- Risk corridor receivables outstanding
no longer deemed collectible given recent court ruling
- Statutory capital associated with risk
corridor receivables previously fully funded by parent company
- Updated 2016 EPS projections of
approximately $6.09 GAAP and approximately $9.50 Adjusted
- Core business operations continue to
perform as previously expected
Humana Inc. (NYSE: HUM) today announced that a change in
interpretation of the Affordable Care Act (ACA) associated with a
recent court decision(a) involving parties unrelated to the company
now requires the company, under applicable accounting rules, to
write-off essentially all of the $591 million in receivables
associated with the risk corridor premium stabilization program(b)
outstanding as of September 30, 2016. The company anticipates
collection of approximately $8 million in risk corridor receivables
outstanding as of September 30, 2016 associated with the 2014 plan
year based on information published by the Centers for Medicare and
Medicaid Services (CMS) on November 18, 2016. The company has
previously collected approximately $30 million from CMS for risk
corridor receivables also associated with the 2014 plan year.
Risk corridor receivables previously recorded resulted in higher
premium income in the related period accrued. Consequently, the
company will reflect the write-off of the receivables as an
adjustment to premium income in the quarter ending December 31,
2016 (4Q16). The company expects to exclude the impact of the risk
corridor receivables write-off from its Adjusted EPS for 4Q16 and
FY16.
The risk corridor premium stabilization program expires on
December 31, 2016, so the write-off of these receivables will have
no impact on the company’s expected performance for the year ending
December 31, 2017. Importantly, risk corridor receivables were not
previously allowed as assets for statutory surplus and, therefore,
were already fully funded by the parent company.
Humana’s core businesses continue to perform as previously
expected. The company has also now included an estimate of
transaction and integration costs for 4Q16 in its projections for
the year ending December 31, 2016 (FY16). Humana’s updated GAAP(c)
and Adjusted(d) diluted earnings per common share (EPS) guidance
for FY16 follows:
EPS – FY16 GAAP EPS
Adjustments to GAAP (d) Adjusted
(Non-GAAP) EPS
Guidance as of November 4, 2016
Approximately $8.68 At least $0.82
Approximately $9.50 Write-off of risk corridor
receivables (b) (2.45) 2.45
- Transaction and integration costs for 4Q16 not previously
estimated (0.14) 0.14 -
Guidance as of December 8, 2016
Approximately $6.09 Approximately $3.41
Approximately $9.50
The company has included financial
measures in this release that are not in accordance with GAAP.
Management believes that these measures, when presented in
conjunction with the comparable GAAP measures, provide investors
greater transparency into the company’s core business operations
and operating performance. Management uses these non-GAAP financial
measures as indicators of the company’s 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. All financial measures in this
press release are in accordance with GAAP unless otherwise
indicated.
Footnotes
(a) On November 10, 2016, the U.S. Court of Federal Claims ruled
in favor of the government in one of a series of cases filed by
insurers against the Department of Health and Humana Services (HHS)
to collect risk corridor payments, rejecting all of the insurer’s
statutory, contract and Constitutional claims for payment. The
company had maintained the receivable in previous periods in
reliance upon the interpretation previously promulgated by HHS that
the risk corridor receivables were obligations of the U.S.
government. Given this court decision, however, the company’s
conclusion with respect to the ultimate collectability of the
receivable has shifted, and accounting rules require that the
receivable be written off. Land of Lincoln Mutual Health Insurance
Company v. United States; United States Court of Federal Claims No.
16-744C.
(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. The company
had previously disclosed in its filings with the Securities and
Exchange Commission (SEC), “. . . to the extent certain provisions
of the Health Care Reform Law are successfully challenged in court
or there are changes in legislation or the application of
legislation, there can be no guarantee that receivables established
under the reinsurance, risk corridor or risk adjustment provisions
of the Health Care Reform Law will ultimately be collected.”
(c) GAAP is Generally Accepted Accounting Principles.
(d) Adjusted EPS guidance for FY16 excludes:
a. Pretax transaction and integration costs
associated with the pending transaction with Aetna Inc. of $105
million, or $0.63 per diluted common share.
b. Amortization expense for identifiable
intangibles of $77 million pretax, or $0.33 per diluted common
share
c. The write-off of risk corridor receivables
totaling $583 million pretax, or $2.45 per diluted common share, in
light of the change in interpretation of the ACA demonstrated by
the recent court decision referenced in footnote (a) above.
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, Humana’s and Aetna’s
actions with respect to the pending Department of Justice (DOJ)
litigation; the outcome of the pending litigation in which the DOJ
is seeking to block the transaction; the timing to consummate the
transaction if it is not blocked; the terms and the timing of
divestiture agreements entered into by Humana and Aetna to address
the DOJ’s perceived competitive concerns regarding Medicare
Advantage; the risk that a condition to closing of the transaction
may not be satisfied or that the closing of the transaction
otherwise does not occur; the risk that a regulatory approval
required for the transaction is delayed, is not obtained or is
obtained subject to conditions that are not anticipated; the
outcome of various litigation matters related to the transaction
that are in addition to the pending DOJ litigation; the diversion
of management time on transaction-related issues (including the
pending DOJ litigation); as well as 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.
- The filing of a civil antitrust
complaint against us and Aetna is delaying, and could ultimately
prevent, the consummation of the merger with Aetna.
- Delays in completing the Merger will
delay the benefits expected to be achieved by the Merger.
- The timing of the closing of the
transactions contemplated by the asset purchase agreements between
Humana and Molina Healthcare, Inc., and between Aetna and Molina
Healthcare, Inc., are uncertain, and may delay the completion of
the merger between Humana and Aetna for a significant period of
time.
- 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. In addition, there can be
no guarantees that any reconsideration that Humana may file with
respect to certain of the Company’s Star rating measures for the
2018 bonus year will be successful, that operational measures
Humana may take will successfully mitigate any negative effects of
Star quality ratings for the 2018 bonus year, or that Humana will
not experience a decline in membership growth for 2017 or 2018 as a
result of the Company’s 2018 bonus year Star ratings.
- 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 federal
and state health insurance exchanges, which entail uncertainties
associated with mix, volume of business and the operation of
premium stabilization programs that 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;
- Form 10-Q for the quarters ended March
31, 2016, June 30, 2016 and September 30, 2016;
- 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
- Calendar of events
- Corporate Governance information
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161208006252/en/
Humana Inc.Investor Relations:Regina Nethery,
502-580-3644Rnethery@humana.comorCorporate Communications:Tom
Noland, 502-580-3674Tnoland@humana.com
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