999 were exhausted as of December 31, 1999 and, therefore, there was no beneficial effect from losses charged to these liabilities in the first nine months of 2000. Because the majority of the Company's customers' contracts renew annually, the Company does not anticipate the need for a premium deficiency charged to earnings in 2000, absent unanticipated adverse events or changes in circumstances.
Prior period adverse claims development primarily in the Company's PPO and Medicare products initially identified during an analysis of February and March 1999 medical claims resulted in a $35 million reserve strengthening. The Company releases or strengthens medical claims reserves when favorable or adverse development in prior periods exceed actuarial margins existing in the reserves. In addition, the Company paid HCA $5 million to settle certain contractual issues associated with the March 31, 1999 hospital agreement in Florida.
Also during the first quarter of 1999, the Company recorded a $12 million gain on the sale of a tangible asset which has been included in interest and other income in the accompanying Condensed Consolidated Statements of Income.
Comparison of Results of Operations
In order 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, 2000 (the "2000 period") and 1999 (the "1999 period"), excludes the previously described medical expenses and tangible asset gain recorded in the 1999 period, but does include the beneficial effect related to premium deficiency in operating results for the period shown. There are no excluded items associated with the 2000 period, or for the quarters ended September 30, 2000 (the "2000 quarter") and September 30, 1999 (the "1999 quarter"). Results reported in the Condensed Consolidated Statements of Income ("Reported Results") reconcile to the results contained in the following discussion ("Adjusted Results") for the 1999 period as follows (in millions, except per share data):
Nine Months Ended September 30, 1999 |
||||||||||||
Reported |
Excluded |
Adjusted |
||||||||||
Condensed Consolidated Statement of Income |
||||||||||||
caption items that are adjusted: |
||||||||||||
Interest and other income |
$ |
123 |
$ |
(12) |
$ |
111 |
||||||
Total revenues |
7,539 |
(12) |
7,527 |
|||||||||
Operating expenses: |
||||||||||||
Medical |
6,378 |
(90) |
6,288 |
|||||||||
Total operating expenses |
7,461 |
(90) |
7,371 |
|||||||||
Income before income taxes |
53 |
78 |
131 |
|||||||||
Net income |
$ |
34 |
$ |
49 |
$ |
83 |
||||||
Basic earnings per common share |
$ |
0.20 |
$ |
0.30 |
$ |
0.50 |
||||||
Diluted earnings per common share |
$ |
0.20 |
$ |
0.30 |
$ |
0.50 |
Nine Months Ended September 30, 1999 |
||||||
|
Ratio |
|
||||
Medical expense ratios: |
|
|
|
|||
Small Group |
82.2% |
(1.0)% |
81.2% |
|||
Totals |
86.0% |
(1.2)% |
84.8% |
(a) |
The item excluded from interest and other income is the $12 million gain on sale of a tangible asset. The items excluded from 1999 medical expenses are the $50 million premium deficiency, $35 million reserve strengthening and $5 million of provider costs. |
-13-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Quarters Ended September 30, 2000 and 1999
During the 2000 quarter, the Company continued its progress to eliminate non-core businesses and position core businesses for growth. Non-core businesses, which currently represent 6.7 percent of total medical membership, are those operations or products that are both unprofitable and for which the Company sees no long-term opportunity. Core businesses include those businesses that have critical mass, growth potential, a history of steady performance and are either profitable or have the potential to be profitable in the near term. Steps taken to reduce the Company's non-core businesses include announcing the exit of 45 Medicare counties effective January 1, 2001 and the exit of 17 small group commercial markets, affecting approximately 80,000 and 25,000 remaining members as of September 30, 2000, respectively. The Company has also completed transactions to reinsure its Medicare supplement business and sell its North Florida Medicaid business affecting 39,000 and 96,000 non-core members, respectively. Consolidated and segment results discussion follows.
The Company's premium revenues increased 2.4 percent to $2.6 billion for the 2000 quarter, compared to $2.5 billion for the 1999 quarter primarily driven by increases in premium yields partially offset by a decline in membership. Commercial and Medicare HMO premium yields averaged 13.5 and 5.5 percent, respectively, in the 2000 quarter versus 6.7 and 4.0 percent, respectively, in the 1999 quarter. Due to the impact these premium increases had on commercial member retention, total medical membership declined 574,400 members or 9.5 percent from the 1999 quarter.
The Company's medical expense ratio for the 2000 quarter was 84.2 percent, compared to 85.0 percent for the 1999 quarter. Improving commercial claims experience from lower pharmacy cost trends and the reduction of higher cost, non-core membership was partially offset by higher Medicare utilization in the 45 Medicare counties the Company will be exiting January 1, 2001. Commercial pharmacy cost trends improved to 6.7 percent compared to 20.4 percent from the conversion of members to a three-tier pharmacy benefit plan. During the 1999 quarter, the Company recorded an $8 million adjustment related to favorable development in the Company's workers' compensation liabilities.
The administrative expense ratio for the 2000 quarter was 15.5 percent, compared to 14.6 percent in the 1999 quarter. Contributing to this increase were planned investments in infrastructure and technology initiatives, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
Investment income totaled $26 million and $29 million for the 2000 and 1999 quarters, respectively. This decrease resulted from a lower average invested balance. Interest expense was unchanged comparing the 2000 and 1999 quarters as lower average borrowings were offset by higher interest rates.
The provision for income taxes in the 2000 quarter is provided for at the anticipated effective tax rate of 21 percent for the year. This lower effective tax rate, in comparison to the 1999 quarter of approximately 35 percent, is the result of recognizing the benefit of anticipated capital gains for which the Company has available capital loss carryforwards created from the sale of the workers' compensation business.
Pretax income totaled $29 million for the 2000 quarter, compared to $34 million for the 1999 quarter. Net income was $23 million, or $0.14 per diluted share in the 2000 quarter, compared to $22 million, or $0.13 per diluted share in the 1999 quarter. Excluding favorable workers' compensation and premium deficiency reserve adjustments, earnings would have been $0.05 per diluted share in the 1999 quarter.
-14-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Humana Inc.
Business Segment Information for the Quarters Ended September 30, 2000 and 1999
Certain financial data for the Company's two segments for the 2000 quarter and 1999 quarter is as follows (in millions):
Quarters Ended September 30, |
||||||||||
2000 |
1999 |
|||||||||
Premium revenues: |
|
|
|
|
||||||
$ |
2,588 |
$ |
2,527 |
|||||||
Income before income taxes: |
|
|
|
|
||||||
$ |
29 |
$ |
34 |
|||||||
Medical expense ratios: |
|
|
||||||||
84.2% |
85.0% |
|||||||||
Administrative expense ratios: |
|
|
||||||||
15.5% |
14.6% |
Health Plan
The Health Plan segment's premium revenues increased 4.8 percent to $1.8 billion for the 2000 quarter primarily due to increases in premium yields. Large group commercial premiums increased 1.4 percent to $589 million during the 2000 quarter from $581 million in the 1999 quarter. This increase was due to higher premium yields ranging from 10 to 11 percent during the 2000 quarter compared to a range of five to six percent for the 1999 quarter, reflecting the Company's improved pricing. Large group commercial membership fell 10.2 percent to 1,278,500 from the 1999 quarter as attrition from pricing actions and the termination of the State of Texas account was partially offset by acquired membership from the MSCHN acquisition. Medicare HMO premiums increased 12.2 percent to $828 million in the 2000 quarter compared to $738 million in the 1999 quarter due to higher premium yields, the MSCHN acquisition and increased membership. Premium yield increased to 5.5 percent in the 2000 quarter compared to 4.0 percent in the 1999 quarter due to the implementation of additional member premiums for many of the Company's Medicare members and improvement in the mix of members in markets with higher HCFA reimbursement rates. Medicare membership increased 23,800 members, or 4.9 percent, despite the exit of 30 Medicare counties on January 1, 2000. This increase was the result of strong sales initiatives in certain markets coupled with the acquired membership from the MSCHN acquisition. Medicaid premiums decreased $2 million or 1.3 percent from the 1999 quarter as the effect from the sale of its North Florida Medicaid business during the second quarter of 2000 was offset by the acquired MSCHN membership. The recent reinsurance of the Medicare supplement membership reduced Health Plan premiums $15 million during the 2000 quarter.
The Health Plan segment's medical expense ratio for the 2000 quarter was 86.4 percent, decreasing 10 basis points from 86.5 percent in the 1999 quarter. Improving large group pharmacy cost trends and the reduction of higher cost, non-core membership was partially offset by higher Medicare utilization in the 45 Medicare counties the Company will be exiting January 1, 2001. Large group commercial pharmacy cost trends improved to 6.0 percent compared to 19.6 percent from the conversion of members to a three-tier pharmacy benefit plan. During the 2000 quarter, the Company completed transactions to reinsure its Medicare supplement business, sell its North Florida Medicaid business and terminate the State of Texas account. These transactions eliminated approximately 182,000 higher cost members. During the 1999 quarter, the Company recorded an $8 million adjustment related to favorable development in the Company's workers' compensation liabilities.
-15-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Humana Inc.
The administrative expense ratio for the 2000 quarter increased to 13.8 percent compared to 12.5 percent for the 1999 quarter. This increase was the result of continued planned investments in infrastructure and technology initiatives, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
Pretax income totaled $11 million for the 2000 quarter, compared to $32 million for the 1999 quarter. Excluding favorable workers' compensation and premium deficiency reserve adjustments, pretax income would have been $14 million for the 1999 quarter.
Small Group
The Small Group segment's premium revenues decreased 2.8 percent to $765 million for the 2000 quarter from $787 million for the 1999 quarter. This decrease was due to a reduction in membership offset by higher premium yields ranging from 16 to 17 percent in the 2000 quarter compared to seven to eight percent in the 1999 quarter. During the 2000 quarter, the Company delivered accelerated rate increases in Colorado and Texas where higher than expected medical cost trends had been experienced. Attrition from rate increases and the announced exit of 17 small group commercial markets resulted in a reduction in small group commercial membership of 345,700 members or 20.3 percent from the 1999 quarter.
The Small Group segment's medical expense ratio for the 2000 quarter was 79.0 percent, decreasing from 81.7 percent for the 1999 quarter. This decrease was the result of lower small group commercial cost trends which were in the nine to 10 percent range in the 2000 quarter compared to the 10 to 11 percent range for the 1999 quarter. This improvement is primarily attributable to declining pharmacy cost trends from 22.4 percent to 6.1 percent, corrective pricing related to the higher cost open access product and membership reduction in the Company's 17 small group commercial exit markets.
The Small Group segment's administrative expense ratio increased to 19.6 percent compared to 19.1 percent for the 1999 quarter. This increase was the result of continued planned investments in infrastructure and technology initiatives, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
Pretax income totaled $18 million for the 2000 quarter compared to $2 million for the 1999 quarter. Excluding favorable premium deficiency reserve adjustments, pretax loss would have been $2 million for the 1999 quarter. This earnings increase is attributable to the Company's pricing actions and the continued improvement in pharmacy cost trends offset by increased administrative expenses.
Nine Months Ended September 30, 2000 and 1999
The Company's premium revenues increased 6.1 percent to $7.9 billion for the 2000 period compared to $7.4 billion for the 1999 period. Higher premium revenues in all lines of business resulted from increased premium yields as a result of pricing actions implemented by the Company during the 2000 period, partially offset by membership reduction as a result of these price increases.
The Company's medical expense ratio for the 2000 period was 84.7 percent compared to an adjusted medical expense ratio of 84.8 percent for the 1999 period. Improving commercial claims experience from lower pharmacy cost trends and the reduction of higher cost, non-core membership was partially offset by higher Medicare utilization in the 45 Medicare counties the Company will be exiting. Commercial pharmacy cost trends improved to 6.6 percent compared to 20.0 percent from the conversion of members to a three-tier pharmacy benefit plan. During the 1999 period, the Company recorded a $23 million adjustment related to favorable development in the Company's workers' compensation liabilities and a $6 million adjustment to premium deficiency reserves from the decision to maintain a presence in Puerto Rico with a favorable two year contract extension.
The administrative expense ratio was 15.1 percent and 14.6 percent for the 2000 and 1999 periods, respectively. Contributing to this increase were planned investments in infrastructure and technology initiatives, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
-16-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Investment income totaled $82 million in the 2000 period, compared to $103 million in the 1999 period. This decrease is primarily attributable to investment gains realized in the 1999 period and a lower average invested balance. Interest expense declined $3 million during the 2000 period as a result of lower average borrowings.
The provision for income taxes in the 2000 period is provided for at the anticipated effective tax rate of 21 percent for the year. This lower effective tax rate, in comparison to the 1999 period of approximately 35 percent, is the result of recognizing the benefit of anticipated capital gains for which the Company has available capital loss carryforwards created from the sale of the workers' compensation business.
Pretax income totaled $80 million for the 2000 period, compared to adjusted pretax income of $131 million for the 1999 period. Net income was $63 million, or $0.38 per diluted share, in the 2000 period compared to adjusted net income of $83 million, or $0.50 per diluted share, in the 1999 period. Excluding the beneficial effects of previously established premium deficiency and severance charges, favorable workers' compensation liability development and non-recurring investment gains, earnings per diluted share would have been $0.22 in the 1999 period.
Business Segment Information for the Nine Months Ended September 30, 2000 and 1999
Certain financial data for the Company's two segments for the 2000 period and 1999 period is as follows (in millions):
Nine Months Ended |
|||||||||||
2000 |
1999(a) |
||||||||||
Premium revenues: |
|
|
|
|
|||||||
$ |
7,865 |
$ |
7,416 |
||||||||
Adjusted income before income taxes: |
|
|
|
|
|||||||
$ |
80 |
$ |
131 |
||||||||
Adjusted medical expense ratios: |
|
|
|||||||||
84.7% |
84.8% |
||||||||||
Administrative expense ratios: |
|
|
|||||||||
15.1% |
14.6% |
(a) |
Excludes $90 million ($66 million Health Plan and $24 million Small Group) of medical expense related to premium deficiency, reserve strengthening and provider costs and $12 million ($7 million Health Plan and $5 million Small Group) gain on the sale of a tangible asset. |
-17-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Health Plan
The Health Plan segment's premium revenues increased 7.7 percent to $5.5 billion for the 2000 period from $5.1 billion for the 1999 period primarily due to increases in premium yields. Large group commercial premiums increased 1.8 percent to $1.8 billion during the 2000 period. This increase was due to higher premium yields, reflecting the Company's improved pricing. Large group commercial membership fell as attrition from pricing actions was partially offset by acquired membership from the MSCHN acquisition. Medicare HMO premiums increased 13.0 percent to $2.5 billion in the 2000 period from $2.2 billion in the 1999 period due to higher premium yields, the MSCHN acquisition and increased membership. Medicare premium yields increased due to improvement in the mix of members in markets with higher HCFA reimbursement rates and the implementation of additional member premiums for many of the Company's Medicare members. Medicare membership increased despite the exit of 30 Medicare counties on January 1, 2000. This membership increase was the result of strong sales initiatives in certain markets coupled with the acquired membership from the MSCHN acquisition. Medicaid premiums increased $64 million or 14.1 percent from the 1999 period primarily from the MSCHN acquisition and TRICARE premiums increased $33 million or 5.2 percent from the 1999 period resulting from an annual rate increase and other favorable contractual adjustments.
The Health Plan segment's medical expense ratio for the 2000 period was 86.7 percent, increasing 30 basis points from an adjusted 86.4 percent in the 1999 period. Higher than expected Medicare utilization in the 45 Medicare counties the Company will be exiting January 1, 2001 was partially offset by improving large group commercial pharmacy cost trends and the reduction of higher cost, non-core membership. Large group commercial pharmacy cost trends improved to 6.8 percent compared to 18.5 percent from the conversion of members to a three-tier pharmacy benefit plan. During the 1999 period, the Company recorded a $23 million adjustment related to favorable development in the Company's workers' compensation liabilities and a $6 million adjustment to premium deficiency reserves from the decision to maintain a presence in Puerto Rico with a favorable two year contract extension.
The administrative expense ratio for the 2000 period increased to 13.2 percent compared to 12.7 percent for the 1999 period. Contributing to this increase were planned investments in infrastructure and technology, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
Pretax income totaled $55 million for the 2000 period compared to adjusted pretax income of $106 million for the 1999 period. Excluding the beneficial effects of previously established premium deficiency and severance charges, favorable workers' compensation liability development and non-recurring investment gains, pretax income would have been $39 million in the 1999 period. Improving large group commercial pharmacy cost trends and the reduction of high cost, non-core membership was offset by higher utilization in the 45 Medicare exit counties and increased administrative costs.
Small Group
The Small Group segment's premium revenues increased 2.3 percent to $2.3 billion for the 2000 period. This increase was due to higher premium yields reflecting the Company's improved pricing, partially offset by reduced membership in the small group commercial product. Small group commercial membership declined 345,700 members or 20.3 percent from the 1999 period due to attrition in reaction to these price increases.
The Small Group segment's medical expense ratio for the 2000 period was 80.2 percent, decreasing from an adjusted medical expense ratio of 81.2 percent for the 1999 period. This improvement is primarily attributable to declining pharmacy cost trends from 24.5 percent to 6.3 percent, corrective pricing related to the higher cost open access product and membership reduction in the Company's 17 small group commercial exit markets. The improvement in the pharmacy cost trend resulted from the progressive implementation of the three-tier pharmacy benefit.
-18-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Humana Inc.
The Small Group segment's administrative expense ratio increased to 19.6 percent compared to 19.0 percent for the 1999 period. This increase was the result of continued planned investments in infrastructure and technology, a lower ratio of members to employees and an increase in amortization expense from the change to a 20 year life for goodwill previously amortized over 40 years.
Pretax income totaled $25 million for the 2000 period compared to an adjusted amount of $25 million for the 1999 period. Excluding the beneficial effects of previously established premium deficiency and non-recurring investment gains, adjusted pretax income would have been $18 million for the 1999 period. This earnings increase is attributable to the Company's pricing actions and the continued improvement in pharmacy cost trends offset by increased administrative expenses.
Liquidity and Capital Resources
Pro forma cash flows for the nine months ended September 30, 2000 and 1999, excluding the effects of the timing of Medicare premium receipts and the previously funded workers' compensation claim payments is as follows (in millions):
|
Nine Months Ended |
||||
2000 |
1999 |
||||
Cash used in operating activities |
$ |
(239) |
$ |
(241) |
|
Pro forma cash flows provided by operating activities |
$ |
42 |
$ |
86 |
2000 pro forma operating cash flow was impacted primarily by a reduction in claims inventory and run-off claim payments related to terminated membership. Partially mitigating these items was lower workers' compensation claim payments from the sale of this run-off business.
The Company used net proceeds from divestitures of $101 million ($32 million net of divested subsidiary's cash) to reduce debt and reinvest in infrastructure and information technology. The divested businesses included total assets of $625 million, primarily consisting of marketable securities and reinsurance recoverables and total liabilities of $431 million, primarily consisting of workers' compensation claim liabilities. In July 2000, the Company paid $10 million to reinsure its Medicare supplement business and $13 million to transfer claim liabilities to the reinsurer.
As of September 30, 2000, the Company has repurchased approximately 3.3 million of its common shares for a total cost of $26 million, primarily from borrowed funds.
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. 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 certain subsidiaries of approximately $80 million.
After this capital infusion, the Company would have approximately $120 million of capital and surplus above the required RBC level considering all subsidiaries on a combined basis.
-19-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
The Company maintains a revolving credit agreement ("Credit Agreement") which provides a line of credit of up to $1.0 billion and expires in August 2002. Principal amounts outstanding under the Credit Agreement bear interest at either a fixed rate or a floating rate, ranging from LIBOR plus 35 basis points to LIBOR plus 80 basis points, depending on the Company's credit ratings. The Credit Agreement contains customary covenants and events of default including, but not limited to, financial tests for interest coverage and leverage. The Company was in compliance with all covenants at September 30, 2000. The Company also maintains and issues short-term debt securities under a commercial paper program, which is backed by the Credit Agreement. All borrowings outstanding at September 30, 2000 were issued under the commercial paper program. The average interest rate on commercial paper borrowings was 7.1 percent and 6.7 percent for the quarter and nine months ended September 30, 2000, respectively.
Management believes that funds from future operating cash flows and funds available under the existing 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 relate primarily to information systems and administrative facilities necessary for activities such as claims processing, billing and collections, medical utilization review and customer service. Planned capital spending for the remainder of 2000 will approximate $30 million to $35 million primarily for the funding of the Company's technology initiatives and expansion and improvement of its administrative facilities.
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. 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 on January 1, 2001 will not have a material impact on the Company's financial position, results of operations or cash flows.
-20-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Quarterly Membership |
2000 |
1999 |
March 31 June 30 September 30 December 31 Medicare HMO members at: March 31 June 30 September 30 December 31 TRICARE members at: March 31 June 30 September 30 December 31 Administrative Services members at: March 31 June 30 September 30 December 31 Medicaid and other members at: March 31 June 30 September 30 December 31 Total Health Plan members at: March 31 June 30 September 30 December 31 Small Group: Small group commercial members at: March 31 June 30 September 30 December 31 Total medical members at: March 31 June 30 September 30 December 31 Specialty members at: March 31 June 30 September 30 December 31 |
1,369,000 1,278,500 518,000 522,100 513,100 1,060,000 1,049,100 1,063,200 657,000 655,700 647,300 697,400 713,900 584,400 4,341,400 4,309,800 4,086,500 1,568,500 1,475,500 1,361,100 5,909,900 5,785,300 5,447,600 2,980,100 2,491,500 2,394,500 |
1,478,300 1,424,400 1,420,500 480,700 484,800 489,300 488,500 1,085,700 1,064,600 1,065,500 1,058,000 617,900 636,700 641,000 648,000 704,300 707,200 695,000 661,100 4,384,100 4,371,600 4,315,200 4,276,100 1,676,200 1,695,700 1,706,800 1,663,100 6,060,300 6,067,300 6,022,000 5,939,200 2,771,900 2,837,600 2,890,100 2,961,300 |
-21-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Operations (Unaudited)
2000 |
||||||||
First |
Second |
Third |
Total |
|||||
Revenues: |
||||||||
Premiums by segment: |
||||||||
Health Plan |
$ |
1,806 |
$ |
1,887 |
$ |
1,823 |
$ |
5,516 |
Small Group |
805 |
779 |
765 |
2,349 |
||||
Total premiums |
2,611 |
2,666 |
2,588 |
7,865 |
||||
Interest and other income |
31 |
30 |
28 |
89 |
||||
Total revenues |
2,642 |
2,696 |
2,616 |
7,954 |
||||
Operating expenses: |
||||||||
Medical |
2,220 |
2,265 |
2,179 |
6,664 |
||||
Selling, general and administrative |
353 |
363 |
363 |
1,079 |
||||
Depreciation and amortization |
34 |
37 |
38 |
109 |
||||
Total operating expenses |
2,607 |
2,665 |
2,580 |
7,852 |
||||
Income from operations |
35 |
31 |
36 |
102 |
||||
Interest expense |
8 |
7 |
7 |
22 |
||||
Income before income taxes |
27 |
24 |
29 |
80 |
||||
Provision for income taxes |
6 |
5 |
6 |
17 |
||||
Net income |
$ |
21 |
$ |
19 |
$ |
23 |
$ |
63 |
Basic earnings per common share |
$ |
0.13 |
$ |
0.11 |
$ |
0.14 |
$ |
0.38 |
Diluted earnings per common share |
$ |
0.13 |
$ |
0.11 |
$ |
0.14 |
$ |
0.38 |
Medical expense ratios: |
||||||||
Health Plan |
86.9% |
86.7% |
86.4% |
86.7% |
||||
Small Group |
80.7% |
80.7% |
79.0% |
80.2% |
||||
Totals |
85.0% |
85.0% |
84.2% |
84.7% |
||||
Administrative expense ratios: |
||||||||
Health Plan |
12.9% |
12.9% |
13.8% |
13.2% |
||||
Small Group |
19.1% |
20.0% |
19.6% |
19.6% |
||||
Totals |
14.8% |
15.0% |
15.5% |
15.1% |
-22-
______________________________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued
Supplemental Consolidated Statement of Quarterly Operations (Unaudited)
1999 |
||||||||||
First(a) |
Second |
Third |
Fourth(b) |
Total |
||||||
Revenues: |
||||||||||
Premiums by segment: |
||||||||||
Health Plan |
$ |
1,682 |
$ |
1,698 |
$ |
1,740 |
$ |
1,727 |
$ |
6,847 |
Small Group |
746 |
763 |
787 |
816 |
3,112 |
|||||
Total premiums |
2,428 |
2,461 |
2,527 |
2,543 |
9.959 |
|||||
Interest and other income |
49 |
44 |
30 |
31 |
154 |
|||||
Total revenues |
2,477 |
2,505 |
2,557 |
2,574 |
10,113 |
|||||
Operating expenses: |
||||||||||
Medical |
2,136 |
2,094 |
2,148 |
2,154 |
8,532 |
|||||
Selling, general and administrative |
325 |
329 |
338 |
376 |
1,368 |
|||||
Depreciation and amortization |
31 |
30 |
30 |
33 |
124 |
|||||
Asset write-downs and other expenses |
|
|
|
460 |
460 |
|||||
Total operating expenses |
2,492 |
2,453 |
2,516 |
3,023 |
10,484 |
|||||
(Loss) income from operations |
(15) |
52 |
41 |
(449) |
(371) |
|||||
Interest expense |
10 |
8 |
7 |
8 |
33 |
|||||
(Loss) income before income taxes |
(25) |
44 |
34 |
(457) |
(404) |
|||||
(Benefit) provision for income taxes |
(9) |
16 |
12 |
(41) |
(22) |
|||||
Net (loss) income |
$ |
(16) |
$ |
28 |
$ |
22 |
$ |
(416) |
$ |
(382) |
Basic (loss) earnings per common share |
$ |
(0.10) |
$ |
0.17 |
$ |
0.13 |
$ |
(2.48) |
$ |
(2.28) |
Diluted (loss) earnings per common share |
$ |
(0.10) |
$ |
0.17 |
$ |
0.13 |
$ |
(2.48) |
$ |
(2.28) |
Medical expense ratios: |
||||||||||
Health Plan |
90.0% |
86.6% |
86.5% |
86.5% |
87.4% |
|||||
Small Group |
83.4% |
81.7% |
81.7% |
81.0% |
81.9% |
|||||
Totals |
88.0% |
85.1% |
85.0% |
84.8% |
85.7% |
|||||
Administrative expense ratios: |
||||||||||
Health Plan |
12.8% |
12.7% |
12.5% |
14.1% |
13.0% |
|||||
Small Group |
18.9% |
18.9% |
19.1% |
20.1% |
19.3% |
|||||
Totals |
14.7% |
14.6% |
14.6% |
16.0% |
15.0% |
(a) |
Includes $90 million of 1999 medical expense related to premium deficiency, reserve strengthening and provider costs and $12 million gain on sale of a tangible asset. |
(b) |
Includes expenses of $495 million primarily related to goodwill write-down, losses on non-core asset sales and professional liability reserve strengthening. |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Humana Inc.
Since the date of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, 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.
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Part II: Other Information
Item 1: Legal Proceedings
Managed Care Industry Litigation
On August 17, 2000, oral argument was heard before the United States District Court for the Southern District of Florida ("Court") on the motion of Humana to dismiss the consolidated complaint filed on June 23, 2000, in the matter of In Re Humana Managed Care Litigation and captioned Price v. Humana Inc. (the "Subscriber Track" case). Two days earlier, on August 15, 2000, the plaintiffs filed their Amended Motion for Class Certification, seeking a class consisting of all members of Humana medical plans, excluding Medicare and Medicaid plans, for the period from 1990 to 1999. Humana is scheduled to file its Opposition to Plaintiffs' Motion for Class certification on November 15, 2000.
In the meantime, on October 23, 2000, the Judicial Panel on Multi District Litigation ordered that similar litigation against other managed care organizations should be consolidated with the Humana litigation in the Southern District of Florida. The Panel's initial consolidation order included cases brought against six other managed care companies on behalf of members (so-called "Subscriber Track" cases) and litigation brought by statewide purported classes of providers against a number of managed care organizations (not including Humana) under Georgia prompt payment statutes. In addition, the Panel's order left in the Southern District of Florida a case filed against Humana and seven other companies that was filed on behalf of a nationwide class of (the so-called "Provider Track" action). In the months to come, other managed care class action cases pending around the country against defendants other than Humana may be transferred to the Southern District of Florida as well.
In the Provider Track action, captioned Shane v. Humana et al., the plaintiffs filed an amended consolidated complaint on August 11, 2000. Humana filed a motion to dismiss the complaint on September 8, 2000, and the seven other defendants have moved to dismiss the complaint and, in some cases, to compel arbitration of the provider claims. Oral argument on most of these motions, including Humana's motion to dismiss, was heard before the Court on October 26, 2000. On October 27, 2000, the Provider Track plaintiffs filed a motion for class certification. Humana is scheduled to file opposition papers to the plaintiffs' class certification motion on November 17, 2000.
Chipps v. Humana Health Insurance Company of Florida, Inc.
In this case, in which a jury in Palm Beach County, Florida, issued an approximately $80 million verdict in a case arising from removal of an insured from a special case management program, the United States District Court for the Southern District of Florida remanded the case to state court, following removal to federal court by a liability insurance carrier, ACE Bermuda. Humana's appeal of the jury verdict continues before the Fourth District Court of Appeals in Florida.
The Company believes the above actions are without merit and intends to pursue the defense of these actions vigorously.
Securities Litigation
On November 7, 2000, the United States District Court for the Western District of Kentucky issued a Memorandum Opinion and Order dismissing the action styled In re Humana Inc. Securities Litigation. That action had involved allegations that certain misleading statements had been made with regard to the impact of negotiations over renewal of the Company's contract with a major provider in 1999.
Government Audits and Other
The Florida Attorney General initiated an investigation in July, 2000, apparently relating to some of the same matters as are involved in the purported class action lawsuits described above (See Managed Care Industry Litigation ).
Damages for claims for personal injuries and medical benefit denials are usual in the Company's business. Personal injury and medical benefit denial 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 in states in which insurance coverage for punitive damages is not permitted. Other potential liabilities may not be covered by insurance, insurers may dispute coverage, or the amount of insurance may not be enough to cover the damages awarded. In addition, insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.
Due to the nature of its business, the Company is or may become subject to pending or threatened litigation or other legal actions relating to the failure to provide or pay for health care or other benefits, poor outcomes for care delivered or arranged under the Company's programs, nonacceptance or termination of providers, failure to return withheld amounts from provider compensation, and failure to disclose network discounts and various provider payment arrangements and claims relating to contract performance. Recent court decisions and legislative activity may increase our exposure for any of these types of claims.
Management does not believe that any pending or threatened legal actions against the Company or audits by agencies will have a material adverse effect on the Company's financial position or results of operations or cash flows. However, the likelihood or outcome of current or future suits cannot be accurately predicted, and they could adversely affect the Company's financial position, results of operations or cash flows.
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Part II: Other Information, continued
Item 2: |
Changes in Securities Defaults Upon Senior Securities None. Submission of Matters to a Vote of Security Holders None. Other Information None. Exhibits and Reports on Form 8-K |
|
(a) |
Exhibit Index |
|
(b) |
Other than the Form 8-K filed on July 14, 2000 and referenced in the June 30, 2000 Form 10-Q, there were no other reports filed on Form 8-K. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HUMANA INC. |
Date: November 14, 2000 |
By: /s/James E. Murray |
Date: November 14, 2000 |
By: /s/Arthur P. Hipwell |
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