Humana Inc. (ticker: HUM, exchange: New York Stock Exchange (.N))
News Release -
27-Oct-2003
Humana Inc. Reports Financial Results for Third Quarter And First Nine Months of 2003
LOUISVILLE, Ky., Oct 27, 2003 /PRNewswire-FirstCall via COMTEX/ -- Humana Inc. (NYSE: HUM)
today reported earnings per diluted share of $.38 for the third quarter ended
September 30, 2003 ("3Q03") compared to $.31 in earnings per diluted share for
the third quarter ended September 30, 2002 ("3Q02"), an increase of 23
percent.
Net income of $62,119,000 for 3Q03 increased 19 percent over the prior
year, up from $52,331,000 in 3Q02. Pretax margin of 3.0 percent for 3Q03
increased 30 basis points from the 3Q02 pretax margin of 2.7 percent.
The increase in year-over-year results for 3Q03 was driven by the
improvement in the company's Commercial segment.
Results for the nine months ended September 30, 2003 ("the 2003 period")
also improved over those for the nine months ended September 30, 2002 ("the
2002 period"). Earnings per diluted share for the 2003 period of $1.01
increased 17 percent compared to $.86 for the 2002 period. Net income of
$162,625,000 increased 13 percent for the 2003 period versus $144,460,000 in
the 2002 period. The company's pretax margin of 2.7 percent in the 2003
period increased 20 basis points over that for the 2002 period of 2.5 percent.
Results for the 2003 period include the writedown of building and
equipment of $17,233,000 pretax ($10,529,000 net of income tax benefit or $.07
per diluted share), gain on the sale of a venture capital investment of
$15,200,000 pretax ($10,108,000 net of income taxes or $.06 per diluted
share), and software abandonment charges of $13,527,000 pretax ($8,265,000 net
of income tax benefit or $.05 per diluted share). Each of these items was
recorded during the six months ended June 30, 2003. The net impact of these
items reduced pretax income for the 2003 period by $15,560,000 ($8,686,000 net
of income taxes or $.05 per diluted share).
"We were pleased with the significant growth in profitability of our
commercial segment in the third quarter, as well as our successful bid on the
government side for the new TRICARE South region contract," said Michael B.
McCallister, Humana's president and chief executive officer. "The government
segment continues to provide a solid base of earnings as we expand our
commercial segment's revenues, income and membership."
Segment Results
Commercial segment pretax income increased to $25,952,000 in 3Q03 from
$4,540,000 in 3Q02. Commercial segment pretax margin of 1.5 percent in 3Q03
was 120 basis points higher than the related pretax margin of 0.3 percent in
3Q02. The improvement in year-over-year Commercial segment results during
3Q03 was driven by a 60 basis point decline in the medical expense ratio,
coupled with gains in administrative efficiencies.
For the 2003 period, Commercial segment pretax income increased to
$106,948,000 versus $45,528,000 in the 2002 period. Pretax margin for the
2003 period in the Commercial segment was 2.1 percent, a 110 basis point
increase from 1.0 percent in the 2002 period.
Commercial segment pretax results for the 2003 period include software
abandonment charges of $13,527,000, gain on the sale of a venture capital
investment of $12,423,000 and the writedown of building and equipment of
$4,325,000. Each of these items was recorded during the six months ended June
30, 2003.
Government segment pretax income of $67,460,000 in 3Q03 compares to 3Q02
Government segment pretax income of $72,417,000. Pretax margin for the
Government segment decreased 70 basis points to 4.8 percent in 3Q03 compared
to 5.5 percent in 3Q02. The decline in year-over-year Government segment
results during 3Q03 was primarily driven by an increase in the TRICARE medical
expense ratio, partially offset by improvement in the medical expense ratio
for the Medicare+Choice business.
Government segment pretax income for the 2003 period decreased to
$138,056,000 from $166,913,000 in the 2002 period. Government segment pretax
margin was 3.4 percent during the 2003 period versus 4.2 percent in the 2002
period.
Government segment pretax results for the 2003 period include the
writedown of building and equipment of $12,908,000 and gain on the sale of a
venture capital investment of $2,777,000. Each of these items was recorded
during the six months ended June 30, 2003.
Revenues and Membership
Consolidated revenues for 3Q03 totaled $3,111,765,000, compared to
$2,841,627,000 in 3Q02, a 10 percent increase. Medical membership as of
September 30, 2003 totaled 6,625,100, essentially unchanged compared to the
6,631,400 medical members as of September 30, 2002.
For the 2003 period, consolidated revenues were $9,073,439,000 versus
$8,406,149,000 in the 2002 period, an increase of 8 percent. Consolidated
revenues for the 2003 period include the gain on the sale of a venture capital
investment of $15,200,000 recorded during the six months ended June 30, 2003.
Commercial segment premiums and administrative services fees totaled
$1,679,518,000 during 3Q03 compared to a total of $1,491,270,000 during 3Q02,
or 13 percent higher than in the prior year. Commercial segment medical
membership was 3,036,400 as of September 30, 2003, a growth of 2 percent from
September 30, 2002. Per member premiums for the Commercial segment fully
insured medical business, net of benefit changes, increased in the range of 12
to 14 percent during 3Q03 compared to 3Q02.
Commercial segment premiums and administrative services fees for the 2003
period were $4,985,574,000 versus $4,405,068,000 in the 2002 period, an
increase of 13 percent.
Government segment premiums and administrative services fees for 3Q03
totaled $1,403,764,000, or 6 percent higher than the related 3Q02 premiums and
administrative services fees of $1,322,122,000.
Medicare+Choice membership totaled 324,600 at September 30, 2003, a
decline of 24,400 members from the prior year's quarter. Per member premiums
for the Medicare+Choice business, net of benefit changes, increased in the
range of 4 to 6 percent during 3Q03 compared to 3Q02.
TRICARE's insured membership totaled 1,746,300 at September 30, 2003,
versus comparable membership at September 30, 2002 of 1,755,700. TRICARE ASO
membership was 1,057,000 at September 30, 2003, up 2 percent from September
30, 2002 membership of 1,038,400. TRICARE premium revenues and administrative
services fees increased year-over-year by approximately 18 percent during 3Q03
due to a change in the monthly base revenue effective in July 2003.
Medicaid membership of 460,800 at September 30, 2003 declined by
approximately 9 percent from September 30, 2002. Approximately 84 percent of
the company's Medicaid membership is in Puerto Rico. Per member premiums for
the Medicaid business, net of benefit changes, increased in the range of 8 to
10 percent during 3Q03 versus 3Q02.
Government segment premiums and administrative services fees for the 2003
period were $3,986,866,000 versus $3,922,719,000 in the 2002 period, an
increase of 2 percent.
Medical and SG&A Expenses
The company's 3Q03 medical expense ratio (medical expenses as a percent of
premiums) of 83.8 percent increased 20 basis points compared to the 3Q02
medical expense ratio of 83.6 percent.
For the 2003 period, the medical expense ratio was 83.7 percent, unchanged
from that for the 2002 period.
The selling, general and administrative ("SG&A") expense ratio (SG&A
expenses as a percent of premiums plus administrative services fees) for 3Q03
of 14.9 percent decreased by 30 basis points from the 3Q02 SG&A ratio of 15.2
percent.
For the 2003 period, the SG&A expense ratio was 15.3 percent compared to
15.4 percent in the 2002 period. SG&A expenses for the 2003 period include
the writedown of building and equipment of $17,233,000 recorded during the six
months ended June 30, 2003. This resulted in an increase to the 2003 period
SG&A ratio of 20 basis points.
Cash flows from operations
Cash flows provided by operations for 3Q03 of $69,654,000 compared to cash
flows provided by operations of $82,613,000 in 3Q02 due to normal fluctuation
in working capital items. Neither quarter's cash flows from operations were
impacted by the timing of the monthly receipt of the Medicare+Choice premium
payment from the Centers for Medicare and Medicaid Services ("CMS").
The fixed monthly Medicare+Choice premium payment from CMS is due to
Humana on the first day of each month. However, if the first of the month
falls on a weekend or a holiday, the company receives that payment on the last
business day of the prior month, often resulting in a significant impact on
cash flows from operations.
Cash flows provided by operations for the 2003 period totaled
$122,920,000, inclusive of the negative impact of $205,755,000 from the timing
of the receipt of the premium payment from CMS. Cash flows used in operations
for the 2002 period of $101,302,000 included the negative impact of
$216,628,000 related to the timing of the premium payment receipt from CMS.
Non-GAAP Financial Measures
There were no non-GAAP financial measures for 3Q03 or 3Q02. The following
is a reconciliation of the most directly comparable financial measures
prepared in accordance with accounting principles generally accepted in the
United States, or GAAP, to certain non-GAAP financial measures used by the
company for the 2003 period and 2002 period.
For the nine months ended
September 30,
2003 2002
(in thousands)
GAAP operating cash flows $ 122,920 $ (101,302)
Timing of premium payment
Receipt from CMS 205,755 216,628
Non-GAAP operating cash flows(1) $ 328,675 $ 115,326
(1) Management believes the difference in timing of this cash event
between periods may be so significant as to distort a particular
period's trend in operating cash flows. Management believes that
meaningful analysis of our financial performance requires an
understanding of the factors underlying that performance and our
judgments about the relevance of a factor to normal operating results.
In some cases, large factors or events may obscure short-term patterns
and long-term trends. When reviewing and analyzing our cash flow
position, management apportions the appropriate CMS premium payment in
each month. To do otherwise would distort a meaningful analysis of our
cash flow. Decisions such as management's forecast or business plans
regarding cash flow, therefore, use this non-GAAP financial measure.
Share Repurchase Program
In July 2003, the company announced that its Board of Directors authorized
the use of up to $100 million for the repurchase of its common shares,
exclusive of shares repurchased in connection with employee stock plans.
During 3Q03, there were no shares repurchased under the July 2003
authorization. However, during 3Q03 the company repurchased 1,412,000 shares
for an aggregate purchase price of $23,127,000, an average price of $16.38 per
share in connection with employee stock plans.
Guidance
The company offers the GAAP guidance detailed below for the investor
community.
For the Fourth Quarter Ending December 31, 2003
* Earnings per diluted share of $.39 to $.41.
For the Year Ending December 31, 2003
* Earnings per diluted share of $1.40 to $1.42 (includes $.05 net loss
per diluted share related to the gain on the sale of a venture capital
investment, writedown of building and equipment, and software
abandonment charges).
* Consolidated revenues of over $12 billion.
* Commercial segment pretax income of over $125 million (includes net
expense of $5.4 million related to software abandonment charges, gain
on the sale of a venture capital investment and writedown of building
and equipment).
* Growth in Commercial segment medical membership of 2 to 3 percent for
fully insured and ASO products combined.
* Growth in per member premiums, net of benefit changes, in the range of
12 to 14 percent for Commercial segment fully insured medical business.
* Increases in per member Commercial segment fully insured medical costs
in the range of 12 to 14 percent.
* Commercial segment SG&A ratio of between 16.5 and 16.9 percent
(includes the impact of the write-down of building and equipment of
$4.3 million).
* Medicare+Choice membership of between 325,000 and 330,000 by year end.
* Growth in per member premiums, net of benefit changes, in the range of
4 to 6 percent for Medicare+Choice business.
* Increases in per member Medicare+Choice medical costs in the range of 4
to 6 percent.
* Pretax margin for the company's TRICARE business of approximately 3
percent.
* Government segment SG&A ratio of between 12.8 and 13.2 percent
(includes impact of the write-down of building and equipment of $12.9
million).
* Cash flows provided by operations of between $400 million and $425
million.
* Capital expenditures of approximately $95 million.
* An effective tax rate of approximately 34 percent.
For the Year Ending December 31, 2004
* Earnings per diluted share of approximately $1.60 (range of $1.55 to
$1.65).
* Consolidated revenues of over $13 billion.
* Commercial segment pretax income of over $170 million.
* Growth in Commercial segment medical membership of 6 to 9 percent for
fully insured and ASO products combined, with growth of over 200
thousand members in the first quarter. (Approximately 60 to 70 percent
of the 2004 growth is anticipated to be in ASO products.)
* Growth in per member premiums, net of benefit changes, in the range of
11 to 13 percent for Commercial segment fully insured medical business.
* Increases in per member Commercial segment fully insured medical costs
in the range of 11 to 13 percent.
* Commercial segment SG&A ratio of between 15.8 and 16.2 percent.
* Medicare+Choice membership of between 325,000 and 350,000 by year end.
* Growth in per member premiums, net of benefit changes, in the range of
2 to 4 percent for Medicare+Choice business.
* Increases in per member Medicare+Choice medical costs in the range of 2
to 4 percent.
* Pretax margin for the company's TRICARE business in the range of 2 to 4
percent.
* Government segment SG&A ratio of between 12.8 and 13.2 percent.
* An effective tax rate of approximately 34 percent.
Conference Call
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 earnings guidance.
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.
A live virtual presentation (audio with slides) will be available and may
be accessed via Humana's Investor Relations page at 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.
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 www.humana.com, approximately two hours following
the live web cast. An audio recording of the conference call will also be
available in the Audio Archives located on the Investor Relations page at
www.humana.com approximately two hours after the live call.
This news release contains forward-looking statements. The
forward-looking statements made in the news release 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 following documents, as filed by
Humana with the Securities and Exchange Commission:
* Form 10-K for the year ended December 31, 2002;
* Form 10-Qs for the quarters ended March 31, 2003 and June 30, 2003.
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's
largest publicly traded health benefits companies, with approximately 6.6
million medical members located primarily in 18 states and Puerto Rico.
Humana offers coordinated health insurance coverage and related services --
through traditional and Internet-based plans -- to employer groups,
government-sponsored plans, and individuals.
More information regarding Humana is available via the Internet at
www.humana.com, including copies of:
* Annual report to stockholders;
* Securities and Exchange Commission filings;
* Most recent investor conference presentation;
* Quarterly earnings press releases;
* Audio archive of most recent earnings release conference call;
* Calendar of events (includes upcoming earnings conference call dates,
times, and access number, as well as planned participation in investor
conferences).
Humana Inc.
In thousands
September 30, Percent
Ending Medical Membership 2003 2002 Difference Change
Commercial:
Fully insured 2,324.6 2,323.6 1.0 0.0
ASO 711.8 658.6 53.2 8.1
Total Commercial 3,036.4 2,982.2 54.2 1.8
Government:
Medicare+Choice 324.6 349.0 (24.4) (7.0)
Medicaid 460.8 506.1 (45.3) (9.0)
TRICARE 1,746.3 1,755.7 (9.4) (0.5)
TRICARE ASO 1,057.0 1,038.4 18.6 1.8
Total Government 3,588.7 3,649.2 (60.5) (1.7)
Total ending medical membership 6,625.1 6,631.4 (6.3) (0.1)
September 30, Percent
Ending Specialty Membership 2003 2002 Difference Change
Commercial:
Dental-fully insured 753.0 777.5 (24.5) (3.2)
Dental-ASO 362.7 306.8 55.9 18.2
Total Dental 1,115.7 1,084.3 31.4 2.9
Group life 504.4 522.1 (17.7) (3.4)
Short-term disability 19.0 23.0 (4.0) (17.4)
Total ending specialty membership 1,639.1 1,629.4 9.7 0.6
Three months ended Nine months ended
September 30, September 30,
Premiums 2003 2002 2003 2002
Commercial:
Fully insured medical $1,567,284 $1,379,897 $4,655,856 $4,076,431
Specialty 81,199 84,806 238,737 251,347
Total Commercial 1,648,483 1,464,703 4,894,593 4,327,778
Government:
Medicare+Choice 626,840 647,265 1,893,114 1,981,931
Medicaid 120,498 118,902 357,733 343,389
TRICARE 620,477 521,466 1,627,212 1,484,789
Total Government 1,367,815 1,287,633 3,878,059 3,810,109
Total premiums $3,016,298 $2,752,336 $8,772,652 $8,137,887
Three months ended Nine months ended
September 30, September 30,
Administrative services fees 2003 2002 2003 2002
Commercial $31,035 $26,567 $90,981 $77,290
Government 35,949 34,489 108,807 112,610
Total Administrative
services fees $66,984 $61,056 $199,788 $189,900
Humana Inc.
Dollars in thousands,
except per share results
Three months ended Nine months ended
September 30, September 30,
Consolidated Statements
of Income 2003 2002 2003 2002
Revenues:
Premiums $3,016,298 $2,752,336 $8,772,652 8,137,887
Administrative
services fees 66,984 61,056 199,788 189,900
Investment income 26,219 25,706 95,264 (a) 72,695
Other income 2,264 2,529 5,735 5,667
Total revenues 3,111,765 2,841,627 9,073,439 8,406,149
Operating expenses:
Medical 2,528,123 2,301,021 7,344,534 6,811,748
Selling, general and
administrative 458,381 429,019 1,371,196 (b) 1,278,516
Depreciation 24,723 26,592 91,009 (c) 78,763
Other intangible
amortization 2,389 3,931 9,223 11,793
Total operating
expenses 3,013,616 2,760,563 8,815,962 8,180,820
Income from operations 98,149 81,064 257,477 225,329
Interest expense 4,737 4,107 12,473 12,888
Income before income taxes 93,412 76,957 245,004 (d) 212,441
Provision for income taxes 31,293 24,626 82,379 67,981
Net income $62,119 $52,331 $162,625 $144,460
Basic earnings per
common share $0.39 $0.32 $1.03 $0.88
Diluted earnings per
common share $0.38 $0.31 $1.01 (d) $0.86
Shares used in computing basic
earnings per common share
(000's) 159,454 163,933 158,202 164,348
Shares used in computing
diluted earnings per common
share (000's) 162,549 167,534 161,384 168,242
Operating Results by Segment
Commercial pretax income 25,952 4,540 106,948 (d) 45,528
Government pretax income 67,460 72,417 138,056 (d) 166,913
Consolidated pretax income 93,412 76,957 245,004 (d) 212,441
Key Ratios
Medical expense ratio
Commercial 83.7% 84.3% 82.7% 83.4%
Government 84.0% 82.8% 85.0% 84.1%
Total 83.8% 83.6% 83.7% 83.7%
Selling, general, and
administrative expense ratio
Commercial 16.6% 17.0% 16.8% (e) 17.0%
Government 12.9% 13.3% 13.4% (e) 13.5%
Total 14.9% 15.2% 15.3% (e) 15.4%
(a) Includes a gain on the sale of a venture capital investment of $15.2
million pretax ($10.1 million after tax, or $0.06 per diluted share).
(b) Includes a writedown of building and equipment of $17.2 million
pretax ($10.5 million after tax, or $0.07 per diluted share).
(c) Includes accelerated depreciation of abandoned software $13.5 million
pretax ($8.3 million after tax, or $0.05 per diluted share).
(d) Includes the total impact of items (a), (b), and (c) of $15.5 million
pretax ($8.7 million after tax, or $0.05 per diluted share). Of the
$15.5 million pretax, $5.4 million relates to Commercial and $10.1
million relates to Government.
(e) Includes the impact of a writedown of building and equipment of $17.2
million pretax ($4.3 million for Commercial and $12.9 for Government)
which increased the selling, general, and administrative expense ratio
by 20 basis points (10 basis points for Commercial and 40 basis points
for Government).
Humana Inc.
Dollars in thousands,
except per share results
September 30, June 30, December 31,
Consolidated Balance Sheets 2003 2003 2002
Assets
Current assets:
Cash and cash equivalents $635,837 $754,942 $721,357
Investment securities 1,682,402 1,399,220 1,405,833
Receivables, net:
Premiums 461,684 402,821 348,562
Administrative services fees 10,952 36,688 68,316
Other 288,836 223,800 250,857
Total current assets 3,079,711 2,817,471 2,794,925
Property and equipment, net 413,402 417,446 459,842
Other assets:
Long-term investment securities 320,464 329,178 288,724
Goodwill 776,874 776,874 776,874
Other 159,273 152,885 279,665
Total other assets 1,256,611 1,258,937 1,345,263
Total assets $4,749,724 $4,493,854 $4,600,030
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses
payable $1,296,566 $1,287,364 $1,142,131
Trade accounts payable and
accrued expenses 438,926 455,541 552,689
Book overdraft 218,751 79,536 94,882
Unearned premium revenues 108,161 100,445 335,757
Short-term debt -- 265,000 265,000
Total current liabilities 2,062,404 2,187,886 2,390,459
Long-term debt 644,440 334,610 339,913
Other long-term liabilities 283,756 265,098 263,184
Total liabilities 2,990,600 2,787,594 2,993,556
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;
173,112,860 shares issued at
September 30, 2003 28,854 28,708 28,556
Capital in excess of par value 961,015 938,648 931,089
Retained earnings 883,502 821,383 720,877
Accumulated other comprehensive
income 20,086 29,839 22,455
Unearned restricted stock
compensation (357) (1,469) (6,516)
Treasury stock, at cost, 12,018,281
shares at September 30, 2003 (133,976) (110,849) (89,987)
Total stockholders' equity 1,759,124 1,706,260 1,606,474
Total liabilities and
stockholders' equity $4,749,724 $4,493,854 $4,600,030
Debt to total capitalization ratio 26.8% 26.0% 27.4%
Humana Inc.
Dollars in thousands
Three months ended Nine months ended
September 30, September 30,
Consolidated Statements of
Cash Flows 2003 2002 2003 2002
Cash flows from operating
activities
Net income $62,119 $52,331 $162,625 $144,460
Adjustments to reconcile
net income to net
Cash provided by
operating activities:
Building and equipment
writedown -- -- 17,233 --
Depreciation and
amortization 27,112 30,523 86,705 90,556
Accelerated depreciation
of software -- -- 13,527 --
Provision for deferred
income taxes 19,159 11,183 30,213 34,221
Changes in operating
assets and liabilities:
Receivables (33,127) (39,819) 7,509 (231,012)
Other assets 5,605 27,996 (17,022) 268
Medical and other
expenses payable 9,202 (30,258) 154,435 78,045
Other liabilities (25,830) 21,424 (85,899) 4,742
Unearned revenues 7,716 7,015 (227,596) (235,063)
Other (2,302) 2,218 (18,810) 12,481
Net cash provided by
(used in) operating
activities 69,654 82,613 122,920 (a) (101,302) (b)
Cash flows from investing
activities
Purchases of property
and equipment, net (20,020) (26,851) (62,497) (83,581)
Divestiture -- -- -- 1,109
Purchases of
investment
securities (1,398,118)(641,706)(3,659,394) (1,639,803)
Proceeds from
maturities of
investment
securities 200,535 95,228 585,461 273,199
Proceeds from sales of
investment securities 871,272 469,688 2,768,446 1,339,124
Net cash used in
investing
activities (346,331)(103,641) (367,984) (109,952)
Cash flows from financing
activities
Proceeds from swap
exchange -- -- 31,556 --
Proceeds from issuance
of senior notes 299,139 -- 299,139 --
Net commercial paper
conduit (repayments)
borrowings (265,000) -- (265,000) 2,000
Change in book
overdraft 139,215 (28,877) 123,869 (48,355)
Common stock
repurchases (23,127) (25,439) (44,147) (25,439)
Other 7,345 380 14,127 7,364
Net cash provided by
(used in) provided by
financing activities 157,572 (53,936) 159,544 (64,430)
Decrease in cash and
cash equivalents (119,105) (74,964) (85,520) (275,684)
Cash and cash
equivalents at
beginning of
period 754,942 450,700 721,357 651,420
Cash and cash
equivalents at
end of period $635,837 $375,736 $635,837 $375,736
(a) Includes the negative impact of receiving the $205.8 million January
2003 CMS payment early in December 2002. This receipt is payable
to us on the first day of the month. When the first day of the month
falls on a weekend or holiday (e.g. New Year's Day), we receive this
payment at the end of the previous month.
(b) Includes the negative impact of receiving the $216.6 million January
2002 CMS payment early in December 2001. This receipt is payable
to us on the first day of the month. When the first day of the month
falls on a weekend or holiday (e.g. New Year's Day), we receive this
payment at the end of the previous month.
Humana Inc.
Percentage of Ending Membership Under Capitation Arrangements
Commercial Segment
Fully Total
Insured ASO Segment
September 30, 2003
Capitated HMO
Hospital system based A 5.6% -- 4.3%
Capitated HMO
Physician group based A 3.3% -- 2.5%
Risk-sharing B 2.7% -- 2.1%
All other membership 88.4% 100.0% 91.1%
Total 100.0% 100.0% 100.0%
Government Segment Consol.
Medicare TRICARE Total Total
+Choice Medicaid TRICARE ASO Segment Medical
September 30, 2003
Capitated HMO
Hospital system based A 12.2% 2.9% -- -- 1.5% 2.8%
Capitated HMO
Physician group based A 1.8% 47.2% -- -- 6.2% 4.5%
Risk-sharing B 48.7% 44.0% -- -- 10.0% 6.4%
All other membership 37.3% 5.9% 100.0% 100.0% 82.3% 86.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Commercial Segment
Fully Total
Insured ASO Segment
September 30, 2002
Capitated HMO
Hospital system based A 6.3% -- 4.9%
Capitated HMO
Physician group based A 3.2% -- 2.5%
Risk-sharing B 3.0% -- 2.3%
All other membership 87.5% 100.0% 90.3%
Total 100.0% 100.0% 100.0%
Government Segment Consol.
Medicare TRICARE Total Total
+Choice Medicaid TRICARE ASO Segment Medical
September 30, 2002
Capitated HMO
Hospital system based A 13.5% 2.2% -- -- 1.6% 3.1%
Capitated HMO
Physician group based A 3.3% 47.5% -- -- 6.9% 4.9%
Risk-sharing B 42.8% 42.9% -- -- 10.0% 6.6%
All other membership 40.4% 7.4% 100.0% 100.0% 81.5% 85.4%
Total 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.
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 Nine For the Twelve
Months Ended Months Ended
September 30, 2003 December 31, 2002
Balances at January 1 $1,142,131 $1,086,386
Incurred related to:
Current year 7,420,343 9,125,915
Prior years - TRICARE (33,852) 25,685 (1)
Prior years - non-TRICARE (41,957) (2) (13,404) (2)
Total incurred 7,344,534 9,138,196
Paid related to:
Current year (6,162,062) (8,002,610)
Prior years (1,028,037) (1,079,841)
Total paid (7,190,099) (9,082,451)
Balances at end of period $1,296,566 $1,142,131
(1) Changes in estimates of medical expenses payable for TRICARE may
result from issues that entitle us to additional revenues derived from
change orders or the bid price adjustment process, which was the
case with substantially all of the unfavorable development for prior
periods recognized during 2002.
(2) Changes in estimates of non-TRICARE incurred claims for prior
years recognized during 2003 and 2002 related primarily to our
commercial lines of business. The impact of any reduction of
"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.
Humana Inc.
Dollars in thousands
Medical Claim Reserves -
Details and Statistics
Medical and Other Expenses
Payable Detail:
September 30, June 30, December 31,
2003 2003 2002
A IBNR and other medical
expenses payable $788,124 $778,460 $650,606
B TRICARE IBNR 280,429 232,591 212,826
C TRICARE other medical
expenses payable 25,941 24,677 37,793
D Unprocessed claim inventories 106,800 92,100 92,300
E Processed claim inventories 47,515 126,516 105,422
F Payable to pharmacy benefit
administrator 47,757 33,020 43,184
Total medical and
other expenses payable $1,296,566 $1,287,364 $1,142,131
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 primarily due to an increase in claim
inventories at our third party claim administrator for claims not
submitted electronically.
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:
Due to increasing electronic connectivity and other efficiencies gained by
our providers with regards to the claim submission process, the average length
of time between when a claim was initially incurred and when the claim form
was received has generally shortened over the past several years. Below is a
summary:
Average # of Days from Incurred Date to Receipt Date (1)
2003 2002 Change % Change
1st Quarter Average 17.1 19.0 (1.9) -10.0%
2nd Quarter Average 16.7 18.1 (1.4) -7.7%
3rd Quarter Average 16.6 17.3 (0.7) -4.0%
4th Quarter Average 0.0 16.9 n/a n/a
Full Year Average 16.8 17.8 (1.0) -5.6%
(1) Receipt cycle time data for our 2 largest claim processing platforms
representing approximately 90% of our 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 Number
Valuation Claim Item of Days
Date (000) Counts On Hand
12/31/2001 $125,400 518,100 5.0
3/31/2002 $121,000 559,600 5.2
6/30/2002 $110,300 513,100 4.8
9/30/2002 $108,800 496,200 4.8
12/31/2002 $92,300 424,200 4.5
3/31/2003 $99,000 421,700 4.4
6/30/2003 $92,100 446,600 4.7
9/30/2003 $106,800 528,400 5.8
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 DCP
in Claims Annual Excluding Annual
Quarter Ended Payable (DCP) Change % Change Capitation Change % Change
12/31/2001 47.4 (3.9) -7.6% 57.1 (4.4) -7.2%
3/31/2002 47.2 (2.3) -4.6% 56.2 (3.4) -5.7%
6/30/2002 46.8 (3.1) -6.2% 55.3 (4.7) -7.8%
9/30/2002 46.6 (2.5) -5.1% 55.3 (3.9) -6.6%
12/31/2002 45.2 (2.2) -4.6% 53.3 (3.8) -6.7%
3/31/2003 46.5 (0.7) -1.5% 54.7 (1.5) -2.7%
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%
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:
2003 2002
4th quarter-prior year 45.2 47.4
Impact of change in claim
receipt cycle time (0.5) (2.6)
Impact of change in unprocessed
claim inventories 0.5 (1.3)
Impact of change in processed
claim inventories (2.2) 0.2
Impact of changing TRICARE
reserve balances 2.5 0.3
Impact of change in pharmacy
payment cutoff 0.2 0.7
All other 1.5 0.5
Year to date-current year 47.2 45.2
SOURCE Humana Inc.
Regina Nethery, Investor Relations, +1-502-580-3644,
Rnethery@humana.com, or Tom Noland, Corporate Communications, +1-502-580-3674,
Tnoland@humana.com, both of Humana Inc. |
Humana Inc.
