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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 2023 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 15, 2024, 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.
Value Creation Initiative****s
Beginning in 2022, in order to create capacity to fund growth and investment in our Medicare Advantage business and further expansion of our healthcare services capabilities, 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, we recorded charges, primarily in asset impairments, of $68 million and $97 million for the three and six months ended June 30, 2024, respectively, within operating costs in the condensed consolidated statements of income. These charges were recorded at the corporate level and not allocated to the segments. We expect to incur additional charges through the end of 2024. We did not record any charges for the three and six months ended June 30, 2023.
Business Segments
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 services 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 solutions, to our Insurance segment customers. Intersegment sales and expenses are recorded primarily 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
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 10 basis points and increased the Insurance segment benefit ratio by 20 basis points for the three months ended June 30, 2024 and 2023, respectively. The Employer Group Commercial Fully-Insured business did not impact the Insurance segment benefit ratio for the six months ended June 30, 2024 and decreased the Insurance segment benefit ratio by 10 basis points for the six months ended 2023.
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 did not impact the Insurance segment operating cost ratio for the three months ended June 30, 2024 and increased the Insurance segment operating cost ratio by 30 basis points for the three months ended 2023. The Employer Group Commercial Fully-Insured business increased the Insurance segment operating cost ratio by 10 basis points and increased the Insurance segment operating cost ratio by 30 basis points for the six months ended June 30, 2024 and 2023, respectively.
2024 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 June 30, 2024, approximately 3,923,200 members, or 70%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 3,618,500 members, or 69%, at June 30, 2023.
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Net income attributable to Humana was $679 million, or $5.62 per diluted common share, and $959 million, or $7.66 per diluted common share, for the three months ended June 30, 2024 and 2023, respectively. Net income attributable to Humana was $1.4 billion, or $11.74 per diluted common share, and $2.2 billion, or $17.54 per diluted common share for the six months ended June 30, 2024, and 2023, respectively. These comparisons were significantly impacted by put/call valuation adjustments associated with non-consolidating minority interest investments, transaction and integration costs, and charges associated with value creation initiatives. 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 2024 and 2023 quarter and period:
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Consolidated income before income taxes and equity in net earnings: | |||||||||||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | $ | 68 | $ | 53 | $ | 199 | $ | 107 | |||||||||||||||
| Transaction and integration costs | — | 4 | — | (48) | |||||||||||||||||||
| Value creation initiatives | 68 | — | 97 | — | |||||||||||||||||||
| Total | $ | 136 | $ | 57 | $ | 296 | $ | 59 | |||||||||||||||
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||||||||
| Put/call valuation adjustments associated with our non consolidating minority interest investments | $ | 0.57 | $ | 0.43 | $ | 1.65 | $ | 0.85 | |||||||||||||||
| Transaction and integration costs | — | 0.03 | — | (0.38) | |||||||||||||||||||
| Value creation initiatives | 0.56 | — | 0.80 | — | |||||||||||||||||||
| Net tax impact of transactions | (0.26) | (0.11) | (0.57) | (0.22) | |||||||||||||||||||
| Total | $ | 0.87 | $ | 0.35 | $ | 1.88 | $ | 0.25 |
Regulatory Environment
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 insurance products, 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, manage and sell our products, 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, increases in regulation of our prescription drug benefit businesses, or changes to the Part D prescription drug benefit design (and uncertainty arising from the implementation of these changes) 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.
In March 2024, the United States Securities and Exchange Commission issued its final regulation on climate-related disclosures. The regulation requires certain disclosures in registration statements and annual reports, including financial impact and climate-related impact metrics. On April 4, 2024, the SEC exercised its discretion to stay the Final Rules pending the completion of judicial review. The new regulation is effective for us beginning with the annual report for the year ended December 31, 2025. We are evaluating the final rule and its impact on our disclosures.
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 solutions, 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 2024 and 2023
The following discussion primarily deals with our results of operations for the three months ended June 30, 2024, or the 2024 quarter, the three months ended June 30, 2023, or the 2023 quarter, the six months ended June 30, 2024, or the 2024 period, and the six months ended June 30, 2023, or the 2023 period.
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, | Six Months Ended June 30, | Three months ended June 30, 2024 vs 2023 | Six Months Ended June 30, 2024 vs 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except per common share results) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums | $ | 28,142 | $ | 25,495 | $ | 56,403 | $ | 51,045 | $ | 2,647 | 10.4 | % | $ | 5,358 | 10.5 | % | |||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Insurance | 214 | 231 | 489 | 473 | (17) | (7.4) | % | 16 | 3.4 | % | |||||||||||||||||||||||||||||||||||||
| CenterWell | 886 | 747 | 1,673 | 1,504 | 139 | 18.6 | % | 169 | 11.2 | % | |||||||||||||||||||||||||||||||||||||
| Total services revenue | 1,100 | 978 | 2,162 | 1,977 | 122 | 12.5 | % | 185 | 9.4 | % | |||||||||||||||||||||||||||||||||||||
| Investment income | 298 | 274 | 586 | 467 | 24 | 8.8 | % | 119 | 25.5 | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | 29,540 | 26,747 | 59,151 | 53,489 | 2,793 | 10.4 | % | 5,662 | 10.6 | % | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Benefits | 25,039 | 22,009 | 50,163 | 43,867 | 3,030 | 13.8 | % | 6,296 | 14.4 | % | |||||||||||||||||||||||||||||||||||||
| Operating costs | 3,148 | 3,111 | 6,190 | 6,090 | 37 | 1.2 | % | 100 | 1.6 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 212 | 191 | 421 | 377 | 21 | 11.0 | % | 44 | 11.7 | % | |||||||||||||||||||||||||||||||||||||
| Total operating expenses | 28,399 | 25,311 | 56,774 | 50,334 | 3,088 | 12.2 | % | 6,440 | 12.8 | % | |||||||||||||||||||||||||||||||||||||
| Income from operations | 1,141 | 1,436 | 2,377 | 3,155 | (295) | (20.5) | % | (778) | (24.7) | % | |||||||||||||||||||||||||||||||||||||
| Interest expense | 168 | 120 | 327 | 233 | 48 | 40.0 | % | 94 | 40.3 | % | |||||||||||||||||||||||||||||||||||||
| Other expense, net | 55 | 54 | 118 | 46 | 1 | 1.9 | % | 72 | 156.5 | % | |||||||||||||||||||||||||||||||||||||
| Income before income taxes and equity in net earnings | 918 | 1,262 | 1,932 | 2,876 | (344) | (27.3) | % | (944) | (32.8) | % | |||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 223 | 296 | 474 | 655 | (73) | (24.7) | % | (181) | (27.6) | % | |||||||||||||||||||||||||||||||||||||
| Equity in net losses | (17) | (10) | (41) | (27) | 7 | 70.0 | % | 14 | 51.9 | % | |||||||||||||||||||||||||||||||||||||
| Net income | $ | 678 | $ | 956 | $ | 1,417 | $ | 2,194 | $ | (278) | (29.1) | % | $ | (777) | (35.4) | % | |||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 5.62 | $ | 7.66 | $ | 11.74 | $ | 17.54 | $ | (2.04) | (26.6) | % | $ | (5.80) | (33.1) | % | |||||||||||||||||||||||||||||||
| Benefit ratio (a) | 89.0 | % | 86.3 | % | 88.9 | % | 85.9 | % | 2.7 | % | 3.0 | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio (b) | 10.8 | % | 11.8 | % | 10.6 | % | 11.5 | % | (1.0) | % | (0.9) | % | |||||||||||||||||||||||||||||||||||
| Effective tax rate | 24.7 | % | 23.6 | % | 25.0 | % | 23.0 | % | 1.1 | % | 2.0 | % |
(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 $2.6 billion, or 10.4%, from $25.5 billion in the 2023 quarter to $28.1 billion in the 2024 quarter and increased $5.4 billion, or 10.5%, from $51.0 billion in the 2023 period to $56.4 billion in the 2024 period primarily due to higher per member Medicare premiums as well as individual and group
Medicare Advantage and state-based contracts membership growth. These factors were partially offset by the continued decline in our group commercial medical and stand-alone PDP membership.
Services Revenue
Consolidated services revenue increased $122 million, or 12.5%, from $978 million in the 2023 quarter to $1.1 billion in the 2024 quarter and increased $185 million, or 9.4%, from $2.0 billion in the 2023 period to $2.2 billion in the 2024 period.
Investment Income
Investment income increased $24 million, or 8.8%, from $274 million in the 2023 quarter to $298 million in the 2024 quarter and increased $119 million, or 25.5%, from $467 million in the 2023 period to $586 million in the 2024 period primarily due to increase in interest income on our debt securities.
Benefit Expense
Consolidated benefits expense increased $3.0 billion, or 13.8%, from $22.0 billion in the 2023 quarter to $25.0 billion in the 2024 quarter and increased $6.3 billion, or 14.4%, from $43.9 billion in the 2023 period to $50.2 billion in the 2024 period. The consolidated benefit ratio increased 270 basis points from 86.3% for the 2023 quarter to 89.0% for the 2024 quarter and increased 300 basis points from 85.9% for the 2023 period to 88.9% for the 2024 period primarily due to the continued impact of elevated Medicare Advantage medical cost trends in the 2024 quarter and period and a lesser favorable impact from prior-period medical claims reserve development in 2024. These factors were partially offset by the impact of the pricing and benefit design of our 2024 Medicare Advantage products, which included a reduction in benefits in response to the net impact of the 2024 final rate notice and the initial emergence of increased medical cost trends in 2023. Further, the year-over-year comparison continues to reflect a shift in line of business mix, with growth in Medicare Advantage and state-based contracts and other membership, which can carry a higher benefit ratio.
Consolidated benefits expense included $134 million of favorable prior-period medical claims reserve development in the 2024 quarter and $232 million of favorable prior-period medical claims development in the 2023 quarter. Consolidated benefits expense included $669 million of favorable prior-period medical claims reserve development in the 2024 period and $754 million of favorable prior-period medical claims reserve development in the 2023 period. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 50 basis points in the 2024 quarter and decreased the consolidated benefit ratio by approximately 90 basis points in the 2023 quarter. Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 120 basis points in the 2024 period and decreased the consolidated benefit ratio by approximately 150 basis points in the 2023 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 $37 million, or 1.2%, from $3.1 billion in the 2023 quarter to $3.1 billion in the 2024 quarter and increased $100 million, or 1.6%, from $6.1 billion in the 2023 period to $6.2 billion in the 2024 period. The consolidated operating cost ratio decreased 100 basis points from 11.8% for the 2023 quarter to 10.8% for the 2024 quarter and decreased 90 basis points from 11.5% for the 2023 period to 10.6% for the 2024 period primarily due to scale efficiencies associated with growth in our Medicare Advantage membership, administrative cost efficiencies resulting from our value creation initiatives, lower commission expense for brokers in the 2024 quarter and period compared to the 2023 quarter and period as a result of significant individual Medicare Advantage membership growth in 2023, and the impact of the accrued charge related to certain anticipated litigation expenses included in the 2023 quarter and period results. These factors were partially offset by the impact from charges related to value creation initiatives in the 2024 quarter and period.
Depreciation and Amortization
Depreciation and amortization increased $21 million, or 11.0%, from $191 million in the 2023 quarter to $212 million in the 2024 quarter and increased $44 million, or 11.7%, from $377 million in the 2023 period to $421 million in the 2024 period primarily due to capital expenditures.
Interest Expense
Interest expense increased $48 million, or 40.0%, from $120 million in the 2023 quarter to $168 million in the 2024 quarter and increased $94 million, or 40.3%, from $233 million in the 2023 period to $327 million in the 2024 period primarily due to increase in interest rates and higher average debt balances.
Income Taxes
The effective income tax rate was 24.7% and 23.6% for the three months ended June 30, 2024, and 2023, respectively, and 25.0% and 23.0% for the six months ended June 30, 2024 and 2023, respectively. The year-over-year increase in the effective income tax rate is primarily due to a change in the mix of current year earnings between our Insurance segment and our CenterWell health services segment, as the latter incurs a higher effective domestic tax rate than the former. In addition, the prior year income tax rate was favorably impacted by the recognition of a non-taxable gain.
Insurance Segment
| June 30, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Members | % | ||||||||||||||||||||
| Membership: | |||||||||||||||||||||||
| Individual Medicare Advantage | 5,617,600 | 5,269,100 | 348,500 | 6.6 | % | ||||||||||||||||||
| Group Medicare Advantage | 544,900 | 509,500 | 35,400 | 6.9 | % | ||||||||||||||||||
| Medicare stand-alone PDP | 2,341,200 | 2,915,300 | (574,100) | (19.7) | % | ||||||||||||||||||
| Total Medicare | 8,503,700 | 8,693,900 | (190,200) | (2.2) | % | ||||||||||||||||||
| Medicare Supplement | 339,200 | 294,300 | 44,900 | 15.3 | % | ||||||||||||||||||
| Commercial fully-insured | 62,200 | 475,500 | (413,300) | (86.9) | % | ||||||||||||||||||
| State-based contracts and other | 1,392,300 | 1,330,200 | 62,100 | 4.7 | % | ||||||||||||||||||
| Military services | 5,959,200 | 5,939,100 | 20,100 | 0.3 | % | ||||||||||||||||||
| Commercial ASO | 47,000 | 395,300 | (348,300) | (88.1) | % | ||||||||||||||||||
| Total Medical Membership | 16,303,600 | 17,128,300 | (824,700) | (4.8) | % | ||||||||||||||||||
| Total Specialty Membership (a) | 4,602,000 | 5,041,100 | (439,100) | (8.7) | % |
(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 June 30, | Six Months Ended June 30, | Three months ended June 30, 2024 vs 2023 | Six Months Ended June 30, 2024 vs 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums and Services Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||||||||||||||||||||
| Individual Medicare Advantage | $ | 22,215 | $ | 19,749 | $ | 44,663 | $ | 39,558 | $ | 2,466 | 12.5 | % | $ | 5,105 | 12.9 | % | |||||||||||||||||||||||||||||||
| Group Medicare Advantage | 1,938 | 1,732 | 3,927 | 3,497 | 206 | 11.9 | % | 430 | 12.3 | % | |||||||||||||||||||||||||||||||||||||
| Medicare stand-alone PDP | 867 | 568 | 1,688 | 1,184 | 299 | 52.6 | % | 504 | 42.6 | % | |||||||||||||||||||||||||||||||||||||
| Total Medicare | 25,020 | 22,049 | 50,278 | 44,239 | 2,971 | 13.5 | % | 6,039 | 13.7 | % | |||||||||||||||||||||||||||||||||||||
| Commercial fully-insured | 152 | 950 | 408 | 1,968 | (798) | (84.0) | % | (1,560) | (79.3) | % | |||||||||||||||||||||||||||||||||||||
| Specialty benefits | 240 | 252 | 479 | 506 | (12) | (4.8) | % | (27) | (5.3) | % | |||||||||||||||||||||||||||||||||||||
| Medicare Supplement | 206 | 182 | 403 | 361 | 24 | 13.2 | % | 42 | 11.6 | % | |||||||||||||||||||||||||||||||||||||
| State-based contracts and other | 2,524 | 2,062 | 4,835 | 3,971 | 462 | 22.4 | % | 864 | 21.8 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums revenue | 28,142 | 25,495 | 56,403 | 51,045 | 2,647 | 10.4 | % | 5,358 | 10.5 | % | |||||||||||||||||||||||||||||||||||||
| Commercial ASO | 8 | 64 | 32 | 135 | (56) | (87.5) | % | (103) | (76.3) | % | |||||||||||||||||||||||||||||||||||||
| Military services and other | 206 | 167 | 457 | 338 | 39 | 23.4 | % | 119 | 35.2 | % | |||||||||||||||||||||||||||||||||||||
| Services revenue | 214 | 231 | 489 | 473 | (17) | (7.4) | % | 16 | 3.4 | % | |||||||||||||||||||||||||||||||||||||
| Total premiums and services revenue | $ | 28,356 | $ | 25,726 | $ | 56,892 | $ | 51,518 | $ | 2,630 | 10.2 | % | $ | 5,374 | 10.4 | % | |||||||||||||||||||||||||||||||
| Income from operations | $ | 763 | $ | 1,031 | $ | 1,661 | $ | 2,358 | $ | (268) | (26.0) | % | $ | (697) | (29.6) | % | |||||||||||||||||||||||||||||||
| Benefit ratio | 89.5 | % | 86.8 | % | 89.4 | % | 86.4 | % | 2.7 | % | 3.0 | % | |||||||||||||||||||||||||||||||||||
| Operating cost ratio | 8.4 | % | 9.9 | % | 8.4 | % | 9.6 | % | (1.5) | % | (1.2) | % |
Income from operations
Insurance segment income from operations decreased $268 million, or 26.0%, from $1.0 billion in the 2023 quarter to $763 million in the 2024 quarter and decreased $697 million, or 29.6%, from $2.4 billion in the 2023 period to $1.7 billion in the 2024 period primarily due to the same factors impacting the segment's higher benefit ratio partially offset by the lower operating cost ratio as more fully described below.
Enrollment
Individual Medicare Advantage membership increased 348,500 members, or 6.6%, from June 30, 2023 to June 30, 2024 primarily due to membership additions associated with the most recent Annual Election Period, or AEP. Individual Medicare Advantage membership includes 952,800 D-SNP members as of June 30, 2024, a net increase of 121,400 D-SNP members, or 14.6%, from 831,400 D-SNP members as of June 30, 2023.
Group Medicare Advantage membership increased 35,400 members, or 6.9%, from June 30, 2023 to June 30, 2024 primarily due to growth in small and medium group accounts.
Medicare stand-alone PDP membership decreased 574,100 members, or 19.7%, from June 30, 2023 to June 30, 2024 primarily due to continued intensified competition for Medicare stand-alone PDP offerings.
State-based contracts and other membership increased 62,100 members, or 4.7%, from June 30, 2023 to June 30, 2024 primarily reflecting the impact of membership additions associated with the implementation of new contracts.
Commercial fully-insured medical membership decreased 413,300 members, or 86.9%, from June 30, 2023 to June 30, 2024 and commercial ASO medical membership decreased 348,300 members, or 88.1%, from June 30, 2023 to June 30, 2024. 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.
Specialty membership decreased 439,100 members, or 8.7%, from June 30, 2023 to June 30, 2024 primarily due to non-renewal of dental and vision plans as a result of exit from the Employer Group Commercial Medical Products business partially offset by growth in dental and vision plans as a result of Medicare Advantage enrollment.
Premiums Revenue
Insurance segment premiums revenue increased $2.6 billion, or 10.4%, from $25.5 billion in the 2023 quarter to $28.1 billion in the 2024 quarter and increased $5.4 billion, or 10.5%, from $51.0 billion in the 2023 period to $56.4 billion in the 2024 period primarily due to higher per member Medicare premiums as well as individual and group Medicare Advantage and state-based contracts membership growth. These factors were partially offset by the continued decline in our group commercial medical and stand-alone PDP membership.
Services Revenue
Insurance segment services revenue decreased $17 million, or 7.4%, from $231 million in the 2023 quarter to $214 million in the 2024 quarter and increased $16 million, or 3.4%, from $473 million in the 2023 period to $489 million in the 2024 period.
Benefits Expense
The Insurance segment benefit ratio increased 270 basis points from 86.8% for the 2023 quarter to 89.5% for the 2024 quarter and increased 300 basis points from 86.4% for the 2023 period to 89.4% for the 2024 period primarily due to the continued impact of elevated Medicare Advantage medical cost trends in the 2024 quarter and period and a lesser favorable impact from prior-period medical claims reserve development in 2024. These factors were partially offset by the impact of the pricing and benefit design of our 2024 Medicare Advantage products, which included a reduction in benefits in response to the net impact of the 2024 final rate notice and the initial emergence of increased medical cost trends in 2023. Further, the year-over-year comparison continues to reflect a shift in line of business mix, with growth in Medicare Advantage and state-based contracts and other membership, which can carry a higher benefit ratio.
Operating Costs
The Insurance segment operating cost ratio decreased 150 basis points from 9.9% for the 2023 quarter to 8.4% for the 2024 quarter and decreased 120 basis points from 9.6% for the 2023 period to 8.4% for the 2024 period primarily due to scale efficiencies associated with growth in our individual Medicare Advantage membership, administrative cost efficiencies resulting from our value creation initiatives, lower commission expense for brokers in the 2024 quarter and period compared to the 2023 quarter and period as a result of significant individual Medicare Advantage membership growth in 2023, and the impact of the accrued charge related to certain anticipated litigation expenses included in the 2023 quarter and period results.
CenterWell Segment
| Change | |||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, | Six Months Ended June 30, | Three months ended June 30, 2024 vs 2023 | Six Months Ended June 30, 2024 vs 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | $ | 335 | $ | 341 | $ | 670 | $ | 655 | $ | (6) | (1.8) | % | $ | 15 | 2.3 | % | |||||||||||||||||||||||||||||||
| Pharmacy solutions | 229 | 216 | 440 | 458 | 13 | 6.0 | % | (18) | (3.9) | % | |||||||||||||||||||||||||||||||||||||
| Primary care | 322 | 190 | 563 | 391 | 132 | 69.5 | % | 172 | 44.0 | % | |||||||||||||||||||||||||||||||||||||
| Total services revenue | 886 | 747 | 1,673 | 1,504 | 139 | 18.6 | % | 169 | 11.2 | % | |||||||||||||||||||||||||||||||||||||
| Intersegment revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home solutions | 499 | 321 | 984 | 635 | 178 | 55.5 | % | 349 | 55.0 | % | |||||||||||||||||||||||||||||||||||||
| Pharmacy solutions | 2,645 | 2,639 | 5,262 | 5,254 | 6 | 0.2 | % | 8 | 0.2 | % | |||||||||||||||||||||||||||||||||||||
| Primary care | 917 | 823 | 1,846 | 1,642 | 94 | 11.4 | % | 204 | 12.4 | % | |||||||||||||||||||||||||||||||||||||
| Total intersegment revenues | 4,061 | 3,783 | 8,092 | 7,531 | 278 | 7.3 | % | 561 | 7.4 | % | |||||||||||||||||||||||||||||||||||||
| Total services and intersegment revenues | $ | 4,947 | $ | 4,530 | $ | 9,765 | $ | 9,035 | $ | 417 | 9.2 | % | $ | 730 | 8.1 | % | |||||||||||||||||||||||||||||||
| Income from operations | $ | 338 | $ | 287 | $ | 620 | $ | 617 | $ | 51 | 17.8 | % | $ | 3 | 0.5 | % | |||||||||||||||||||||||||||||||
| Operating cost ratio | 92.0 | % | 92.6 | % | 92.5 | % | 92.1 | % | (0.6) | % | 0.4 | % |
Income from operations
CenterWell income from operations increased $51 million, or 17.8%, from $287 million in the 2023 quarter to $338 million in the 2024 quarter and increased $3 million, or 0.5%, from $617 million in the 2023 period to $620 million in the 2024 period primarily due to the same factors impacting the segment's operating cost ratio as more fully described below.
Services Revenue
CenterWell services revenue increased $139 million, or 18.6%, from $747 million in the 2023 quarter to $886 million in the 2024 quarter and increased $169 million, or 11.2%, from $1.5 billion in the 2023 period to $1.7 billion in the 2024 period primarily due to higher revenues associated with growth in the primary care business, partially offset by the impact of the v28 risk model revision.
Intersegment Revenue
CenterWell intersegment revenues increased $0.3 billion, or 7.3%, from $3.8 billion in the 2023 quarter to $4.1 billion in the 2024 quarter and increased $0.6 billion, or 7.4%, from $7.5 billion in the 2023 period to $8.1 billion in the 2024 period primarily due to greater intersegment revenues associated with the home solutions business in the 2024 quarter and period as compared to the 2023 quarter and period as a result of the expansion of the value-based home care mode and higher intersegment revenues associated with growth in the primary care business, partially offset by the impact of the v28 risk model revision.
Operating Costs
The CenterWell segment operating cost ratio decreased 60 basis points from 92.6% for the 2023 quarter to 92.0% for the 2024 quarter primarily due to administrative cost efficiencies resulting from the our value creation initiatives and favorable prior-period medical claims reserve development within the primary care business, partially offset by the impact of the v28 risk model revision. The CenterWell segment operating cost ratio increased 40 basis points from 92.1% for the 2023 period to 92.5% for the 2024 period primarily due to the unfavorable impact of the v28 risk model revision to the primary care business.
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 2023 Form 10-K and Part II, Item 1A, "Risk Factors" of this Form 10-Q.
Cash and cash equivalents increased to approximately $5.5 billion at June 30, 2024 from $4.7 billion at December 31, 2023. The change in cash and cash equivalents for the six months ended June 30, 2024 and 2023 is summarized as follows:
| Six Months Ended | |||||||||||
| 2024 | 2023 | ||||||||||
| (in millions) | |||||||||||
| Net cash provided by operating activities | $ | 1,636 | $ | 9,863 | |||||||
| Net cash used in investing activities | (1,416) | (2,025) | |||||||||
| Net cash provided by financing activities | 587 | 3,315 | |||||||||
| Increase in cash and cash equivalents | $ | 807 | $ | 11,153 |
Cash Flow from Operating Activities
Cash flows provided by operations of $1.6 billion in the 2024 period decreased $8.2 billion from cash flows provided by operations of $9.9 billion in the 2023 period. Our operating cash flows for the 2023 period were significantly impacted by the early receipt of the Medicare premium remittance of $7.0 billion in June 2023 because the payment date for July 2023 fell on a weekend. This also resulted in an increase to unearned revenues in our condensed consolidated balance sheet at June 30, 2023. Additionally, the 2023 period includes the CMS mid-year settlement of $2.2 billion which was received in June 2023. The 2024 period does not include the CMS mid-year settlement as it was received in July 2024.
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 2023 Form 10-K.
The detail of total net receivables at June 30, 2024 and December 31, 2023 and reconciliation to cash flow for the six months ended June 30, 2024 and 2023 was as follows:
| June 30, 2024 | December 31, 2023 | 2024 Period Change | 2023 Period Change | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Medicare | $ | 3,396 | $ | 1,426 | $ | 1,970 | $ | (347) | |||||||||||||||
| Commercial and other | 607 | 549 | 58 | 84 | |||||||||||||||||||
| Military services | 183 | 148 | 35 | 20 | |||||||||||||||||||
| Allowances | (96) | (88) | (8) | (2) | |||||||||||||||||||
| Total net receivables | $ | 4,090 | $ | 2,035 | $ | 2,055 | $ | (245) | |||||||||||||||
| Reconciliation to cash flow statement: | |||||||||||||||||||||||
| Receivables acquired | — | (24) | |||||||||||||||||||||
| Change in receivables per cash flow statement | $ | 2,055 | $ | (269) |
The changes in Medicare receivables for both the 2024 period and the 2023 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 2024 mid-year settlement of approximately $2.3 billion in July 2024. The 2023 period was impacted by the early receipt of the 2023 mid-year payment in June 2023.
Cash Flow from Investing Activities
During the 2024 period and 2023 period, we acquired various businesses for approximately $17 million and $189 million, net of cash and cash equivalents received, respectively.
Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our 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 net capital expenditures, excluding acquisitions, were $291 million in the 2024 period and $487 million in the 2023 period.
Net purchases of investment securities were $1.1 billion and $1.3 billion in the 2024 period and 2023 period, 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 $0.3 billion and $3.5 billion in the 2024 and 2023 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 $63 million and $27 million in the 2024 and 2023 periods, respectively.
In March 2024, we issued $1.25 billion of 5.375% unsecured senior notes due April 15, 2031 and $1.00 billion of 5.750% unsecured senior notes due April 15, 2054. Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $2.23 billion. We used the net proceeds for general corporate purposes, which include the repayment of existing indebtedness, including borrowings under our commercial paper program.
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 March 2023, we entered into a Rule 10b5-1 Repurchase Plan, or the 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 Plan period beginning on March 13, 2023 and ending on July 21, 2023. During the six months ended June 30, 2023, we repurchased $325 million principal amount of our $1.5 billion, 0.650% senior notes for approximately $322 million cash and $28 million principal amount of our $600 million, 3.850% senior notes for approximately $27 million cash.
Net repayments from the issuance of commercial paper were $895 million in the 2024 period and net proceeds from the issuance of commercial paper were $238 million in the 2023 period. The maximum principal amount outstanding at any one time during the 2024 period was $2.7 billion.
We repurchased common shares for $750 million and $601 million in the 2024 period and 2023 period, respectively, under share repurchase plans authorized by the Board of Directors. We also acquired common shares in connection with employee stock plans for $16 million and $27 million in the 2024 period and 2023 period, respectively.
We paid dividends to stockholders of $216 million and $211 million during the 2024 period and 2023 period, respectively.
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.
Acquisitions
For additional information regarding acquisitions, 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 June 30, 2024 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 $1.3 billion at June 30, 2024 compared to $510 million at December 31, 2023. This increase primarily reflects 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 partially offset by common stock repurchases, repayment of maturing senior notes, capital expenditures, repayment of borrowings under the commercial paper program, capital contributions to certain subsidiaries, cash dividends to shareholders and acquisitions. 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 March 31, 2024, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $12.9 billion, which exceeded aggregate minimum regulatory requirements of $10.3 billion. The amount of ordinary dividends paid to our parent company was approximately $0.5 billion during the six months ended June 30, 2024. 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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