01—Abstract
Summary
Summary of the 10-K filed February 18, 2011. Cited figures are marked; the original filing is the authoritative source.
Humana Inc. (NYSE: HUM), headquartered in Louisville, Kentucky, reported 2010 total revenues of $33.87 billiona, net income of $1.10 billion, and diluted earnings per share of $6.47, compared with net income of $1.04 billion and diluted EPS of $6.15 in 2009.
Premiums rose 9.3% to $32.7 billionb, driven by the Government segment, where Medicare Advantage premium revenues grew 17.5% to $19.3 billion. Government segment pretax income increased 10.0% to $1.65 billion, while Commercial segment pretax income fell 2.5% to $101.6 million. Results were held back by a $147.5 million write-down of deferred acquisition costs on individual major medical policies and $138.9 million of reserve strengthening on a closed block of long-term care policies, partly offset by about $231.2 million of favorable prior-year reserve releases not in the ordinary course of business.
The company's revenue base is highly concentrated in government programs. Government contracts generated 76%c of premiums and administrative services fees in 2010, and Medicare accounted for roughly 65%. The filing flags material risks tied to the CMS Medicare Advantage risk-adjustment audit methodology, the TRICARE South Region contract (extended through March 31, 2011 with Option Period IX exercised for April 2011 to March 2012, and a pending third-generation award protest), and the Health Insurance Reform Legislation.
The company also notes that a goodwill impairment in military services could occur in the second half of 2011 if the third-generation TRICARE contract is not awarded. Balance sheet and cash flow were solid. Operating cash flow rose to $2.24 billiond from $1.42 billion, cash and investments totaled $10.05 billion, and stockholders' equity reached $6.92 billion.
Humana acquired Concentra Inc. on December 21, 2010 for $804.7 million in cash. The company paid no cash dividends and repurchased $100.0 million of common stock in 2010.
02—Key points
Key Highlights
- 2010 total revenues of $33.87 billion, up from $30.96 billion in 2009; net income of $1.10 billion, or $6.47 diluted EPS, versus $6.15 in 2009.
- Government segment is the core earnings driver: pretax income rose 10.0% to $1.65 billion, and Medicare Advantage premiums grew 17.5% to $19.3 billion.
- Commercial segment pretax income declined 2.5% to $101.6 million after a $147.5 million deferred acquisition cost write-down and a $138.9 million long-term care reserve strengthening charge.
- Approximately 76% of premiums and ASO fees came from federal government contracts in 2010; Medicare represented about 65% of total premiums and ASO fees.
- Material regulatory and contract risks: CMS's proposed RADV audit methodology, which Humana calls fundamentally flawed, and the TRICARE South Region contract, which runs through March 31, 2012 including Option Period IX.
- Acquired Concentra Inc. on December 21, 2010 for $804.7 million in cash, adding over 300 medical centers and 240 worksite medical facilities.
- Operating cash flow increased to $2.24 billion from $1.42 billion; the company paid no cash dividends and repurchased $100.0 million of stock in 2010.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 18, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $33.60B$30.74B | +9.3% |
| SG&A Expenses | $4.38B$4.01B | +9.1% |
| Operating Income | $1.85B$1.71B | +8.5% |
| Interest Expense | $105.00M$106.00M | −0.9% |
| Net Income | $1.10B$1.04B | +5.7% |
| EPS (Basic) | $6.55$6.21 | +5.5% |
| EPS (Diluted) | $6.47$6.15 | +5.2% |
| Shares Outstanding (Basic) | 167.78M167.36M | +0.2% |
| Shares Outstanding (Diluted) | 169.80M169.07M | +0.4% |
05—Questions
Frequently Asked Questions
What drove the increase in Humana's 2010 earnings?
The increase primarily reflected improved Government segment operating performance from higher average Medicare Advantage membership, along with approximately $231.2 million of prior-year favorable reserve releases not in the ordinary course of business across both segments. These gains were partially offset by a $147.5 million write-down of deferred acquisition costs and a $138.9 million reserve strengthening charge on long-term care policies.
How concentrated is Humana's revenue in government programs?
Contracts with the federal government generated approximately 76% of premiums and administrative services fees in 2010. Medicare alone accounted for about 65% of total premiums and ASO fees, and the Government segment represented approximately 78%. The Medicare Advantage Florida contracts accounted for about 17% and military services for about 11%.
What are the main risks to the TRICARE South Region contract?
The original five-year contract was extended through March 31, 2011. In January 2011 the TRICARE Management Activity intends to exercise Option Period IX, running from April 1, 2011 through March 31, 2012. The contract award protest with the GAO remains unresolved, and Humana states that if it is not awarded the third-generation contract, a goodwill impairment of military services would likely occur in the second half of 2011. Goodwill in that reporting unit was $49.8 million at December 31, 2010.
What is the risk from CMS's proposed RADV audit methodology?
CMS proposed a Risk-Adjustment Data Validation methodology that reviews medical records only for Medicare Advantage data, not fee-for-service data. Humana believes this approach is actuarially unsound and in violation of the Social Security Act, and it intends to defend its position vigorously. Humana states that if CMS implements the methodology without changes, it would have a material adverse effect on Medicare Advantage revenues. On February 3, 2011, CMS said it anticipates making changes to the proposed methodology.
How did the Concentra acquisition affect Humana's financials?
Humana acquired Concentra Inc. on December 21, 2010 for $804.7 million in cash. The acquisition added primary and workplace care through more than 300 medical centers and 240 worksite medical facilities, and it is included in the consolidated results only from the acquisition date. Concentra contributed approximately 0.1% of consolidated revenues and about 6% of total assets, and goodwill of $531.4 million was recorded for the acquisition.
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