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 2022 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 16, 2023, 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 committed to putting health first – for our teammates, our customers, and our company. Through our Humana insurance services, and our CenterWell health care services, we make it easier for the millions of people we serve to achieve their best health – delivering the care and service they need, when they need it. These efforts are leading to a better quality of life for people with Medicare, Medicaid, families, individuals, military service personnel, and communities at large.
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.
Employer Group Commercial Medical Products Business Exit
In February 2023, we announced our planned exit from the Employer Group Commercial Medical Products business, which includes all fully insured, self-funded and Federal Employee Health Benefit medical plans, as well as associated wellness and rewards programs. No other Humana health plan offerings are materially affected. Following a strategic review, we determined the Employer Group Commercial Medical Products business was no longer positioned to sustainably meet the needs of commercial members over the long term or support our long-term strategic plans. The exit from this line of business will be phased over the 18 to 24 months following our February 2023 announcement.
Sale of Hospice and Personal Care Divisions
On August 11, 2022, we completed the sale of a 60% interest in Gentiva Hospice to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from Gentiva 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.
COVID-19
The emergence and spread of the novel coronavirus, or COVID-19, beginning in the first quarter of 2020 has impacted our business. Initially 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.
The COVID-19 National Emergency declared in 2020 was terminated on April 10, 2023 and the Public Health Emergency expired on May 11, 2023.
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 beginning 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. For the three and nine months ended September 30, 2022, these charges primarily relate to $4 million and $144 million, respectively, in asset impairments, including software and abandonment, and $44 million and $65 million, respectively, of severance charges in connection with workforce optimization. The remainder of the charges primarily relate to external consulting fees. During the three months ended September 30, 2023, we recorded charges of $52 million primarily in asset impairments relating to software and abandonment. In connection with these initiatives, we expect to incur additional charges through the end of 2024. These charges are recorded at the corporate level and not allocated to the segments.
Business Segments
During December 2022, we realigned our businesses into two distinct segments: Insurance and CenterWell. The Insurance segment includes the businesses that were previously included in the Retail and Group and Specialty segments, as well as the Pharmacy Benefit Manager, or PBM, business which was previously included in the Healthcare Services segment. The CenterWell segment (formerly Healthcare Services) represents our payor-agnostic healthcare services offerings, including pharmacy dispensing services, primary care, and home services. In addition to the new segment classifications being utilized to assess performance and allocate resources, we believe this simpler structure will create greater collaboration across the Insurance and CenterWell businesses and will accelerate work that is underway to centralize and integrate operations within the organization. Prior period segment financial information has been recast to conform to the 2023 presentation. For a recast of prior period segment financial information, refer to Note 14 to the unaudited Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Form 10-Q.
Our two reportable segments, Insurance and CenterWell, 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 Insurance segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts, as well as our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible demonstration, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. This segment also includes products consisting 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. In addition, our Insurance segment includes our Military business, primarily our T-2017 East Region contract, as well as the operations of our PBM business.
The CenterWell segment includes our pharmacy, primary care, and home solutions operations. The segment also includes our strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers, as well as our minority ownership interest in hospice operations. 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 income (loss) from operations. Transactions between reportable segments primarily consist of sales of products and services rendered by our CenterWell segment, primarily pharmacy, primary care, and home services, to our Insurance 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. At the same time, during periods of increased incidences of COVID-19, COVID-19 treatment and testing costs increased. Similar impacts and seasonal disruptions from either higher or lower utilization are expected to persist as we recover from the COVID-19 global health crisis.
One of the product offerings of our Insurance segment is Medicare stand-alone prescription drug plans, or PDP, under the Medicare Part D program. Our quarterly Insurance 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.
The Insurance segment also experiences seasonality in the commercial fully-insured product offering. The effect on the Insurance segment benefit ratio is opposite of the Medicare stand-alone PDP impact, with the benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses. The Employer Group Commercial Fully-Insured business increased the Insurance segment benefit ratio by 20 basis points and increased the Insurance segment benefit ratio by 30 basis points for the three months ended September 30, 2023 and 2022, respectively. The Employer Group Commercial Fully-Insured business did not impact the Insurance segment benefit ratio for the nine months ended September 30, 2023 and increased the Insurance segment benefit ratio by 10 basis points for the nine months ended 2022.
The Insurance 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. The Insurance segment may experience adverse impacts in the operating cost ratio as a result of our Employer Group Commercial Medical Products exit phased over the 18-24 months following our February 2023 announcement. The Employer Group Commercial Fully-Insured business increased the Insurance segment operating cost ratio by 40 basis points and increased the Insurance segment operating cost ratio by 50 basis points for the three months ended September 30, 2023 and 2022, respectively. The Employer Group Commercial Fully-Insured business increased the Insurance segment operating
cost ratio by 40 basis points and increased the Insurance segment operating cost ratio by 50 basis points for the nine months ended September 30, 2023 and 2022, respectively.
2023 Highlights
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Our strategy offers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At September 30, 2023, approximately 3,727,500 members, or 69%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 3,145,200 members, or 69%, at September 30, 2022.
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Net income attributable to Humana was $0.8 billion, or $6.71 per diluted common share, and $1.2 billion, or $9.39 per diluted common share, for the three months ended September 30, 2023 and 2022, respectively. Net income attributable to Humana was $3.0 billion, or $24.26 per diluted common share, and $2.8 billion, or $22.16 per diluted common share, for the nine months ended September 30, 2023 and 2022, respectively. These comparisons were significantly impacted by put/call valuation adjustments associated with non-consolidating minority interest investments, transaction and integration costs, charges associated with value creation initiatives, the change in the fair value of publicly-traded equity securities, the gain on sale of Gentiva Hospice and accrual related to certain anticipated litigation expenses. 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 2023 and 2022 quarter and period:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Consolidated income before income taxes and equity in net earnings: | |||||||||||||||||||||||
| Gain on sale of Gentiva Hospice | $ | — | $ | (240) | $ | — | $ | (240) | |||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | 35 | 13 | 141 | (16) | |||||||||||||||||||
| Transaction and integration costs | — | 17 | (47) | 70 | |||||||||||||||||||
| Change in the fair value of publicly-traded equity securities | — | (51) | (1) | 119 | |||||||||||||||||||
| Value creation initiatives | 52 | 82 | 52 | 285 | |||||||||||||||||||
| Accrual related to certain anticipated litigation expenses | 15 | — | 105 | — | |||||||||||||||||||
| Total | $ | 102 | $ | (179) | $ | 250 | $ | 218 | |||||||||||||||
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Gain on sale of Gentiva Hospice | $ | — | $ | (1.89) | $ | — | $ | (1.89) | |||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | 0.28 | 0.10 | 1.13 | (0.13) | |||||||||||||||||||
| Transaction and integration costs | — | 0.13 | (0.38) | 0.55 | |||||||||||||||||||
| Change in the fair value of publicly-traded equity securities | — | (0.40) | (0.01) | 0.94 | |||||||||||||||||||
| Value creation initiatives | 0.42 | 0.65 | 0.42 | 2.24 | |||||||||||||||||||
| Accrual related to certain anticipated litigation expenses | 0.12 | — | 0.84 | — | |||||||||||||||||||
| Net tax impact of transactions | (0.18) | (1.25) | $ | (0.57) | $ | (0.66) | |||||||||||||||||
| Total | $ | 0.64 | $ | (2.66) | $ | 1.43 | $ | 1.05 |
Health Care Reform
We are and will continue to be regularly subject to new laws and regulations, changes to existing laws and regulations, and judicial determinations that impact the interpretation and applicability of those laws and regulations. The Health Care Reform Law, the Families First Act, the CARES Act, and the Inflation Reduction Act, and related regulations, are examples of laws which have enacted significant reforms to various aspects of the U.S. health insurance industry, including, 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, and changes to the Part D prescription drug benefit design.
It is reasonably possible that these laws and regulations, as well as other current or future legislative, judicial or regulatory changes 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 products and services rendered by our CenterWell segment, primarily pharmacy, primary care, and home services, to our Insurance segment customers and are described in Note 14 to the condensed consolidated financial statements included in this report.
Comparison of Results of Operations for 2023 and 2022
The following discussion primarily details our results of operations for the three months ended September 30, 2023, or the 2023 quarter, the three months ended September 30, 2022, or the 2022 quarter, the nine months ended September 30, 2023, or the 2023 period, and the nine months ended September 30, 2022, or the 2022 period.
Consolidated
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine Months Ended September 30, | Three months ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except per common share results) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums | $ | 25,099 | $ | 21,468 | $ | 76,144 | $ | 66,437 | $ | 3,631 | 16.9 | % | $ | 9,707 | 14.6 | % | |||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Insurance | 257 | 210 | 730 | 620 | 47 | 22.4 | % | 110 | 17.7 | % | |||||||||||||||||||||||||||||||||||||
| CenterWell | 759 | 949 | 2,263 | 3,152 | (190) | (20.0) | % | (889) | (28.2) | % | |||||||||||||||||||||||||||||||||||||
| Total services revenue | 1,016 | 1,159 | 2,993 | 3,772 | (143) | (12.3) | % | (779) | (20.7) | % | |||||||||||||||||||||||||||||||||||||
| Investment income | 308 | 172 | 775 | 222 | 136 | 79.1 | % | 553 | 249.1 | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | 26,423 | 22,799 | 79,912 | 70,431 | 3,624 | 15.9 | % | 9,481 | 13.5 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefits | 21,745 | 18,384 | 65,612 | 57,108 | 3,361 | 18.3 | % | 8,504 | 14.9 | % | |||||||||||||||||||||||||||||||||||||
| Operating costs | 3,271 | 3,061 | 9,361 | 9,120 | 210 | 6.9 | % | 241 | 2.6 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 201 | 182 | 578 | 527 | 19 | 10.4 | % | 51 | 9.7 | % | |||||||||||||||||||||||||||||||||||||
| Total operating expenses | 25,217 | 21,627 | 75,551 | 66,755 | 3,590 | 16.6 | % | 8,796 | 13.2 | % | |||||||||||||||||||||||||||||||||||||
| Income from operations | 1,206 | 1,172 | 4,361 | 3,676 | 34 | 2.9 | % | 685 | 18.6 | % | |||||||||||||||||||||||||||||||||||||
| Gain on sale of Gentiva Hospice | — | (240) | — | (240) | (240) | (100.0) | % | (240) | (100.0) | % | |||||||||||||||||||||||||||||||||||||
| Interest expense | 114 | 102 | 347 | 293 | 12 | 11.8 | % | 54 | 18.4 | % | |||||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (6) | 13 | 40 | (16) | 19 | 146.2 | % | 56 | 350.0 | % | |||||||||||||||||||||||||||||||||||||
| Income before income taxes and equity in net earnings | 1,098 | 1,297 | 3,974 | 3,639 | (199) | (15.3) | % | 335 | 9.2 | % | |||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 256 | 107 | 911 | 820 | 149 | 139.3 | % | 91 | 11.1 | % | |||||||||||||||||||||||||||||||||||||
| Equity in net (losses) earnings | (12) | 3 | (39) | 1 | 15 | 500.0 | % | 40 | nm | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 830 | $ | 1,193 | $ | 3,024 | $ | 2,820 | $ | (363) | (30.4) | % | $ | 204 | 7.2 | % | |||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 6.71 | $ | 9.39 | $ | 24.26 | $ | 22.16 | $ | (2.68) | (28.5) | % | $ | 2.10 | 9.5 | % | |||||||||||||||||||||||||||||||
| Benefit ratio (a) | 86.6 | % | 85.6 | % | 86.2 | % | 86.0 | % | 1.0 | % | 0.2 | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio (b) | 12.5 | % | 13.5 | % | 11.8 | % | 13.0 | % | (1.0) | % | (1.2) | % | |||||||||||||||||||||||||||||||||||
| Effective tax rate | 23.5 | % | 8.2 | % | 23.1 | % | 22.5 | % | 15.3 | % | 0.6 | % |
(a)Represents benefits expense as a percentage of premiums revenue.
(b)Represents operating costs as a percentage of total revenues less investment income.
nm - not meaningful
Premiums Revenue
Consolidated premiums revenue increased $3.6 billion, or 16.9%, from $21.5 billion in the 2022 quarter to $25.1 billion in the 2023 quarter and increased $9.7 billion, or 14.6%, from $66.4 billion in the 2022 period to $76.1 billion in the 2023 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums. These factors were partially offset by the year-over-year decline in membership associated with group commercial medical, group Medicare Advantage and stand-alone PDP products. In addition, the period was negatively impacted by the phase-out of COVID-19 sequestration relief in 2022.
Services Revenue
Consolidated services revenue decreased $0.1 billion, or 12.3%, from $1.2 billion in the 2022 quarter to $1.0 billion in the 2023 quarter and decreased $0.8 billion, or 20.7%, from $3.8 billion in the 2022 period to $3.0 billion in the 2023 period primarily due to the divestiture of the 60% ownership of Gentiva Hospice in August 2022.
Investment Income
Investment income increased $136 million, or 79.1%, from $172 million in the 2022 quarter to $308 million in the 2023 quarter primarily due to an increase in interest income on our debt securities partially offset by the net favorable mark to market impact of our publicly traded equity securities investments during the 2022 quarter. Investment income increased $553 million, or 249.1%, from $222 million in the 2022 period to $775 million in the 2023 period primarily due to an increase in interest income on our debt securities as well as the net unfavorable mark to market impact of our publicly traded equity securities during the 2022 period.
Benefit Expense
Consolidated benefits expense increased $3.4 billion, or 18.3%, from $18.4 billion in the 2022 quarter to $21.7 billion in the 2023 quarter and increased $8.5 billion, or 14.9%, from $57.1 billion in the 2022 period to $65.6 billion in the 2023 period. The consolidated benefit ratio increased 100 basis points from 85.6% for the 2022 quarter to 86.6% for the 2023 quarter and increased 20 basis points from 86.0% for the 2022 period to 86.2% for the 2023 period primarily due to investments in the benefit design of our Medicare Advantage products for 2023, the continuation of elevated Medicare Advantage utilization trends initially discussed in the second quarter of 2023, combined with higher COVID-19 admissions in the 2023 quarter, without the offsetting impact of lower non-COVID care, as well as the impact of continued individual Medicare Advantage growth following the previous Annual Election Period, or AEP, including a high proportion of age-ins, which typically have a higher benefits expense ratio initially than the average new member. These increases were partially offset by increased individual Medicare Advantage premiums and decreased average unit costs given the additional 20% payment on COVID-19 admissions during the Public Health Emergency, which expired on May 11, 2023. In addition, the period was favorably impacted by higher favorable prior-period medical claims reserve development. Further, the 2023 quarter and period ratios continue to reflect a shift in line of business mix, with growth in individual Medicare Advantage and state-based contracts and other membership, which can carry a higher benefits expense ratio.
Consolidated benefits expense included $4 million of favorable prior-period medical claims reserve development in the 2023 quarter and $7 million of favorable prior-period medical claims development in the 2022 quarter. Consolidated benefits expense included $758 million of favorable prior-period medical claims reserve development in the 2023 period and $404 million of favorable prior-period medical claims reserve development in the 2022 period. Prior-period medical claims reserve development did not impact the Insurance segment benefit ratio in the 2023 quarter or the 2022 quarter. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 100 basis points in the 2023 period and decreased the consolidated benefit ratio by approximately 60 basis points in the 2022 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 $0.2 billion, or 6.9%, from $3.1 billion in the 2022 quarter to $3.3 billion in the 2023 quarter and increased $0.2 billion, or 2.6%, from $9.1 billion in the 2022 period to $9.4 billion in the 2023 period. The consolidated operating cost ratio decreased 100 basis points from 13.5% for the 2022 quarter to 12.5% for the 2023 quarter and decreased 120 basis points from 13.0% for the 2022 period to 11.8% for the 2023 period primarily due to the divestiture of the 60% ownership of Gentiva Hospice in August 2022, which carried a significantly higher operating cost ratio compared to the historical consolidated operating cost ratio, scale efficiencies associated with growth in individual Medicare Advantage membership, as well as administrative cost efficiencies that resulted as part of the our value creation initiatives, combined with a lesser impact from accelerated charges related to value-creation initiatives in 2023 compared to 2022. These factors were partially offset by an increase in commissions for brokers related to the individual Medicare Advantage membership growth in 2023 and an accrual related to certain anticipated litigation expenses in the 2023 quarter and period. In addition, the 2023 period was negatively impacted by the phase-out of COVID-19 sequestration relief in 2022.
Depreciation and Amortization
Depreciation and amortization increased $19 million, or 10.4%, from $182 million in the 2022 quarter to $201 million in the 2023 quarter and increased $51 million, or 9.7%, from $527 million in the 2022 period to $578 million in the 2023 period primarily due to capital expenditures.
Interest Expense
Interest expense increased $12 million, or 11.8%, from $102 million in the 2022 quarter to $114 million in the 2023 quarter and increased $54 million, or 18.4%, from $293 million in the 2022 period to $347 million in the 2023 period due to higher rates on higher average debt balances.
Income Taxes
The effective income tax rate was 23.5% and 8.2% for the three months ended September 30, 2023, and 2022, respectively, and 23.1% and 22.5% for the nine months ended September 30, 2023 and 2022, respectively. The year-over-year increase in the effective income tax rate is primarily due to the August 2022 disposition of our 60% interest in Gentiva 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.
Insurance Segment
| September 30, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Members | % | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Individual Medicare Advantage | 5,374,400 | 4,564,200 | 810,200 | 17.8 | % | ||||||||||||||||||
| Group Medicare Advantage | 510,300 | 564,600 | (54,300) | (9.6) | % | ||||||||||||||||||
| Medicare stand-alone PDP | 2,885,800 | 3,569,100 | (683,300) | (19.1) | % | ||||||||||||||||||
| Total Medicare | 8,770,500 | 8,697,900 | 72,600 | 0.8 | % | ||||||||||||||||||
| Medicare Supplement | 299,400 | 316,500 | (17,100) | (5.4) | % | ||||||||||||||||||
| Commercial fully-insured | 409,300 | 574,500 | (165,200) | (28.8) | % | ||||||||||||||||||
| State-based contracts and other | 1,264,600 | 1,098,900 | 165,700 | 15.1 | % | ||||||||||||||||||
| Military | 5,935,400 | 5,977,900 | (42,500) | (0.7) | % | ||||||||||||||||||
| Commercial ASO | 284,300 | 438,600 | (154,300) | (35.2) | % | ||||||||||||||||||
| Total Medical Membership | 16,963,500 | 17,104,300 | (140,800) | (0.8) | % | ||||||||||||||||||
| Total Specialty Membership (a) | 4,964,300 | 5,210,100 | (245,800) | (4.7) | % |
(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, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individual Medicare Advantage | $ | 19,637 | $ | 16,007 | $ | 59,195 | $ | 49,751 | $ | 3,630 | 22.7 | % | $ | 9,444 | 19.0 | % | |||||||||||||||||||||||||||||||
| Group Medicare Advantage | 1,695 | 1,792 | 5,192 | 5,524 | (97) | (5.4) | % | (332) | (6.0) | % | |||||||||||||||||||||||||||||||||||||
| Medicare stand-alone PDP | 493 | 534 | 1,677 | 1,779 | (41) | (7.7) | % | (102) | (5.7) | % | |||||||||||||||||||||||||||||||||||||
| Total Medicare | 21,825 | 18,333 | 66,064 | 57,054 | 3,492 | 19.0 | % | 9,010 | 15.8 | % | |||||||||||||||||||||||||||||||||||||
| Commercial fully-insured | 842 | 1,075 | 2,810 | 3,324 | (233) | (21.7) | % | (514) | (15.5) | % | |||||||||||||||||||||||||||||||||||||
| Specialty benefits | 252 | 262 | 758 | 784 | (10) | (3.8) | % | (26) | (3.3) | % | |||||||||||||||||||||||||||||||||||||
| Medicare Supplement | 185 | 188 | 546 | 555 | (3) | (1.6) | % | (9) | (1.6) | % | |||||||||||||||||||||||||||||||||||||
| State-based contracts and other | 1,995 | 1,610 | 5,966 | 4,720 | 385 | 23.9 | % | 1,246 | 26.4 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums revenue | 25,099 | 21,468 | 76,144 | 66,437 | 3,631 | 16.9 | % | 9,707 | 14.6 | % | |||||||||||||||||||||||||||||||||||||
| Commercial ASO | 55 | 73 | 190 | 225 | (18) | (24.7) | % | (35) | (15.6) | % | |||||||||||||||||||||||||||||||||||||
| Military and other | 202 | 137 | 540 | 395 | 65 | 47.4 | % | 145 | 36.7 | % | |||||||||||||||||||||||||||||||||||||
| Services revenue | 257 | 210 | 730 | 620 | 47 | 22.4 | % | 110 | 17.7 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums and services revenue | $ | 25,356 | $ | 21,678 | $ | 76,874 | $ | 67,057 | $ | 3,678 | 17.0 | % | $ | 9,817 | 14.6 | % | |||||||||||||||||||||||||||||||
| Income from operations | $ | 722 | $ | 873 | $ | 3,080 | $ | 2,976 | $ | (151) | (17.3) | % | $ | 104 | 3.5 | % | |||||||||||||||||||||||||||||||
| Benefit ratio | 87.6 | % | 85.8 | % | 86.8 | % | 86.3 | % | 1.8 | % | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio | 10.4 | % | 10.6 | % | 9.9 | % | 9.7 | % | (0.2) | % | 0.2 | % |
Income from operations
Insurance segment income from operations decreased $0.2 billion, or 17.3%, from $0.9 billion in the 2022 quarter to $0.7 billion in the 2023 quarter primarily due to the same factors impacting the segment's higher benefit ratio offset by the segment's lower operating cost ratio as more fully described below. Insurance segment income from operations increased $0.1 billion, or 3.5%, from $3.0 billion in the 2022 period to $3.1 billion in the 2023 period primarily due to growth in individual Medicare Advantage membership in 2023.
Enrollment
Individual Medicare Advantage membership increased 810,200 members, or 17.8%, from September 30, 2022 to September 30, 2023 primarily due to membership additions associated with the previous AEP and continued growth in 2023. 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 868,000 D-SNP members as of September 30, 2023, a net increase of 201,000 members, or 30.1%, from 667,000 members as of September 30, 2022.
Group Medicare Advantage membership decreased 54,300 members, or 9.6%, from September 30, 2022 to September 30, 2023 reflecting the net loss of certain large accounts partially offset by continued growth in small group accounts.
Medicare stand-alone PDP membership decreased 683,300 members, or 19.1%, from September 30, 2022 to September 30, 2023 primarily due to continued intensified competition for Medicare stand-alone PDP offerings.
State-based contracts and other membership increased 165,700 members, or 15.1%, from September 30, 2022 to September 30, 2023 reflecting the impact of membership additions associated with the implementation of the Louisiana and Ohio contracts effective January 2023 and February 2023, respectively, partially offset by ending the suspension of state eligibility redetermination efforts previously enacted as part of the Public Health Emergency.
Commercial fully-insured medical membership decreased 165,200 members, or 28.8%, from September 30, 2022 to September 30, 2023 and commercial ASO medical membership decreased 154,300 members, or 35.2%, from September 30, 2022 to September 30, 2023. These decreases reflect our planned exit of the Employer Group Commercial Medical Products business, which includes all fully insured, self-funded and Federal Employee Health Benefit medical plans, as well as associated wellness and rewards programs. The exit from this line of business will be phased over the 18 to 24 months following our February 2023 announcement.
Military membership decreased 42,500 members, or 0.7%, from September 30, 2022 to September 30, 2023. 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 245,800 members, or 4.7%, from September 30, 2022 to September 30, 2023 reflecting the decline in membership associated with our Optional Supplemental Benefit products as a result of enhanced mandatory dental and vision supplemental benefits on Medicare Advantage plans. In addition, the decline reflects loss of dental and vision individuals due to terminations as well as loss of dental and vision groups cross-sold with commercial medical products.
Premiums Revenue
Insurance segment premiums revenue increased $3.6 billion, or 16.9%, from $21.5 billion in the 2022 quarter to $25.1 billion in the 2023 quarter and increased $9.7 billion, or 14.6%, from $66.4 billion in the 2022 period to $76.1 billion in the 2023 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums. These factors were partially offset by the year-over-year decline in membership associated with group commercial medical, group Medicare Advantage and stand-alone PDP products. In addition, the period was negatively impacted by the phase-out of COVID-19 sequestration relief in 2022.
Services Revenue
Insurance segment services revenue increased $47 million, or 22.4%, from $210 million in the 2022 quarter to $257 million in the 2023 quarter and increased $110 million, or 17.7%, from $620 million in the 2022 period to $730 million in the 2023 period.
Benefits Expense
The Insurance segment benefit ratio increased 180 basis points from 85.8% for the 2022 quarter to 87.6% for the 2023 quarter and increased 50 basis points from 86.3% for the 2022 period to 86.8% for the 2023 period primarily due to investments in the benefit design of our Medicare Advantage products for 2023, the continuation of elevated Medicare Advantage utilization trends initially discussed in the second quarter of 2023, combined with higher COVID-19 admissions in the 2023 quarter, without the offsetting impact of lower non-COVID care, as well as the impact of continued individual Medicare Advantage growth following the previous Annual Election Period, or AEP, including a high proportion of age-ins, which typically have a higher benefits expense ratio initially than the average new member. These increases were partially offset by increased individual Medicare Advantage premiums and decreased average unit costs given the additional 20% payment on COVID-19 admissions during the Public Health Emergency, which expired on May 11, 2023. In addition, the period was favorably impacted by higher favorable prior-period medical claims reserve development. Further, the 2023 quarter and period ratios continue to reflect a shift in line of business mix, with growth in individual Medicare Advantage and state-based contracts and other membership, which can carry a higher benefits expense ratio.
The Insurance segment benefits expense included $4 million of favorable prior-period medical claims reserve development in the 2023 quarter and $7 million of favorable prior-period medical claims reserve development in the 2022 quarter. The Insurance segment benefit expense included $758 million of favorable prior-period medical claims reserve development in the 2023 period and $404 million of favorable prior-period medical claims reserve development in the 2022 period. Prior-period medical claims reserve development did not impact the Insurance segment benefit ratio in the 2023 quarter or the 2022 quarter. Prior-period medical claims reserve development decreased the Insurance segment benefit ratio by approximately 100 basis points in the 2023 period and decreased the Insurance segment benefit ratio by approximately 60 basis points in the 2022 period.
Operating Costs
The Insurance segment operating cost ratio decreased 20 basis points from 10.6% for the 2022 quarter to 10.4% for the 2023 quarter primarily due to scale efficiencies associated with growth in the individual Medicare Advantage membership and administrative cost efficiencies as a result of our value creation initiatives. These factors were partially offset by an increase in commissions for brokers related to the individual Medicare Advantage membership growth in 2023 and an accrual related to certain anticipated litigation expenses in the 2023 quarter. The Insurance segment operating cost ratio increased 20 basis points from 9.7% for the 2022 period to 9.9% for the 2023 period primarily due to the net unfavorable impact of the 2023 quarter operating cost ratio factors. In addition, the period was negatively impacted by the phase-out of COVID-19 sequestration relief in 2022.
CenterWell Segment
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine Months Ended September 30, | Three months ended September 30, 2023 vs 2022 | Nine Months Ended September 30, 2023 vs 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | $ | 342 | $ | 519 | $ | 997 | $ | 1,997 | $ | (177) | (34.1) | % | $ | (1,000) | (50.1) | % | |||||||||||||||||||||||||||||||
| Pharmacy solutions | 203 | 271 | 661 | 746 | (68) | (25.1) | % | (85) | (11.4) | % | |||||||||||||||||||||||||||||||||||||
| Primary care | 214 | 159 | 605 | 409 | 55 | 34.6 | % | 196 | 47.9 | % | |||||||||||||||||||||||||||||||||||||
| Total services revenue | 759 | 949 | 2,263 | 3,152 | (190) | (20.0) | % | (889) | (28.2) | % | |||||||||||||||||||||||||||||||||||||
| Intersegment revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | 453 | 126 | 1,088 | 352 | 327 | 259.5 | % | 736 | 209.1 | % | |||||||||||||||||||||||||||||||||||||
| Pharmacy solutions | 2,594 | 2,459 | 7,848 | 7,394 | 135 | 5.5 | % | 454 | 6.1 | % | |||||||||||||||||||||||||||||||||||||
| Primary care | 854 | 737 | 2,496 | 2,262 | 117 | 15.9 | % | 234 | 10.3 | % | |||||||||||||||||||||||||||||||||||||
| Total intersegment revenues | 3,901 | 3,322 | 11,432 | 10,008 | 579 | 17.4 | % | 1,424 | 14.2 | % | |||||||||||||||||||||||||||||||||||||
| Total services and intersegment revenues | $ | 4,660 | $ | 4,271 | $ | 13,695 | $ | 13,160 | $ | 389 | 9.1 | % | $ | 535 | 4.1 | % | |||||||||||||||||||||||||||||||
| Income from operations | $ | 400 | $ | 300 | $ | 1,017 | $ | 1,028 | $ | 100 | 33.3 | % | $ | (11) | (1.1) | % | |||||||||||||||||||||||||||||||
| Operating cost ratio | 90.3 | % | 92.0 | % | 91.5 | % | 91.2 | % | (1.7) | % | 0.3 | % |
Income from operations
CenterWell income from operations increased $0.1 billion, or 33.3%, from $0.3 billion in the 2022 quarter to $0.4 billion in the 2023 quarter and decreased $0.01 billion, or 1.1%, from $1.03 billion in the 2022 period to $1.02 billion in the 2023 period primarily due to the same factors impacting the segment's operating cost ratio as more fully described below.
Services Revenue
CenterWell services revenue decreased $0.2 billion, or 20.0%, from $0.9 billion in the 2022 quarter to $0.8 billion in the 2023 quarter and decreased $0.9 billion, or 28.2%, from $3.2 billion in the 2022 period to $2.3 billion in the 2023 period primarily due to the divestiture of the 60% ownership of Gentiva Hospice in August 2022.
Intersegment Revenues
CenterWell intersegment revenues increased $0.6 billion, or 17.4%, from $3.3 billion in the 2022 quarter to $3.9 billion in the 2023 quarter and increased $1.4 billion, or 14.2%, from $10.0 billion in the 2022 period to $11.4 billion in the 2023 period primarily due to individual Medicare Advantage membership growth, which led to higher pharmacy revenues, higher revenues associated with growth in the primary care business, and greater revenues associated with the home solutions business as a result of the expansion of the value-based care home model in 2023 compared to 2022.
Operating Costs
The CenterWell segment operating cost ratio decreased 170 basis points from 92.0% for the 2022 quarter to 90.3% for the 2023 quarter primarily due to an improving ratio in the primary care business driven by year-over-year medical costs favorability and administrative cost efficiencies related to the pharmacy solutions business. These factors were partially offset by the divestiture of the 60% ownership of Gentiva Hospice in August 2022, which carried a lower operating cost ratio compared to other businesses within the segment, the expansion of the value-based care model within the home solutions business, which carries a higher operating cost ratio compared to the core fee-for-service business, along with growth in Medicare Advantage episodes in the core fee-for-service business, as well as continued investments within the home solutions business to abate the pressures of the current nursing labor environment. The CenterWell segment operating cost ratio increased 30 basis points from 91.2% for the 2022 period to 91.5% for the 2023 period primarily due the unfavorable impact of the 2023 quarter operating cost ratio factors.
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 CenterWell 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 2022 Form 10-K and Part II, Item 1A, "Risk Factors" of this Form 10-Q.
Cash and cash equivalents increased to approximately $15.1 billion at September 30, 2023 from $5.1 billion at December 31, 2022. The change in cash and cash equivalents for the nine months ended September 30, 2023 and 2022 is summarized as follows:
| Nine Months Ended | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Net cash provided by operating activities | $ | 11,115 | $ | 9,714 | |||||||
| Net cash (used in) provided by investing activities | (2,610) | 6 | |||||||||
| Net cash provided by financing activities | 1,582 | 444 | |||||||||
| Increase in cash and cash equivalents | $ | 10,087 | $ | 10,164 |
Cash Flow from Operating Activities
Cash flows provided by operations of $11.1 billion in the 2023 period increased $1.4 billion from cash flows provided by operations of $9.7 billion in the 2022 period. Our operating cash flows for the 2023 period and the 2022 period were significantly impacted by the early receipt of the Medicare premium remittance of $7.1 billion in September 2023 and $5.8 billion in September 2022, because the payment date for October 2023 and 2022, respectively, 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, 2023 and 2022. Our operating cash flows for the 2023 period also reflect higher earnings compared to the 2022 period.
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 2022 Form 10-K.
The detail of total net receivables at September 30, 2023 and December 31, 2022 and reconciliation to cash flow for the nine months ended September 30, 2023 and 2022 was as follows:
| September 30, 2023 | December 31, 2022 | 2023 Period Change | 2022 Period Change | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Medicare | $ | 1,293 | $ | 1,260 | $ | 33 | $ | 4 | |||||||||||||||
| Commercial and other | 479 | 383 | 96 | (225) | |||||||||||||||||||
| Military | 125 | 101 | 24 | 4 | |||||||||||||||||||
| Allowances | (73) | (70) | (3) | 12 | |||||||||||||||||||
| Total net receivables | $ | 1,824 | $ | 1,674 | $ | 150 | $ | (205) | |||||||||||||||
| Reconciliation to cash flow statement: | |||||||||||||||||||||||
| Receivables from acquisition | (24) | — | |||||||||||||||||||||
| Receivables disposed | — | 194 | |||||||||||||||||||||
| Change in receivables per cash flow statement | $ | 126 | $ | (11) |
The changes in Medicare receivables for both the 2023 period and the 2022 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.
Cash Flow from Investing Activities
During the 2023 period and 2022 period, we acquired various businesses for approximately $223 million and $293 million, net of cash and cash equivalents received, respectively.
During the 2022 period, we completed the sale of a 60% interest of Gentiva 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 primary care 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 $721 million in the 2023 period and $862 million in the 2022 period.
Net purchases of investment securities were $1.7 billion and $1.5 billion in the 2023 and 2022 periods, respectively.
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 $2.5 billion and $3.7 billion in the 2023 and 2022 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 $28 million in the 2023 period and reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by $60 million in the 2022 period.
In August 2023, we entered into a Rule 10b5-1 Repurchase Plan to repurchase a portion of our $750 million aggregate principal amount of 1.350% senior notes maturing in February 2027, our $600 million aggregate principal amount of 3.950% senior notes maturing in March 2027, our $750 million aggregate principal amount of 3.700% senior notes maturing in March 2029, and our $500 million aggregate principal amount of 3.125% senior notes maturing in August 2029 during the period beginning on August 7, 2023 and ending on November 15, 2023. For the three months ended September 30, 2023, we repurchased $213 million principal amount of these senior notes for approximately $196 million cash.
In March 2023, we entered into a Rule 10b5-1 Repurchase Plan to repurchase a portion of our $1.5 billion aggregate principal amount of 0.650% senior notes maturing in August 2023 and our $600 million aggregate principal amount of 3.850% senior notes maturing in October 2024 during the period beginning on March 13, 2023 and ending on July 21, 2023. For the nine months ended September 30, 2023, we repurchased $361 million principal amount of these senior notes for approximately $358 million cash. In August 2023, we repaid the remaining $1.2 billion aggregate principal amount of our 0.650% senior notes due on their maturity date of August 3, 2023.
In March 2023, we issued $500 million of 5.700% unsecured senior notes due March 13, 2026 and $750 million of 5.500% unsecured senior notes due March 15, 2053. Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $1.2 billion. We used the net proceeds to repay outstanding amounts under our $500 million Delayed Draw Term Loan. The remaining net proceeds will be used for general corporate purposes, which include the repayment of existing indebtedness, including borrowings under our commercial paper program.
In August 2022, we repaid the $2.0 billion October 2021 Term Loan Agreement without a prepayment penalty due.
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.
Net proceeds from the issuance of commercial paper were $1.6 billion in the 2023 period and net repayments from the issuance of commercial paper were $660 million in the 2022 period. The maximum principal amount outstanding at any one time during the 2023 period was $2.3 billion.
We repurchased common shares for $980 million and $1.0 billion in the 2023 period and 2022 period, respectively, under share repurchase plans authorized by the Board of Directors. We also acquired common shares in connection with employee stock plans for $31 million and $32 million in the 2023 period and 2022 period, respectively.
We paid dividends to stockholders of $320 million during the 2023 period and $291 million during the 2022 period.
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 in Gentiva Hospice to CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from Gentiva 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.
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, 2023 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa2 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 $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 $518 million at September 30, 2023 compared to $934 million at December 31, 2022. This decrease primarily reflects common stock repurchases, repayment of the Delayed Draw Term Loan and senior notes, capital expenditures, repayment of borrowings under the commercial paper program, capital contributions to certain subsidiaries, cash dividends to shareholders and acquisitions partially offset by net proceeds from the issuance of senior notes and commercial paper, the sale of investment securities, dividends from insurance subsidiaries and cash from certain non-insurance subsidiaries within our CenterWell segment. Our use of operating cash derived from our non-insurance subsidiaries, such as our CenterWell 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, 2023, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $12.1 billion, which exceeded aggregate minimum regulatory requirements of $9.1 billion. The amount of ordinary dividends paid to our parent company was approximately $661 million during the nine months ended September 30, 2023. 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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