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 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 for an enterprise value of $8.2 billion, which included 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 August 11, 2022, we completed the sale of a 60% interest of Humana’s Kindred at Home Hospice subsidiary, or KAH Hospice, to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from KAH Hospice to Humana of $1.9 billion. In connection with the sale we recognized a pre-tax gain, net of transaction costs, of $240 million which is reported as a gain on sale of KAH Hospice in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2022.
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 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.
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 three and nine months ended September 30, 2022, we recorded charges of $82 million and $285 million, respectively, primarily related to asset and software impairment and abandonment in the amount of $4 million and $144 million for the three and nine months ended September 30, 2022, respectively. Also included in this charge was $44 million and $65 million for the three and nine months ended September 30, 2022, respectively, 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. These charges are included within operating costs in the condensed consolidated statements of income for the three and nine months ended September 30, 2022, and were recorded at the corporate level and not allocated to the segments. 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.
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 segment also includes the company's strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers. Services offered by this segment are designed to enhance the overall healthcare experience. These services may lead to lower utilization associated with improved member health and/or lower drug costs.
The results of each segment are measured by segment earnings, and for our Retail and Healthcare Services segments, 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 stand-alone 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 September 30, 2022, approximately 3,145,200 members, or 69%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,979,800 members, or 68%, at September 30, 2021.
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In October 2022, the Centers for Medicare and Medicaid Services, or CMS, published its updated Medicare Star Ratings for bonus year 2024 (plan year 2023). We have 4.9 million members, or 96%, of our existing Medicare Advantage membership, in contracts rated 4-stars or higher, with more than 3.0 million members in plans rated 4.5 stars or higher. Three of our contracts received a 5-star rating on CMS's 5-star rating system, including HMO plans in Louisiana, Tennessee, and Kentucky, covering approximately 356,000 members. More than 99% of retirees in our group Medicare Advantage rated plans remain in 4-star or above contracts for 2023.
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Net income was $1.2 billion, or $9.39 per diluted common share, and $1.5 billion, or $11.84 per diluted common share, for the three months ended September 30, 2022, and 2021, respectively. Net income was $2.8 billion, or $22.16 per diluted common share, and $2.9 billion, or $22.77 per diluted common share, for the nine months ended September 30, 2022, and 2021, respectively. These comparisons were significantly impacted by the gain on KAH equity method investment recognized in August 2021, put/call valuation adjustments associated with non-consolidating minority interest investments, transaction and integration costs, the change in the fair value of publicly-traded equity securities, charges associated with productivity initiatives related to previously disclosed $1 billion value creation plan and the net gain on the sale of KAH Hospice. 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 September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Consolidated income before income taxes and equity in net earnings: | |||||||||||||||||||||||
| Gain on Kindred at Home equity method investment | $ | — | $ | (1,129) | $ | — | $ | (1,129) | |||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | 13 | 33 | (16) | 567 | |||||||||||||||||||
| Transaction and integration costs | 17 | 71 | 70 | 93 | |||||||||||||||||||
| Change in the fair value of publicly-traded equity securities | (51) | 174 | 119 | 197 | |||||||||||||||||||
| Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan | 82 | — | 285 | — | |||||||||||||||||||
| Gain on sale of KAH Hospice | (240) | — | (240) | — | |||||||||||||||||||
| Total | $ | (179) | $ | (851) | $ | 218 | $ | (272) | |||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2022 (1) | 2021 (2) | 2022 (1) | 2021 (2) | ||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Gain on Kindred at Home equity method investment | $ | — | $ | (8.74) | $ | — | $ | (8.73) | |||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | 0.08 | 0.20 | (0.10) | 3.38 | |||||||||||||||||||
| Transaction and integration costs | 0.10 | 0.39 | 0.42 | 0.52 | |||||||||||||||||||
| Change in the fair value of publicly-traded equity securities | (0.31) | 1.04 | 0.72 | 1.18 | |||||||||||||||||||
| Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan | 0.50 | — | 1.73 | — | |||||||||||||||||||
| Net gain on sale of KAH Hospice | (3.03) | — | (1.72) | — | |||||||||||||||||||
| Total | $ | (2.66) | $ | (7.11) | $ | 1.05 | $ | (3.65) |
(1) The net gain on sale of KAH Hospice impact of $3.03 per diluted common share and $1.72 per diluted common share for the three and nine months ended September 30, 2022, respectively, include the $240 million pretax gain recorded on sale of KAH Hospice in August 2022 and the related income tax effects of the transaction. The 2022 period income tax impact was $0.17 per diluted common share, reflective of the $1.31 per diluted common share related to the recognition of a deferred tax liability in the second quarter of 2022 in connection with the held-for-sale classification resulting from the pending transaction, partially offset by the $1.14 per diluted common share benefit recognized in the third quarter of 2022 associated with the increase to our tax basis in both the shares sold and the shares retained at the time of the completion of the sale in August 2022. The remaining significant adjustments for the three and nine months ended September 30, 2022 include a total cumulative net tax benefit of approximately $0.11 per diluted common share and $0.83 per diluted common share, respectively.
(2) The significant adjustments for the three and nine months ended September 30, 2021 include a total cumulative net tax benefit of approximately $0.53 per diluted common share and $1.55 per diluted common share, respectively.
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 September 30, 2022, or the 2022 quarter, the three months ended September 30, 2021, or the 2021 quarter, the nine months ended September 30, 2022, or the 2022 period, and the nine months ended September 30, 2021, or the 2021 period.
Consolidated
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, 2022 vs 2021 | Nine months ended September 30, 2022 vs 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except per common share results) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||||||||||||||
| Retail | $ | 20,131 | $ | 18,401 | $ | 62,329 | $ | 55,460 | $ | 1,730 | 9.4 | % | $ | 6,869 | 12.4 | % | |||||||||||||||||||||||||||||||
| Group and Specialty | 1,337 | 1,484 | 4,108 | 4,527 | (147) | (9.9) | % | (419) | (9.3) | % | |||||||||||||||||||||||||||||||||||||
| Total premiums | 21,468 | 19,885 | 66,437 | 59,987 | 1,583 | 8.0 | % | 6,450 | 10.8 | % | |||||||||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Retail | 10 | — | 24 | 17 | 10 | 100.0 | % | 7 | 41.2 | % | |||||||||||||||||||||||||||||||||||||
| Group and Specialty | 197 | 198 | 588 | 582 | (1) | (0.5) | % | 6 | 1.0 | % | |||||||||||||||||||||||||||||||||||||
| Healthcare Services | 952 | 647 | 3,160 | 1,203 | 305 | 47.1 | % | 1,957 | 162.7 | % | |||||||||||||||||||||||||||||||||||||
| Total services | 1,159 | 845 | 3,772 | 1,802 | 314 | 37.2 | % | 1,970 | 109.3 | % | |||||||||||||||||||||||||||||||||||||
| Investment income (loss) | 172 | (33) | 222 | 221 | 205 | 621.2 | % | 1 | 0.5 | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | 22,799 | 20,697 | 70,431 | 62,010 | 2,102 | 10.2 | % | 8,421 | 13.6 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefits | 18,384 | 17,316 | 57,108 | 51,761 | 1,068 | 6.2 | % | 5,347 | 10.3 | % | |||||||||||||||||||||||||||||||||||||
| Operating costs | 3,061 | 2,603 | 9,120 | 6,726 | 458 | 17.6 | % | 2,394 | 35.6 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 182 | 150 | 527 | 436 | 32 | 21.3 | % | 91 | 20.9 | % | |||||||||||||||||||||||||||||||||||||
| Total operating expenses | 21,627 | 20,069 | 66,755 | 58,923 | 1,558 | 7.8 | % | 7,832 | 13.3 | % | |||||||||||||||||||||||||||||||||||||
| Income from operations | 1,172 | 628 | 3,676 | 3,087 | 544 | 86.6 | % | 589 | 19.1 | % | |||||||||||||||||||||||||||||||||||||
| Gain on sale of KAH Hospice | (240) | — | (240) | — | 240 | 100.0 | % | 240 | 100.0 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense | 102 | 88 | 293 | 235 | 14 | 15.9 | % | 58 | 24.7 | % | |||||||||||||||||||||||||||||||||||||
| Other expense (income), net | 13 | (1,096) | (16) | (562) | (1,109) | (101.2) | % | (546) | (97.2) | % | |||||||||||||||||||||||||||||||||||||
| Income before income taxes and equity in net earnings | 1,297 | 1,636 | 3,639 | 3,414 | (339) | (20.7) | % | 225 | 6.6 | % | |||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 107 | 120 | 820 | 536 | (13) | (10.8) | % | 284 | 53.0 | % | |||||||||||||||||||||||||||||||||||||
| Equity in net earnings | 3 | 15 | 1 | 69 | (12) | (80.0) | % | (68) | (98.6) | % | |||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,193 | $ | 1,531 | $ | 2,820 | $ | 2,947 | $ | (338) | (22.1) | % | $ | (127) | (4.3) | % | |||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 9.39 | $ | 11.84 | $ | 22.16 | $ | 22.77 | $ | (2.45) | (20.7) | % | $ | (0.61) | (2.7) | % | |||||||||||||||||||||||||||||||
| Benefit ratio (a) | 85.6 | % | 87.1 | % | 86.0 | % | 86.3 | % | (1.5) | % | (0.3) | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio (b) | 13.5 | % | 12.6 | % | 13.0 | % | 10.9 | % | 0.9 | % | 2.1 | % | |||||||||||||||||||||||||||||||||||
| Effective tax rate | 8.2 | % | 7.2 | % | 22.5 | % | 15.4 | % | 1.0 | % | 7.1 | % |
(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 revenue increased $1.6 billion, or 8.0%, from $19.9 billion in the 2021 quarter to $21.5 billion in the 2022 quarter and increased $6.5 billion, or 10.8%, from $60.0 billion in the 2021 period to $66.4 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 the phase-out of COVID-19 sequestration relief in the 2022 period.
Services Revenue
Consolidated services revenue increased $314 million, or 37.2%, from $845 million in the 2021 quarter to $1.2 billion in the 2022 quarter and increased $2.0 billion, or 109.3%, from $1.8 billion in the 2021 period to $3.8 billion in the 2022 period primarily due to the impact of home solutions revenues which reflects the acquisition of the remaining 60% interest in KAH during August 2021 partially offset by the divestiture of the 60% ownership of KAH Hospice during August 2022.
Investment Income
Investment income increased $205 million, or 621.2%, from a $33 million loss in the 2021 quarter to $172 million of income in the 2022 quarter primarily due to lower mark to market losses on our publicly traded equity securities during the 2022 quarter compared to the 2021 quarter and higher interest income on our debt securities. Investment income increased $1 million, or 0.5%, from $221 million in the 2021 period to $222 million in the 2022 period.
Benefit Expense
Consolidated benefits expense increased $1.1 billion, or 6.2%, from $17.3 billion in the 2021 quarter to $18.4 billion in the 2022 quarter and increased $5.3 billion, or 10.3%, from $51.8 billion in the 2021 period to $57.1 billion in the 2022 period. The consolidated benefit ratio decreased 150 basis points from 87.1% for the 2021 quarter to 85.6% for the 2022 quarter and decreased 30 basis points from 86.3% for the 2021 period to 86.0% for the 2022 period primarily due to higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business. These factors were partially offset by lower favorable prior-period medical claims reserve development. 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, which has a lower benefits expense ratio.
Consolidated benefits expense included $7 million of favorable prior-period medical claims reserve development in the 2022 quarter and $49 million of favorable prior-period medical claims development in the 2021 quarter. Consolidated benefits expense included $404 million of favorable prior-period medical claims reserve development in the 2022 period and $768 million of favorable prior-period medical claims reserve development in the 2021 period. Prior-period medical claims reserve development did not impact the consolidated benefit ratio in the 2022 quarter and decreased the consolidated benefit ratio by approximately 20 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 60 basis points in the 2022 period and decreased the consolidated benefit ratio by approximately 130 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 $458 million, or 17.6%, from $2.6 billion in the 2021 quarter to $3.1 billion in the 2022 quarter and increased $2.4 billion, or 35.6%, from $6.7 billion in the 2021 period to $9.1 billion in the 2022 period. The consolidated operating cost ratio increased 90 basis points from 12.6% for the 2021 quarter
to 13.5% for the 2022 quarter and increased 210 basis points from 10.9% for the 2021 period to 13.0% for the 2022 period primarily due to the impact of the consolidation of KAH operations, which have a significantly higher operating cost ratio than our historical consolidated operating cost ratio, as well as the $285 million in charges related to productivity initiatives in the 2022 period, primarily related to asset and software impairment and abandonment and severance. These increases were partially offset by scale efficiencies associated with growth in individual Medicare Advantage membership.
Depreciation and Amortization
Depreciation and amortization increased $32 million, or 21.3%, from $150 million in the 2021 quarter to $182 million in the 2022 quarter and increased $91 million, or 20.9%, from $436 million in the 2021 period to $527 million in the 2022 period primarily due to capital expenditures.
Interest Expense
Interest expense increased $14 million, or 15.9%, from $88 million in the 2021 quarter to $102 million in the 2022 quarter and increased $58 million, or 24.7%, from $235 million in the 2021 period to $293 million in the 2022 period from borrowings to finance the KAH acquisition.
Income Taxes
The effective income tax rate was 8.2% and 7.2% for the three months ended September 30, 2022, and 2021, respectively, and 22.5% and 15.4% for the nine months ended September 30, 2022 and 2021, respectively. The year-over-year increase in the effective income tax rates is primarily due to the impact of the August 2021 acquisition of the remaining 60% interest in KAH. In that period, we recognized a $1.1 billion mark-to-market gain related to our previously held 40% investment in KAH. This unrealized gain was not taxable, thereby reducing the effective income tax rate for the three and nine months ended September 30, 2021. The increase is partially offset by the August 2022 disposition of our 60% interest in KAH Hospice, which resulted in an increase to our tax basis in both the shares sold and the shares retained, thereby reducing the effective income tax rate for the three and nine months ended September 30, 2022.
Retail Segment
| September 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Members | % | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Medical membership: | |||||||||||||||||||||||
| Individual Medicare Advantage | 4,564,200 | 4,397,300 | 166,900 | 3.8 | % | ||||||||||||||||||
| Group Medicare Advantage | 564,600 | 559,800 | 4,800 | 0.9 | % | ||||||||||||||||||
| Medicare stand-alone PDP | 3,569,100 | 3,638,400 | (69,300) | (1.9) | % | ||||||||||||||||||
| Total Retail Medicare | 8,697,900 | 8,595,500 | 102,400 | 1.2 | % | ||||||||||||||||||
| State-based Medicaid and other | 1,098,900 | 909,100 | 189,800 | 20.9 | % | ||||||||||||||||||
| Medicare Supplement | 316,500 | 332,000 | (15,500) | (4.7) | % | ||||||||||||||||||
| Total Retail medical members | 10,113,300 | 9,836,600 | 276,700 | 2.8 | % | ||||||||||||||||||
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, 2022 vs 2021 | Nine months ended September 30, 2022 vs 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individual Medicare Advantage | $ | 16,007 | $ | 14,642 | $ | 49,751 | $ | 44,042 | $ | 1,365 | 9.3 | % | $ | 5,709 | 13.0 | % | |||||||||||||||||||||||||||||||
| Group Medicare Advantage | 1,792 | 1,737 | 5,524 | 5,267 | 55 | 3.2 | % | 257 | 4.9 | % | |||||||||||||||||||||||||||||||||||||
| Medicare stand-alone PDP | 534 | 541 | 1,779 | 1,867 | (7) | (1.3) | % | (88) | (4.7) | % | |||||||||||||||||||||||||||||||||||||
| Total Retail Medicare | 18,333 | 16,920 | 57,054 | 51,176 | 1,413 | 8.4 | % | 5,878 | 11.5 | % | |||||||||||||||||||||||||||||||||||||
| State-based Medicaid and other | 1,610 | 1,296 | 4,720 | 3,739 | 314 | 24.2 | % | 981 | 26.2 | % | |||||||||||||||||||||||||||||||||||||
| Medicare Supplement | 188 | 185 | 555 | 545 | 3 | 1.6 | % | 10 | 1.8 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums | 20,131 | 18,401 | 62,329 | 55,460 | 1,730 | 9.4 | % | 6,869 | 12.4 | % | |||||||||||||||||||||||||||||||||||||
| Services | 10 | — | 24 | 17 | 10 | 100.0 | % | 7 | 41.2 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums and services revenue | $ | 20,141 | $ | 18,401 | $ | 62,353 | $ | 55,477 | $ | 1,740 | 9.5 | % | $ | 6,876 | 12.4 | % | |||||||||||||||||||||||||||||||
| Segment earnings | $ | 737 | $ | 456 | $ | 2,450 | $ | 2,086 | $ | 281 | 61.6 | % | $ | 364 | 17.4 | % | |||||||||||||||||||||||||||||||
| Benefit ratio | 86.5 | % | 88.1 | % | 87.2 | % | 87.6 | % | (1.6) | % | (0.4) | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio | 9.4 | % | 9.1 | % | 8.5 | % | 8.4 | % | 0.3 | % | 0.1 | % |
Segment Earnings
Retail segment earnings increased $281 million, or 61.6%, from $456 million in the 2021 quarter to $737 million in the 2022 quarter and increased $364 million, or 17.4%, from $2.1 billion in the 2021 period to $2.5 billion in the 2022 period primarily due to the same factors impacting the segment's lower benefit ratio offset by the same factors impacting the segment's higher operating cost ratio as more fully described below.
Enrollment
Individual Medicare Advantage membership increased 166,900 members, or 3.8%, from September 30, 2021 to September 30, 2022 primarily due to membership additions associated with the previous Annual Election Period, or AEP. The year-over-year growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, membership. Individual Medicare Advantage membership
includes 667,000 D-SNP members as of September 30, 2022, a net increase of 105,700, or 18.8%, from 561,300 as of September 30, 2021.
Group Medicare Advantage membership increased 4,800 members, or 0.9%, from September 30, 2021 to September 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 69,300 members, or 1.9%, from September 30, 2021 to September 30, 2022 primarily due to continued intensified competition for Medicare stand-alone PDP offerings.
State-based Medicaid membership increased 189,800 members, or 20.9%, from September 30, 2021 to September 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 revenue increased $1.7 billion, or 9.4%, from $18.4 billion in the 2021 quarter to $20.1 billion in the 2022 quarter and increased $6.9 billion, or 12.4%, from $55.5 billion in the 2021 period to $62.3 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 the phase-out of COVID-19 sequestration relief in the 2022 period.
Benefits Expense
The Retail segment benefit ratio decreased 160 basis points from 88.1% for the 2021 quarter to 86.5% for the 2022 quarter and decreased 40 basis points from 87.6% for the 2021 period to 87.2% for the 2022 period primarily due to the favorable impact of higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business. These factors were partially offset by lower favorable prior-period medical claims reserve development. 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 $12 million of favorable prior-period medical claims reserve development in the 2022 quarter and $54 million of favorable prior-period medical claims reserve development in the 2021 quarter. The Retail segment’s benefit expense included $379 million of favorable prior-period medical claims reserve development in the 2022 period and $673 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 10 basis points in the 2022 quarter and decreased the Retail segment's benefit ratio by approximately 30 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 60 basis points in the 2022 period and decreased the Retail segment benefit ratio by approximately 120 basis points in the 2021 period.
Operating Costs
The Retail segment operating cost ratio increased 30 basis points from 9.1% for the 2021 quarter to 9.4% for the 2022 quarter and increased 10 basis points from 8.4% for the 2021 period to 8.5% for the 2022 period primarily due to strategic investments to position the segment for long-term success, including 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
| September 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | Members | % | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Medical membership: | |||||||||||||||||||||||
| Fully-insured commercial group | 574,500 | 690,000 | (115,500) | (16.7) | % | ||||||||||||||||||
| ASO | 438,600 | 496,500 | (57,900) | (11.7) | % | ||||||||||||||||||
| Military services | 5,977,900 | 6,051,700 | (73,800) | (1.2) | % | ||||||||||||||||||
| Total group medical members | 6,991,000 | 7,238,200 | (247,200) | (3.4) | % | ||||||||||||||||||
| Specialty membership (a) | 5,210,100 | 5,313,100 | (103,000) | (1.9) | % |
(a)We provide a full range of insured specialty products including dental, vision, and life insurance benefits marketed to individuals and groups. Members included in these products may not be unique to each product since members have the ability to enroll in a medical product and one or more specialty products.
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, 2022 vs 2021 | Nine months ended September 30, 2022 vs 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||||||||||||||
| Fully-insured commercial group | $ | 912 | $ | 1,052 | $ | 2,827 | $ | 3,229 | $ | (140) | (13.3) | % | $ | (402) | (12.4) | % | |||||||||||||||||||||||||||||||
| Group specialty | 425 | 432 | 1,281 | 1,298 | (7) | (1.6) | % | (17) | (1.3) | % | |||||||||||||||||||||||||||||||||||||
| Total premiums | 1,337 | 1,484 | 4,108 | 4,527 | (147) | (9.9) | % | (419) | (9.3) | % | |||||||||||||||||||||||||||||||||||||
| Services | 197 | 198 | 588 | 582 | (1) | (0.5) | % | 6 | 1.0 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums and services revenue | $ | 1,534 | $ | 1,682 | $ | 4,696 | $ | 5,109 | $ | (148) | (8.8) | % | $ | (413) | (8.1) | % | |||||||||||||||||||||||||||||||
| Segment earnings (loss) | $ | 49 | $ | (28) | $ | 282 | $ | 186 | $ | 77 | 275.0 | % | $ | 96 | 51.6 | % | |||||||||||||||||||||||||||||||
| Benefit ratio | 78.7 | % | 86.4 | % | 76.5 | % | 81.2 | % | (7.7) | % | (4.7) | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio | 27.6 | % | 24.9 | % | 26.5 | % | 23.9 | % | 2.7 | % | 2.6 | % |
Segment Earnings
Group and Specialty segment earnings increased $77 million, or 275.0%, from a $28 million loss in the 2021 quarter to $49 million in earnings in the 2022 quarter and increased $96 million, or 51.6%, from $186 million in the 2021 period to $282 million in the 2022 period primarily due to the same factors impacting the segment's lower benefit ratio partially offset by the same factors impacting the segment's higher operating ratio as more fully described below.
Enrollment
Fully-insured commercial group medical membership decreased 115,500 members, or 16.7%, from September 30, 2021 to September 30, 2022 reflecting the impact of pricing discipline to address COVID-19 and improve profitability.
Group ASO commercial medical membership decreased 57,900 members, or 11.7%, from September 30, 2021 to September 30, 2022 reflecting continued intensified competition for small group accounts, partially offset by strong retention among large group accounts.
Military services membership decreased 73,800 members, or 1.2%, from September 30, 2021 to September 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 103,000 members, or 1.9%, from September 30, 2021 to September 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 revenue decreased $147 million, or 9.9%, from $1.5 billion in the 2021 quarter to $1.3 billion in the 2022 quarter and decreased $419 million, or 9.3%, from $4.5 billion in the 2021 period to $4.1 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.
Services Revenue
Group and Specialty segment services revenue decreased $1 million, or 0.5%, from $198 million in the 2021 quarter to $197 million in the 2022 quarter and increased $6 million, or 1.0%, from $582 million in the 2021 period to $588 million in the 2022 period.
Benefits Expense
The Group and Specialty segment benefit ratio decreased 770 basis points from 86.4% in the 2021 quarter to 78.7% in the 2022 quarter and decreased 470 basis points from 81.2% in the 2021 period to 76.5% 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, a less severe COVID-19 impact in the 2022 period compared to the elevated impact in the 2021 period, including the Delta variant in the 2021 quarter, and the enrolled population's higher vaccination rate in 2022 compared to 2021. These factors were partially offset by lower prior-period medical claims reserve development.
The Group and Specialty segment's benefits expense included $5 million of unfavorable prior-period medical claims reserve development in the 2022 quarter and $5 million of unfavorable prior-period medical claims reserve development in the 2021 quarter. The Group and Specialty segment's benefits expense included $25 million of favorable prior-period medical claims reserve development in the 2022 period and $95 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 40 basis points in the 2022 quarter and increased the Group Specialty segment benefit ratio by approximately 30 basis points in the 2021 quarter. Prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 60 basis points in the 2022 period and decreased the Group and Specialty segment benefit ratio by approximately 210 basis points in the 2021 period.
Operating Costs
The Group and Specialty segment operating cost ratio increased 270 basis points from 24.9% for the 2021 quarter to 27.6% for the 2022 quarter and increased 260 basis points from 23.9% in the 2021 period to 26.5% 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, Military services, and specialty 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 Defense's TRICARE contracts, as well as investments in the specialty business to promote growth.
Healthcare Services Segment
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, 2022 vs 2021 | Nine months ended September 30, 2022 vs 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | $ | 519 | $ | 374 | $ | 1,997 | $ | 423 | $ | 145 | 38.8 | % | $ | 1,574 | 372.1 | % | |||||||||||||||||||||||||||||||
| Pharmacy solutions | 274 | 163 | 754 | 482 | 111 | 68.1 | % | 272 | 56.4 | % | |||||||||||||||||||||||||||||||||||||
| Provider services | 159 | 110 | 409 | 298 | 49 | 44.5 | % | 111 | 37.2 | % | |||||||||||||||||||||||||||||||||||||
| Total services revenue | 952 | 647 | 3,160 | 1,203 | 305 | 47.1 | % | 1,957 | 162.7 | % | |||||||||||||||||||||||||||||||||||||
| Intersegment revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | 223 | 191 | 639 | 452 | 32 | 16.8 | % | 187 | 41.4 | % | |||||||||||||||||||||||||||||||||||||
| Pharmacy solutions | 6,966 | 6,569 | 20,464 | 19,244 | 397 | 6.0 | % | 1,220 | 6.3 | % | |||||||||||||||||||||||||||||||||||||
| Provider services | 736 | 630 | 2,261 | 1,858 | 106 | 16.8 | % | 403 | 21.7 | % | |||||||||||||||||||||||||||||||||||||
| Total intersegment revenues | 7,925 | 7,390 | 23,364 | 21,554 | 535 | 7.2 | % | 1,810 | 8.4 | % | |||||||||||||||||||||||||||||||||||||
| Total services and intersegment revenues | $ | 8,877 | $ | 8,037 | $ | 26,524 | $ | 22,757 | $ | 840 | 10.5 | % | $ | 3,767 | 16.6 | % | |||||||||||||||||||||||||||||||
| Segment earnings | $ | 630 | $ | 373 | $ | 1,513 | $ | 953 | $ | 257 | 68.9 | % | $ | 560 | 58.8 | % | |||||||||||||||||||||||||||||||
| Operating cost ratio | 95.0 | % | 95.0 | % | 94.6 | % | 95.6 | % | — | % | (1.0) | % |
Segment Earnings
Healthcare Services segment earnings increased $257 million, or 68.9%, from $373 million in the 2021 quarter to $630 million in the 2022 quarter and increased $560 million, or 58.8%, from $953 million in the 2021 period to $1.5 billion in the 2022 period primarily due to the same factors impacting the increase in services revenue and intersegment revenues as well as the same factors impacting the segment's lower operating cost ratio in the 2022 period as more fully described below.
Script Volume
Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 134 million in the 2022 quarter, up 3.1%, versus scripts of approximately 130 million in the 2021 quarter and increased to approximately 398 million in the 2022 period, up 3.7%, versus scripts of approximately 384 million in the 2021 period primarily due to individual Medicare Advantage membership growth and higher utilization in PDP offset by the decline in fully-insured commercial and ASO membership.
Services Revenue
Services revenue increased $305 million, or 47.1%, from $647 million in the 2021 quarter to $952 million in the 2022 quarter and increased $2.0 billion, or 162.7%, from $1.2 billion in the 2021 period to $3.2 billion in the 2022 period primarily due to the impact of home solutions revenues which reflects the acquisition of the remaining 60% interest in KAH during August 2021 partially offset by the divestiture of the 60% ownership of KAH Hospice during August 2022.
Intersegment Revenues
Intersegment revenues increased $535 million, or 7.2%, from $7.4 billion in the 2021 quarter to $7.9 billion in the 2022 quarter and increased $1.8 billion, or 8.4%, from $21.6 billion in the 2021 period to $23.4 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 was unchanged at 95.0% for the 2021 quarter and the 2022 quarter and decreased 100 basis points from 95.6% for the 2021 period to 94.6% for the 2022 period primarily due to the consolidation of KAH operations for the entire 2022 period compared to the partial 2021 period due to timing of the previously disclosed transaction. The KAH operations have a lower operating cost ratio than other businesses within the segment. The decrease further reflects favorability in our pharmacy operations partially offset by investments in KAH to abate the pressures of the current nursing labor environment.
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. As 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 regarding our liquidity risk, refer to Part I, Item 1A, "Risk Factors" in our 2021 Form 10-K and Part II, Item 1A, "Risk Factors" of this Form 10-Q.
Cash and cash equivalents increased to approximately $13.6 billion at September 30, 2022 from $3.4 billion at December 31, 2021. The change in cash and cash equivalents for the nine months ended September 30, 2022 and 2021 is summarized as follows:
| Nine Months Ended | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Net cash provided by operating activities | $ | 9,714 | $ | 2,358 | |||||||
| Net cash provided by (used in) investing activities | 6 | (6,454) | |||||||||
| Net cash provided by financing activities | 444 | 3,727 | |||||||||
| Increase (decrease) in cash and cash equivalents | $ | 10,164 | $ | (369) |
Cash Flow from Operating Activities
Cash flows provided by operations of $9.7 billion in the 2022 period increased $7.4 billion from cash flows provided by operations of $2.4 billion in the 2021 period. Our operating cash flows for the 2022 period was significantly impacted by the early receipt of the Medicare premium remittance of $5.8 billion in September 2022 because the payment date for October 2022 fell on a weekend. Generally, when the first day of a month falls on a weekend or holiday, with the exception of January 1 (New Year's Day), we receive this payment at the end of the previous month. This also resulted in an increase to unearned revenues in our condensed consolidated balance sheet
at September 30, 2022. Our operating cash flows for the 2022 period were positively impacted by higher earnings, exclusive of the gain on the sale of KAH Hospice recognized in the 2022 period and the gain on the KAH equity method investment recognized in the 2021 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. Benefits expense includes claim payments, capitation payments, pharmacy costs net of rebates, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well as estimates of future payments to hospitals and others for medical care and other supplemental benefits provided on or prior to the balance sheet date. For additional information regarding our benefits payable and benefits expense recognition, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in our 2021 Form 10-K.
The detail of total net receivables at September 30, 2022 and December 31, 2021 and reconciliation to cash flow for the nine months ended September 30, 2022 and 2021 was as follows:
| September 30, 2022 | December 31, 2021 | 2022 Period Change | 2021 Period Change | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Medicare | $ | 1,218 | $ | 1,214 | $ | 4 | $ | 254 | |||||||||||||||
| Commercial and other | 354 | 579 | (225) | 490 | |||||||||||||||||||
| Military services | 108 | 104 | 4 | 7 | |||||||||||||||||||
| Allowances | (71) | (83) | 12 | (10) | |||||||||||||||||||
| Total net receivables | $ | 1,609 | $ | 1,814 | $ | (205) | $ | 741 | |||||||||||||||
| Reconciliation to cash flow statement: | |||||||||||||||||||||||
| Receivables from acquisition | — | (447) | |||||||||||||||||||||
| Receivables disposed | 194 | ||||||||||||||||||||||
| Change in receivables per cash flow statement | $ | (11) | $ | 294 |
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. The decrease in Commercial and other receivables and the allowance for doubtful accounts for the 2022 period primarily relates to the KAH Hospice disposition. The increase in Commercial and other receivables and the allowance for doubtful accounts for the 2021 period primarily relates to the Kindred at Home acquisition in the 2021 period.
Cash Flow from Investing Activities
During the 2022 period, we acquired various businesses totaling to approximately $293 million, net of cash and cash equivalents received.
During the 2021 period, we acquired KAH and other various health and wellness related businesses for cash consideration of approximately $4.0 billion, net of cash received.
During the 2022 period, we completed the sale of a 60% interest of KAH Hospice to CD&R for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from KAH Hospice to Humana of $1.9 billion. In connection with the sale we recognized a pre-tax gain, net of transaction costs, of $240 million which is reported as a gain on sale of KAH Hospice in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2022.
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 $862 million in the 2022 period and $945 million in the 2021 period.
Net purchases of investment securities were $1.5 billion in the 2022 period and net purchases of investment securities were $1.6 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 $3.7 billion and $624 million in the 2022 and 2021 periods, respectively.
Under our administrative services only TRICARE contracts, reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by $60 million in the 2022 period and health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by $19 million in the 2021 period.
On August 16, 2022, we repaid the $2.0 billion October 2021 Term Loan Agreement without a prepayment penalty due.
In August 2021, we borrowed $500 million under the delayed draw term loan agreement and repaid $150 million of term loan borrowings.
Net repayments from the issuance of commercial paper were $660 million in the 2022 period and net proceeds from the issuance of commercial paper were $193 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 $32 million in the 2022 period and $36 million in the 2021 period.
We paid dividends to stockholders of $291 million during the 2022 period and $263 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 additional information regarding our dividends to stockholders, refer to Note 10 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.
Stock Repurchases
For additional information regarding stock repurchases, refer to Note 10 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.
Debt
For additional information regarding debt, including our senior notes, term loans, revolving credit agreements, commercial paper program and other short-term borrowings, refer to Note 12 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.
Divestiture
On August 11, 2022, we completed the sale of a 60% interest of KAH Hospice to CD&R for cash proceeds of approximately $2.7 billion, net of cash received, including debt repayments from KAH Hospice to Humana of $1.9 billion. In connection with the sale we recognized a pre-tax gain, net of transaction costs, of $240 million which is reported as a gain on sale of KAH Hospice in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2022.
For additional information regarding the divestiture, refer to Note 3 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.
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, 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 $1.2 billion at September 30, 2022 compared to $1.3 billion at December 31, 2021. This decrease primarily was due to the repayment of the October 2021 Term Loan Agreement, 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 as well as earnings and cash proceeds from the sale of KAH Hospice within our 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 June 30, 2022, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $11.0 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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