Humana(US:HUM)2025-02-20 19:34Business Overview Humana Inc. operates as a health and well-being company through its insurance and healthcare services segments, primarily serving Medicare members and deriving significant revenue from federal government contracts Company Profile Humana Inc. is a health and well-being company operating through insurance and healthcare services segments, serving approximately 16 million medical members and 5 million specialty product members as of December 31, 2024 - As of December 31, 2024, Humana had approximately 16 million medical members and 5 million specialty product members14 - In 2024, 85% of total premiums and services revenue was derived from federal government contracts, with individual Medicare Advantage contracts in Florida representing 14% of this revenue, covering about 924,800 members14 Business Segments Humana operates through its Insurance segment, providing health insurance products primarily focused on Medicare, and its CenterWell segment, delivering integrated healthcare services including pharmacy, primary care, and home solutions Insurance Segment The Insurance segment is Humana's largest, generating 97% of consolidated premiums and services revenue in 2024, primarily from Individual Medicare Advantage, and is exiting the Employer Group Commercial Medical Products business Insurance Segment Premiums and Services Revenue (FY 2024) | Product | Revenue (in millions) | % of Consolidated Revenue | | :--- | :--- | :--- | | Individual Medicare Advantage | $88,019 | 75.6% | | Group Medicare Advantage | $7,731 | 6.6% | | Medicare stand-alone PDP | $3,137 | 2.7% | | State-based contracts and other | $10,915 | 9.4% | | Total Insurance Segment | $113,070 | 97.0% | - The company is exiting the Employer Group Commercial Medical Products business, with the process expected to be finalized in the first half of 202541 - Humana was awarded the new T-5 TRICARE East Region contract, which commenced on January 1, 2025, covering approximately 4.6 million beneficiaries across 24 states and Washington D.C45 CenterWell Segment The CenterWell segment provides pharmacy, primary care, and home solutions, generating $3.47 billion in external services revenue in 2024 and operating 344 primary care clinics CenterWell Segment Services Revenue (FY 2024) | Line of Business | External Revenue (in millions) | Intersegment Revenue (in millions) | | :--- | :--- | :--- | | Home solutions | $1,313 | $2,050 | | Pharmacy solutions | $904 | $10,724 | | Primary care | $1,248 | $3,697 | | Total | $3,465 | $16,471 | - The Primary Care Organization (PCO) operates 344 primary care clinics with approximately 1,000 providers, serving 390,500 patients50 - Humana sold a 60% interest in Gentiva Hospice in August 2022 and continues to hold approximately a 35% minority ownership stake56 Medical Membership As of December 31, 2024, Humana's total insurance medical membership was approximately 16.3 million, with Military services (TRICARE) and Individual Medicare Advantage being the largest components Medical Membership by Product (as of Dec 31, 2024) | Product | Membership (in thousands) | % of Total | | :--- | :--- | :--- | | Military services (TRICARE) | 6,009.1 | 36.8% | | Individual Medicare Advantage | 5,661.8 | 34.6% | | Medicare stand-alone PDP | 2,288.2 | 14.0% | | State-based contracts and other | 1,459.9 | 8.9% | | Group Medicare Advantage | 545.7 | 3.3% | | Medicare Supplement | 377.3 | 2.3% | | Total | 16,347.1 | 100.0% | Provider Arrangements and Care Management Humana manages healthcare services through contracted and employed providers, utilizing various reimbursement models including value-based arrangements where providers share financial risk - As of December 31, 2024, approximately 2.4 million members (14.4% of total medical membership) were covered under shared risk value-based arrangements66 - Within the individual Medicare Advantage population, 2.1 million members (38.0%) were in shared risk arrangements66 Human Capital Management As of December 31, 2024, Humana employed approximately 65,680 associates, focusing on well-being and engagement, though voluntary turnover increased to 14.4% in 2024 - The company had approximately 65,680 associates as of December 31, 202484 - Voluntary turnover rate (VTR) increased to 14.4% in 2024 from 13.4% in 202385 Risk Factors Humana faces significant risks related to business operations, regulatory changes, and cybersecurity threats, which could materially impact its financial performance and reputation Business and Operational Risks Humana faces risks from product pricing, medical cost estimation, intense competition, and a significant decline in Medicare Advantage Star Ratings for 2025, which will negatively impact future bonus payments - Profitability may be adversely affected if premiums are insufficient to cover healthcare costs, which are sensitive to utilization, new technologies, and prescription drug costs9697 - The company faces intense competition, with price being a significant factor; failure to compete effectively or manage membership mix could harm financial results102105 - A significant decline in Medicare Advantage Star Ratings for 2025 will negatively impact 2026 quality bonus payments, with approximately 25% of MA members in plans rated 4-star or higher for 2025, compared to 94% for 2024109110 Regulatory and Legal Risks As a major government contractor, Humana is exposed to substantial regulatory and legal risks, including changes in government programs, audit challenges, and ongoing litigation - Approximately 94% of total premiums and services revenue for 2024 came from government programs, making the company highly sensitive to legislative and regulatory changes124 - The company is challenging the CMS Final RADV Rule, which eliminates the FFS Adjuster for audits starting in PY 2018; an unfavorable outcome could materially impact results129130563 - Humana is subject to various legal proceedings, including a putative stockholder class action alleging false or misleading statements about financial performance and Medicare Advantage Star Ratings118119573 Cybersecurity and Technology Risks Humana's operations heavily rely on information systems and data integrity, exposing it to risks from system failures and cybersecurity attacks that could lead to data breaches and reputational damage - Business operations depend significantly on information systems for pricing, service delivery, and financial reporting; failure to maintain or implement new systems could have a material adverse effect111112 - The company is a regular target of cybersecurity attacks; a successful attack could result in misappropriation of data, system shutdowns, regulatory fines, and reputational damage115116 Management's Discussion and Analysis (MD&A) This section provides management's perspective on Humana's financial condition and results of operations, highlighting key performance drivers, strategic initiatives, and significant financial impacts Executive Overview Management's overview emphasizes Humana's integrated care delivery strategy, the planned exit from the Employer Group Commercial Medical business, and the significant impact of special charges on 2024 net income - As of December 31, 2024, 71% of individual Medicare Advantage members (4.0 million) were in value-based care relationships216 - The company is exiting the Employer Group Commercial Medical Products business, with the process expected to be finalized in the first half of 2025199 Impact of Special Items on Pre-Tax Income (in millions) | Item | 2024 | 2023 | | :--- | :--- | :--- | | Put/call valuation adjustments | $296 | $320 | | Value creation initiatives | $281 | $436 | | Impairment charges | $200 | $91 | | Accrued litigation charge | — | $105 | | Transaction and integration costs | — | $(48) | | Total Impact | $777 | $904 | Results of Operations (2024 vs. 2023) Humana's consolidated revenues increased 10.7% to $117.8 billion in 2024, driven by Medicare Advantage growth, but net income fell 51.1% to $1.2 billion due to a worsened benefit ratio Consolidated Financial Results (FY 2024 vs. FY 2023) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $117,761M | $106,374M | +10.7% | | Net Income | $1,214M | $2,484M | -51.1% | | Diluted EPS | $9.98 | $20.00 | -50.1% | | Benefit Ratio | 89.8% | 87.3% | +250 bps | | Operating Cost Ratio | 11.8% | 12.5% | -70 bps | - The increase in the benefit ratio was primarily due to elevated Medicare Advantage and state-based contracts medical cost trends and lower favorable prior period medical claims reserve development ($701 million in 2024 vs. $872 million in 2023)230231 - The operating cost ratio improved due to scale efficiencies from MA membership growth, cost-saving initiatives, and lower broker commission expenses compared to the prior year233 Insurance Segment Results The Insurance segment's income from operations decreased 51.4% to $1.3 billion in 2024, despite revenue growth, due to a higher benefit ratio driven by elevated medical cost trends Insurance Segment Key Metrics (FY 2024 vs. FY 2023) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total External Revenues | $113,070M | $102,272M | +10.6% | | Income from Operations | $1,289M | $2,654M | -51.4% | | Benefit Ratio | 90.4% | 88.0% | +240 bps | | Operating Cost Ratio | 9.2% | 10.2% | -100 bps | - Individual Medicare Advantage membership grew by 252,900 (4.7%), while stand-alone PDP membership declined by 560,900 (19.7%)238240242 - For 2025, the company anticipates a net membership decline of approximately 550,000 in its individual Medicare Advantage offerings240 CenterWell Segment Results The CenterWell segment's income from operations decreased 5.3% to $1.3 billion in 2024, despite revenue growth, primarily due to an increased operating cost ratio influenced by risk model revisions and compensation accruals CenterWell Segment Key Metrics (FY 2024 vs. FY 2023) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $19,936M | $18,405M | +8.3% | | Income from Operations | $1,329M | $1,404M | -5.3% | | Operating Cost Ratio | 92.2% | 91.2% | +100 bps | - The increase in the operating cost ratio was driven by the v28 risk model revision's impact on primary care and reduced compensation accruals in 2023, partially offset by value creation initiatives255 Liquidity and Capital Resources Humana's cash and cash equivalents decreased by $2.5 billion in 2024, with cash from operations at $3.0 billion, and the company utilized cash for investing and financing activities Summary of Cash Flows (FY 2024, in billions) | Cash Flow Category | Amount | | :--- | :--- | | Net cash from operating activities | $3.0 | | Net cash used in investing activities | $(3.0) | | Net cash used in financing activities | $(2.5) | | Net (decrease) in cash | $(2.5) | - The company repurchased $0.8 billion of common stock and paid $431 million in dividends during 2024280281 - As of December 31, 2024, the parent company had $0.6 billion in cash and equivalents, and state-regulated subsidiaries held aggregate statutory capital of $13.2 billion, exceeding the minimum requirement of $11.4 billion288551 Critical Accounting Policies and Estimates Humana's critical accounting estimates include benefits expense recognition (IBNR), revenue recognition (Medicare risk-adjustment), and impairment testing for investments, goodwill, and intangible assets - Benefits Payable (IBNR) is a critical estimate; the company recorded $701 million in favorable prior-period medical claims reserve development in 2024, compared to $872 million in 2023297299 - Goodwill stood at $9.6 billion and indefinite-lived intangible assets at $1.2 billion at year-end; an impairment charge of $200 million was recorded in 2024 related to indefinite-lived intangible assets315319 - The investment portfolio had $1.4 billion in gross unrealized losses at year-end, primarily attributed to increased market interest rates309324 Financial Statements and Supplementary Data This section presents Humana's consolidated financial statements, including balance sheets, income statements, and cash flow statements, along with detailed notes on accounting policies and financial disclosures Consolidated Financial Statements The consolidated financial statements provide Humana's financial position as of December 31, 2024 and 2023, and its results of operations and cash flows for the three years ended December 31, 2024 Consolidated Balance Sheet Highlights (as of Dec 31, 2024) | Account | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $2,221 | | Investment securities | $18,635 | | Goodwill | $9,631 | | Total Assets | $46,479 | | Benefits payable | $10,440 | | Total debt (Short & Long-term) | $11,721 | | Total Liabilities | $30,034 | | Total Stockholders' Equity | $16,375 | Consolidated Income Statement Highlights (FY 2024) | Account | Amount (in millions) | | :--- | :--- | | Premiums Revenue | $112,104 | | Services Revenue | $4,431 | | Total Revenues | $117,761 | | Benefits Expense | $100,664 | | Operating Costs | $13,696 | | Income from Operations | $2,562 | | Net Income Attributable to Humana | $1,207 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on Humana's significant accounting policies, segment information, debt, and legal contingencies, including critical audit matters identified by the independent auditor - Benefits payable totaled $10.4 billion at year-end, including an IBNR estimate of $7.3 billion; the company recognized $701 million in favorable development from prior years' reserves in 2024492495 - Total debt outstanding was $11.7 billion; the company maintains $4.7 billion in revolving credit facilities, with no borrowings outstanding at year-end509523 - The company is involved in significant legal proceedings, including a stockholder class action related to financial performance disclosures and a lawsuit filed against HHS to vacate its 2025 Star Ratings573574 - The independent auditor's report identified two Critical Audit Matters: (1) Valuation of Incurred but not yet Reported Benefits Payable, and (2) Impairment Assessments of Home Solutions Reporting Unit Goodwill and Certificates of Need Intangible Assets608609613 Controls and Procedures Management concluded that Humana's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2024, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024622 - Based on the COSO framework, management determined that the company's internal control over financial reporting was effective as of December 31, 2024625 - There were no material changes to the company's internal control over financial reporting during the fourth quarter of 2024627