Item 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 2021 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 17, 2022, 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. 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.

Sale of Hospice and Personal Care Divisions

On April 21, 2022, we signed a definitive agreement with private investment firm Clayton, Dubilier & Rice, or CD&R, to divest a 60% interest in the Hospice and Personal Care divisions of Humana’s Kindred at Home subsidiary, or KAH Hospice, at an enterprise valuation of $3.4 billion. These divisions include patient-centered services for Hospice, Palliative, Community and Personal Care. Under the agreement, we will receive cash proceeds of approximately $2.8 billion, which includes a combination of debt repayments from KAH Hospice to Humana and equity proceeds from the 60% interest purchased by CD&R.

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The transaction is expected to close in the third quarter of 2022 and is subject to customary state and federal regulatory approvals.

Value Creation Initiatives

During 2022, in order to create capacity to fund growth and investment in our Medicare Advantage business and further expansion of our Healthcare Services capabilities in 2023, we committed to drive additional value for the enterprise through cost saving, productivity initiatives, and value acceleration from previous investments. As a result of these initiatives, during the second quarter of 2022, we recorded a charge of $203 million, primarily related to asset and software impairment and abandonment in the amount of $140 million. These charges are included within operating costs in the condensed consolidated statements of income for the three and six months ended June 30, 2022, and were recorded at the corporate level and not allocated to the segments. Included in this charge is $21 million in future severance payments in connection with the optimization of our workforce to increase speed, agility, and the pace at which Humana must work as a large, integrated healthcare organization. We expect this liability to be primarily paid within the next 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses. We anticipate additional charges in the remainder of the year across these same categories as additional cost saving, productivity initiatives, and value acceleration opportunities are identified.

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, a reduction in non-COVID-19 hospital admissions for non-emergent and elective medical care have resulted in lower overall healthcare system utilization. At the same time, COVID-19 treatment and testing costs increased utilization. During the first half of 2022, we experienced lower overall utilization of the healthcare system than anticipated, as the reduction in COVID-19 utilization following the increased incidence associated with the Omicron variant outpaced the increase in non-COVID-19 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, significantly affected our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans. Finally, changes in utilization patterns and actions taken in 2021 as a result of the COVID-19 pandemic, including the suspension of certain financial recovery programs for a period of time and shifting the timing of claim payments and provider capitation surplus payments, impacted our claim reserve development and operating cash flows for 2021.

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, including Temporary Assistance for Needy Families, or TANF, dual eligible demonstration, 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 pharmacy, provider, and home services, along with other services and capabilities to promote wellness and advance population health. The operations of the recently acquired full ownership of Kindred at Home, as well as

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the company's strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers are also included in the Healthcare Services segment.

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.

2022 Highlights

  • 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 June 30, 2022, approximately 3,095,300 members, or 68%,

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of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,914,300 members, or 67%, at June 30, 2021.

  • Net income was $697 million, or $5.48 per diluted common share, and $588 million, or $4.55, for the three months ended June 30, 2022, and 2021, respectively. Net income was $1.6 billion, or $12.77 per diluted common share, and $1.4 billion, or $10.94 per diluted common share, for the six months ended June 30, 2022, and 2021, respectively. This comparison was significantly impacted by charges associated with productivity initiatives related to previously disclosed $1 billion value creation plan, tax provision related to the pending sale of Kindred at Home's Hospice and Personal Care divisions, put/call valuation adjustments associated with certain equity method investments, transaction and integration costs, as well as the change in the fair value of publicly-traded equity securities. 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 2022 and 2021 quarter and period:
For the three months ended June 30,For the six months ended June 30,
2022202120222021
Consolidated income before income taxes and equity in net earnings:
Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan$203$—$203$—
Put/call valuation adjustments associated with company's non consolidating minority interest investments(8)419(29)534
Transaction and integration costs36225322
Change in the fair value of publicly-traded equity securities62(63)17022
Total$293$378$397$578
For the three months ended June 30,For the six months ended June 30,
2022202120222021
Diluted earnings per common share:
Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan$1.23$—$1.23$—
Tax provision related to the pending sale of Kindred at Home's Hospice and Personal Care divisions1.31—1.31—
Put/call valuation adjustments associated with company's non consolidating minority interest investments(0.05)2.49(0.18)3.18
Transaction and integration costs0.220.130.320.13
Change in the fair value of publicly-traded equity securities0.37(0.37)1.030.13
Total$3.08$2.25$3.71$3.44

◦Excluding these adjustments, our improved comparisons of our results of operations were primarily impacted by our Healthcare Services segment, including the consolidation of Kindred at Home operations.

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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, or the Families First Act, the Coronavirus Aid, Relief, and Economic Security Act, or 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 2022 and 2021

The following discussion primarily deals with our results of operations for the three months ended June 30, 2022, or the 2022 quarter, the three months ended June 30, 2021, or the 2021 quarter, the six months ended June 30, 2022, or the 2022 period, and the six months ended June 30, 2021, or the 2021 period.

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Consolidated

For the three months ended June 30,Change
20222021DollarsPercentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail$20,896$18,468$2,42813.1%
Group and Specialty1,3701,510(140)(9.3)%
Total premiums22,26619,9782,28811.5%
Services:
Retail812(4)(33.3)%
Group and Specialty19619421.0%
Healthcare Services1,145285860301.8%
Total services1,349491858174.7%
Investment income47176(129)(73.3)%
Total revenues23,66220,6453,01714.6%
Operating expenses:
Benefits19,09917,1491,95011.4%
Operating costs3,1732,1161,05750.0%
Depreciation and amortization1751443121.5%
Total operating expenses22,44719,4093,03815.7%
Income from operations1,2151,236(21)(1.7)%
Interest expense101792227.8%
Other (income) expense, net(8)419427101.9%
Income before income taxes and equity in net earnings1,12273838452.0%
Provision for income taxes427183244133.3%
Equity in net earnings233(31)(93.9)%
Net income$697$588$10918.5%
Diluted earnings per common share$5.48$4.55$0.9320.4%
Benefit ratio (a)85.8%85.8%—%
Operating cost ratio (b)13.4%10.3%3.1%
Effective tax rate38.1%23.7%14.4%

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For the six months ended June 30,Change
20222021DollarsPercentage
(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail$42,198$37,059$5,13913.9%
Group and Specialty2,7713,043(272)(8.9)%
Total premiums44,96940,1024,86712.1%
Services:
Retail1417(3)(17.6)%
Group and Specialty39138471.8%
Healthcare Services2,2085561,652297.1%
Total services2,6139571,656173.0%
Investment income50254(204)(80.3)%
Total revenues47,63241,3136,31915.3%
Operating expenses:
Benefits38,72434,4454,27912.4%
Operating costs6,0594,1231,93647.0%
Depreciation and amortization3452865920.6%
Total operating expenses45,12838,8546,27416.1%
Income from operations2,5042,459451.8%
Interest expense1911474429.9%
Other (income) expense, net(29)534563105.4%
Income before income taxes and equity in net earnings2,3421,77856431.7%
Provision for income taxes71341629771.4%
Equity in net (losses) earnings(2)54(56)(103.7)%
Net income$1,627$1,416$21114.9%
Diluted earnings per common share$12.77$10.94$1.8316.7%
Benefit ratio (a)86.1%85.9%0.2%
Operating cost ratio (b)12.7%10.0%2.7%
Effective tax rate30.5%22.7%7.8%

(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 $2.3 billion, or 11.5%, from $20.0 billion in the 2021 quarter to $22.3 billion in the 2022 quarter and increased $4.9 billion, or 12.1%, from $40.1 billion in the 2021 period to $45.0 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums, partially offset by declining year-over-year membership associated with the group commercial medical products and a reduction in sequestration relief in the 2022 quarter compared to the 2021 quarter.

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Services Revenue

Consolidated services revenue increased $858 million, or 174.7%, from $491 million in the 2021 quarter to $1.3 billion in the 2022 quarter and increased $1.7 billion, or 173.0%, from $1.0 billion in the 2021 period to $2.6 billion in the 2022 period primarily due to the impact of Kindred at Home revenues from external customers.

Investment Income

Investment income decreased $129 million, or 73.3%, from $176 million in the 2021 quarter to $47 million in the 2022 quarter and decreased $204 million, or 80.3%, from $254 million in the 2021 period to $50 million in the 2022 period primarily due to the decrease in the fair value of our publicly traded equity securities investments.

Benefit Expense

Consolidated benefits expense increased $2.0 billion, or 11.4%, from $17.1 billion in the 2021 quarter to $19.1 billion in the 2022 quarter and increased $4.3 billion, or 12.4%, from $34.4 billion in the 2021 period to $38.7 billion in the 2022 period. The consolidated benefit ratio was unchanged at 85.8% for the 2021 quarter and 2022 quarter and increased 20 basis points from 85.9% for the 2021 period to 86.1% for the 2022 period primarily due to the lower favorable prior-period medical claims reserve development, offset by higher per member individual Medicare Advantage premiums and lower admissions per thousand, or APT, associated with the individual Medicare Advantage business in the current year. Further, the 2022 quarter and period ratios reflect a shift in line of business mix with continued growth in certain government programs, which carry a higher benefits expense ratio, combined with a decline in Medicare stand-alone PDP and Group and Specialty membership, which have a lower benefits expense ratio.

Consolidated benefits expense included $37 million of favorable prior-period medical claims reserve development in the 2022 quarter and $164 million of favorable prior-period medical claims development in the 2021 quarter. Consolidated benefits expense included $397 million of favorable prior-period medical claims reserve development in the 2022 period and $719 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2022 quarter and decreased the consolidated benefit ratio by approximately 80 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 90 basis points in the 2022 period and decreased the consolidated benefit ratio by approximately 180 basis points in the 2021 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 $1.1 billion, or 50.0%, from $2.1 billion in the 2021 quarter to $3.2 billion in the 2022 quarter and increased $1.9 billion, or 47.0%, from $4.1 billion in the 2021 period to $6.1 billion in the 2022 period. The consolidated operating cost ratio increased 310 basis points from 10.3% for the 2021 quarter to 13.4% for the 2022 quarter and increased 270 basis points from 10.0% for the 2021 period to 12.7% for the 2022 period primarily due to the impact of the consolidation of Kindred at Home operations, which have a significantly higher operating cost ratio than our historical consolidated operating cost ratio. Kindred at Home operations added approximately 220 basis points and 210 basis points, respectively, to the 2022 quarter and period consolidated operating costs ratios. Further, the year-over-year increases reflect the $203 million in charges related to productivity initiatives in the 2022 quarter primary related to asset and software impairment and abandonment, partially offset by scale efficiencies associated with growth in individual Medicare Advantage membership.

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Depreciation and Amortization

Depreciation and amortization increased $31 million, or 21.5%, from $144 million in the 2021 quarter to $175 million in the 2022 quarter and increased $59 million, or 20.6%, from $286 million in the 2021 period to $345 million in the 2022 period primarily due to capital expenditures.

Interest Expense

Interest expense increased $22 million, or 27.8%, from $79 million in the 2021 quarter to $101 million in the 2022 quarter and increased $44 million, or 29.9%, from $147 million in the 2021 period to $191 million in the 2022 period from borrowings to finance the Kindred at Home acquisition.

Income Taxes

The effective income tax rate was 38.1% and 23.7% for the three months ended June 30, 2022, and 2021, respectively, and 30.5% and 22.7% for the six months ended June 30, 2022 and 2021, respectively. The increase is primarily due to the tax impact resulting from the excess of the book basis over the tax basis of KAH Hospice in connection with the held-for-sale classification at June 30, 2022.

Retail Segment

June 30,Change
20222021MembersPercentage
Membership:
Medical membership:
Individual Medicare Advantage4,555,1004,341,600213,5004.9%
Group Medicare Advantage562,500557,3005,2000.9%
Medicare stand-alone PDP3,580,7003,653,100(72,400)(2.0)%
Total Retail Medicare8,698,3008,552,000146,3001.7%
State-based Medicaid and other1,053,000877,300175,70020.0%
Medicare Supplement317,400330,400(13,000)(3.9)%
Total Retail medical members10,068,7009,759,700309,0003.2%

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For the three months ended June 30,Change
20222021DollarsPercentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage$16,692$14,585$2,10714.4%
Group Medicare Advantage1,8571,775824.6%
Medicare stand-alone PDP606662(56)(8.5)%
Total Retail Medicare19,15517,0222,13312.5%
State-based Medicaid and other1,5561,26429223.1%
Medicare Supplement18518231.6%
Total premiums20,89618,4682,42813.1%
Services812(4)(33.3)%
Total premiums and services revenue20,90418,480$2,42413.1%
Segment earnings$929$836$9311.1%
Benefit ratio87.0%87.0%—%
Operating cost ratio8.2%8.3%(0.1)%
For the six months ended June 30,Change
20222021DollarsPercentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage$33,744$29,400$4,34414.8%
Group Medicare Advantage3,7323,5302025.7%
Medicare stand-alone PDP1,2451,326(81)(6.1)%
Total Retail Medicare38,72134,2564,46513.0%
State-based Medicaid and other3,1102,44366727.3%
Medicare Supplement36736071.9%
Total premiums42,19837,0595,13913.9%
Services1417(3)(17.6)%
Total premiums and services revenue$42,212$37,076$5,13613.9%
Segment earnings$1,713$1,630$835.1%
Benefit ratio87.5%87.3%0.2%
Operating cost ratio8.1%8.0%0.1%

Segment Earnings

  • Retail segment earnings increased $93 million, or 11.1%, from $836 million in the 2021 quarter to $929 million in the 2022 quarter and increased $83 million, or 5.1%, from $1.6 billion in the 2021 period to $1.7 billion in the 2022 period primarily due to the same factors impacting the segment's benefit and operating cost ratios as more fully described below.

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Enrollment

  • Individual Medicare Advantage membership increased 213,500 members, or 4.9%, from June 30, 2021 to June 30, 2022 primarily due to membership additions associated with the most recent Annual Election Period, or AEP. The year-over-year growth was further impacted by continued enrollment resulting from special elections in the second half of 2021 and Dual Eligible Special Need Plans, or D-SNP, membership growth. Individual Medicare Advantage membership includes 661,200 D-SNP members as of June 30, 2022, a net increase of 128,300, or 24.1%, from 532,900 as of June 30, 2021.

  • Group Medicare Advantage membership increased 5,200 members, or 0.9%, from June 30, 2021 to June 30, 2022 reflecting smaller account sales and organic growth in concurrent accounts with no large accounts won or lost for the period.

  • Medicare stand-alone PDP membership decreased 72,400 members, or 2.0%, from June 30, 2021 to June 30, 2022 primarily due to continued intensified competition for Medicare stand-alone PDP offerings.

  • State-based Medicaid membership increased 175,700 members, or 20.0%, from June 30, 2021 to June 30, 2022 reflecting the suspension of state eligibility redetermination efforts due to the currently enacted public health emergency, or PHE.

Premiums Revenue

  • Retail segment premiums increased $2.4 billion, or 13.1%, from $18.5 billion in the 2021 quarter to $20.9 billion in the 2022 quarter and increased $5.1 billion, or 13.9%, from $37.1 billion in the 2021 period to $42.2 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums partially offset by a reduction of sequestration relief in the 2022 quarter compared to the 2021 quarter.

Benefits Expense

  • The Retail segment benefit ratio is unchanged at 87.0% for the 2021 quarter and 2022 quarter and increased 20 basis points from 87.3% for the 2021 period to 87.5% for the 2022 period primarily due to the lower favorable prior-period medical claims reserve development, partially offset by the impact of higher per member individual Medicare Advantage premiums and lower APT associated with the individual Medicare Advantage business. Further, the 2022 quarter and period ratios reflect a shift in line of business mix within the segment, with growth in individual Medicare Advantage and state-based contracts and other membership, which carry a higher benefits expense ratio, combined with a decline in Medicare stand-alone PDP, which has a lower benefits expense ratio.

  • The Retail segment's benefits expense included $39 million of favorable prior-period medical claims reserve development in the 2022 quarter and $156 million of favorable prior-period medical claims development in the 2021 quarter. The Retail segment’s benefit expense included $367 million of favorable prior-period medical claims reserve development in the 2022 period and $619 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development decreased the Retail segment's benefit ratio by approximately 20 basis points in the 2022 quarter and decreased the Retail segment's benefit ratio by approximately 80 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 90 basis points in the 2022 period and decreased the Retail segment benefit ratio by approximately 170 basis points in the 2021 period.

Operating Costs

  • The Retail segment operating cost ratio decreased 10 basis points from 8.3% for the 2021 quarter to 8.2% for the 2022 quarter primarily due to scale efficiencies associated with growth in the individual Medicare Advantage membership, partially offset by strategic investments to position the segment for long-term success. The Retail segment operating cost ratio increased 10 basis points from 8.0% for the 2021 period to

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8.1% for the 2022 period primarily due to strategic investments to position the segment for long-term success, as well as the impact of higher marketing spend in the 2022 period to support individual Medicare Advantage growth. These factors were partially offset by scale efficiencies associated with growth in the individual Medicare Advantage membership.

Group and Specialty Segment

June 30,Change
20222021MembersPercentage
Membership:
Medical membership:
Fully-insured commercial group595,400706,100(110,700)(15.7)%
ASO448,100497,800(49,700)(10.0)%
Military services6,017,8006,038,500(20,700)(0.3)%
Total group medical members7,061,3007,242,400(181,100)(2.5)%
Specialty membership (a)5,156,4005,327,500(171,100)(3.2)%

(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 June 30,Change
20222021DollarsPercentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group$943$1,078$(135)(12.5)%
Group specialty427432(5)(1.2)%
Total premiums1,3701,510(140)(9.3)%
Services19619421.0%
Total premiums and services revenue$1,566$1,704$(138)(8.1)%
Segment earnings$101$40$61152.5%
Benefit ratio76.3%82.6%(6.3)%
Operating cost ratio26.3%23.9%2.4%

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For the six months ended June 30,Change
20222021DollarsPercentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group$1,915$2,177$(262)(12.0)%
Group specialty856866(10)(1.2)%
Total premiums2,7713,043(272)(8.9)%
Services39138471.8%
Total premiums and services revenue$3,162$3,427$(265)(7.7)%
Segment earnings$233$214$198.9%
Benefit ratio75.5%78.6%(3.1)%
Operating cost ratio26.0%23.4%2.6%

Segment Earnings

  • Group and Specialty segment earnings increased $61 million, or 152.5%, from $40 million in the 2021 quarter to $101 million in the 2022 quarter and increased $19 million, or 8.9%, from $214 million in the 2021 period to $233 million in the 2022 period primarily due to the same factors that led to the segment's lower benefit ratio partially offset by the same factors that led to the segment's higher operating ratio as more fully described below.

Enrollment

  • Fully-insured commercial group medical membership decreased 110,700 members, or 15.7%, from June 30, 2021 to June 30, 2022 reflecting the impact of pricing discipline to address COVID-19 and improve profitability.

  • Group ASO commercial medical membership decreased 49,700 members, or 10.0%, from June 30, 2021 to June 30, 2022 reflecting continued intensified competition for small group accounts, partially offset by strong retention among large group accounts.

  • Military services membership decreased 20,700 members, or 0.3%, from June 30, 2021 to June 30, 2022. 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 171,100 members, or 3.2%, from June 30, 2021 to June 30, 2022 primarily due to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of group fully-insured commercial medical membership above. In addition, current membership reflects the economic impact of the COVID-19 pandemic.

Premiums Revenue

  • Group and Specialty segment premiums decreased $140 million, or 9.3%, from $1.5 billion in the 2021 quarter to $1.4 billion in the 2022 quarter and decreased $272 million, or 8.9%, from $3.0 billion in the 2021 period to $2.8 billion in the 2022 period primarily due to the decline in our fully-insured commercial medical and ASO commercial membership, partially offset by higher per member premiums across the fully-insured commercial business.

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Services Revenue

  • Group and Specialty segment services revenue increased $2 million, or 1.0%, from $194 million in the 2021 quarter to $196 million in the 2022 quarter and increased $7 million, or 1.8%, from $384 million in the 2021 period to $391 million in the 2022 period.

Benefits Expense

  • The Group and Specialty segment benefit ratio decreased 630 basis points from 82.6% in the 2021 quarter to 76.3% in the 2022 quarter and decreased 310 basis points from 78.6% in the 2021 period to 75.5% in the 2022 period primarily due to the impact of the specialty product's lower benefit ratio, as the segment results now reflect a higher mix of the specialty business, pricing and benefit design efforts to address COVID-19 and increase profitability, as well as a less severe COVID-19 impact within the fully-insured commercial business due to the enrolled population's vaccination rate in 2022 compared to 2021. These factors were partially offset by the lower prior-period medical claims reserve development.

  • The Group and Specialty segment's benefits expense included $2 million of unfavorable prior-period medical claims reserve development in the 2022 quarter and $8 million of favorable prior-period medical claims reserve development in the 2021 quarter. The Group and Specialty segment's benefits expense included $30 million of favorable prior-period medical claims reserve development in the 2022 period and $100 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development increased the Group and Specialty segment benefit ratio by approximately 10 basis points in the 2022 quarter and decreased the Group Specialty segment benefit ratio by approximately 50 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 110 basis points in the 2022 period and decreased the Group and Specialty segment benefit ratio by approximately 330 basis points in the 2021 period.

Operating Costs

  • The Group and Specialty segment operating cost ratio increased 240 basis points from 23.9% for the 2021 quarter to 26.3% for the 2022 quarter and increased 260 basis points from 23.4% in the 2021 period to 26.0% in the 2022 period primarily due to the impact of membership declining at a greater rate than the decline in absolute administrative expenses, as well as a greater proportion of membership associated with our ASO commercial and military services businesses, each of which have a higher operating cost ratio than the fully-insured commercial product. The increase further reflects investments in the Military services business across demonstration programs, partners service contracts and in preparation for the next generation of the United States Department of Defenses's TRICARE contracts, as well as investments in the specialty business to promote growth.

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Healthcare Services Segment

For the three months ended June 30,Change
20222021DollarsPercentage
(in millions)
Revenues:
Services:
Home solutions$752$25$7272908.0%
Pharmacy solutions2561639357.1%
Provider services137974041.2%
Total services revenues1,145285860301.8%
Intersegment revenues:
Home solutions2141387655.1%
Pharmacy solutions6,8256,4583675.7%
Provider services77764213521.0%
Total intersegment revenues7,8167,2385788.0%
Total services and intersegment revenues$8,961$7,523$1,43819.1%
Segment earnings$437$311$12640.5%
Operating cost ratio94.5%95.8%(1.3)%
For the six months ended June 30,Change
20212021DollarsPercentage
(in millions)
Revenues:
Services:
Home solutions1,478491,4292916.3%
Pharmacy solutions48031916150.5%
Provider services2501886233.0%
Total services revenues2,2085561,652297.1%
Intersegment revenues:
Home solutions41626115559.4%
Pharmacy solutions13,49812,6758236.5%
Provider services1,5251,22829724.2%
Total intersegment revenues15,43914,1641,2759.0%
Total services and intersegment revenues$17,647$14,720$2,92719.9%
Segment earnings$883$580$30352.2%
Operating cost ratio94.4%95.9%(1.5)%

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Segment Earnings

  • Healthcare Services segment earnings increased $126 million, or 40.5%, from $311 million in the 2021 quarter to $437 million in the 2022 quarter and increased $303 million, or 52.2%, from $580 million in the 2021 period to $883 million in the 2022 period primarily due to consolidation of Kindred at Home earnings, individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy earnings as well as the same factors that led to the segment's lower operating cost ratio.

Script Volume

  • Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 133 million in the 2022 quarter, up 3.3%, versus scripts of approximately 129 million in the 2021 quarter and increased to approximately 264 million in the 2022 period, up 3.8%, versus scripts of approximately 255 million in the 2021 period primarily due to individual Medicare Advantage membership growth, partially offset by the decline in stand-alone PDP, fully-insured commercial and ASO membership.

Services Revenues

*•*Services revenues increased $860 million, or 301.8%, from $285 million in the 2021 quarter to $1.1 billion in the 2022 quarter and increased $1.7 billion, or 297.1%, from $556 million in the 2021 period to $2.2 billion in the 2022 period primarily due to the impact of Kindred at Home revenues from external customers.

Intersegment Revenues

  • Intersegment revenues increased $578 million, or 8.0%, from $7.2 billion in the 2021 quarter to $7.8 billion in the 2022 quarter and increased $1.3 billion, or 9.0%, from $14.2 billion in the 2021 period to $15.4 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy revenues, the impact of greater mail-order pharmacy penetration, as well as higher revenues associated with growth in our provider business.

Operating Costs

  • The Healthcare Services segment operating cost ratio decreased 130 basis points from 95.8% for the 2021 quarter to 94.5% for the 2022 quarter and decreased 150 basis points from 95.9% for the 2021 period to 94.4% for the 2022 period primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, combined with a favorable impact to the ratio related to our pharmacy operations.

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

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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 2021 Form 10-K and Item 1A of Part II of this document.

Cash and cash equivalents increased to approximately $5.2 billion at June 30, 2022 from $3.4 billion at December 31, 2021. The change in cash and cash equivalents for the six months ended June 30, 2022 and 2021 is summarized as follows:

Six Months Ended
20222021
(in millions)
Net cash provided by (used in) operating activities$1,261$(477)
Net cash used in investing activities(1,670)(2,203)
Net cash provided by financing activities2,2351,385
Increase (decrease) in cash and cash equivalents$1,826$(1,295)

Cash Flow from Operating Activities

Cash flows provided by operations of $1.3 billion in the 2022 period increased $1.7 billion from cash flows used in operations of $477 million in the 2021 period primarily due to higher earnings in the 2022 period combined with the 2021 period impact associated with the pay down of claims inventory and capitation for provider surplus amounts earned in 2020 and additional provider support.

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 June 30, 2022 and December 31, 2021:

June 30, 2022December 31, 20212022 Period Change2021 Period Change
(in millions)
IBNR (1)$5,953$5,695$258$129
Reported claims in process (2)1,471907564428
Other benefits payable (3)2,2261,687539(215)
Total benefits payable$9,650$8,289$1,361$342
Payables from acquisition—(42)
Change in benefits payable per cash flow statement resulting in cash from operations$1,361$300

(1)IBNR represents an estimate of benefits payable for claims incurred but not reported, or 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.

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(3)Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.

The increase in benefits payable in the 2022 period was primarily due to an increase in reported claims in process, higher capitation accruals and higher IBNR. Higher reported claims in process was a function of month-end cut off. IBNR increased primarily as a result of increased individual Medicare Advantage and state-based contracts membership.

The detail of total net receivables was as follows at June 30, 2022 and December 31, 2021:

June 30, 2022December 31, 20212022 Period Change2021 Period Change
(in millions)
Medicare$2,954$1,214$1,740$1,225
Commercial and other378579(201)78
Military services10910453
Allowance for doubtful accounts(72)(83)11(6)
Total net receivables$3,369$1,814$1,555$1,300
Reconciliation to cash flow statement:
Receivables from acquisition—(15)
Receivables held-for-sale178
Change in receivables per cash flow statement resulting in cash from operations$1,733$1,285

The changes in Medicare receivables for both the 2022 period and the 2021 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 2022 mid-year settlement of approximately $2.0 billion in July 2022.

Cash Flow from Investing Activities

During the 2022 period and 2021 period, we acquired immaterial businesses of approximately $167 million and $325 million, net of cash and cash equivalents received, respectively.

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 $574 million in the 2022 period and $619 million in the 2021 period.

Net purchases of investment securities were $929 million in the 2022 period and net purchases of investment securities were $1.3 billion in the 2021 period.

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 $3.1 billion and $1.2 billion in the 2022 and 2021 periods, respectively.

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 $4 million and $2 million in the 2022 and 2021 periods, respectively.

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Net repayments from the issuance of commercial paper were $418 million in the 2022 period and net proceeds from the issuance of commercial paper were $508 million in the 2021 period. The maximum principal amount outstanding at any one time during the 2022 period was $1.5 billion.

In March 2022, we issued $750 million of 3.700% unsecured senior notes due March 23, 2029. Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $744 million.

On January 11, 2022, we entered into the January 2022 ASR Agreements with Mizuho and Wells Fargo to repurchase $1 billion of our common stock as part of the $3 billion repurchase program authorized by the Board of Directors on February 18, 2021. On January 12, 2022, we made a payment of $1 billion and received an initial delivery of 2.2 million shares of our common stock.

We acquired common shares in connection with employee stock plans for an aggregate cost of $28 million in the 2022 period and $33 million in the 2021 period.

We paid dividends to stockholders of $191 million during the 2022 period and $173 million during the 2021 period.

The remainder of the cash used in or provided by financing activities in 2022 and 2021 primarily resulted from 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.

Divestiture

In the third quarter of 2022, we expect to divest a 60% interest in KAH Hospice pursuant to the definitive agreement we signed with CD&R on April 21, 2022. Under the agreement, we will receive cash proceeds of approximately $2.8 billion, which includes a combination of debt repayments from KAH Hospice to Humana and equity proceeds from the 60% interest purchased by CD&R. The transaction is subject to customary state and federal regulatory approvals. For a detailed discussion of this transaction, please refer to Note 3 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.

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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 June 30, 2022 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 $800 million at June 30, 2022 compared to $1.3 billion at December 31, 2021. This decrease primarily was due to common stock repurchases, capital expenditures, repayment of borrowings under the commercial paper program, cash dividends to shareholders, capital contributions to certain subsidiaries and acquisitions, partially offset by net proceeds from the senior notes, proceeds from the sale of investment securities and earnings in non-regulated Healthcare Services 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 March 31, 2022, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $10.3 billion, which exceeded aggregate minimum regulatory requirements of $7.9 billion. 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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