filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the Securities and Exchange Commission, or SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “believes,” “expects,” “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 Item 1A. – Risk Factors in our 2020 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent to February 18, 2021, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are 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.
Executive Overview
General
Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company committed to helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and well being and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as in home care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective.
Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking
total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.
Kindred at Home Acquisition
On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home, or KAH, the nation’s largest home health and hospice provider, from TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, two private equity funds, or the Sponsors, for an enterprise value of $8.2 billion, which includes our equity value of $2.4 billion associated with our 40% minority ownership interest. The remeasurement to fair value of our previously held 40% equity method investment with a carrying value of approximately $1.3 billion, resulted in a $1.1 billion gain recognized in "Other (income) expense, net". KAH has locations in 40 states, providing extensive geographic coverage with approximately 65% overlap with our individual Medicare Advantage membership. We paid the approximate $5.8 billion transaction price (net of our existing equity stake) through a combination of debt financing, the assumption of existing KAH indebtedness and parent company cash.
COVID-19
The emergence and spread of the novel coronavirus, or COVID-19, beginning in the first quarter of 2020 has impacted our business. During periods of increased incidences of COVID-19, non-essential care from a reduction in
non-COVID-19 hospital admissions and lower overall healthcare system consumption decreased utilization. Likewise COVID-19 treatment and testing cost increased utilization. The significant disruption in utilization during 2020 also impacted our ability to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles, and, as such, is significantly affecting our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans.
Business Segments
We manage our business with three reportable segments: Retail, Group and Specialty, and Healthcare Services. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes our military services business, primarily our TRICARE T2017 East Region contract. The Healthcare Services segment includes services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and home solutions services, such as home health and other services and capabilities to promote wellness and advance population health, including our non-consolidating minority investment in the strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers. Our home solutions business now includes Kindred at Home.
The results of each segment are measured by segment earnings, and for our Healthcare Services Segment, also include equity in net earnings from our equity method investees. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home solutions services, to our Retail and Group and Specialty segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations.
Seasonality
COVID-19 disrupted the pattern of our quarterly earnings and operating cash flows largely due to the temporary deferral of non-essential care which resulted in reductions in non-COVID-19 hospital admissions and lower overall healthcare system utilization during higher levels of COVID-19 hospital admissions. Likewise, during periods of increased incidences of COVID-19, COVID-19 treatment and testing costs increase. Similar impacts and seasonal disruptions from either higher or lower utilization are expected to persist as we respond to and recover from the COVID-19 global health crisis.
One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. Our quarterly Retail segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive
stages of a member’s plan period, which begins annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases as the year progresses. In addition, the number of low income senior members as well as year-over-year changes in the mix of membership in our standalone PDP products affects the quarterly benefit ratio pattern.
In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.
Our Group and Specialty segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in the Retail segment, with the Group and Specialty segment’s benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.
2021 Highlights
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Our strategy offers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At September 30, 2021, approximately 2,979,800 members, or 68%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,605,900 members, or 66%, at September 30, 2020. Medicare Advantage and dual demonstration program membership enrolled in a Humana care management program was 963,500 at September 30, 2021, an increase of 5.0% from 917,200 at September 30, 2020. These members may not be unique to each program since members have the ability to enroll in multiple programs. The increase is primarily driven by growth in Special Needs Plans, or SNP, membership, partially offset by improved predictive modeling leading to a reduction in members being managed by legacy care management programs.
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Net income was $1.5 billion, or $11.84 per diluted common share, and $1.3 billion, or $10.05, for the three months ended September 30, 2021, and 2020, respectively. Net income was $2.9 billion, or $22.77 per diluted common share, and $3.6 billion, or $27.37 per diluted common share for the nine months ended September 30, 2021, and 2020, respectively. These comparisons were significantly impacted by the gain on our equity method investment in Kindred at Home upon completion of our acquisition of the business, put/call valuation adjustments associated with certain equity method investments, the change in the fair value of publicly-traded equity securities, transaction and integration costs associated with the Kindred at Home acquisition, and the receipt of unpaid risk corridor payments in the third quarter of 2020 that were previously written off. The put/call valuation adjustments included the impact of the termination of the put/call agreement related to Kindred at Home as a result of the transaction announced on April 27, 2021. The impact of these adjustments to our consolidated income before income taxes and equity in net earnings and diluted earnings per common share was as follows for the 2021 quarter and period.
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Consolidated income before income taxes and equity in net earnings: | |||||||||||||||||||||||
| Gain on Kindred at Home equity method investment | $ | 1,129 | $ | — | $ | 1,129 | $ | — | |||||||||||||||
| Change in the fair value of publicly-traded equity securities | (174) | 643 | (197) | $ | 643 | ||||||||||||||||||
| Receipt of commercial risk corridor receivables previously written off, net | — | 578 | — | 578 | |||||||||||||||||||
| Put/call valuation adjustments | (33) | 7 | (567) | (63) | |||||||||||||||||||
| Transaction and integration costs associated with Kindred at Home acquisition | (71) | — | (93) | — | |||||||||||||||||||
| Total | $ | 851 | $ | 1,228 | $ | 272 | $ | 1,158 | |||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Gain on Kindred at Home equity method investment | $ | 8.74 | $ | — | $ | 8.73 | $ | — | |||||||||||||||
| Change in the fair value of publicly-traded equity securities | (1.04) | 3.72 | (1.18) | 3.73 | |||||||||||||||||||
| Receipt of commercial risk corridor receivables previously written off, net | — | 3.35 | — | 3.35 | |||||||||||||||||||
| Put/call valuation adjustments | (0.20) | 0.03 | (3.38) | (0.37) | |||||||||||||||||||
| Transaction and integration costs associated with Kindred at Home acquisition | (0.39) | — | (0.52) | — | |||||||||||||||||||
| Total | $ | 7.11 | $ | 7.10 | $ | 3.65 | $ | 6.71 |
Excluding these adjustments, comparisons of our results of operations were materially impacted by the significant, temporary deferral of care in 2020 resulting from stay-at-home orders, physical distancing measures, and other restrictions implemented to reduce the spread of COVID-19, as well as the impact of COVID-19 testing and treatment costs, which on a net basis significantly and favorably impacted the 2020 results, in particular to the second quarter of 2020, when compared to the 2021 period results. In addition, the third quarter of 2021 reflects the impact of lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response effort, the build-out of infrastructure necessary to support employees working remotely and charitable contribution cost to support the communities served by us.
In addition, our results of operations for 2021 were favorably impacted by individual Medicare Advantage and state-based contract membership growth and improved operating performance in our Healthcare Services segment, including the consolidation of Kindred at Home operations upon completion of the acquisition of the remaining 60% interest in Kindred at Home in August 2021. Further, 2021 was also favorably impacted by the lower tax rate resulting from the termination of the non-deductible health insurance industry fee in 2021, as well as a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share repurchases.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of the U.S. health insurance industry. Certain significant provisions of the Health Care Reform Law include, among others, mandated coverage requirements, mandated benefits and guarantee issuance associated with commercial medical insurance, rebates to policyholders based on minimum benefit ratios, adjustments to Medicare Advantage premiums, the establishment of federally facilitated or state-based exchanges coupled with programs designed to spread risk among insurers, and the introduction of plan designs based on set actuarial values. In addition, the Health Care Reform Law established insurance industry assessments, including an annual health insurance industry fee. The annual health insurance industry fee, which was not deductible for income tax purposes and significantly increased our effective tax rate, was in effect for 2020, but was permanently repealed beginning in calendar year 2021.
It is reasonably possible that the Health Care Reform Law and related regulations, as well as other current or future legislative, judicial or regulatory changes such as the Families First Coronavirus Response Act (the "Families First Act"), the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other legislative or regulatory action taken in response to COVID-19 including restrictions on our ability to manage our provider network or otherwise operate our business, or restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, increases in member benefits or changes to member eligibility criteria without corresponding increases in premium payments to us, or increases in regulation of our prescription drug benefit businesses, in the aggregate may have a material adverse effect on our results of operations (including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, further lowering our Medicare payment rates and increasing our expenses associated with assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows.
We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home solutions services, to our Retail and Group and Specialty segment customers and are described in Note 14 to the condensed consolidated financial statements included in this report.
Comparison of Results of Operations for 2021 and 2020
The following discussion primarily deals with our results of operations for the three months ended September 30, 2021, or the 2021 quarter, and the three months ended September 30, 2020, or the 2020 quarter, the nine months ended September 30, 2021, or the 2021 period, and the nine months ended September 30, 2020, or the 2020 period.
Consolidated
| For the three months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (dollars in millions, except per common share results) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Retail | $ | 18,401 | $ | 16,709 | $ | 1,692 | 10.1 | % | |||||||||||||||
| Group and Specialty | 1,484 | 1,593 | (109) | (6.8) | % | ||||||||||||||||||
| Corporate | — | 602 | (602) | (100.0) | % | ||||||||||||||||||
| Total premiums | 19,885 | 18,904 | 981 | 5.2 | % | ||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Retail | — | 4 | (4) | (100.0) | % | ||||||||||||||||||
| Group and Specialty | 198 | 189 | 9 | 4.8 | % | ||||||||||||||||||
| Healthcare Services | 647 | 264 | 383 | 145.1 | % | ||||||||||||||||||
| Total services | 845 | 457 | 388 | 84.9 | % | ||||||||||||||||||
| Investment (loss) income | (33) | 714 | (747) | (104.6) | % | ||||||||||||||||||
| Total revenues | 20,697 | 20,075 | 622 | 3.1 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Benefits | 17,316 | 15,611 | 1,705 | 10.9 | % | ||||||||||||||||||
| Operating costs | 2,603 | 2,513 | 90 | 3.6 | % | ||||||||||||||||||
| Depreciation and amortization | 150 | 128 | 22 | 17.2 | % | ||||||||||||||||||
| Total operating expenses | 20,069 | 18,252 | 1,817 | 10.0 | % | ||||||||||||||||||
| Income from operations | 628 | 1,823 | (1,195) | (65.6) | % | ||||||||||||||||||
| Interest expense | 88 | 75 | 13 | 17.3 | % | ||||||||||||||||||
| Other income, net | (1,096) | (7) | 1,089 | 15,557.1 | % | ||||||||||||||||||
| Income before income taxes and equity in net earnings | 1,636 | 1,755 | (119) | (6.8) | % | ||||||||||||||||||
| Provision for income taxes | 120 | 450 | (330) | (73.3) | % | ||||||||||||||||||
| Equity in net earnings | 15 | 35 | (20) | (57.1) | % | ||||||||||||||||||
| Net income | $ | 1,531 | $ | 1,340 | $ | 191 | 14.3 | % | |||||||||||||||
| Diluted earnings per common share | $ | 11.84 | $ | 10.05 | $ | 1.79 | 17.8 | % | |||||||||||||||
| Benefit ratio (a) | 87.1 | % | 82.6 | % | 4.5 | % | |||||||||||||||||
| Operating cost ratio (b) | 12.6 | % | 13.0 | % | (0.4) | % | |||||||||||||||||
| Effective tax rate | 7.2 | % | 25.2 | % | (18.0) | % |
| For the nine months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (dollars in millions, except per common share results) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Retail | $ | 55,460 | $ | 50,336 | $ | 5,124 | 10.2 | % | |||||||||||||||
| Group and Specialty | 4,527 | 4,884 | (357) | (7.3) | % | ||||||||||||||||||
| Corporate | — | 602 | (602) | (100.0) | % | ||||||||||||||||||
| Total premiums | 59,987 | 55,822 | 4,165 | 7.5 | % | ||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Retail | 17 | 14 | 3 | 21.4 | % | ||||||||||||||||||
| Group and Specialty | 582 | 576 | 6 | 1.0 | % | ||||||||||||||||||
| Healthcare Services | 1,203 | 741 | 462 | 62.3 | % | ||||||||||||||||||
| Total services | 1,802 | 1,331 | 471 | 35.4 | % | ||||||||||||||||||
| Investment income | 221 | 940 | (719) | (76.5) | % | ||||||||||||||||||
| Total revenues | 62,010 | 58,093 | 3,917 | 6.7 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Benefits | 51,761 | 45,415 | 6,346 | 14.0 | % | ||||||||||||||||||
| Operating costs | 6,726 | 6,984 | (258) | (3.7) | % | ||||||||||||||||||
| Depreciation and amortization | 436 | 362 | 74 | 20.4 | % | ||||||||||||||||||
| Total operating expenses | 58,923 | 52,761 | 6,162 | 11.7 | % | ||||||||||||||||||
| Income from operations | 3,087 | 5,332 | (2,245) | (42.1) | % | ||||||||||||||||||
| Interest expense | 235 | 211 | 24 | 11.4 | % | ||||||||||||||||||
| Other (income) expense, net | (562) | 63 | 625 | 992.1 | % | ||||||||||||||||||
| Income before income taxes and equity in net earnings | 3,414 | 5,058 | (1,644) | (32.5) | % | ||||||||||||||||||
| Provision for income taxes | 536 | 1,485 | (949) | (63.9) | % | ||||||||||||||||||
| Equity in net earnings | 69 | 68 | 1 | 1.5 | % | ||||||||||||||||||
| Net income | $ | 2,947 | $ | 3,641 | $ | (694) | (19.1) | % | |||||||||||||||
| Diluted earnings per common share | $ | 22.77 | $ | 27.37 | $ | (4.60) | (16.8) | % | |||||||||||||||
| Benefit ratio (a) | 86.3 | % | 81.4 | % | 4.9 | % | |||||||||||||||||
| Operating cost ratio (b) | 10.9 | % | 12.2 | % | (1.3) | % | |||||||||||||||||
| Effective tax rate | 15.4 | % | 29.0 | % | (13.6) | % |
(a)Represents benefits expense as a percentage of premiums revenue.
(b)Represents operating costs as a percentage of total revenues less investment income.
Premiums Revenue
Consolidated premiums increased $1.0 billion, or 5.2%, from $18.9 billion in the 2020 quarter to $19.9 billion in the 2021 quarter and increased $4.2 billion, or 7.5%, from $55.8 billion in the 2020 period to $60.0 billion in the 2021 period. These increases were primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher per member individual Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment, or MRA, headwinds resulting from COVID-19 related utilization disruption in 2020. These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership. The comparison was further impacted by 2020 quarter impact of the receipt of commercial risk corridor receivables that were previously written off.
Services Revenue
Consolidated services revenue increased $388 million, or 84.9%, from $457 million in the 2020 quarter to $845 million in the 2021 quarter and increased $471 million, or 35.4%, from $1.3 billion in the 2020 period to $1.8 billion in the 2021 period. These increases were primarily due to higher home solutions revenues associated with our Kindred at Home acquisition.
Investment Income
Investment income decreased $747 million, or 104.6%, from $714 million in the 2020 quarter to a $33 million loss in the 2021 quarter. Investment income decreased $719 million, or 76.5%, from $940 million in the 2020 period to $221 million in the 2021 period. The decline in both the quarter and period primarily reflects a significant decrease in the fair value of our common stock investments.
Benefit Expense
Consolidated benefits expense increased $1.7 billion, or 10.9%, from $15.6 billion in the 2020 quarter to $17.3 billion in the 2021 quarter and increased $6.3 billion, or 14.0%, from $45.4 billion in the 2020 period to $51.8 billion in the 2021 period. The consolidated benefit ratio increased 450 basis points from 82.6% for the 2020 quarter to 87.1% for the 2021 quarter and increased 490 basis points from 81.4% for the 2020 period to 86.3% for the 2021 period. These increases reflect the 2020 quarter impact of the receipt of commercial risk corridor receivables that were previously written off, the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, COVID-19 impacts, including the impact of the deferral of non-essential care, net of COVID-19 treatment and testing costs and our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020, and the impact in 2021 associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development in 2021.
The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time. The suspension during 2020 was intended to provide financial and administrative relief for provider facing unprecedented strain as a result of the COVID-19 pandemic. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2021 quarter whereas the favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2020 quarter. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 130 basis points in the 2021 period versus approximately 50 basis points in the 2020 period.
Operating Costs
Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
Consolidated operating costs increased $90 million, or 3.6%, from $2.5 billion in the 2020 quarter to $2.6 billion in the 2021 quarter and decreased $258 million, or 3.7%, from $7.0 billion in the 2020 period to $6.7 billion in the 2021 period. The consolidated operating cost ratio decreased 40 basis points from 13.0% for the 2020 quarter to 12.6% for the 2021 quarter and decreased 130 basis points from 12.2% for the 2020 period to 10.9% for the 2021 period. These ratio decreases were primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. These decreases were further impacted by scale efficiencies associated with growth in our Medicare Advantage membership and operating cost efficiencies in 2021 from previously implemented productivity initiatives. These factors were partially offset by the impact of Kindred at Home operations as the business has a significantly higher operating cost ratio than our historical consolidated operating cost ratio, continued strategic investments made to position us for long-term success, transaction and integration costs associated with the Kindred at Home transaction, and the 2020 quarter receipt of the commercial risk corridor receivables that were previously written off. The period decrease was further impacted by a $200 million contribution to the Humana Foundation in the first half of 2020 to support communities served by the company, particularly those with social and health disparities. The non-deductible health insurance industry fee impacted the operating cost ratio by 150 basis points in the 2020 quarter and period.
Depreciation and Amortization
Depreciation and amortization increased $22 million, or 17.2%, from $128 million in the 2020 quarter to $150 million in the 2021 quarter and increased $74 million, or 20.4%, from $362 million in the 2020 period to $436 million in the 2021 period primarily due to capital expenditures.
Interest Expense
Interest expense increased $13 million, or 17.3%, from $75 million in the 2020 quarter to $88 million in the 2021 quarter and increased $24 million, or 11.4%, from $211 million in the 2020 period to $235 million in the 2021 period from borrowings to fund the KAH acquisition.
Income Taxes
The effective income tax rate was 7.2% and 25.2% for the three months ended September 30, 2021, and 2020, respectively and was 15.4% and 29.0% for the nine months ended September 30, 2021 and 2020, respectively. The decreases were primarily due to the non-taxable gain we recognized on our previously held Kindred at Home equity method investment from our acquisition of the remaining ownership interest in the business in August 2021 and the termination of the non-deductible health insurance industry fee in 2021.
Retail Segment
| September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Members | Percentage | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Medical membership: | |||||||||||||||||||||||
| Individual Medicare Advantage | 4,397,300 | 3,935,100 | 462,200 | 11.7 | % | ||||||||||||||||||
| Group Medicare Advantage | 559,800 | 612,000 | (52,200) | (8.5) | % | ||||||||||||||||||
| Medicare stand-alone PDP | 3,638,400 | 3,892,200 | (253,800) | (6.5) | % | ||||||||||||||||||
| Total Retail Medicare | 8,595,500 | 8,439,300 | 156,200 | 1.9 | % | ||||||||||||||||||
| State-based Medicaid and other | 909,100 | 730,100 | 179,000 | 24.5 | % | ||||||||||||||||||
| Medicare Supplement | 332,000 | 331,300 | 700 | 0.2 | % | ||||||||||||||||||
| Total Retail medical members | 9,836,600 | 9,500,700 | 335,900 | 3.5 | % | ||||||||||||||||||
| For the three months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Individual Medicare Advantage | $ | 14,642 | $ | 12,949 | $ | 1,693 | 13.1 | % | |||||||||||||||
| Group Medicare Advantage | 1,737 | 1,880 | (143) | (7.6) | % | ||||||||||||||||||
| Medicare stand-alone PDP | 541 | 622 | (81) | (13.0) | % | ||||||||||||||||||
| Total Retail Medicare | 16,920 | 15,451 | 1,469 | 9.5 | % | ||||||||||||||||||
| State-based Medicaid and other | 1,296 | 1,081 | 215 | 19.9 | % | ||||||||||||||||||
| Medicare Supplement | 185 | 177 | 8 | 4.5 | % | ||||||||||||||||||
| Total premiums | 18,401 | 16,709 | 1,692 | 10.1 | % | ||||||||||||||||||
| Services | — | 4 | (4) | (100.0) | % | ||||||||||||||||||
| Total premiums and services revenue | 18,401 | 16,713 | $ | 1,688 | 10.1 | % | |||||||||||||||||
| Segment earnings | $ | 456 | $ | 553 | $ | (97) | (17.5) | % | |||||||||||||||
| Benefit ratio | 88.1 | % | 85.1 | % | 3.0 | % | |||||||||||||||||
| Operating cost ratio | 9.1 | % | 11.2 | % | (2.1) | % |
| For the nine months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Individual Medicare Advantage | $ | 44,042 | $ | 38,748 | $ | 5,294 | 13.7 | % | |||||||||||||||
| Group Medicare Advantage | 5,267 | 5,867 | (600) | (10.2) | % | ||||||||||||||||||
| Medicare stand-alone PDP | 1,867 | 2,108 | (241) | (11.4) | % | ||||||||||||||||||
| Total Retail Medicare | 51,176 | 46,723 | 4,453 | 9.5 | % | ||||||||||||||||||
| State-based Medicaid and other | 3,739 | 3,104 | 635 | 20.5 | % | ||||||||||||||||||
| Medicare Supplement | 545 | 509 | 36 | 7.1 | % | ||||||||||||||||||
| Total premiums | 55,460 | 50,336 | 5,124 | 10.2 | % | ||||||||||||||||||
| Services | 17 | 14 | 3 | 21.4 | % | ||||||||||||||||||
| Total premiums and services revenue | $ | 55,477 | $ | 50,350 | $ | 5,127 | 10.2 | % | |||||||||||||||
| Segment earnings | $ | 2,086 | $ | 3,227 | $ | (1,141) | (35.4) | % | |||||||||||||||
| Benefit ratio | 87.6 | % | 83.3 | % | 4.3 | % | |||||||||||||||||
| Operating cost ratio | 8.4 | % | 10.0 | % | (1.6) | % |
Segment Earnings
- Retail segment earnings decreased $97 million, or 17.5%, from $553 million in the 2020 quarter to $456 million in the 2021 quarter and decreased $1.1 billion, or 35.4%, from $3.2 billion in the 2020 period to $2.1 billion in the 2021 period. These decreases primarily resulted from the same factors that led to the segment's higher benefit ratio, partially offset by the segment's lower operating cost ratio as more fully described below.
Enrollment
-
Individual Medicare Advantage membership increased 462,200 members, or 11.7%, from September 30, 2020 to September 30, 2021, primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The membership growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, members. The OEP sales period, which ran from January 1 to March 31, 2021 added approximately 36,000 members compared to the 2020 OEP that added approximately 30,000 members. Individual Medicare Advantage membership includes 561,300 D-SNP members as of September 30, 2021, a net increase of 170,200, or 43.5%, from 391,100 as of September 30, 2020.
-
Group Medicare Advantage membership decreased 52,200, or 8.5%, from September 30, 2020 to September 30, 2021, primarily due to the net loss of certain large accounts in January 2021, partially offset by continued growth in small group accounts.
-
Medicare stand-alone PDP membership decreased 253,800 members, or 6.5%, from September 30, 2020 to September 30, 2021, primarily due to anticipated declines as a result of the Walmart Value plan no longer being the low cost leader in 2021.
-
State-based Medicaid membership increased 179,000 members, or 24.5%, from September 30, 2020 to September 30, 2021, primarily reflecting additional enrollment as a result of the suspension of state eligibility redetermination efforts due to the currently enacted Public Health Emergency, as well as the recently completed acquisition in Wisconsin.
Premiums Revenue
- Retail segment premiums increased $1.7 billion, or 10.1%, from $16.7 billion in the 2020 quarter to $18.4 billion in the 2021 quarter and increased $5.1 billion, or 10.2%, from $50.3 billion in the 2020 period to $55.5 billion in the 2021 period. These increases were primarily due to higher premiums as a result of individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of MRA headwinds resulting from COVID-19 related utilization disruption in 2020. These favorable items were partially offset by the decline in membership in our stand-alone PDP and group Medicare Advantage offerings. The 2021 period was further impacted by the Medicare sequestration relief in the first quarter of 2021 that was not enacted until the second quarter of 2020.
Benefits Expense
-
The Retail segment benefit ratio increased 300 basis points from 85.1% for the 2020 quarter to 88.1% for the 2021 quarter and increased 430 basis points from 83.3% for the 2020 period to 87.6% for the 2021 period. These increases were primarily due to the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, which was contemplated in the pricing and benefit design of our products, COVID-19 impacts, including the impact of the deferral of non-essential care, net of COVID-19 treatment and testing costs and our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVD-19 related utilization disruption in 2020, as well as the impact in 2021 associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development.
-
The Retail segment's benefits expense for the 2021 quarter includes $54 million in favorable prior-period medical claims reserve development versus $30 million in favorable prior-period medical claims development in the 2020 quarter. For the 2021 period, the Retail segment’s benefit expense includes the beneficial effect of $673 million in favorable prior-period medical claims reserve development versus $235 million in the 2020 period. Prior-period medical claims reserve development decreased the Retail segment's benefit ratio by approximately 30 basis points in the 2021 quarter and decreased the Retail segment's benefit ratio by approximately 20 basis points in the 2020 quarter. Favorable prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 120 basis points in the 2021 period versus approximately 50 basis points in the 2020 period.
Operating Costs
- The Retail segment operating cost ratio decreased 210 basis points from 11.2% for the 2020 quarter to 9.1% for the 2021 quarter and decreased 160 basis points from 10.0% for the 2020 period to 8.4% for the 2021 period. These decreases were primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in the 2021 quarter, as previously discussed, scale efficiencies associated with growth in our individual Medicare Advantage membership, and operating cost efficiencies in the 2021 quarter driven by previously implemented productivity initiatives. These improvements were partially offset by continued strategic investments made to position us for long-term success. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 quarter and period.
Group and Specialty Segment
| September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Members | Percentage | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Medical membership: | |||||||||||||||||||||||
| Fully-insured commercial group | 690,000 | 799,500 | (109,500) | (13.7) | % | ||||||||||||||||||
| ASO | 496,500 | 502,100 | (5,600) | (1.1) | % | ||||||||||||||||||
| Military services | 6,051,700 | 6,016,400 | 35,300 | 0.6 | % | ||||||||||||||||||
| Total group medical members | 7,238,200 | 7,318,000 | (79,800) | (1.1) | % | ||||||||||||||||||
| Specialty membership (a) | 5,313,100 | 5,325,600 | (12,500) | (0.2) | % |
(a)Specialty products include dental, vision, and other supplemental health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.
| For the three months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Fully-insured commercial group | $ | 1,052 | $ | 1,169 | $ | (117) | (10.0) | % | |||||||||||||||
| Group specialty | 432 | 424 | 8 | 1.9 | % | ||||||||||||||||||
| Total premiums | 1,484 | 1,593 | (109) | (6.8) | % | ||||||||||||||||||
| Services | 198 | 189 | 9 | 4.8 | % | ||||||||||||||||||
| Total premiums and services revenue | $ | 1,682 | $ | 1,782 | $ | (100) | (5.6) | % | |||||||||||||||
| Segment loss | $ | (28) | $ | (160) | $ | 132 | 82.5 | % | |||||||||||||||
| Benefit ratio | 86.4 | % | 93.0 | % | (6.6) | % | |||||||||||||||||
| Operating cost ratio | 24.9 | % | 25.2 | % | (0.3) | % |
| For the nine months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||
| Fully-insured commercial group | $ | 3,229 | $ | 3,606 | $ | (377) | (10.5) | % | |||||||||||||||
| Group specialty | 1,298 | 1,278 | 20 | 1.6 | % | ||||||||||||||||||
| Total premiums | 4,527 | 4,884 | (357) | (7.3) | % | ||||||||||||||||||
| Services | 582 | 576 | 6 | 1.0 | % | ||||||||||||||||||
| Total premiums and services revenue | $ | 5,109 | $ | 5,460 | $ | (351) | (6.4) | % | |||||||||||||||
| Segment earnings | $ | 186 | $ | 232 | $ | (46) | (19.8) | % | |||||||||||||||
| Benefit ratio | 81.2 | % | 79.6 | % | 1.6 | % | |||||||||||||||||
| Operating cost ratio | 23.9 | % | 24.0 | % | (0.1) | % |
Segment Earnings
- Group and Specialty segment losses decreased $132 million, or 82.5%, from a $160 million loss in the 2020 quarter to a $28 million loss in the 2021 quarter. The quarter over quarter improvement reflects the segments lower benefit and operating ratios as more fully described below. Segment earnings decreased $46 million, or 19.8%, from $232 million in the 2020 period to $186 million in the 2021 period. The period over period decline reflects the same factors that resulted in a higher benefit ratio, partially offset by a decreased operating cost ratio, as more fully described below.
Enrollment
-
Fully-insured commercial group medical membership decreased 109,500 members, or 13.7%, from September 30, 2020 to September 30, 2021 reflecting lower small group quoting activity and sales attributable to depressed economic activity from the COVID-19 pandemic, partially offset by higher retention of existing customers, particularly in larger groups. The portion of group fully-insured commercial medical membership in small group accounts was approximately 51% at September 30, 2021 and 56% at September 30, 2020.
-
Group ASO commercial medical membership decreased 5,600 members, or 1.1%, from September 30, 2020 to September 30, 2021. Small group membership comprised 44% of group ASO medical membership at September 30, 2021 and 45% at September 30, 2020. The membership change reflects intensified competition for small group accounts, partially offset by strong retention among large group accounts.
-
Military services membership increased 35,300 members, or 0.6%, from September 30, 2020 to September 30, 2021. Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the current TRICARE East Region contract.
-
Specialty membership decreased 12,500 members, or 0.2%, from September 30, 2020 to September 30, 2021 due primarily to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of group fully-insured commercial medical membership described above. The decrease also reflects the impact of the economic downturn driven by the COVID-19 pandemic.
Premiums Revenue
- Group and Specialty segment premiums decreased $109 million, or 6.8%, from $1.6 billion in the 2020 quarter to $1.5 billion in the 2021 quarter and decreased $357 million, or 7.3%, from $4.9 billion in the 2020 period to $4.5 billion in the 2021 period. These decreases were primarily due to the decline in our fully-insured group commercial membership, partially offset by higher per member premiums across the fully-insured commercial business.
Services Revenue
- Group and Specialty segment services revenue increased $9 million, or 4.8%, from $189 million in the 2020 quarter to $198 million in the 2021 quarter and increased $6 million, or 1.0%, from $576 million in the 2020 period to $582 million in the 2021 period.
Benefits Expense
- The Group and Specialty segment benefit ratio decreased 660 basis points from 93.0% in the 2020 quarter to 86.4% in the 2021 quarter. The decrease reflects the negative impact on the 2020 quarter as a result of ongoing pandemic relief efforts, primarily surrounding initiatives to ease administrative and financial stress for providers and employers, including premium rate relief for select employer groups and the payment of monthly stipends to support dental providers. Comparisons were favorably impacted by the deliberate pricing and benefit design efforts for 2021 to increase profitability and position the commercial business for
long-term success and the impact of lower specialty utilization, primarily related to dental services. These favorable comparisons were partially offset by the termination in 2021 of the non-deductible health insurance industry fee in which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, and the impact of unfavorable prior-period medical claims reserve development in the 2021 quarter.
The Group and Specialty segment benefit ratio increased 160 basis points from 79.6% in the 2020 period to 81.2% in the 2021 period primarily due to the termination in 2021 of the non-deductible HIF which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products and the significant impact of the deferral of non-essential care, primarily in the second quarter of 2020, net of COVID-19 treatment and testing cost and our pandemic relief efforts in the 2020 period. These unfavorable factors were partially offset by the impact of higher favorable prior period development in the 2021 period and the deliberate pricing and benefit design efforts for 2021 to increase profitability and position the commercial business for long-term success.
- The Group and Specialty segment's benefits expense included $5 million in unfavorable prior-period medical claims reserve development in the 2021 quarter versus $13 million in favorable prior-period medical claims reserve development in the 2020 quarter. This prior-period medical claims reserve development increased the Group and Specialty segment benefit ratio by approximately 30 basis points in the 2021 quarter but decreased the Group Specialty segment benefit ratio by approximately 80 basis points in the 2020 quarter. The Group and Specialty segment's benefits expense included the effect of a favorable prior-period medical claims reserve development of $95 million in the 2021 period versus $43 million in the 2020 period. The favorable prior period medical claims reserve development for the 2021 period decreased the Group and Specialty segment benefit ratio by approximately 210 basis points and 90 basis points in the 2020 period.
Operating Costs
- The Group and Specialty segment operating cost ratio decreased 30 basis points from 25.2% for the 2020 quarter to 24.9% for the 2021 quarter and decreased 10 basis points from 24.0% in the 2020 period to 23.9% in the 2021 period. These decreases primarily reflect the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021, as previously discussed, and operating cost efficiencies driven by previously implemented productivity initiatives. These were partially offset by continued strategic investments made to position us for long-term success. The non-deductible health insurance industry fee impacted the operating cost ratio by 130 basis points in the 2020 quarter and period.
Healthcare Services Segment
| For the three months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Home solutions | $ | 374 | $ | 26 | 348 | 1338.5 | % | ||||||||||||||||
| Pharmacy solutions | $ | 163 | $ | 157 | $ | 6 | 3.8 | % | |||||||||||||||
| Provider services | 110 | 81 | 29 | 35.8 | % | ||||||||||||||||||
| Total services revenues | 647 | 264 | 383 | 145.1 | % | ||||||||||||||||||
| Intersegment revenues: | |||||||||||||||||||||||
| Home solutions | 191 | 134 | 57 | 42.5 | % | ||||||||||||||||||
| Pharmacy solutions | 6,569 | 6,158 | 411 | 6.7 | % | ||||||||||||||||||
| Provider services | 630 | 573 | 57 | 9.9 | % | ||||||||||||||||||
| Total intersegment revenues | 7,390 | 6,865 | 525 | 7.6 | % | ||||||||||||||||||
| Total services and intersegment revenues | $ | 8,037 | $ | 7,129 | $ | 908 | 12.7 | % | |||||||||||||||
| Segment earnings | $ | 373 | $ | 249 | $ | 124 | 49.8 | % | |||||||||||||||
| Operating cost ratio | 95.0 | % | 96.4 | % | (1.4) | % |
| For the nine months ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollars | Percentage | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Services: | |||||||||||||||||||||||
| Home solutions | 423 | 80 | 343 | 428.8 | % | ||||||||||||||||||
| Pharmacy solutions | 482 | 425 | 57 | 13.4 | % | ||||||||||||||||||
| Provider services | 298 | 236 | 62 | 26.3 | % | ||||||||||||||||||
| Total services revenues | 1,203 | 741 | 462 | 62.3 | % | ||||||||||||||||||
| Intersegment revenues: | |||||||||||||||||||||||
| Home solutions | 452 | 415 | 37 | 8.9 | % | ||||||||||||||||||
| Pharmacy solutions | 19,244 | 18,275 | 969 | 5.3 | % | ||||||||||||||||||
| Provider services | 1,858 | 1,724 | 134 | 7.8 | % | ||||||||||||||||||
| Total intersegment revenues | 21,554 | 20,414 | 1,140 | 5.6 | % | ||||||||||||||||||
| Total services and intersegment revenues | $ | 22,757 | $ | 21,155 | $ | 1,602 | 7.6 | % | |||||||||||||||
| Segment earnings | $ | 953 | $ | 816 | $ | 137 | 16.8 | % | |||||||||||||||
| Operating cost ratio | 95.6 | % | 95.8 | % | (0.2) | % |
Segment Earnings
- Healthcare Services segment earnings increased $124 million, or 49.8%, from $249 million in the 2020 quarter to $373 million in the 2021 quarter and increased $137 million, or 16.8%, from $816 million in the 2020 period to $953 million in the 2021 period primarily due to higher earnings from our Kindred at Home acquisition and the factors that drove the segment declining operating cost ratio as more fully described below.
Script Volume
- Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 130 million in the 2021 quarter, up 8.6%, versus scripts of approximately 119 million in the 2020 quarter. For the 2021 period, script volumes increased to approximately 384 million, up 8.0%, versus scripts of approximately 356 million in the 2020 period. These increases were primarily due to higher individual Medicare Advantage and state-based contracts membership, partially offset by the decline in stand-alone PDP and group Medicare Advantage membership.
Services Revenues
- Services revenues increased $383 million, or 145.1%, from $264 million in the 2020 quarter to $647 million in the 2021 quarter and increased $462 million, or 62.3%, from $741 million in the 2020 period to $1.2 billion in the 2021 period. These increases were primarily due to higher revenues associated with our Kindred at Home acquisition. The 2021 period further reflects additional pharmacy revenues associated with the acquisition of Enclara which was closed during the first quarter of 2020.
Intersegment Revenues
- Intersegment revenues increased $525 million, or 7.6%, from $6.9 billion in the 2020 quarter to $7.4 billion in the 2021 quarter and increased $1.1 billion, or 5.6%, from $20.4 billion in the 2020 period to $21.6 billion in the 2021 period. These increases were primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher revenues associated with our provider business. These increases were partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP and group Medicare Advantage membership as previously discussed.
Operating Costs
- The Healthcare Services segment operating cost ratio decreased 140 basis points from 96.4% for the 2020 quarter to 95.0% for the 2021 quarter and decreased 20 basis points from 95.8% for the 2020 period to 95.6% for the 2021 period. These decreases primarily result from the the impact of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the impact on the third quarter 2020 ratio associated with COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and home solutions teams who continued to provide services to members throughout the crisis, as well as operational improvements in our provider services business, largely related to Conviva, along with operating cost efficiencies driven by previously implemented productivity initiatives. These factors contributing to a decrease in the operating cost ratio were partially offset by increased administrative cost in the pharmacy operations as a result of incremental spend to accelerate growth within the business, additional shipping costs incurred in pharmacy operations to ensure members’ timely receipt of prescriptions, and increased utilization levels in our provider business in the 2021 quarter compared to levels in the 2020 quarter amid the COVID-19 pandemic.
Liquidity
Historically, our primary sources of cash have included receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities, and borrowings. Our
primary uses of cash historically have included disbursements for claims payments, operating costs, interest on borrowings, taxes, purchases of investment securities, acquisitions, capital expenditures, repayments on borrowings, dividends, and share repurchases. Because premiums generally are collected in advance of claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. From period to period, our cash flows may also be affected by the timing of working capital items including premiums receivable, benefits payable, and other receivables and payables. Our cash flows are impacted by the timing of payments to and receipts from CMS associated with Medicare Part D subsidies for which we do not assume risk. The use of cash flows may be limited by regulatory requirements of state departments of insurance (or comparable state regulators) which require, among other items, that our regulated subsidiaries maintain minimum levels of capital and seek approval before paying dividends from the subsidiaries to the parent. Our use of cash flows derived from our non-insurance subsidiaries, such as in our Healthcare Services segment, is generally not restricted by state departments of insurance (or comparable state regulators).
For additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our 2020 Form 10-K and Item 1A of Part II of this document.
Cash and cash equivalents decreased to approximately $4.3 billion at September 30, 2021 from $4.7 billion at December 31, 2020. The change in cash and cash equivalents for the nine months ended September 30, 2021 and 2020 is summarized as follows:
| Nine Months Ended | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Net cash provided by operating activities | $ | 2,358 | $ | 5,356 | |||||||
| Net cash used in investing activities | (6,454) | (3,010) | |||||||||
| Net cash provided by financing activities | 3,727 | 1,585 | |||||||||
| (Decrease) increase in cash and cash equivalents | $ | (369) | $ | 3,931 |
Cash Flow from Operating Activities
Cash flows provided by operations of $2.4 billion in the 2021 period decreased $3.0 billion from cash flows provided by operations of $5.4 billion in the 2020 period primarily due to the negative impact of working capital items and lower earnings in the 2021 period compared to the 2020 period. Our 2021 period operating cash flows were significantly impacted by changes to working capital levels, primarily as a result of prior year disruptions caused by COVID-19. These impacts include paying down claims inventory and capitation for provider surplus amounts earned in 2020 as well as additional provider support. These factors were partially offset by the favorable impact of the termination of the non-deductible HIF in 2021.
The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables.
The detail of benefits payable was as follows at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | 2021 Period Change | 2020 Period Change | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| IBNR (1) | $ | 5,973 | $ | 5,290 | $ | 683 | $ | 999 | |||||||||||||||
| Reported claims in process (2) | 1,201 | 816 | 385 | 539 | |||||||||||||||||||
| Other benefits payable (3) | 1,584 | 2,037 | (453) | 666 | |||||||||||||||||||
| Total benefits payable | $ | 8,758 | $ | 8,143 | $ | 615 | $ | 2,204 | |||||||||||||||
| Payables from acquisition | (42) | — | |||||||||||||||||||||
| Change in benefits payable per cash flow statement resulting in cash from operations | $ | 573 | $ | 2,204 |
(1)IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received and processed (i.e. a shorter time span results in a lower IBNR).
(2)Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.
(3)Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.
The increase in benefits payable in 2021 was primarily due to higher IBNR and an increase in reported claims in process partially offset by a reduction in capitation accruals. IBNR increased primarily as a result of individual Medicare Advantage membership growth partially offset by paying down claim inventories. Higher reported claims in process was a function of timing of month-end cutoff. The 2020 period was significantly impacted by higher capitation accruals as significantly lower utilization caused by COVID-19 resulted in higher surplus accruals to providers. These higher surplus accrual to providers were paid down during 2021.
The detail of total net receivables was as follows at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | 2021 Period Change | 2020 Period Change | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Medicare | $ | 1,182 | $ | 928 | $ | 254 | $ | 28 | |||||||||||||||
| Commercial and other | 612 | 122 | 490 | 47 | |||||||||||||||||||
| Military services | 167 | 160 | 7 | 13 | |||||||||||||||||||
| Allowance for doubtful accounts | (82) | (72) | (10) | (9) | |||||||||||||||||||
| Total net receivables | $ | 1,879 | $ | 1,138 | $ | 741 | $ | 79 | |||||||||||||||
| Reconciliation to cash flow statement: | |||||||||||||||||||||||
| Receivables from acquisition | (447) | 3 | |||||||||||||||||||||
| Change in receivables per cash flow statement resulting in cash from operations | $ | 294 | $ | 82 |
The changes in Medicare receivables for both the 2021 period and the 2020 period reflect individual Medicare Advantage membership growth and the typical pattern caused by the timing of accruals and related collections
associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter. We received the 2021 $1.3 billion mid-year settlement in July 2021. The increase in Commercial and other receivables and the allowance for doubtful accounts primarily relates to the Kindred at Home acquisition.
Cash Flow from Investing Activities
During 2021, we acquired Kindred at Home and other various health and wellness related businesses for cash consideration of approximately $4.0 billion, net of cash received.
During 2020, we acquired privately held Enclara Healthcare for cash consideration of approximately $709 million, net of cash received.
Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $945 million in the 2021 period and $668 million in the 2020 period.
Net purchases of investment securities were $1.6 billion in both the 2021 and 2020 periods.
Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claim payments by $625 million in the 2021 period and claim payments were higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk by $283 million in the 2020 period.
Under our administrative services only TRICARE contracts, health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by $20 million in the 2021 period and reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by $9 million in the 2020 period.
Net proceeds from the issuance of commercial paper were $193 million in the 2021 period and $21 million in the 2020 period. The maximum principal amount outstanding at any one time during the 2021 period was $1.1 billion.
In August 2021, we issued $1,500 million of 0.650% unsecured senior notes due August 3, 2023, $750 million of 1.350% unsecured senior notes due February 3, 2027 and $750 million of 2.150% unsecured senior notes due February 3, 2032. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of September 30, 2021 were $2.984 billion.
In March 2020, we issued $600 million of 4.500% senior notes due April 1, 2025 and $500 million of 4.875% senior notes due April 1, 2030. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of September 30, 2020 were $1,088 million.
In August 2021, we borrowed $500 million under the delayed draw term loan agreement. In March 2020, we drew $1 billion on our existing term loan commitment, which was repaid in November 2020.
As of the closing of the acquisition of Kindred at Home on August 17, 2021, we assumed approximately $2.1 billion of borrowings under the Gentiva Term Loan, and subsequent to the acquisition, we repaid $150 million of borrowings under the Gentiva Term Loan.
We acquired common shares in connection with employee stock plans for an aggregate cost of $36 million in the 2021 period and $30 million in the 2020 period.
We paid dividends to stockholders of $263 million during the 2021 period and $239 million during the 2020 period.
The remainder of the cash used in or provided by financing activities in 2021 and 2020 primarily resulted from debt issuance costs, proceeds from stock option exercises and the change in book overdraft.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 10 to the condensed consolidated financial statements.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 10 to the condensed consolidated financial statements.
Debt
For a detailed discussion of our debt, including our senior notes, term loans, credit agreements, commercial paper program, and other short-term borrowings, please refer to Note 12 to the condensed consolidated financial statements.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares.
Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at September 30, 2021 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by less than $1 million, up to a maximum 100 basis points, or annual interest expense by $3 million.
In addition, we operate as a holding company in a highly regulated industry. Humana Inc., our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were $1.2 billion at September 30, 2021 compared to $772 million at December 31, 2020. This increase primarily was due to net proceeds from the senior notes and term loans, dividends received from regulated subsidiaries, earnings in non-regulated Healthcare Services subsidiaries, and the issuance of commercial paper, partially offset by acquisitions, capital expenditures, cash dividends to shareholders, and capital contributions to certain subsidiaries. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by departments of insurance (or comparable state regulators).
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval
by state regulatory authorities, or ordinary dividends, is limited based on the entity’s level of statutory income and statutory capital and surplus. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an extraordinary dividend requiring prior regulatory approval. In most states, prior notification is provided before paying a dividend even if approval is not required.
Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of June 30, 2021, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $9.6 billion, which exceeded aggregate minimum regulatory requirements of $7.2 billion. The amount of ordinary dividends paid to our parent company was approximately $1.3 billion during the nine months ended September 30, 2021 compared to $360 million during the nine months ended September 30, 2020. The amount, timing and mix of ordinary and extraordinary dividend payments will vary due to state regulatory requirements, the level of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.
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