- 2005 earnings guidance reaffirmed
- 2006 EPS expected to grow at least 25 percent
- Medicare membership up 5 percent sequentially, related guidance raised
- Consolidated medical expense ratio improved 60 basis points versus 2Q04
- 1H05 cash flows from operations up significantly year over year
LOUISVILLE, Ky., Aug. 1 /PRNewswire-FirstCall/ -- Humana Inc. (NYSE: HUM)
today reported $0.51 diluted earnings per common share (EPS) for the quarter
ended June 30, 2005 (2Q05) compared to $0.50 EPS for the quarter ended June
30, 2004 (2Q04). Results for 2Q05 were slightly better than the company
anticipated due to higher-than-expected enrollment gains in the company's
Medicare operations. (2Q04 EPS included $0.04 per share net benefit from
unusual items.)
"This quarter's results reflect the increasing momentum we are seeing in
our Medicare operations, together with solid execution in our other
diversified lines of business," said Michael B. McCallister, Humana's
president and chief executive officer. "Humana's dedication to the consumer,
supported by both innovation and operational diligence, has us well positioned
for future growth."
The company continues to anticipate EPS for the year ending December 31,
2005 (FY 2005) in the range of $2.23 to $2.25. The company also announced
that it further anticipates growth in EPS of at least 25 percent for 2006, or
$2.80 per share.
"Given the magnitude of our Medicare opportunity for 2006 and our thorough
preparation to take advantage of it, we are comfortable with our ability to
achieve the results we are forecasting today," McCallister said.
Consolidated Results Summary
- 2Q05 EPS of $0.51 compares to $0.50 for 2Q04. 2Q04 included a $0.04
per share unusual benefit, the net effect of a gain on the sale of a
venture capital investment and unusual expenses for severance and other
costs. The increase in operating earnings year over year was driven by
improved performance in the company's Government segment.
- First half 2005 (1H05) EPS of $1.18 rose 30 percent from $0.91 EPS in
the first half of 2004 (1H04). Unusual items recorded in each of these
periods increased 1H05 EPS by $0.14 per share and 1H04 EPS by $0.04 per
share. Year-over-year operating improvements during 1H05 were also
driven by results from the Government segment.
- 2Q05 consolidated revenues rose 3 percent to $3.55 billion from $3.43
billion in 2Q04, with total premium and administrative services fees up
4 percent compared to the prior year's quarter. Increases in Medicare
premium revenues more than offset the enrollment-driven decline in
Commercial segment revenues and lower TRICARE revenues year over year
associated with the implementation of the South Region contract in the
second half of 2004.
- 1H05 consolidated revenues of $6.93 billion increased 3 percent over
1H04 revenues of $6.72 billion, also driven by higher Government
segment premiums. Continued growth in Medicare enrollment together
with a more significant year-over-year increase in TRICARE revenues in
the latter half of 2005 should result in forecasted revenue growth for
FY 2005 of more than 10 percent.
- The company's medical expense ratio (medical expenses as a percent of
premium revenue or MER) of 83.8 percent improved 60 basis points from
2Q04, with year over year MER declines in both of the company's
business segments.
- The company's consolidated Selling, General, & Administrative (SG&A)
expense ratio (SG&A expenses as a percent of premiums plus
administrative services fees) was 13.9 percent for 2Q05, a 50 basis
point improvement versus the prior year.
- The company achieved a pretax margin of 3.6 percent in 2Q05, in line
with that for 2Q04 despite a 30-basis-point benefit from unusual items
in the prior year. The 1H05 pretax margin of 3.6 percent also compares
favorably to 3.4 percent in 1H04, including the 20-basis-point-benefit
from unusual items in 1H04.
- The company continues to anticipate EPS for the second half of 2005 to
be in the range of $1.05 to $1.07. Third quarter 2005 EPS expectations
reflect revised timing by the Centers for Medicare and Medicaid
Services (CMS) to complete their Medicare risk adjustment premium
process, resulting in $0.16 EPS moving from the third quarter to the
fourth quarter.
Government Segment Results Summary
Pretax earnings:
- Government segment pretax income was $104.1 million in 2Q05 compared to
$85.4 million in 2Q04, an increase of 22 percent, the result of
significant growth in the company's Medicare membership combined with a
slight improvement in the performance of the company's TRICARE
operations year over year.
- For 1H05, Government segment pretax income of $176.3 million increased
18 percent versus 1H04, with a significant increase in Medicare
operations performance together with slightly improved results in the
company's TRICARE business year over year.
Enrollment:
- Organic growth in Medicare Advantage membership increased during 2Q05
due primarily to expanded participation in various Medicare programs
and markets combined with marketing and other related spending in these
programs by the company. Medicare membership of 474,300 at June 30,
2005 increased 24,400 members or 5 percent from 449,900 at March 31,
2005 and 106,400 members or 29 percent from June 30, 2004.
- Medicare Advantage geographic expansions approved by CMS during 2Q05
are anticipated to contribute to continued enrollment growth, with
projected membership in the range of 540,000 to 550,000 by the end of
2005.
- As expected, TRICARE membership of 2,876,400 at June 30, 2005 was
essentially unchanged from March 31, 2005. The company also
anticipates no material change in TRICARE membership for the remainder
of 2005.
Revenues:
- Medicare Advantage premiums of $1.09 billion in 2Q05 increased 41
percent compared to $775 million in 2Q04, the result of substantially
higher enrollment and increases in per-member premiums.
- Medicare Advantage premiums per member increased 11 percent year over
year during both 2Q05 and 1H05. Given the company's diligence in
demonstrating the risk profile of its membership, premium yields are
anticipated to increase in the latter half of 2005, with full-year per-
member premiums projected to increase in the range of 11 to 13 percent.
- TRICARE premiums and administrative services fees during 2Q05 of $624.8
million reflect the implementation of the new South Region contract
with the Department of Defense, which included a reduction in the
benefits and services provided under previous contracts, and thus,
lower revenues. This contractual change accounted for the expected
year-over-year decline in TRICARE premiums and administrative services
fees of approximately 5 percent in 2Q05.
- For 2005, the company anticipates TRICARE premiums and administrative
services fees to approximate $2.5 billion as the company experiences a
full year under the new South Region contract.
- Government segment investment income for 2Q04 included $3.0 million
related to the gain from the sale of a venture capital investment.
Medical Expenses:
- The Government segment MER declined 40 basis points in 2Q05 compared to
the prior year, driven by lower increases in Medicare medical costs per
member.
- Medicare Advantage medical costs per member are now anticipated to
increase in the range of 9 to 11 percent for FY 2005 due to a lower
percentage of the company's Medicare Advantage members being enrolled
in capitated HMO plans.
SG&A Expenses:
- The Government segment's SG&A expense ratio for 2Q05 of 10.6 percent
was 170 basis points lower than that for 2Q04, as higher Medicare
revenues outpaced the increases in the segment's SG&A expenses during
the quarter. Results were similar for 1H05, with a 150 basis point
decline in the Government segment's SG&A expense ratio.
- Government segment SG&A expenses (both incurred to date and forecast
for 2005) include the impact of significant investment spending to
prepare for 2006 Medicare Advantage opportunities. Government segment
SG&A expenses for 2Q04 included $1.5 million in severance and other
unusual costs.
Commercial Segment Results Summary
Pretax earnings:
- Commercial segment pretax income decreased to $25.2 million in 2Q05
from $36.9 million in 2Q04, or 32 percent. Results for 2Q04 included a
$6.9 million net benefit from unusual items. Commercial segment
earnings declined as the result of lower commercial medical membership
in the 2 to 300 case-size accounts and a modest increase in the related
medical expense ratio, both primarily resulting from the competitive
price environment which had the largest impact for groups of this size.
- Pretax margin for the Commercial segment decreased 50 basis points year
over year to 1.5 percent in 2Q05 versus 2.0 percent in 2Q04. The
unusual items recorded in 2Q04 increased the segment's pretax margin by
40 basis points. The 1H05 pretax margin for the segment of 2.2 percent
was slightly improved from 2.1 percent for 1H04, despite the 20-basis-
point benefit in 1H04 from the effect of unusual items.
- Commercial segment earnings for FY 2005 are forecast to exceed FY 2004
earnings by 10 to 15 percent.
Enrollment:
- Commercial segment medical membership of 3,199,700 at June 30, 2005
decreased less than 1 percent or 19,700 from March 31, 2005, driven by
a decrease in fully-insured accounts.
- The company's HumanaOne product demonstrated continuing progress during
2Q05, growing individual membership sequentially by 8 percent.
Consumer-choice plan membership grew by 2 percent on a sequential
basis, totaling 358,500 members at June 30, 2005. As expected,
enrollment in administrative services only (ASO) products was
relatively unchanged from the first quarter 2005 since this business
generally renews at the beginning of the year.
Revenues:
- Premiums and administrative services fees for the Commercial segment
decreased 9 percent to $1.66 billion in 2Q05 compared to $1.83 billion
in the prior year's quarter, as administrative services fees from an 18
percent increase in ASO membership were more than offset by lower
premiums due to declines in at-risk enrollment.
- Commercial segment premiums and administrative services fees for 1H05
decreased 7 percent to $3.32 billion versus $3.57 billion in 1H04,
similarly impacted by substantial growth in ASO membership and
reductions in at-risk commercial medical enrollment.
- Commercial segment medical premiums for fully insured groups increased
approximately 8 percent on a per-member basis during 2Q05. The company
continues to anticipate FY 2005 commercial premiums for fully insured
group membership to increase in the range of 8 to 10 percent on a per-
member basis.
- Commercial segment investment income for 2Q04 included $13.0 million
related to the gain from the sale of the venture capital investment.
Medical Expenses:
- In 2Q05, the Commercial segment MER of 83.8 percent was 80 basis points
lower than the 2Q04 MER of 84.6 percent, reflecting the company's
improving risk profile in its commercial portfolio. For 1H05, the
Commercial segment MER of 83.0 percent decreased 110 basis points from
84.1 percent in 1H04, further reflecting the progress made in improving
the risk of its commercial book of business.
- Per-member medical costs for commercial fully insured group accounts
continue to be forecast to rise in the range of 8 to 10 percent for FY
2005.
SG&A Expenses:
- The Commercial segment's SG&A expenses declined $5.0 million or 2
percent in 2Q05 compared to the prior year. Commercial segment SG&A
expenses for 2Q04 included $6.1 million in severance and other unusual
costs. The segment's SG&A expense ratio was 17.5 percent in 2Q05
versus 16.2 percent in 2Q04, the result of lower average fully-insured
medical enrollment and a significantly higher percentage of ASO
business in 2Q05 than in the prior year.
Cash Flows from Operations
Cash flows provided by operations for 2Q05 of $181.9 million compared
favorably to $63.5 million cash flows provided by operations in 2Q04. Cash
flows provided by operations for 1H05 of $281.1 million increased
substantially from $24.9 million in 1H04 as a result of the timing of premium
payments received from CMS. The company also evaluates operating cash flows
on a non-GAAP basis, as described below.
The company continues to anticipate that cash flows from operations for FY
2005 will be in the range of $625 million to $675 million driven by expected
higher earnings.
Non-GAAP Cash Flows from Operations
The following is a reconciliation of the most directly comparable
historical and projected cash flows from operations prepared in accordance
with Generally Accepted Accounting Principles (GAAP), to the historical and
projected non-GAAP financial measures. When reviewing and analyzing Humana's
operating cash flows, company management applies the CMS premium payment in
each month to match the corresponding disbursements. To do otherwise distorts
meaningful analysis of the company's operating cash flow. Therefore,
decisions such as management's forecasting and business plans regarding cash
flow use this non-GAAP financial measure.
($ in 2Q04 2Q05 1H04 1H05 FY 2005
millions) Actual Actual Actual Actual Expected
GAAP cash
flows provided
by operations $63.5 $181.9 $24.9 $281.1 $625 to $675
Timing of
premium payment
receipt from
CMS - - 211.9 19.8 19.8
Non-GAAP cash
flows provided
by operations $63.5 $181.9 $236.8 $300.9 $625 to $675
Non-GAAP cash flows provided by operations for 2Q05 and 2Q04 were the same
as those determined under GAAP. The substantial increase in 1H05 non-GAAP
cash flows provided by operations versus that for 1H04 is attributable to
higher earnings year to date.
Balance Sheet
At June 30, 2005, cash and investment securities comprised 51 percent of
the company's total assets compared to 49 percent at March 31, 2005. Debt as
a percent of total capitalization (debt plus stockholders' equity) decreased
120 basis points to 27.5 percent from 28.7 percent at March 31, 2005 as the
company paid down certain of its outstanding debt obligations during the
quarter.
Conference Call & Virtual Slide Presentation
Humana will host a conference call, as well as a virtual slide
presentation, at 9:00 a.m. eastern time today to discuss its financial results
for the quarter and the company's expectations for future earnings.
A live virtual presentation (audio with slides) may be accessed via
Humana's Investor Relations page at http://www.humana.com. The company suggests web
participants sign on approximately 15 minutes in advance of the call. The
company also suggests web participants visit the site well in advance of the
call to run a system test and to download any free software needed to view the
presentation.
All parties interested in the audio-only portion of the conference call
are invited to dial 888-625-7430. No password is required. The company
suggests participants dial in approximately ten minutes in advance of the
call.
For those unable to participate in the live event, the virtual
presentation archive will be available in the Presentations section of the
Investor Relations page at http://www.humana.com.
Cautionary Statement
This news release contains forward-looking statements. The forward-
looking statements herein are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be significantly impacted by certain risks and uncertainties
described in the company's Form 10-K for the year ended December 31, 2004 and
its Form 10-Q for the quarter ended March 31, 2005, as filed by Humana with
the Securities and Exchange Commission.
About Humana
Humana Inc., headquartered in Louisville, Ky., is one of the nation's
largest publicly traded health benefits companies, with approximately 7
million medical members. Humana offers a diversified portfolio of health
insurance products and related services - through traditional and consumer-
choice plans - to employer groups, government-sponsored plans, and
individuals.
Over its 44-year history, Humana has consistently seized opportunities to
meet changing customer needs. Today, the company is a leader in consumer
engagement, providing guidance that leads to lower costs and a better health
plan experience throughout its diversified customer portfolio.
More information regarding Humana is available to investors via the
Investor Relations page of the company's web site at http://www.humana.com,
including copies of:
- Annual report to stockholders;
- Securities and Exchange Commission filings;
- Most recent investor conference presentation;
- Quarterly earnings news releases;
- Replay of most recent earnings release conference call;
- Calendar of events (includes upcoming earnings conference call dates, \
times, and access number, as well as planned interaction with research
analysts and institutional investors);
- Corporate Governance information.
Humana Inc.
2005 Earnings Guidance
As of August 1, 2005
Diluted earnings per common share Full year: $2.23 to $2.25
Second half 2005: $1.05 to $1.07
3Q05: $0.50 to $0.51
Revenues Consolidated: Approximately $14.5
billion
TRICARE: Approximately $2.5
billion
Year-end medical membership Medicare: 540,000 to 550,000
Commercial: No significant change
excluding loss of 89,000 member
account in January 2005
Medicaid: Decline of
approximately 20,000
TRICARE: No material change from
prior year
Medical premium yields (the increase Medicare: 11% to 13%
in medical premiums on a per-member Commercial - total book: 6% to 8%
basis when compared to the same Commercial - group accounts: 8% to
period in the prior year) 10%
Medical cost trends (the increase Medicare: 9% to 11%
in medical costs on a per-member Commercial - total book: 6% to 8%
basis when compared to the same Commercial - group accounts: 8% to
period in the prior year) 10%
Selling, general & administrative Consolidated: SG&A expense ratio
expenses of 13.5% to 14.5%
Government segment: Includes
approximately $80 million of
Medicare Advantage investment
spending
Commercial segment pretax income Increase of 10% to 15% over prior
year
TRICARE pretax margin Approximately 3% to 4%
Cash flows from operations $625 million to $675 million
Capital expenditures $155 million to $165 million
Effective tax rate Full year: Approximately 30%
3Q05 & 4Q05: 34% to 36%
Weighted average shares outstanding Approximately 166 million
used to compute diluted earnings per
common share
Humana Inc.
In thousands
June 30, Percent
Ending Medical Membership 2005 2004 Difference Change
Commercial:
Fully insured 2,021.3 2,407.7 (386.4) (16.0)
ASO 1,178.4 996.7 181.7 18.2
Total Commercial 3,199.7 3,404.4 (204.7) (6.0)
Government:
Medicare Advantage 474.3 367.9 106.4 28.9
Medicaid 477.9 466.4 11.5 2.5
TRICARE 1,733.6 1,856.9 (123.3) (6.6)
TRICARE ASO 1,142.8 786.0 356.8 45.4
Total TRICARE 2,876.4 2,642.9 233.5 8.8
Total Government 3,828.6 3,477.2 351.4 10.1
Total ending medical
membership 7,028.3 6,881.6 146.7 2.1
June 30, Percent
Ending Specialty Membership 2005 2004 Difference Change
Commercial:
Dental-fully insured 893.7 791.7 102.0 12.9
Dental-ASO 488.9 407.9 81.0 19.9
Total Dental 1,382.6 1,199.6 183.0 15.3
Group life 437.1 474.4 (37.3) (7.9)
Short-term disability 16.4 17.4 (1.0) (5.7)
Total ending specialty
membership 1,836.1 1,691.4 144.7 8.6
Three months ended Six months ended
June 30, June 30,
Premiums 2005 2004 2005 2004
Commercial:
Fully insured medical $1,512,278 $1,700,759 $3,029,672 $3,317,879
Specialty 95,390 86,139 188,928 172,110
Total Commercial 1,607,668 1,786,898 3,218,600 3,489,989
Government:
Medicare Advantage 1,092,442 774,604 2,075,583 1,480,922
TRICARE 611,179 616,412 1,173,507 1,265,405
Medicaid 134,730 125,798 269,144 246,577
Total Government 1,838,351 1,516,814 3,518,234 2,992,904
Total premiums $3,446,019 $3,303,712 $6,736,834 $6,482,893
Three months ended Six months ended
June 30, June 30,
Administrative 2005 2004 2005 2004
services fees
Commercial $51,263 $40,768 $101,374 $82,464
Government 13,639 40,578 25,263 77,119
Total administrative
services fees $64,902 $81,346 $126,637 $159,583
Humana Inc.
Dollars in thousands, except per share results
Three months ended Six months ended
June 30, June 30,
Consolidated Statements
of Income 2005 2004 2005 2004
Revenues:
Premiums $3,446,019 $3,303,712 $6,736,834 $6,482,893
Administrative
services fees 64,902 81,346 126,637 159,583
Investment income 31,131 43,863 61,342 71,317
Other income 4,309 2,557 8,773 4,634
Total revenues 3,546,361 3,431,478 6,933,586 6,718,427
Operating expenses:
Medical 2,888,509 2,789,740 5,642,242 5,473,256
Selling, general and
administrative 486,460 486,895 960,493 956,524
Depreciation 24,815 24,272 49,621 48,195
Other intangible
amortization 6,948 2,893 11,391 5,282
Total operating
expenses 3,406,732 3,303,800 6,663,747 6,483,257
Income from operations 139,629 127,678 269,839 235,170
Interest expense 10,322 5,325 18,845 10,044
Income before
income taxes 129,307 122,353 250,994 225,126
Provision for income
taxes 45,170 41,600 57,062 76,543
Net income $84,137 $80,753 $193,932 $148,583
Basic earnings per
common share $0.52 $0.50 $1.20 $0.92
Diluted earnings per
common share $0.51 $0.50 $1.18 $0.91
Shares used in
computing basic
earnings per common
share (000's) 161,492 160,832 161,202 161,399
Shares used in
computing diluted
earnings per common
share (000's) 164,908 162,353 164,543 163,355
Operating Results by
Segment
Pretax income
Commercial $25,215 $36,912 $74,678 $75,998
Government 104,092 85,441 176,316 149,128
Consolidated $129,307 $122,353 $250,994 $225,126
Key Ratios
Medical expense ratio
Commercial 83.8 % 84.6 % 83.0 % 84.1 %
Government 83.8 % 84.2 % 84.4 % 84.8 %
Consolidated 83.8 % 84.4 % 83.8 % 84.4 %
Selling, general, and
administrative expense
ratio
Commercial 17.5 % 16.2 % 17.5 % 16.3 %
Government 10.6 % 12.3 % 10.7 % 12.2 %
Consolidated 13.9 % 14.4 % 14.0 % 14.4 %
Humana Inc.
Dollars in thousands, except per share results
June 30, March 31, December 31,
Consolidated Balance Sheets 2005 2005 2004
Assets
Current assets:
Cash and cash equivalents $603,790 $560,264 $580,079
Investment securities 2,217,698 2,136,841 2,145,645
Receivables, net:
Premiums 588,706 568,184 554,661
Administrative services fees 19,448 20,145 24,954
Securities lending collateral 76,998 126,678 77,840
Other 236,430 226,339 212,958
Total current assets 3,743,070 3,638,451 3,596,137
Property and equipment, net 437,393 428,890 399,506
Other assets:
Long-term investment securities 358,643 345,692 348,465
Goodwill 1,221,663 1,244,370 885,572
Other 517,138 492,190 427,937
Total other assets 2,097,444 2,082,252 1,661,974
Total assets $6,277,907 $6,149,593 $5,657,617
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other $1,677,551 $1,546,050 $1,422,010
expenses payable
Trade accounts payable
and accrued expenses 385,313 395,498 488,332
Book overdraft 182,493 192,741 192,060
Securities lending payable 76,998 126,678 77,840
Unearned revenues 121,148 143,683 146,326
Total current liabilities 2,443,503 2,404,650 2,326,568
Long-term debt 878,388 885,271 636,696
Other long-term liabilities 639,828 659,867 604,229
Total liabilities 3,961,719 3,949,788 3,567,493
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000
shares authorized; none issued - - -
Common stock, $0.16 2/3 par;
300,000,000 shares authorized;
178,064,599 shares issued at
June 30, 2005 29,677 29,592 29,340
Capital in excess of par value 1,068,406 1,055,491 1,017,156
Retained earnings 1,423,755 1,339,618 1,229,823
Accumulated other
comprehensive income 13,115 (5,648) 16,526
Unearned stock compensation (16,074) (16,872) (1,721)
Treasury stock, at cost, 15,832,428
shares at June 30, 2005 (202,691) (202,376) (201,000)
Total stockholders' equity 2,316,188 2,199,805 2,090,124
Total liabilities and
stockholders' equity $6,277,907 $6,149,593 $5,657,617
Debt to total capitalization ratio 27.5% 28.7% 23.3%
Humana Inc.
Dollars in thousands
Three months ended Six months ended
Consolidated Statements June 30, June 30,
of Cash Flows 2005 2004 2005 2004
Cash flows from operating
activities
Net income $84,137 $80,753 $193,932 $148,583
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 31,763 27,165 61,012 53,477
Provision for deferred
income taxes 3,664 17,741 10,919 29,964
Changes in operating assets
and liabilities excluding
the effects of acquisitions:
Receivables (19,825) 5,028 (26,250) (15,518)
Other assets (20,154) (8,412) (28,514) (23,884)
Medical and other
expenses payable 131,501 (13,622) 218,166 111,006
Other liabilities (10,185) (1,150) (107,733) (32,175)
Unearned revenues (22,535) (26,320) (44,951) (228,019)
Other 3,491 (17,679) 4,504 (18,579)
Net cash provided by
operating activities 181,857 63,504 281,085 24,855
Cash flows from investing
activities
Acquisitions, net of cash
acquired (4,627) (67,329) (352,726) (68,735)
Purchases of property and
equipment (31,034) (25,314) (67,227) (48,046)
Proceeds from sales of
property and equipment 30 9,343 38 28,728
Purchases of investment
securities (531,234) (749,924)(1,245,605)(2,241,196)
Proceeds from maturities
of investment securities 131,947 99,342 393,612 346,187
Proceeds from sales of
investment securities 325,329 529,956 759,835 1,316,824
Change in securities
lending collateral 49,680 40,898 842 25,676
Net cash used in investing
activities (59,909) (163,028) 511,231) (640,562)
Cash flows from financing
activities
Borrowings under credit
agreement - - 294,000 -
Repayments under credit
agreement (25,000) - (50,000) -
Change in book overdraft (10,248) (38,375) (9,567) (46,992)
Change in securities
lending payable (49,680) (40,898) (842) (25,676)
Common stock repurchases (315) (35,966) (1,691) (48,802)
Proceeds from stock option
exercises and other 6,821 752 21,957 9,409
Net cash (used in) provided
by financing activities (78,422) (114,487) 253,857 (112,061)
Increase (decrease) in cash
and cash equivalents 43,526 (214,011) 23,711 (727,768)
Cash and cash equivalents at
beginning of period 560,264 417,647 580,079 931,404
Cash and cash equivalents
at end of period $603,790 $203,636 $603,790 $203,636
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Consol.
Total
Commercial Segment Government Segment Medical
-------------------- ----------------------------------
Total
Fully Total Medicare Medi- TRICARE Seg-
Insured ASO Segment Advantage caid TRICARE ASO ment
June 30, 2005
Capitated HMO
hospital
system based
A 2.7% - 1.7% 7.6% 3.1% - - 1.3% 1.5%
Capitated HMO
physician
group based
A 2.4% - 1.5% 4.9% 35.5% - - 5.0% 3.4%
Risk-sharing
B 2.5% - 1.6% 46.1% 55.3% - - 12.6% 7.6%
All other
membership 92.4% 100.0% 95.2% 41.4% 6.1% 100.0% 100.0% 81.1% 87.5%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
June 30, 2004
Capitated HMO
hospital
system based
A 4.2% - 2.9% 10.5% 3.6% - - 1.6% 2.3%
Capitated HMO
physician
group based
A 2.9% - 2.1% 1.2% 42.8% - - 5.9% 4.0%
Risk-sharing
B 3.3% - 2.3% 56.7% 47.7% - - 12.4% 7.4%
All other
membership 89.6% 100.0% 92.7% 31.6% 5.9% 100.0% 100.0% 80.1% 86.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
A - In a limited number of circumstances, we contract with hospitals and
physicians to accept financial risk for a defined set of HMO membership.
In transferring this risk, we prepay these providers a monthly fixed-fee
per member to coordinate substantially all of the medical care for their
capitated HMO membership, including some health benefit administrative
functions and claims processing. For these capitated HMO arrangements,
we generally agree to reimbursement rates that target a medical expense
ratio ranging from 82% to 89%. Providers participating in hospital-
based capitated HMO arrangements generally receive a monthly payment for
all of the services within their system for their HMO membership.
Providers participating in physician-based capitated HMO arrangements
generally have subcontracted specialist physicians and are responsible
for reimbursing such hospitals and physicians for services rendered to
their HMO membership.
B - In some circumstances, we contract with physicians under risk-
sharing arrangements whereby physicians have assumed some level of risk
for all or a portion of the medical costs of their HMO membership.
Although these arrangements do include capitation payments for services
rendered, we process substantially all of the claims under these
arrangements.
Humana Inc.
Dollars in thousands
Medical Claim Reserves - Details and Statistics
Change in medical and other expenses payable:
The change in medical and other expenses payable is summarized as
follows:
For the Six For the Twelve
Months Ended Months Ended
June 30, 2005 December 31, 2004
Balances at January 1 $1,422,010 $1,272,156
Acquisition 37,375 71,063
Incurred related to:
Current year 5,745,101 10,763,105
Prior years - non-TRICARE (58,445) (68,448)
Prior years - TRICARE (1) (44,414) (25,010)
Total incurred 5,642,242 10,669,647
Paid related to:
Current year (4,298,404) (9,504,331)
Prior years (1,125,672) (1,086,525)
Total paid (5,424,076) (10,590,856)
Balances at end of period $1,677,551 $1,422,010
The impact of any change in "incurred related to prior years"
claims may be offset as we re-establish the "incurred related to
current year". Our reserving practice is to consistently recognize
the actuarial best estimate of our ultimate liability for our
claims within a level of confidence required to meet actuarial
standards. Thus, only when the release of a prior year reserve is
not offset with the same level of conservatism in estimating the
current year reserve will the redundancy reduce medical expense.
We have consistently applied this methodology in determining our
best estimate for unpaid claims liability in each period.
(1) Changes in estimates of TRICARE incurred claims for prior
years recognized during 2004 and 2005 resulted primarily from claim
costs and utilization levels developing favorably from the levels
originally estimated for the prior year. As a result of
substantial risk-sharing provisions with the Department of Defense
and with subcontractors, any resulting impact on operations from
the change in estimates of incurred related to prior years is
substantially reduced, whether positive or negative.
Humana Inc.
Dollars in thousands
Medical Claim Reserves - Details and Statistics
Medical and Other Expenses Payable Detail:
June 30, March 31, December 31,
2005 2005 2004
A IBNR and other medical
expenses payable $991,695 $962,681 $910,525
B TRICARE IBNR 329,558 328,920 284,647
C TRICARE other medical
expenses payable 69,865 20,395 6,970
D Unprocessed claim
inventories 109,200 111,200 115,300
E Processed claim
inventories 128,204 92,030 97,801
F Payable to pharmacy benefit
administrator 49,029 30,824 6,767
Total medical and other
expenses payable $1,677,551 $1,546,050 $1,422,010
A IBNR represents an estimate of medical expenses payable for claims
incurred but not reported (IBNR) at the balance sheet date. The level
of IBNR is primarily impacted by membership levels, medical claim
trends and the receipt cycle time, which represents the length of
time between when a claim is initially incurred and when the claim
form is received (i.e. a shorter time span results in lower reserves
for claims IBNR).
B TRICARE IBNR has increased from higher medical expenses due to the
transition to the new South region contract.
C TRICARE other medical expense payable may include liabilities to
subcontractors and/or risk share payables to the Department of
Defense. The level of these balances may fluctuate from period to
period due to the timing of payment (cutoff) and whether or not the
balances are payables or receivables (receivables from the Department
of Defense are classified as "receivables" in our balance sheet).
D Unprocessed claim inventories represent the estimated valuation of
claims received but not yet fully processed. TRICARE claim
inventories are not included in this amount as an independent third
party administrator processes all TRICARE medical claims on our
behalf. Reserves for TRICARE claims inventory are included in TRICARE
IBNR.
E Processed claim inventories represent the estimated valuation of
processed claims that are in the post claim adjudication process,
which consists of administrative functions such as audit and check
batching and handling.
F The balance due to our pharmacy benefit administrator fluctuates due
to bi-weekly payments and the month-end cutoff.
Receipt Cycle Time:
The receipt cycle time measures the average length of time between when a
claim was initially incurred and when the claim form was received. Below
is a summary:
Average Number of Days from Incurred Date
to Receipt Date (1)
2005 2004 Change % Change
1st Quarter Average 16.6 17.4 (0.8) -4.6 %
2nd Quarter Average 15.9 16.7 (0.8) -4.8 %
3rd Quarter Average - 16.9 N/A N/A
4th Quarter Average - 16.4 N/A N/A
Full Year Average 16.2 16.9 (0.7) -4.1 %
(1) Receipt cycle time data for our 3 largest claim processing platforms
representing approximately 90% of our fully insured claims volume.
Humana Inc.
Medical Claim Reserves - Details and Statistics
Unprocessed Claim Inventories:
The estimated valuation and number of claims on hand that are yet to be
processed are as follows:
Estimated Claim Number
Valuation Item of Days
Date (000) Counts On Hand
6/30/2003 $92,100 446,600 4.7
9/30/2003 $106,800 528,400 5.8
12/31/2003 $109,700 443,000 4.9
3/31/2004 $94,800 400,900 3.9
6/30/2004 $98,100 387,000 3.7
9/30/2004 $122,300 453,300 4.4
12/31/2004 $115,300 394,400 3.7
3/31/2005 $111,200 393,200 3.6
6/30/2005 $109,200 402,400 3.9
Days in Claims Payable (Quarterly):
A common metric for monitoring medical claim reserve levels relative to
the medical claim expenses is days in claims payable, or DCP, which
represents the medical claim liabilities at the end of the period divided
by average medical expenses per day in the quarterly period. Since we have
some providers under capitation payment arrangements (which do not require
a medical claim IBNR reserve), we have also summarized this metric
excluding capitation expenses.
Days
in Claims DCP
Quarter Payable Annual % Excluding Annual %
Ended (DCP) Change Change Capitation Change Change
6/30/2003 47.9 1.1 2.4 % 56.2 0.9 1.6 %
9/30/2003 47.2 0.6 1.3 % 54.5 (0.8) -1.4 %
12/31/2003 46.2 1.0 2.2 % 53.2 (0.1) -0.2 %
3/31/2004 47.4 0.9 1.9 % 54.3 (0.4) -0.7 %
6/30/2004 47.4 (0.5) -1.0 % 54.1 (2.1) -3.7 %
9/30/2004 51.8 4.6 9.7 % 59.1 4.6 8.4 %
12/31/2004 49.5 3.3 7.1 % 54.8 1.6 3.0 %
3/31/2005 50.5 3.1 6.5 % 56.1 1.8 3.3 %
6/30/2005 52.8 5.4 11.4 % 58.6 4.5 8.3 %
This metric fluctuates due to all of the issues reviewed above, including
the change in the receipt cycle time, the change in medical claim
inventories, the change in TRICARE liability balances, and the timing of
our bi-weekly payment to our pharmacy benefits administrator. An annual
recap follows:
2005 2004
4th quarter-prior year 49.5 46.2
Impact of change in claim receipt cycle time (0.7) (0.2)
Impact of change in unprocessed claim inventories (0.2) 0.2
Impact of change in processed claim inventories 1.0 0.9
Impact of changing TRICARE reserve balances 0.6 1.6
Impact of change in pharmacy payment cutoff 1.4 (0.4)
All other 1.2 1.2
Year to date-current year 52.8 49.5
SOURCE Humana Inc.
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CONTACT:
Regina Nethery, Investor Relations,
+1-502-580-3644, or Rnethery@humana.com , or Tom Noland,
Corporate Communications, +1-502-580-3674, or Tnoland@humana.com
, both of Humana Inc.
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