01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
Humana Inc., headquartered in Louisville, Kentucky, reported 2018 net income of $1.68 billiona, or $12.16 per diluted common share, down from $2.45 billion, or $16.81 per diluted share, in 2017.
Total revenues rose to $56.91 billionb from $53.77 billion, with premiums of $54.94 billion. The decline was driven by a $786 million pretax loss on the sale of KMG America, the absence of the 2017 $936 million net merger termination fee benefit, and the reinstatement of the non-deductible health insurance industry fee, which the filing says was $1.04 billion paid in 2018. Pretax income fell to $2.06 billion from $4.02 billion, and the effective tax rate dropped to 18.9% from 39.1%.
The company's revenue base is concentrated in government programs. The filing states that 81% of 2018 premiums and services revenue came from federal government contracts, including 15% from individual Medicare Advantage contracts in Florida covering about 636,800 members. Individual Medicare Advantage membership reached 3,064,000 at year-end, and Retail segment premiums rose 7.8% to $48.1 billionc.
Management highlighted acquisitions of MCCI and Family Physicians Group and a 40% interest in Kindred at Home for about $1.1 billiond, as well as an investment in value-based care arrangements, with 67% of individual Medicare Advantage members in value-based relationships. Capital returns were significant. The company repurchased $1.09 billion of shares in 2018 under a $3.0 billion authorization, paid dividends of $2.00 per share declared for the year, and increased its quarterly dividend to $0.50 with a $0.55 quarterly dividend declared in February 2019.
Cash flow from operations fell to $2.17 billion from $4.05 billion, and debt rose to $6.07 billion. The filing also discloses pending risks, including a proposed CMS rule on RADV audit extrapolation, a court decision vacating CMS's Overpayment Rule, a pending Department of Justice information request on Medicare risk adjustment, and an $611 million risk corridor claim against the federal government.
02—Key points
Key Highlights
- Net income fell to $1.68 billion ($12.16 diluted EPS) from $2.45 billion ($16.81) in 2017, reflecting the $786 million loss on the KMG sale and the absence of the 2017 $936 million merger termination fee benefit.
- Total revenues grew to $56.91 billion from $53.77 billion, with premiums of $54.94 billion versus $52.38 billion.
- 81% of 2018 premiums and services revenue came from federal government contracts, including 15% from Florida individual Medicare Advantage contracts.
- Individual Medicare Advantage membership reached 3,064,000 at December 31, 2018, and the company expects 2019 net growth of 375,000 to 400,000 members.
- The 2018 benefit ratio was 83.5% and the operating cost ratio was 13.3%, with the non-deductible health insurance industry fee cited as a key factor in the higher operating cost ratio.
- Shareholder returns included $1.09 billion of 2018 share repurchases, a 25% increase in the per-share dividend, and a $0.55 quarterly dividend declared for April 2019.
- Open regulatory exposures include a proposed CMS RADV extrapolation rule, a Department of Justice Medicare risk adjustment inquiry, and a pending $611 million risk corridor claim against the federal government.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $56.91B$53.77B | +5.8% |
| SG&A Expenses | $7.53B$6.57B | +14.6% |
| Operating Income | $3.10B$4.26B | −27.3% |
| Interest Expense | $218.00M$242.00M | −9.9% |
| Net Income | $1.68B$2.45B | −31.2% |
| EPS (Basic) | $12.24$16.94 | −27.7% |
| EPS (Diluted) | $12.16$16.81 | −27.7% |
| Shares Outstanding (Basic) | 137.49M144.49M | −4.8% |
| Shares Outstanding (Diluted) | 138.40M145.59M | −4.9% |
05—Questions
Frequently Asked Questions
Why did Humana's net income decline in 2018?
The filing attributes the decline mainly to a $786 million pretax loss on the sale of KMG America, the absence of the $936 million net merger termination fee recognized in 2017, and the return of the non-deductible health insurance industry fee in 2018, which the company paid at $1.04 billion. Pretax income fell to $2.06 billion from $4.02 billion. Partly offsetting this, the effective tax rate fell to 18.9% from 39.1%.
How dependent is Humana on government programs?
Very dependent. The filing states that 81% of 2018 premiums and services revenue came from federal government contracts, and Medicare, military and Medicaid programs together accounted for approximately 85% of total premiums and services revenue. Florida individual Medicare Advantage contracts alone represented 15% of that revenue.
What regulatory risks does the filing highlight?
The filing discusses a CMS proposed rule issued October 26, 2018 that would extrapolate RADV audit results without a FFS Adjuster, which management says could have a material adverse effect. It also notes a September 7, 2018 federal court decision vacating CMS's Overpayment Rule, which CMS is contesting. A Department of Justice information request on Medicare risk adjustment and a qui tam suit alleging actuarial equivalence issues in a Part D plan are also pending.
How much capital did Humana return to shareholders and what is the outlook for dividends?
In 2018 the company repurchased $1.09 billion of common shares and paid $265 million in dividends. Dividends declared per share were $2.00 for 2018, and the Board declared a $0.55 quarterly dividend payable April 26, 2019. The remaining repurchase authorization was approximately $1,176 million as of February 21, 2019.
What did Humana acquire in 2018 and how does it relate to its strategy?
Humana acquired a 40% interest in Kindred at Home for about $1.1 billion in cash, along with Curo's hospice business, the remaining interest in MCCI for $169 million in cash plus notes, and Family Physicians Group for about $185 million. The filing presents these as investments in its integrated care delivery model, including home health, hospice and value-based primary care in its Healthcare Services segment.
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