- Adjusted EPS(a) of $1.86 for 1Q 2016
versus management’s guidance of at least $1.80
- Full year 2016 Adjusted EPS(a) guidance
of at least $8.85 reaffirmed
- 1Q 2016 cash flows from operations of
$482 million compared to $107 million in 1Q 2015
- Individual Medicare Advantage key early
performance indicators solid
- Healthcare Services segment performing
above company expectations
- Individual commercial business
continues to be challenging
Humana Inc. (NYSE: HUM) today reported diluted earnings per
common share (EPS) for the quarter ended March 31, 2016 (1Q 2016)
of $1.56 compared to $2.82 for the quarter ended March 31, 2015 (1Q
2015). The company also evaluates certain financial measures on an
adjusted basis and has included certain adjusted financial
measures(a) throughout this earnings press release.
Beginning with its 1Q 2016 results, the company is also
adjusting for the exclusion of amortization of identifiable
intangibles to align with reporting methods used across the managed
care sector. For comparability to 1Q 2016, adjusted amounts for 1Q
2015 have been recast to also reflect the amortization
adjustment.
Adjusted consolidated pretax income(a) and Adjusted EPS(a) for
1Q 2016 and 1Q 2015 were as follows:
Consolidated pretax income (in
millions)
1Q 2016
1Q 2015Recast
Generally Accepted Accounting Principles (GAAP)
$500 $744 Transaction and integration
costs associated with pending transaction with Aetna Inc. (Aetna)
34 - Amortization associated
with identifiable intangibles
21
26
Adjusted (non-GAAP) $555
$770
Diluted earnings per common share
(EPS)
1Q 2016
1Q 2015Recast
GAAP $1.56 $2.82
Transaction and integration costs associated with pending
transaction with Aetna
0.21 -
Amortization associated with identifiable intangibles
0.09 0.11 Tax benefit related to sale of
Concentra, Inc. (Concentra) - (0.35)
Adjusted (non-GAAP) $1.86
$2.58
The lower year-over-year Adjusted consolidated pretax income for
1Q 2016 primarily reflected lower operating results from the Retail
segment, partially offset by slightly higher operating results in
the Group and Healthcare Services segments. For the Retail segment,
an increase in earnings associated with higher premiums was more
than offset by an increase in the benefit ratio. The Group segment
experienced a lower operating cost ratio which was partially offset
by a higher benefit ratio. The Healthcare Services segment grew
revenues in its pharmacy and home based businesses with the related
increase in pretax earnings partially offset by decreased
profitability in the company’s provider services business. Further
discussions of each segment’s operating results are below.
The lower year-over-year Adjusted EPS for the quarter reflected
the same factors impacting Adjusted consolidated pretax income as
well as the beneficial impact of a lower share count in 1Q 2016
compared to 1Q 2015.
“We are pleased with our first-quarter earnings and believe the
strategic and operational initiatives implemented in 2015, focusing
on both clinical processes and administrative costs, will continue
to yield positive results across the enterprise,” said Bruce D.
Broussard, Humana’s President and Chief Executive Officer. “As we
continue to anticipate closing the pending transaction with Aetna
in the second half of 2016, we believe the combination will further
enhance the high-quality healthcare experience focused on the
health and wellness of our members we strive for every day.”
“We are encouraged by the early indicators we are seeing in our
Medicare and Healthcare Services businesses but remain cautious
while our healthcare exchange experience continues to develop,”
added Brian A. Kane, Senior Vice President and Chief Financial
Officer. “We remain keenly focused on an enterprise-wide view of
driving shareholder value by balancing continued pretax margin
improvement and membership growth across our franchise.”
2016 Earnings Guidance
Humana reaffirmed Adjusted EPS for the year ending December 31,
2016 (FY16) of at least $8.85 as noted below. For comparability to
FY16 Adjusted EPS guidance, FY15 Adjusted EPS is recast below to
also adjust for the exclusion of amortization of identifiable
intangibles as discussed above. Additional FY16 guidance points are
included in the table on page 18 of this earning press release.
The company is projecting Adjusted EPS of at least $2.15 for the
second quarter of 2016 and reaffirmed its expectation for Adjusted
EPS for the second through fourth quarters of 2016 to generally
mirror the percentage distribution of Adjusted EPS among the last
three quarters of 2015.
Diluted earnings per common
share FY16E FY15 Recast
GAAP At least $8.32 $8.44
Premium deficiency reserve (PDR) for certain 2016 individual
commercial policies
- 0.74
Transaction and integration costs associated with pending
transaction with Aetna; costs beyond those for 1Q 2016 are to be
determined
At least 0.21 0.14
Gain related to sale of Concentra
-
(1.57) Amortization of identifiable intangibles
0.32 0.39
Adjusted (non-GAAP)
At least $8.85 $8.14
Aetna Transaction
As previously announced, Humana entered into a definitive merger
agreement with Aetna on July 2, 2015 under which, at the closing,
Aetna will acquire each outstanding common share of Humana for $125
in cash and 0.8375 of an Aetna common share. At separate special
stockholder meetings both held on October 19, 2015, Humana
stockholders approved the adoption of the Aetna merger agreement
and Aetna shareholders approved the issuance of the Aetna common
stock in the transaction.
The transaction is subject to customary closing conditions,
including the expiration of the Hart-Scott-Rodino anti-trust
waiting period and approvals of certain state Departments of
Insurance and other regulators. During 1Q 2016, Humana completed
its submission of data to the Department of Justice (DOJ) in
response to the DOJ’s request for information in connection with
the pending transaction and, to date, has secured approximately
two-thirds of the necessary state change of control approvals.
The company continues to expect the transaction to close in the
second half of 2016.
Conference Call
Given the pending transaction with Aetna, the company is not
hosting a conference call in conjunction with its 1Q 2016 earnings
release and does not expect to do so for future quarters. Please
direct any questions regarding this earnings release to Humana
Investor Relations or Humana Corporate Communications.
Humana Consolidated
Highlights
Consolidated revenues
Consolidated revenues (including investment income) for 1Q 2016
were $13.80 billion, a decrease of $33 million, or less than 1
percent, from $13.83 billion in 1Q 2015, with total premiums and
services revenues for 1Q 2016 of $13.70 billion decreasing $38
million, or less than 1 percent, from $13.74 billion in 1Q 2015.
The year-over-year decrease in premiums and services revenues
primarily reflected lower services revenues in 1Q 2016 given the
sale of Concentra in June 2015 and the loss of premiums associated
with a large group Medicare account that moved to a private
exchange. These decreases were partially offset by premiums
associated with higher average individual Medicare membership and
per-member premium increases.
Consolidated benefits
expense
The 1Q 2016 consolidated benefit ratio of 84.8 percent increased
by 170 basis points from 83.1 percent for the prior year’s quarter
reflecting a higher ratio in the Retail and Group segments.
As discussed more fully in the segment-level highlights section
of this earnings release, the year-over-year increase in the
consolidated benefit ratio was primarily driven by the unfavorable
seasonal impact of an extra business day from leap year, as well as
a higher benefit in 1Q 2015 of the seasonal pattern of earnings
associated with the individual commercial business.
Prior period medical claims development (Prior Period
Development) favorably impacted the consolidated benefit ratio by
$340 million in 1Q 2016 and $194 million in 1Q 2015 with both the
Retail and Group segments experiencing year-over-year increases.
Prior Period Development decreased the consolidated benefit ratio
by 250 basis points in 1Q 2016 and 150 basis points in 1Q 2015. As
discussed below, the beneficial effect to earnings of the higher
favorable Prior Period Development in 1Q 2016 was partially offset
by adjustments to receivables associated with the premium
stabilization programs established under health care reform,
commonly referred to as the 3Rs(b).
Consolidated operating
expenses
Consolidated operating cost
ratio
(operating costs as a percent of total
revenues less investment income)
1Q 2016
1Q 2015
GAAP 12.9% 14.2%
Transaction and integration costs associated with pending
transaction with Aetna
(0.2%) -
Adjusted (non-GAAP) (a) 12.7%
14.2%
The 1Q 2016 Adjusted consolidated operating cost ratio
(operating costs as a percent of total revenues less investment
income) of 12.7 percent, a decrease of 150 basis points from 14.2
percent in 1Q 2015, primarily reflected the sale of Concentra in
June 2015, which carried a higher operating cost ratio than that
for the company on a consolidated basis, as well as management
cost-reduction initiatives across all lines of business.
Balance sheet
At March 31, 2016, the company had cash, cash equivalents, and
investment securities of $12.48 billion, up $798 million from
$11.68 billion at December 31, 2015 primarily reflecting the
changes driven by higher cash flows from operations discussed below
as well as the timing of net receipts from the Centers for Medicare
and Medicaid Services (CMS) for both Part D reinsurance and
low-income member claims.
Cash and short-term investments held at the parent company of
$1.41 billion at March 31, 2016 decreased $234 million from $1.65
billion at December 31, 2015, primarily reflecting the funding in
1Q 2016 of $450 million of capital contributions into subsidiaries
as a result of the statutory-based PDR for the Affordable Care Act
(ACA)-compliant individual commercial business, capital
expenditures and the payment of stockholder dividends, all
partially offset by operating cash derived from the company’s
non-insurance subsidiaries’ profits.
At March 31, 2016, net receivables of $759 million were
associated with the 3Rs. Approximately 56 percent of the total net
3Rs receivables were related to reinsurance recoverables. At March
31, 2016, net receivables (payables) for the 3Rs were as
follows:
Net Amounts Accrued for the 3Rs(in
millions)Assets (liabilities)
Balances Related toprior plan
years at3/31/16
Balances Related to2016 plan
year at3/31/16
Total Balancesat 3/31/16
Total Balances at12/31/15 (all related
to2014 and 2015 planyears)
Reinsurance recoverables $402 $25
$427 $610 Net risk adjustment
settlement (122) (12)
(134) (87) Net risk corridor settlement (c)
369 97
466
459
Total Net Amounts Accrued for the 3Rs
$649 $110
$759 $982
In 1Q 2016, the Department of Health and Human Services (HHS)
paid health plans a portion of the estimated reinsurance
recoverables for the 2015 plan year, with the remainder expected to
be paid in the third and fourth quarters of 2016. Reinsurance
recoverables associated with the 2014 plan year were paid by HHS in
the third and fourth quarters of 2015.
Other changes in estimate of the net 3Rs receivables for prior
plan years during 1Q 2016 primarily result from Prior Period
Development, as well as updates to third-party studies and tax
estimates.
Net risk corridor receivables are anticipated to be primarily
collected in future years and thus the related amounts have been
classified as long-term receivables as of March 31, 2016.
Days in claims payable (DCP) of 43.0 at March 31, 2016 increased
1.4 days from 41.6 at December 31, 2015. DCP represents the
benefits payable at the end of the quarter divided by the average
benefits expense per day in the quarter. The company computes this
metric excluding: (1) the impact of the military services and
Medicare stand-alone PDP businesses, (2) reinsurance expense
related to the commercial individual business and long-duration
products and (3) the PDR related to the 2016 ACA-compliant
individual commercial medical policies.
As previously disclosed and discussed above, in the fourth
quarter of 2015, the company recorded a PDR related to certain of
its 2016 individual commercial policies. The PDR is included on the
company’s balance sheet in benefits payable. Activity associated
with the PDR during 1Q 2016 was as follows:
Premium Deficiency Reserve
Rollforward(in millions)
1Q 2016
Balance at January 1, 2016 $176 1Q 2016
financial results for ACA-compliant individual commercial medical
business excluding related indirect administrative costs
13 Balance at March 31, 2016
$189
Debt-to-total capitalization at March 31, 2016 was 28.0 percent,
down 30 basis points from 28.3 percent at December 31, 2015, and
below the company’s long-term target range of 30 to 35 percent
needed to maintain its investment grade credit rating, providing
the company with significant financial flexibility. The sequential
change in this ratio primarily reflected higher capital from the
net impact of 1Q 2016 earnings, partially offset by cash dividends
during the quarter. As of March 31, 2016, the company had
approximately $300 million outstanding on its commercial paper
program compared to $299 million at December 31, 2015.
Cash flows from
operations
Cash flow provided by operations of $482 million in 1Q 2016
increased $375 million from $107 million in 1Q 2015 primarily due
to the favorable timing of working capital changes partially offset
by lower earnings year over year. Significant year-over-year
changes to working capital items primarily included the early
receipt of certain commercial reinsurance recoveries from HHS in 1Q
2016 discussed above, one less payroll cycle in 1Q 2016 than in 1Q
2015 and lower management incentive payments in 1Q 2016 associated
with prior-year performance than those paid in 1Q 2015.
Share repurchases
In September 2014, the company’s Board of Directors approved a
new $2 billion share repurchase authorization with an expiration
date of December 31, 2016 that replaced its previous $1 billion
share repurchase authorization. Approximately $1.04 billion of the
current $2 billion repurchase authorization remains
outstanding.
Due to the pending transaction with Aetna, the company suspended
its share repurchase program on July 2, 2015.
Cash dividends
The company paid cash dividends to its stockholders of $47
million in 1Q 2016 and $44 million in 1Q 2015. In April 2016, the
company’s Board of Directors declared a cash dividend of $0.29 per
share payable on July 29, 2016 to stockholders of record on June
30, 2016.
The company’s ability and intent to continue its quarterly
dividend policy is not impacted by the pending transaction with
Aetna, although the company has agreed with Aetna that its
quarterly dividend will not exceed $0.29 per share prior to closing
the transaction.
Humana’s Retail Segment
This segment consists of Medicare benefits, marketed to
individuals or directly via group accounts, as well as individual
commercial fully-insured medical and specialty health insurance
benefits, including dental, vision, and other supplemental health
and financial protection products. In addition, this segment also
includes the company’s contract with CMS to administer the Limited
Income Newly Eligible Transition (LI-NET) prescription drug plan
program and contracts with various states to provide Medicaid, dual
eligible, and Long-Term Support Services (LTSS) benefits. These
contracts are collectively referred to as state-based
contracts.
Retail Segment Highlights – 1Q
2016
Individual Medicare Advantage
business
The company’s individual Medicare Advantage operating results
for 1Q 2016 are consistent with management’s expectations,
reflecting measures taken to address challenges faced by the
company in 2015 such as strategic benefit plan design changes,
refinements in the company’s clinical programs and enhancements to
financial recovery processes. Further, both early utilization
metrics and Prior Period Development associated with claim
recoveries were positive relative to the company’s expectations.
Although early indications of Medicare Advantage performance are
positive, the company is continuing to monitor performance and
therefore has not fully reflected the impact of these early
indicators in its financial guidance for FY16.
On February 22, 2016, the company issued its preliminary
analysis of the 2017 Medicare Advantage and Part D Advance Notice
and Draft Call Letter (the Advance Notice) issued by CMS on
February 19, 2016 indicating a projected 2017 rate increase of 0.2
percent. On April 4, 2016, CMS issued its announcement of 2017
Medicare Advantage Capitation Rates and Medicare Advantage and Part
D Payment Policies and Final Call Letter (the Final Rate Notice).
The company believes the Final Rate Notice will result in Medicare
Advantage funding pressure of approximately 1.3 percent for 2017.
The primary difference between the company’s preliminary Advance
Notice analysis and the analysis of the Final Rate Notice was CMS’
acknowledgement of a technical error in the Advance Notice that was
corrected in the Final Rate Notice. The beneficial effect of the
temporary suspension of the health insurance industry fee for 2017
announced by CMS in December 2015 is not reflected in the company’s
estimate for its 2017 rate changes.
The company is in the process of designing its Medicare
Advantage product offerings for 2017 and is drawing upon its
program expertise to design competitive offerings that promote
quality of care and service for its members while driving overall
enterprise value by balancing membership growth with pretax margin
improvement.
Stand-alone Prescription Drug Plan (PDP)
business
For 1Q 2016 the company’s stand-alone PDP business performed in
line with management’s expectations reflecting solid membership
growth and emerging cost trends consistent with expectations
incorporated into 2016 plan designs. Importantly, the company’s
Humana-Walmart plan remains a leader in low-price product
offerings.
Group Medicare Advantage
business
In 1Q 2016, the company’s group Medicare Advantage business
performed in line with expectations, reflecting lower revenues and
earnings than those in the prior year, primarily due to the
previously disclosed loss of a large profitable account on January
1, 2016 as this account moved to a private exchange. The majority
of members in the account that moved to a private exchange opted
for Original Medicare combined with a Medicare supplement
offering.
Individual commercial business
As previously disclosed, in the fourth quarter of 2015 the
company recorded a PDR associated with its 2016 individual
commercial ACA-compliant offerings. Historically, this business has
reported a profit in the first quarter of the year due to the
related benefit designs. Because the company continues to
anticipate a loss associated with this business for the full year
2016, the seasonal earnings generated in 1Q 2016 are offset by an
increase in the PDR, resulting in a higher benefit ratio year over
year. This first quarter seasonality was anticipated as the company
developed its estimate of the full-year PDR recorded in the fourth
quarter of 2015.
Financial results associated with the wind-down of the non-ACA
compliant (legacy) business, including the related release of
policy reserves, as well as indirect administrative costs
associated with ACA-compliant offerings are included in the
company’s 1Q 2016 financial results.
Consistent with data evaluated as the company established the
PDR in the fourth quarter of 2015, early indications for
ACA-compliant business effective in 1Q 2016 include:
- New members enrolling in off-exchange
plans had higher admissions per thousand members (APT) than
renewing members.
- Renewing members in both on and off
exchange plans from 2015 to 2016 were higher utilizers based on APT
and pharmacy statistics than those terminating coverage.
The company will continue to evaluate the performance of this
business for 2016 as it further develops and the corresponding
impact on the PDR, if any, over the coming quarters.
Humana is in the process of finalizing plans for its
ACA-compliant individual commercial medical market offerings in
2017. Humana anticipates proposing a number of changes to retain a
viable product for individual consumers, where feasible, and
address persistent risk selection challenges. Such changes may
include certain statewide market and product exits both on and off
exchange, service area reductions and pricing commensurate with
anticipated levels of risk by state.
State-based contracts business
The performance of the company’s state-based contract business
is generally in line with management’s expectations. Operating
results projected for FY16 are primarily driven by the full-year
benefit of a rate increase for the company’s Medicaid Temporary
Assistance for Needy Families (TANF) products, provider network
initiatives and the continued rationalization of this business’
administrative cost structure.
Retail segment premiums and services revenue:
- The 1Q 2016 premiums and services
revenue for the Retail segment was $11.84 billion, an increase of
$255 million, or 2 percent, from $11.58 billion in 1Q 2015. The
higher revenues resulted primarily from an increase in average
membership year over year in the company’s individual Medicare
offerings as well as per-member premium increases partially offset
by the loss of premiums associated with a large group Medicare
account that moved to a private exchange as well as lower
individual commercial medical membership.
Retail segment enrollment:
- Individual Medicare Advantage
membership was 2,807,200 as of March 31, 2016, an increase of
121,300, or 5 percent, from 2,685,900 at March 31, 2015, and up
53,800, or 2 percent, from 2,753,400 as of December 31, 2015,
primarily due to net membership additions associated with the 2016
plan year, particularly in the company’s HMO offerings.
- Group Medicare Advantage
membership was 349,200 as of March 31, 2016, a decrease of 121,700,
or 26 percent, from 470,900 at March 31, 2015 and down 134,900, or
28 percent, from 484,100 at December 31, 2015, primarily due to the
previously disclosed loss of a large profitable account on January
1, 2016 as this account moved to a private exchange.
- Membership in the company’s
stand-alone PDP offerings was 4,834,100 as of March 31,
2016, an increase of 452,700, or 10 percent, from 4,381,400 at
March 31, 2015, and up 276,200, or 6 percent, from 4,557,900 as of
December 31, 2015. These increases primarily resulted from growth
in the company’s low-price Humana-Walmart plan offering.
- Individual commercial membership
of 875,700 as of March 31, 2016, was down 233,200, or 21 percent,
from 1,108,900 at March 31, 2015, and down 23,400, or 3 percent,
from 899,100 at December 31, 2015 The year-over-year change
primarily reflected the loss of approximately 150,000 members due
to termination by CMS for lack of eligibility documentation, lower
membership in legacy plans and the loss of membership associated
with non-payment of premiums during the last three quarters of
2015. The sequential change in individual commercial membership
primarily reflected lower membership in legacy plans and the loss
of membership associated with 1Q 2016 ACA-compliant plan
discontinuances.
- State-based contracts membership
(including dual-eligible demonstration members) was 388,400 as of
March 31, 2016, an increase of 49,400, or 15 percent, from 339,000
at March 31, 2015, and up 14,700, or 4 percent, from 373,700 at
December 31, 2015. These increases versus the prior year were
primarily driven by the addition of membership under the Florida
state-based contracts in the second half of 2015.
- Membership in individual specialty
products(d) was 1,143,200 as of March 31, 2016, a decrease of
30,100, or 3 percent, from 1,173,300 at March 31, 2015, and down
9,900, or 1 percent, from 1,153,100 at December 31, 2015. These
decreases primarily resulted from the loss of individual commercial
medical members that also had specialty coverage.
Retail segment benefits expense:
- The 1Q 2016 benefit ratio for the
Retail segment of 87.7 percent increased 190 basis points from 85.8
percent in 1Q 2015 due to unfavorable leap year seasonality, lower
seasonal policy reserve releases associated with the legacy
individual commercial business, adjustments to receivables
associated with the 3Rs, and the seasonal impact of the PDR
partially offset by higher Prior Period Development year over
year.
- The Retail segment Prior Period
Development increased to $298 million in 1Q 2016 compared to $188
million in 1Q 2015. The increase primarily related to the
earlier-than-projected receipt of certain Medicare claim recoveries
and favorable year-over-year comparisons for the individual
commercial and state-based contracts businesses.
- Prior Period Development decreased the
1Q 2016 Retail segment benefit ratio by 250 basis points and by 160
basis points for 1Q 2015.
Retail segment operating costs:
- The Retail segment’s operating cost
ratio of 10.8 percent in 1Q 2016 was unchanged compared to the 1Q
2015 ratio. The ratio remained unchanged year over year as
administrative cost efficiencies associated with medical membership
growth in the segment were offset by the loss of the large group
Medicare Advantage account which carried a lower operating cost
ratio than that for individual Medicare Advantage business.
- The non-deductible health insurance
industry fee increased the Retail segment’s operating cost ratio by
approximately 170 basis points in both 1Q 2016 and 1Q 2015.
Retail segment pretax results:
Retail segment pretax income (in
millions)
1Q 2016
1Q 2015Recast
Generally Accepted Accounting Principles (GAAP)
$154 $375 Amortization associated with
identifiable intangibles
6 7
Adjusted (non-GAAP) $160
$382
- The Retail segment’s Adjusted pretax
income of $160 million in 1Q 2016 compared to Adjusted pretax
income of $382 million in 1Q 2015, a decrease of $222 million as an
increase in earnings associated with higher premiums was more than
offset by an increase in the segment’s benefit ratio.
Humana’s Group Segment
This segment consists of employer group commercial fully-insured
medical and specialty health insurance benefits, including dental,
vision, and other supplemental health and voluntary insurance
benefits, as well as Administrative Services Only (ASO) products.
In addition, the Group segment includes health and wellness
products (primarily marketed to employer groups) and military
services business, primarily the TRICARE South Region contract.
Group Segment Highlights
The Group segment’s 1Q 2016 performance was generally in line
with management’s expectations.
Group segment premiums and services revenue:
- The 1Q 2016 premiums and services
revenue for the Group segment were $1.81 billion, down $45 million,
or 2 percent from $1.85 billion in 1Q 2015, primarily reflecting
declines in average fully-insured and ASO commercial group medical
membership, partially offset by an increase in fully-insured
commercial medical per-member premiums.
Group segment enrollment:
- Group fully-insured commercial
medical membership was 1,136,400 at March 31, 2016, a decrease
of 53,200, or 4 percent, from 1,189,600 at March 31, 2015, and also
down 41,900, or 4 percent, from 1,178,300 at December 31, 2015
reflecting lower membership in both large group and small group
accounts. The portion of group fully-insured commercial medical
membership in small group accounts (2-99 sized employer groups) was
approximately 66 percent at March 31, 2016 versus approximately 65
percent at both March 31, 2015 and December 31, 2015.
- Group ASO commercial medical
membership was 579,400 at March 31, 2016, a decline of 157,400, or
21 percent, from 736,800 at March 31, 2015, and also down 131,300,
or 18 percent from 710,700 at December 31, 2015. The year-over-year
decline primarily reflects the loss of certain large group accounts
due to continued discipline in pricing of services for self-funded
accounts amid a highly competitive environment.
- Military services membership was
3,076,800 at March 31, 2016, a decrease of 8,800, or less than 1
percent, from 3,085,600 at March 31, 2015, but up 2,400, or less
than 1 percent, from 3,074,400 at December 31, 2015.
- Membership in Group specialty
products was 5,901,900 at March 31, 2016, a decline of 349,300,
or 6 percent from 6,251,200 at March 31, 2015, and down 166,800, or
3 percent from 6,068,700 at December 31, 2015. These decreases
primarily resulted from the loss of several large stand-alone
dental and vision accounts, along with certain fully-insured group
medical accounts that also had specialty coverage.
- Membership in HumanaVitality® (to be
renamed Go365TM), the company’s wellness and
loyalty rewards program, was 3,734,100 at March 31, 2016, a
decrease of 213,800, or 5 percent from 3,947,900 at March 31, 2015,
and down 198,200, or 5 percent from 3,932,300 at December 31, 2015.
The year-over-year and sequential declines in membership primarily
reflect the decline in group Medicare membership from the loss of
the large account on January 1, 2016 discussed above.
Group segment benefits expense:
- The 1Q 2016 benefit ratio for the Group
segment was 74.8 percent, an increase of 90 basis points from 73.9
percent for 1Q 2015. The year-over-year increase in the benefit
ratio primarily reflected the cumulative effect of unfavorable
current year medical claims development in the last three quarters
of 2015 (including changes in estimate for risk adjustment
accruals) and unfavorable leap year seasonality, partially offset
by higher favorable Prior Period Development year over year.
- The Group segment Prior Period
Development increased to $41 million in 1Q 2016 compared to $5
million in 1Q 2015. Prior Period Development decreased the Group
segment benefit ratio by 260 basis points in 1Q 2016 and 30 basis
points in 1Q 2015 with higher claim recoveries year over year
primarily driving the increase in 1Q 2016.
Group segment operating costs:
- The Group segment’s operating cost
ratio was 24.1 percent in 1Q 2016, a decrease of 40 basis points
from 24.5 percent in 1Q 2015, primarily reflecting the loss of
certain large ASO accounts resulting in a lower percentage of ASO
business (which carries a higher operating cost ratio than
fully-insured commercial business) as well as operating cost
efficiencies associated with the fully-insured business. Operating
cost efficiencies were primarily the result of sustainable cost
reduction initiatives.
- The non-deductible health insurance
industry fee negatively impacted the Group segment’s operating cost
ratio by approximately 140 basis points in both 1Q 2016 and 1Q
2015.
Group segment pretax results:
Group segment pretax income (in
millions)
1Q 2016
1Q 2015Recast
Generally Accepted Accounting Principles (GAAP)
$158 $154 Amortization associated with
identifiable intangibles
3 3
Adjusted (non-GAAP) $161
$157
- The 1Q 2016 Adjusted Group segment
pretax income of $161 million increased from an Adjusted pretax
income of $157 million in 1Q 2015, primarily reflecting the
segment’s lower operating cost ratio, partially offset by a higher
benefit ratio.
Humana’s Healthcare Services
Segment
This segment includes services offered to the company’s health
plan members as well as to third parties, including pharmacy
solutions, provider services, home based services, and clinical
programs, as well as services and capabilities to advance
population health.
Healthcare Services Segment
Highlights
1Q 2016 operating performance for the Healthcare Services
segment was slightly ahead of management’s expectations, primarily
driven by higher-than-projected mail order rates for Humana
Pharmacy and the benefit of effective drug purchasing and
contracting strategies. 1Q 2016 results exclude the impact of the
company’s Concentra operations which were sold in June 2015.
Healthcare Services segment revenues:
- Revenue of $6.18 billion in 1Q 2016 for
the Healthcare Services segment increased $347 million, or 6
percent from $5.83 billion in 1Q 2015, primarily due to growth in
the company’s individual Medicare Advantage and stand-alone PDP
membership which resulted in higher utilization of the Healthcare
Services businesses, partially offset by lower external services
revenues due to the previously discussed sale of the Concentra
business and lower utilization of clinical services associated with
the loss of a large group Medicare Advantage account as previously
discussed.
Healthcare Services segment operating costs:
- The Healthcare Services segment’s
operating cost ratio of 95.7 percent in 1Q 2016 increased 40 basis
points from 95.3 percent in 1Q 2015 primarily due to decreased
profitability in the company’s provider services business
reflecting significantly lower Medicare rates year over year.
Healthcare Services segment operating statistics:
- Primary care providers in value-based
(shared risk and path to risk) relationships of 47,800 at March 31,
2016 increased 5 percent from 45,500 at March 31, 2015 and December
31, 2015. At March 31, 2016, 61 percent of the company’s individual
Medicare Advantage members were in value-based relationships
compared to 54 percent at March 31, 2015 and 59 percent at December
31, 2015.
- Medicare Advantage membership in the
Humana Chronic Care Program rose to 572,300 at March 31, 2016, up
24 percent from 463,000 at March 31, 2015, reflecting enhanced
predictive modeling capabilities and focus on proactive clinical
outreach and member engagement but down 3 percent from 590,300 at
December 31, 2015, primarily due to the loss of engaged members
associated with the group Medicare Advantage account that termed on
January 1, 2016 as discussed above.
- Pharmacy script volumes of 104 million
for 1Q 2016 increased 9 percent compared to 96 million for 1Q 2015,
and up 1 percent versus 103 million for the fourth quarter of 2015,
driven primarily by higher average medical membership.
Healthcare Services segment pretax results:
Healthcare Services segment pretax
income (in millions)
1Q 2016
1Q 2015Recast
Generally Accepted Accounting Principles (GAAP)
$241 $230 Amortization associated with
identifiable intangibles
11 15
Adjusted (non-GAAP) $252
$245
- Healthcare Services segment Adjusted
pretax income of $252 million in 1Q 2016 increased by $7 million
from the Adjusted pretax income of $245 million in 1Q 2015,
primarily due to revenue growth from the pharmacy solutions and
home based services businesses as they serve the company’s growing
individual Medicare Advantage membership. High levels of individual
Medicare Advantage and stand-alone PDP membership growth, as well
as increased engagement of members in clinical programs have
resulted in higher usage of services across the segment compared to
1Q 2015. The segment’s operating results were negatively impacted
by decreased profitability in the company’s provider services
business reflecting significantly lower Medicare rates year over
year associated with CMS’ risk coding recalibration for 2016 in
geographies where provider assets are located.
Detailed press release
Humana’s full earnings press release including the statistical
pages has been posted to the company’s Investor Relations site and
may be accessed at
http://phx.corporate-ir.net/phoenix.zhtml?c=92913&p=irol-IRHome
or via a current report on Form 8-K filed by the company with the
Securities and Exchange Commission this morning (available at
www.sec.gov or on the company’s website).
Footnotes
(a)
1Q 2016
Adjusted consolidated pretax income and Adjusted EPS for 1Q 2016
exclude pretax transaction costs of $34 million, or $0.21 per
diluted common share, associated with the pending transaction with
Aetna and amortization expense associated with identifiable
intangibles of $21 million, or $0.09 per diluted common share. The
consolidated operating cost ratio has also been adjusted to exclude
the impact of the $34 million in costs associated with the pending
transaction with Aetna. Segment pretax results have also been
adjusted to reflect each segment’s respective amount of
amortization expense associated with identifiable intangibles.
1Q 2015
Adjusted EPS for 1Q 2015 excludes approximately $0.35 per diluted
common share of tax benefit associated with the recognition of a
deferred tax asset in connection with the held-for-sale
classification resulting from the company’s announcement in March
2015 of an agreement to sell its wholly-owned subsidiary,
Concentra, Inc. Adjusted consolidated pretax income and Adjusted
EPS for 1Q 2015 also exclude amortization expense associated with
identifiable intangibles of $26 million, or $0.11 per diluted
common share. Segment pretax results have also been adjusted to
reflect each segment’s respective amount of identifiable intangible
amortization expense.
FY16
Beginning in the first quarter of 2016, the company is including an
adjustment to add back amortization expense related to identifiable
intangibles to align with reporting methods used across the managed
care sector. For FY16, this adjustment is estimated to approximate
$0.32 per diluted common share.
FY15
Adjusted EPS for FY2015 excludes the PDR of $0.74 per diluted
common share related to the company’s 2016 ACA-compliant individual
commercial medical offerings, pretax transaction costs of $0.14 per
diluted common share associated with the pending transaction with
Aetna, a gain of $1.57 per diluted common share associated with the
completion of the company’s sale of its wholly-owned subsidiary,
Concentra, on June 1, 2015, and amortization expense of $0.39 per
diluted common share. The company has included these
financial measures (which are not in accordance with Generally
Accepted Accounting Principles (GAAP)) in its summary of financial
results within this earnings release as management believes that
these measures, when presented in conjunction with the comparable
GAAP measures, are useful to both management and its investors in
analyzing the company’s ongoing business and operating performance.
The excluded items described herein are not a recurring part of the
company’s operating plan. Consequently, management uses these
non-GAAP financial measures as indicators of business performance,
as well as for operational planning and decision making purposes.
Non-GAAP financial measures should be considered in addition to,
but not as a substitute for, or superior to, financial measures
prepared in accordance with GAAP.
(b)
Under health care reform, premium
stabilization programs, commonly referred to as the 3Rs, became
effective January 1, 2014. These programs include a permanent risk
adjustment program, a transitional reinsurance program, and a
temporary risk corridors program designed to more evenly spread the
financial risk borne by issuers and to mitigate the risk that
issuers would have mispriced products. In each case, operation of
the program is subject to appropriation or other federal
administrative action.
(c)
On October 1, 2015, Humana and other
industry participants received notification from CMS that 12.6
percent of risk corridor receivables for the 2014 coverage year
would be paid on an interim basis given expected risk corridor
collections for the 2014 coverage year. The risk corridor program
is a three-year program and guidance from HHS provides that risk
corridor collections over the life of the three-year program will
first be applied to any shortfalls from previous benefit years
before application to current year obligations. Subsequent to the
October 1, 2015 notification from CMS, HHS reiterated its
recognition that the ACA requires the Secretary of HHS to make full
payments to issuers, and that amounts unpaid following the 12.6
percent payment will be recorded as obligations of the United
States Government for which full payment is required. In the event
of a shortfall for the 2016 program year, HHS has asserted it will
explore other sources of funding for risk corridors payments,
subject to the availability of appropriations, including working
with Congress on the necessary funding for outstanding risk
corridor payments.
(d)
The company provides a full range of
insured specialty products including dental, vision, other
supplemental health, financial protection, and voluntary insurance
benefits. Members included in these products may not be unique to
each product since members have the ability to enroll in multiple
products. Other supplemental benefits include life, disability, and
fixed benefit products including cancer and critical illness
policies.
Cautionary Statement
This news release includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
When used in investor presentations, press releases, Securities and
Exchange Commission (SEC) filings, and in oral statements made by
or with the approval of one of Humana’s executive officers, the
words or phrases like “expects,” “believes,” “anticipates,”
“intends,” “likely will result,” “estimates,” “projects” or
variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject
to risks, uncertainties, and assumptions, including, among other
things, information set forth in the “Risk Factors” section of the
company’s SEC filings, a summary of which includes but is not
limited to the following:
- Humana’s transaction with Aetna is
subject to various closing conditions, including governmental and
regulatory approvals as well as other uncertainties and there can
be no assurances as to whether and when it may be completed.
- The merger agreement between Humana and
Aetna prohibits Humana from pursuing alternative transactions to
the pending transaction with Aetna.
- The number of shares of Aetna common
stock that Humana’s stockholders will receive in the transaction is
based on a fixed exchange ratio. Because the market price of
Aetna’s common stock will fluctuate, Humana’s stockholders cannot
be certain of the value of the portion of the transaction
consideration to be paid in Aetna’s common stock.
- While the transaction with Aetna is
pending, Humana is subject to business uncertainties and
contractual restrictions that could materially adversely affect
Humana’s results of operations, financial position and cash flows
or result in a loss of employees, customers, members or
suppliers.
- Failure to consummate the transaction
with Aetna could negatively impact Humana’s results of operations,
financial position and cash flows.
- If Humana does not design and price its
products properly and competitively, if the premiums Humana
receives are insufficient to cover the cost of health care services
delivered to its members, if the company is unable to implement
clinical initiatives to provide a better health care experience for
its members, lower costs and appropriately document the risk
profile of its members, or if its estimates of benefits expense are
inadequate, Humana’s profitability could be materially adversely
affected. Humana estimates the costs of its benefit expense
payments, and designs and prices its products accordingly, using
actuarial methods and assumptions based upon, among other relevant
factors, claim payment patterns, medical cost inflation, and
historical developments such as claim inventory levels and claim
receipt patterns. We continually review estimates of future
payments relating to benefit expenses for services incurred in the
current and prior periods and make necessary adjustments to our
reserves, including premium deficiency reserves, where appropriate.
These estimates, however, involve extensive judgment, and have
considerable inherent variability because they are extremely
sensitive to changes in claim payment patterns and medical cost
trends, so any reserves we may establish, including premium
deficiency reserves, may be insufficient.
- If Humana fails to effectively
implement its operational and strategic initiatives, particularly
its Medicare initiatives, state-based contract strategy, and its
participation in the new health insurance exchanges, the company’s
business may be materially adversely affected, which is of
particular importance given the concentration of the company’s
revenues in these products.
- If Humana fails to properly maintain
the integrity of its data, to strategically implement new
information systems, to protect Humana’s proprietary rights to its
systems, or to defend against cyber-security attacks, the company’s
business may be materially adversely affected.
- Humana’s business may be materially
adversely impacted by the adoption of a new coding set for
diagnoses (commonly known as ICD-10), the implementation of which
became effective on October 1, 2015.
- Humana is involved in various legal
actions, or disputes that could lead to legal actions (such as,
among other things, provider contract disputes relating to rate
adjustments resulting from the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended, commonly referred to as
“sequestration”; other provider contract disputes; and qui tam
litigation brought by individuals on behalf of the government) and
governmental and internal investigations, any of which, if resolved
unfavorably to the company, could result in substantial monetary
damages or changes in its business practices. Increased litigation
and negative publicity could also increase the company’s cost of
doing business.
- As a government contractor, Humana is
exposed to risks that may materially adversely affect its business
or its willingness or ability to participate in government health
care programs including, among other things, loss of material
government contracts, governmental audits and investigations,
potential inadequacy of government-determined payment rates,
potential restrictions on profitability, including by comparison of
profitability of the company’s Medicare Advantage business to
non-Medicare Advantage business, or other changes in the
governmental programs in which Humana participates.
- The Health Care Reform Law, including
The Patient Protection and Affordable Care Act and The Health Care
and Education Reconciliation Act of 2010, could have a material
adverse effect on Humana’s results of operations, including
restricting revenue, enrollment and premium growth in certain
products and market segments, restricting the company’s ability to
expand into new markets, increasing the company's medical and
operating costs by, among other things, requiring a minimum benefit
ratio on insured products, lowering the company’s Medicare payment
rates and increasing the company’s expenses associated with a
non-deductible health insurance industry fee and other assessments;
the company’s financial position, including the company's ability
to maintain the value of its goodwill; and the company’s cash
flows.
- Humana’s participation in the new
federal and state health care exchanges, which entail uncertainties
associated with mix, volume of business, and the operation of
premium stabilization programs, which are subject to federal
administrative action, could adversely affect the company’s results
of operations, financial position, and cash flows.
- Humana’s business activities are
subject to substantial government regulation. New laws or
regulations, or changes in existing laws or regulations or their
manner of application could increase the company’s cost of doing
business and may adversely affect the company’s business,
profitability and cash flows.
- If Humana fails to develop and maintain
satisfactory relationships with the providers of care to its
members, the company’s business may be adversely affected.
- Humana’s pharmacy business is highly
competitive and subjects it to regulations in addition to those the
company faces with its core health benefits businesses.
- Changes in the prescription drug
industry pricing benchmarks may adversely affect Humana’s financial
performance.
- If Humana does not continue to earn and
retain purchase discounts and volume rebates from pharmaceutical
manufacturers at current levels, Humana’s gross margins may
decline.
- Humana’s ability to obtain funds from
certain of its licensed subsidiaries is restricted by state
insurance regulations.
- Downgrades in Humana’s debt ratings,
should they occur, may adversely affect its business, results of
operations, and financial condition.
- The securities and credit markets may
experience volatility and disruption, which may adversely affect
Humana’s business.
In making forward-looking statements, Humana is not undertaking
to address or update them in future filings or communications
regarding its business or results. In light of these risks,
uncertainties, and assumptions, the forward-looking events
discussed herein may or may not occur. There also may be other
risks that the company is unable to predict at this time. Any of
these risks and uncertainties may cause actual results to differ
materially from the results discussed in the forward-looking
statements.
Humana advises investors to read the following documents as
filed by the company with the SEC for further discussion both of
the risks it faces and its historical performance:
- Form 10-K for the year ended December
31, 2015, and
- Form 8-Ks filed during 2016.
About Humana
Humana Inc., headquartered in Louisville, Ky., is a leading
health and well-being company focused on making it easy for people
to achieve their best health with clinical excellence through
coordinated care. The company’s strategy integrates care delivery,
the member experience, and clinical and consumer insights to
encourage engagement, behavior change, proactive clinical outreach
and wellness for the millions of people we serve across the
country.
More information regarding Humana is available to investors via
the Investor Relations page of the company’s web site at
www.humana.com, including copies of:
- Annual reports to stockholders
- Securities and Exchange Commission
filings
- Most recent investor conference
presentations
- Quarterly earnings news releases
- Replays of most recent earnings release
conference calls
- Calendar of events
Humana Inc. – Earnings Guidance Points
as of May 4, 2016
In accordance with
GenerallyAccepted AccountingPrinciples (GAAP)
unlessotherwise noted
Projections for thequarter
endingJune 30, 2016
Projections for the
yearendingDecember 31, 2016
Comments
Diluted earnings per common
share(EPS)
GAAP: At least $2.06Adjustments: At least
$0.09Adjusted: At least $2.15(New guidance point)
GAAP: At least $8.32Adjustments: At least
$0.53Adjusted: At least $8.85(No change to Adjusted EPS)
As previously disclosed, Adjusted EPS for
2Q
2016 through 4Q 2016 are expected to
generally mirror the percentage
distribution of Adjusted EPS among the
last three quarters of 2015.
Projected adjustments to GAAP EPS
include
(1) transaction and integration costs
associated with the pending Aetna
transaction and (2) amortization of
identifiable intangibles. See also
footnote
(a) within this earnings press release
which discusses the use of non-GAAP
financial measures.
Transaction and integration costs
beyond
those incurred in 1Q 2016 are to be
determined.
Consolidated revenues
At least $53.5 billion(No change from
prior guidance)
Revenues include expected investment
income
Effective tax rate
49% to 51%(No change from prior
guidance)
Reflects the non-deductibility of the
health
insurance industry fee.
Parent company cash and
short-term
investments at year end
$1.2 billion to $1.5 billion(No change
from prior guidance)
Assumes no outstanding commercial
paper
balances
Change in ending medical
membership from prior year end
Projections for the year ending
December 31, 2016(No changes from prior guidance)
- Individual Medicare Advantage – Up 100,000 to
120,000
- Group Medicare Advantage – Down 120,000 to 125,000
- Medicare stand-alone PDP – Up 300,000 to 330,000
- Individual commercial – Down 200,000 to 300,000
Medicare stand-alone PDP excludes
membership associated with the Limited
Income Newly Eligible Transition
program.
Segment level results
Projections for the year ending
December 31, 2016 (No changes from prior guidance)
- Retail – Improved year-over-year results for individual
Medicare Advantage, stand-alone PDP andindividual commercial
businesses partially offset by lower earnings associated with the
loss of alarge group Medicare Advantage account
- Group – Modest decline in earnings associated with lower
projected medical membership andcertain settlements for military
services operations in 2015 not expected to recur in 2016
- Healthcare Services – Earnings projected to be slightly
lower versus the prior year due primarily toexpected growth in the
company’s pharmacy businesses being largely offset by projected
lossesassociated with the company’s provider services businesses
and lower pretax income due to thesale of Concentra in June
2015.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160504005458/en/
Humana Inc.Investor Relations:Regina Nethery,
502-580-3644Rnethery@humana.comorCorporate CommunicationsTom
Noland, 502-580-3674Tnoland@humana.com
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