For discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this 2021 Form 10-K, refer to "Item 7. - Management Discussion and Analysis of Financial Condition and Results of Operations" found in our Form 10-K for the year endedDecember 31, 2020 , that was filed with theSecurities and Exchange Commission onFebruary 18, 2021 .
Executive Overview
General
Humana Inc. , headquartered inLouisville, Kentucky , is a leading health and well-being company committed to helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and wellbeing and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large. To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, such as inhome care, behavioral health, pharmacy services, data analytics and wellness solutions, combine to produce a simplified experience that makes health care easier to navigate and more effective. The health benefits 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.
Acquisition of parents at home
OnAugust 17, 2021 , we acquired the remaining 60% interest in Kindred at Home, or KAH, the nation's largest home health and hospice provider, fromTPG Capital andWelsh, Carson, Anderson & Stowe , two private equity funds, for an enterprise value of$8.2 billion , which includes our equity value of$2.4 billion associated with our 40% minority ownership interest. The remeasurement to fair value of our previously held 40% equity method investment with a carrying value of approximately$1.3 billion , resulted in a$1.1 billion gain recognized in "Other (income) expense, net". KAH has locations in 40 states, providing extensive geographic coverage with approximately 65% overlap with our individual Medicare Advantage membership. We paid the approximate$5.8 billion transaction price (net of our existing equity stake) through a combination of debt financing, the assumption of existing KAH indebtedness and parent company cash.
COVID-19[female[feminine
The emergence and spread of the novel coronavirus, or COVID-19, beginning in the
first quarter of 2020 has impacted our business. During periods of increased
incidences of COVID-19, non-essential care from a reduction in non-COVID-19
hospital admissions and lower overall healthcare system consumption decreased
utilization. At the same time, COVID-19 treatment and testing costs increased
utilization. The significant disruption in utilization during 2020 also impacted
our ability to implement clinical initiatives to manage health care costs and
chronic conditions of our members, and appropriately document their risk
profiles, and, as such, significantly affected our 2021 revenue under the risk
adjustment payment model for Medicare Advantage plans. Finally, changes in
utilization patterns and actions taken in 2020 and 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 2020 and 2021.
41
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Activity area
Advertising
We manage our business with three reportable segments:Retail, Group and Specialty, and Healthcare Services. The reportable segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer, the Chief Operating Decision Maker, to assess performance and allocate resources. See Note 18 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data for segment financial information. The Retail segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible demonstration, andLong-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health benefits, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes our military services business, primarily ourTRICARE T2017 East Region contract. The Healthcare Services segment includes pharmacy, provider, and home services, along with other services and capabilities to promote wellness and advance population health. The operations of the recently acquired full ownership of Kindred at Home, as well as the company's strategic partnership withWelsh, Carson, Anderson & Stowe (WCAS) to develop and operate senior-focused, payor-agnostic, primary care centers are also included in the Healthcare Services segment. The results of each segment are measured by income before income taxes and equity in net earnings from equity method investments, or segment earnings. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home services, to ourRetail and Group and Specialty segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations.
Seasonality
COVID-19 disrupted the pattern of our quarterly earnings and operating cash flows largely due to the temporary deferral of non-essential care which resulted in reductions in non-COVID-19 hospital admissions and lower overall healthcare system utilization during higher levels of COVID-19 hospital admissions. At the same time, during periods of increased incidences of COVID-19, COVID-19 treatment and testing costs increase. Similar impacts and seasonal disruptions from either higher or lower utilization are expected to persist as we respond to and recover from the COVID-19 global health crisis. One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. Our quarterly Retail segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member's cumulative out-of-pocket costs pass through successive stages of a member's plan period, which begins annually onJanuary 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases as the year progresses. In addition, the number of low income senior members as well as year-over-year changes in the mix of membership in our standalone PDP products affects the quarterly benefit ratio pattern. 42 --------------------------------------------------------------------------------
In addition, the Retail segment also experiences seasonality in operations
cost ratio resulting from costs incurred in the second half of the year
associated with the Medicare marketing season.
Our Group and Specialty segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in the Retail segment, with the Group and Specialty segment's benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.
Strong points
•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. AtDecember 31, 2021 , approximately 3,009,600 members, or 68%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,650,100 members, or 67%, atDecember 31, 2020 . •In order to create capacity to fund growth and investment in our Medicare Advantage business and further expand our Healthcare Services capability in 2023, we committed to efforts to create additional value through cost savings, productivity initiatives and value acceleration from previous investments. As a result of these initiatives, we anticipate that we may incur certain charges in 2022. •OnFebruary 2, 2022 ,Centers for Medicare & Medicaid Services , or CMS, issued its preliminary 2023 Medicare Advantage and Part D payment rates and proposed policy changes, collectively, the Advance Notice. CMS has invited public comment on the Advance Notice before publishing final rate on or beforeApril 4, 2022 , or the Final Notice. In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 4.48% increase in benchmark funding based on proposals included therein. As indicated by CMS, its estimate excludes the impact of fee-for-service county rebasing/re-pricing since the related impact is dependent upon finalization of certain data, which will be available with the publication of the Final Notice. Further the benchmark increase excludes MA risk score trend as individual plans' experience will vary. Based on the company's preliminary analysis using the same factors CMS included in its estimate, the components of which are detailed on CMS's website, we anticipate the proposals in the Advance Notice would result in a change generally in line with CMS's estimate. The company will be drawing upon its program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact on Medicare beneficiaries' quality of care and service to its members through the Medicare Advantage program. •Net income was$2.9 billion , or$22.67 per diluted common share, and$3.4 billion , or$25.31 per diluted common share, in 2021 and 2020, respectively. This comparison was significantly impacted by the gain on our equity method investment in Kindred at Home upon completion of our acquisition of the business, put/call valuation adjustments associated with our non consolidating minority interest investments, the change in the fair value of publicly-traded equity securities, transaction and integration costs associated with the Kindred at Home acquisition, and the receipt of unpaid risk corridor payments in the third quarter of 2020 that were previously written off. The put/call valuation adjustments included the impact of the termination of the put/call agreement related to Kindred at Home as a result of the signing of the definitive agreement for the transaction onApril 27, 2021 . The impact of these adjustments to our consolidated income before income taxes and equity in net earnings and diluted earnings per common share was as follows for 2021. 43 -------------------------------------------------------------------------------- 2021 2020
(in millions)
Consolidated profit before income taxes and share of net income:
Gain on investment under the equity method of Kindred at Home
$
$1,129 –
Put/call valuation adjustments associated with non-
consolidation of minority interests
(597) (103)
Transaction and integration costs associated with Kindred at Home
acquisition
(128) -
Change in the fair value of publicly-traded equity securities (341) 745
Receipt of commercial risk corridor receivables previously
written-off - 578
$ 63 $ 1,220
2021 2020
Diluted earnings per common share:
Gain on Kindred at Home equity method investment $
$8.73 –
Put/call valuation adjustments associated with non-
consolidation of minority interests
(3.56) (0.60)
Transaction and integration costs associated with Kindred at Home
acquisition
(0.72) -
Change in the fair value of publicly-traded equity securities (2.03) 4.32
Receipt of commercial risk corridor receivables previously
written-off - 3.35
$ 2.42 $ 7.07
•Excluding these adjustments, comparisons of our results of operations were
materially impacted by the significant, temporary deferral of care in 2020
resulting from stay-at-home orders, physical distancing measures, and other
restrictions implemented to reduce the spread of COVID-19, as well as the impact
of COVID-19 testing and treatment costs, which on a net basis significantly and
favorably impacted the 2020 period results when compared to the 2021 period
results. In addition, the 2021 period results reflect the impact of lower
COVID-19 related administrative costs in 2021 compared to 2020. Administrative
costs in 2020 included costs associated with personal protective equipment,
member response effort, the build-out of infrastructure necessary to support
employees working remotely and charitable contribution cost to support the
communities served by us. Combined, the COVID-19 impacts described previously
resulted in lower operating results in 2021 compared to 2020.
•Partially offsetting the COVID-19 financial headwind that we experienced in
2021, our results of operations for 2021 were favorably impacted by individual
Medicare Advantage and state-based contract membership growth and improved
operating performance in our Healthcare Services segment, including the
consolidation of Kindred at Home operations upon completion of the acquisition
of the remaining 60% interest in Kindred at Home in August 2021 . Further, 2021
was also favorably impacted by the lower tax rate resulting from the termination
of the non-deductible health insurance industry fee in 2021, as well as a lower
number of shares used to compute dilutive earnings per common share, primarily
reflecting share repurchases.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of the
U.S. health insurance industry. Certain significant provisions of the Health
Care Reform Law include, among others, mandated coverage requirements, mandated
benefits and guarantee issuance associated with commercial medical insurance,
rebates to policyholders based on minimum benefit ratios, adjustments to
Medicare Advantage premiums, the establishment of federally facilitated or
state-based exchanges coupled with programs designed to spread risk among
insurers, and the introduction of plan designs based on set actuarial values. In
addition, the Health Care Reform Law established insurance industry assessments,
including an annual health insurance industry fee. The annual health insurance
44
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industry fees, which are not deductible for income tax purposes and significantly
increases our effective tax rate, was effective for calendar year 2020 and
definitively repealed from the calendar year 2021.
It is reasonably possible that the Health Care Reform Law and related regulations, as well as other current or future legislative, judicial or regulatory changes such as the Families First Coronavirus Response Act (the "Families First Act"), the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other legislative or regulatory action taken in response to COVID-19 including restrictions on our ability to manage our provider network or otherwise operate our business, or restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, increases in member benefits or changes to member eligibility criteria without corresponding increases in premium payments to us, or increases in regulation of our prescription drug benefit businesses, in the aggregate may have a material adverse effect on our results of operations (including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, further lowering our Medicare payment rates and increasing our expenses associated with assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows. We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home services, to ourRetail and Group and Specialty segment customers and are described in Note 18 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data in this 2021 Form 10-K. 45
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Comparison of operating results for 2021 and 2020
Certain financial data on a consolidated basis and for our segments were also
follows for completed exercises
Consolidated
Change
2021 2020 Dollars Percentage
(dollars in millions, except per
common share results)
Revenues:
Premiums:
Retail $ 73,820 $ 67,124 $ 6,696 10.0 %
Group and Specialty 6,002 6,460 (458) (7.1) %
Corporate - 602 (602) (100.0) %
Total premiums 79,822 74,186 5,636 7.6 %
Services:
Retail 23 19 4 21.1 %
Group and Specialty 816 780 36 4.6 %
Healthcare Services 2,216 1,016 1,200 118.1 %
Total services 3,055 1,815 1,240 68.3 %
Investment income 187 1,154 (967) (83.8) %
Total revenues 83,064 77,155 5,909 7.7 %
Operating expenses:
Benefits 69,199 61,628 7,571 12.3 %
Operating costs 10,121 10,052 69 0.7 %
Depreciation and amortization 596 489 107 21.9 %
Total operating expenses 79,916 72,169 7,747 10.7 %
Income from operations 3,148 4,986 (1,838) (36.9) %
Interest expense 326 283 43 15.2 %
Other (income) expense, net (532) 103 635 616.5 %
Income before income taxes and equity in net
earnings 3,354 4,600 (1,246) (27.1) %
Provision for income taxes 485 1,307 (822) (62.9) %
Equity in net earnings 65 74 (9) (12.2) %
Net income $ 2,934 $ 3,367 $ (433) (12.9) %
Diluted earnings per common share $ 22.67 $ 25.31 $ (2.64) (10.4) %
Benefit ratio (a) 86.7 % 83.1 % 3.6 %
Operating cost ratio (b) 12.2 % 13.2 % (1.0) %
Effective tax rate 14.2 % 28.0 % (13.8) %
(a) Represents total benefits expense as a percentage of premium income.
(b) Represents total operating costs, excluding depreciation, as
a percentage of total income less investment income.
46
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Premium income
Consolidated premiums increased$5.6 billion , or 7.6%, from$74.2 billion in the 2020 period to$79.8 billion in the 2021 period primarily due to higher premium revenues from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment (MRA) headwinds resulting from COVID-19 related utilization disruption in 2020, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020. These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership as more fully described in the detailed segment results discussion that follows, as well as the 2020 impact of the receipt of commercial risk corridor receivables previously written off.
Service revenue
Consolidated services revenue increased$1.2 billion , or 68.3%, from$1.8 billion in the 2020 period to$3.1 billion in the 2021 period primarily due to higher home solutions revenues associated with consolidation of Kindred at Home earnings. Investment Income Investment income decreased$967 million , or 83.8%, from$1.2 billion in the 2020 period to$187 million in the 2021 period primarily due to a significant decrease in the fair value of our publicly-traded equity securities investments.
Expenses related to employee benefits
Consolidated benefits expense increased$7.6 billion , or 12.3%, from$61.6 billion in the 2020 period to$69.2 billion in the 2021 period. The consolidated benefit ratio increased 360 basis points from 83.1% in the 2020 period to 86.7% in the 2021 period. These increases reflect the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, and COVID-19 impacts, including the impact of the deferral of non-essential care, net of meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020. The year over year increase further reflects the 2020 impact of the receipt of commercial risk corridor receivables that were previously written off, and the 2021 impact associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development in 2021. The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 100 basis points in the 2021 period versus approximately 40 basis points in the 2020 period. Operating Costs Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent. Consolidated operating costs increased$0.07 billion , or 0.7%, from$10.05 billion in the 2020 period to$10.12 billion in the 2021 period. The consolidated operating cost ratio decreased 100 basis points from 13.2% in the 2020 period to 12.2% in the 2021 period. The ratio decrease was primarily due to the termination of the non-deductible health insurance industry fee in 2021, as well as lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. The decrease was 47 -------------------------------------------------------------------------------- further impacted by scale efficiencies associated with growth in our individual Medicare Advantage membership, operating cost efficiencies in 2021 from previously implemented productivity initiatives, as well as the impact of a$200 million contribution to theHumana Foundation in the first half of 2020 to support communities served by the Company, particularly those with social and health disparities. These factors were partially offset by the consolidation of Kindred at Home operations as the business has a significantly higher operating cost ratio than our historical consolidated operating cost ratio, continued strategic and technology modernization investments made to position us for long-term success, transaction and integration costs associated with the Kindred at Home transaction, as well as the 2020 impact of the receipt of the commercial risk corridor receivables that were previously written off. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 period.
Depreciation and amortization
Depreciation increased
million
capital expenditure.
Interest Expense
Interest expense increased
period to
acquisition.
Income taxes
Our effective tax rate during 2021 was 14.2% compared to the effective tax rate of 28.0% in 2020. The change was primarily due to the non-taxable gain we recognized on our previously held Kindred at Home equity method investment from our acquisition of the remaining ownership interest in the business inAugust 2021 and the termination of the non-deductible health insurance industry fee in 2021. See Note 12 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate. Retail Segment Change 2021 2020 Members Percentage Membership: Medical membership: Individual Medicare Advantage 4,409,100 3,962,700 446,400 11.3 % Group Medicare Advantage 560,600 613,200 (52,600) (8.6) % Medicare stand-alone PDP 3,606,200 3,866,700 (260,500) (6.7) % Total Retail Medicare 8,575,900 8,442,600 133,300 1.6 % State-based Medicaid 940,100 772,400 167,700 21.7 % Medicare Supplement 331,900 335,600
(3,700) (1.1)%
Total Retail Medical Members 9,847,900 9,550,600 297,300
3.1 %
48
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Change
2021 2020 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage $ 58,654 $ 51,697 $ 6,957 13.5 %
Group Medicare Advantage 6,955 7,774 (819) (10.5) %
Medicare stand-alone PDP 2,371 2,742 (371) (13.5) %
Total Retail Medicare 67,980 62,213 5,767 9.3 %
State-based Medicaid 5,109 4,223 886 21.0 %
Medicare Supplement 731 688 43 6.3 %
Total premiums 73,820 67,124 6,696 10.0 %
Services 23 19 4 21.1 %
Total premiums and services revenue $ 73,843 $ 67,143 $ 6,700 10.0 %
Segment earnings $ 1,937 $ 3,017 $ (1,080) (35.8) %
Benefit ratio 87.9 % 84.2 % 3.7 %
Operating cost ratio 9.2 % 11.0 % (1.8) %
Segment Earnings
•Retail segment earnings decreased $1.1 billion , or 35.8%, from $3.0 billion in
the 2020 period to $1.9 billion in the 2021 period primarily due to the same
factors reflecting the segment's higher benefit ratio, partially offset by the
segment's lower operating cost ratio as more fully described below.
Registration
•Individual Medicare Advantage membership increased 446,400 members, or 11.3%, from 3,962,700 members as ofDecember 31, 2020 to 4,409,100 members as ofDecember 31, 2021 primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The membership growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, members. The OEP sales period, which ran fromJanuary 1 to March 31, 2021 added approximately 36,000 members compared to the 2020 OEP that added approximately 30,000 members. Individual Medicare Advantage membership includes 576,100 D-SNP members as ofDecember 31, 2021 , a net increase of 170,000 members, or 42%, from 406,100 members as ofDecember 31, 2020 . For the full year 2022, we anticipate a net membership growth in our individual Medicare Advantage offerings of approximately 150,000 to 200,000 members. •Group Medicare Advantage membership decreased 52,600 members, or 8.6%, from 613,200 members as ofDecember 31, 2020 to 560,600 members as ofDecember 31, 2021 primarily due to the net loss of certain large accounts inJanuary 2021 , partially offset by continued growth in small group accounts. For the full year 2022, we anticipate relatively flat membership growth. •Medicare stand-alone PDP membership decreased 260,500 members, or 6.7%, from 3,866,700 members as ofDecember 31, 2020 to 3,606,200 members as ofDecember 31, 2021 primarily due to anticipated declines as a result of the Walmart Value plan no longer being the low cost leader in 2021. For the full year 2022, we anticipate a net membership decline in our Medicare stand-alone PDP offerings of approximately 125,000 members. •State-based Medicaid membership increased 167,700 members, or 21.7%, from 772,400 members as ofDecember 31, 2020 to 940,100 members as ofDecember 31, 2021 primarily reflecting additional 49 -------------------------------------------------------------------------------- enrollment as a result of the suspension of state eligibility redetermination efforts due to the currently-enacted Public Health Emergency, as well as the recently completed acquisition of our remaining 50% ownership interest inWisconsin health care company iCare. For the full year 2022, we anticipate a net membership decline in our state-based contracts of approximately 50,000 to 100,000 members assuming the Public Health Emergency will end inApril 2022 .
Bounty revenue
•Retail segment premiums increased$6.7 billion , or 10.0%, from$67.1 billion in the 2020 period to$73.8 billion in the 2021 period primarily due to higher premiums as a result of individual Medicare Advantage and state-based contracts membership growth, higher per member individual Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of MRA headwinds resulting from COVID-19 related utilization disruption in 2020, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020. These favorable items were partially offset by the decline in membership in our stand-alone PDP and group Medicare Advantage offerings. Benefits expense •The Retail segment benefit ratio increased 370 basis points from 84.2% in the 2020 period to 87.9% in the 2021 period primarily due to the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, COVID-19 impacts, including the impact of the deferral of non-essential care, net of meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVD-19 related utilization disruption in 2020. Also contributing to the higher benefit ratio was the 2021 impact of the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development. •The Retail segment's benefits expense for the 2021 period includes the beneficial effect of$729 million in favorable prior-year medical claims reserve development versus$266 million in 2020. This favorable prior-year medical claims reserve development decreased the Retail segment benefit ratio by approximately 100 basis points in 2021 versus approximately 40 basis points in 2020. The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic.
Operating costs
•The Retail segment operating cost ratio decreased 180 basis points from 11.0%
in the 2020 period to 9.2% in the 2021 period primarily due to the termination
of the non-deductible health insurance industry fee in 2021, lower COVID-19
related administrative costs, as previously discussed, scale efficiencies
associated with growth in our individual Medicare Advantage membership, as well
as operating cost efficiencies driven by previously implemented productivity
initiatives. These improvements were partially offset by continued strategic
investments made in 2021 to position us for long-term success. The
non-deductible health insurance industry fee impacted the operating cost ratio
by 160 basis points in the 2020 period.
50
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Group and Specialty Segment
Change
2021 2020 Members Percentage
Membership:
Medical membership:
Fully-insured commercial group 674,600 777,400 (102,800) (13.2) %
ASO 495,500 504,900 (9,400) (1.9) %
Military services 6,049,000 5,998,700 50,300 0.8 %
Total group medical members 7,219,100 7,281,000 (61,900) (0.9) %
Specialty membership (a) 5,294,300 5,310,300 (16,000) (0.3) %
(a) Specialty products include dental, vision and life insurance benefits.
The members included in these products may not be unique to each product since
members have the ability to sign up for multiple products.
Change
2021 2020 Dollars Percentage
(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group $ 4,271 $ 4,761 $ (490) (10.3) %
Specialty 1,731 1,699 32 1.9 %
Total premiums 6,002 6,460 (458) (7.1) %
Services 816 780 36 4.6 %
Total premiums and services revenue $ 6,818 $ 7,240 $ (422) (5.8) %
Segment earnings (loss) $ 149 $ (143) $ 292 204.2 %
Benefit ratio 82.5 % 85.6 % (3.1) %
Operating cost ratio 24.6 % 25.0 % (0.4) %
Segment Earnings
•Group and Specialty segment earnings increased $292 million , or 204.2%, from a
$143 million loss in the 2020 period to $149 million of earnings in the 2021
period primarily due to the same factors reflecting the segment's lower benefit
ratio and operating cost ratio as more fully described below.
Registration
•Fully-insured commercial group medical membership decreased 102,800 members, or 13.2%, from 777,400 members as ofDecember 31, 2020 to 674,600 members as ofDecember 31, 2021 reflecting lower small group quoting activity and sales attributable to depressed economic activity from the COVID-19 pandemic, partially offset by higher retention of existing customers, particularly in larger groups. The portion of group fully-insured commercial medical membership in small group accounts was approximately 50% atDecember 31, 2021 and 54% atDecember 31, 2020 . •Group ASO commercial medical membership decreased 9,400 members, or 1.9%, from 504,900 members as ofDecember 31, 2020 to 495,500 members as ofDecember 31, 2021 . Small group membership comprised 43% of group ASO medical membership atDecember 31, 2021 and 45% atDecember 31, 2020 . The membership change reflects intensified competition for small group accounts, partially offset by strong retention among large group accounts. For the full year 2022, we anticipate a net membership decline in our group commercial medical offerings, which includes fully-insured and ASO, of approximately 125,000 to 165,000 members. 51 -------------------------------------------------------------------------------- •Military services membership increased 50,300 members, or 0.8%, from 5,998,700 members as ofDecember 31, 2020 to 6,049,000 members as ofDecember 31, 2021 . Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the currentTRICARE East Region contract. •Specialty membership decreased 16,000 members, or 0.3%, from 5,310,300 members as ofDecember 31, 2020 to 5,294,300 members as ofDecember 31, 2021 primarily due to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of group fully-insured commercial medical membership described above. The decrease also reflects the impact of the economic downturn driven by the COVID-19 pandemic.
Bounty revenue
•Group and Specialty segment premiums decreased$458 million , or 7.1%, from$6.5 billion in the 2020 period to$6.0 billion in the 2021 period primarily due to the decline in our fully-insured group commercial membership, partially offset by higher per member premiums across the fully-insured commercial business.
Service revenue
•Group and Specialty segment services revenue increased$36 million , or 4.6%, from$780 million in the 2020 period to$816 million in the 2021 period primarily due to higher TRICARE services revenue partially offset by lower ASO membership described previously.
Benefit expenses
•The Group and Specialty segment benefit ratio decreased 310 basis points from 85.6% in the 2020 period to 82.5% in the 2021 period. The decrease reflects the negative COVID-19 impacts in 2020 including meaningful COVID-19 treatment and testing costs along with our ongoing pandemic relief efforts, primarily surrounding initiatives to ease administrative and financial stress for providers and employers, net of the impact of the deferral of non-essential care. The comparison was further impacted by the deliberate pricing and benefit design efforts in 2021 to increase profitability and position the commercial business for long-term success, lower specialty utilization, primarily related to dental services in 2021, as well as the beneficial impact of higher favorable prior-period medical claims reserve development in the 2021 period. These favorable comparisons were partially offset by the termination in 2021 of the non-deductible health insurance industry fee in which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products. •The Group and Specialty segment's benefits expense includes the beneficial effect of$96 million in prior-period medical claims reserve development in 2021 versus$47 million in 2020. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 160 basis points in 2021 versus approximately 70 basis points in 2020. Operating costs •The Group and Specialty segment operating cost ratio decreased 40 basis points from 25.0% in the 2020 period to 24.6% in the 2021 period primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021, as previously discussed, as well as operating cost efficiencies driven by previously implemented productivity initiatives. These were partially offset by continued strategic investments made to position us for long-term success. The non-deductible health insurance industry fee impacted the operating cost ratio by 130 basis points in the 2020 period. 52 --------------------------------------------------------------------------------
Healthcare Services Segment
Change
2021 2020 Dollars Percentage
(in millions)
Revenues:
Services:
Home solutions $ 1,166 $ 107 $ 1,059 989.7 %
Pharmacy solutions 637 581 56 9.6 %
Provider services 413 328 85 25.9 %
Total services revenues 2,216 1,016 1,200 118.1 %
Intersegment revenues:
Home solutions 691 566 125 22.1 %
Pharmacy solutions 25,855 24,587 1,268 5.2 %
Provider services 2,476 2,266 210 9.3 %
Total intersegment revenues 29,022 27,419 1,603 5.8 %
Total Services and Intersegment Revenue
2,803 9.9 % Segment earnings$ 1,329 $ 944 $ 385 40.8 % Operating cost ratio 95.4 % 96.3 % (0.9) % Segment Earnings •Healthcare Services segment earnings increased$385 million , or 40.8%, from$944 million in the 2020 period to$1.3 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings, individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy revenues, higher revenues associated with growth in the company's provider business, as well as the factors that drove the segment declining operating cost ratio as more fully described below. Script Volume •Humana Pharmacy Solutions® script volumes for theRetail and Group and Specialty segment membership increased to approximately 515 million in 2021, up 7.7% versus scripts of approximately 478 million in 2020 primarily due to growth in Medicare Advantage Prescription Drug and state-based contracts membership, partially offset by the decline in stand-alone PDP membership.
Service revenue
•Services revenues increased$1.2 billion , or 118.1%, from$1.0 billion in the 2020 period to$2.2 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings. The 2021 period further reflects higher revenue from growth in the number of primary care clinics serving third party payors, and additional pharmacy revenues associated with the acquisition of Enclara which was closed during the first quarter of 2020.
Intersegment revenue
•Intersegment revenues increased$1.6 billion , or 5.8%, from$27.4 billion in the 2020 period to$29.0 billion in the 2021 period primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher revenues associated with our provider business. These increases were partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP and group Medicare Advantage membership as previously discussed. 53 --------------------------------------------------------------------------------
Operating costs
•The Healthcare Services segment operating cost ratio decreased 90 basis points from 96.3% in the 2020 period to 95.4% in the 2021 period primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the 2020 impact associated with COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and home solutions teams who continued to provide services to members throughout the crisis, as well as operational improvements in our provider services business, largely related toConviva , along with operating cost efficiencies driven by previously implemented productivity initiatives in 2021. The decrease further reflects the impact of additional investments in the segment's provider business during 2020 related to marketing and AEP initiatives. These decreases were partially offset by increased administrative costs in the pharmacy operations as a result of incremental spend to accelerate growth within the business, increased utilization levels in our provider business in 2021 compared to levels in 2020 amid the COVID-19 pandemic, as well as increased pharmacy labor-related overtime costs due to weather disruptions occurring in the first quarter of 2021.
Liquidity
Historically, our primary sources of cash have included receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities, and borrowings. Our primary uses of cash historically have included disbursements for claims payments, operating costs, interest on borrowings, taxes, purchases of investment securities, acquisitions, capital expenditures, repayments on borrowings, dividends, and share repurchases. Because premiums generally are collected in advance of claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. From period to period, our cash flows may also be affected by the timing of working capital items including premiums receivable, benefits payable, and other receivables and payables. Our cash flows are impacted by the timing of payments to and receipts from CMS associated with Medicare Part D subsidies for which we do not assume risk. The use of cash flows may be limited by regulatory requirements of state departments of insurance (or comparable state regulators) which require, among other items, that our regulated subsidiaries maintain minimum levels of capital and seek approval before paying dividends from the subsidiaries to the parent. Our use of cash flows derived from our non-insurance subsidiaries, such as in our Healthcare Services segment, is generally not restricted by state departments of insurance (or comparable state regulators).
For further information on our liquidity risk, please refer to Section 1A. –
Risk factors in this 2021 Form 10-K.
Cash and cash equivalents decreased to$3.4 billion atDecember 31, 2021 from$4.7 billion atDecember 31, 2020 . The change in cash and cash equivalents for the years endedDecember 31, 2021 , 2020 and 2019 is summarized as follows: 2021 2020
2019
(in
millions)
Net cash provided by operating activities$ 2,262 $ 5,639 $ 5,284 Net cash used in investing activities (6,556) (3,065) (1,278) Net cash provided by (used in) financing activities 3,015 (1,955) (2,295) (Decrease) increase in cash and cash equivalents$ (1,279) $ 619
54 --------------------------------------------------------------------------------
Cash flow from operating activities
Cash flows provided by operations of$2.3 billion in the 2021 period decreased$3.4 billion from cash flows provided by operations of$5.6 billion in the 2020 period primarily due to the negative impact of working capital items and lower earnings in the 2021 period compared to the 2020 period. Our 2021 period operating cash flows were significantly impacted by changes to working capital levels, primarily as a result of prior year disruptions caused by COVID-19. These impacts include paying down claims inventory and capitation for provider surplus amounts earned in 2020 as well as additional provider support. The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables. The detail of benefits payable was as follows atDecember 31, 2021 , 2020 and 2019: Change Change 2021 2020 2019 2021 2020 (in millions) IBNR (1)$ 5,695 $ 5,290 $ 4,150 $ 405 $ 1,140 Reported claims in process (2) 907 816 628 91 188 Other benefits payable (3) 1,687 2,037 1,226 (350) 811 Total benefits payable$ 8,289 $ 8,143 $ 6,004 146 2,139 Reconciliation to cash flow statement: Change in payables from acquisition of business (42) - Changes in benefits payable per cash flow statement resulting in cash from operations$ 104 $ 2,139 (1)IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received and processed (i.e. a shorter time span results in a lower IBNR). (2)Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff. (3)Other benefits payable include amounts owed to providers under capitated and risk sharing arrangements. The increase in benefits payable in 2021 was primarily due to higher IBNR and an increase in reported claims in process partially offset by a reduction in capitation accruals. IBNR increased primarily as a result of individual Medicare Advantage membership growth partially offset by paying down claim inventories. Higher reported claims in process was a function of timing of month-end cutoff. The 2020 period was significantly impacted by higher capitation accruals as significantly lower utilization caused by COVID-19 resulted in higher surplus accruals to providers. These higher surplus accrual to providers were paid down during 2021. 55 -------------------------------------------------------------------------------- The detail of total net receivables was as follows atDecember 31, 2021 , 2020 and 2019: Change Change 2021 2020 2019 2021 2020 (in millions) Medicare$ 1,214 $ 928 $ 835 $ 286 $ 93 Commercial and other 579 122 162 457 (40) Military services 104 160 128 (56) 32 Allowance for doubtful accounts (83) (72) (69) (11) (3) Total net receivables$ 1,814 $ 1,138 $ 1,056 676 82 Reconciliation to cash flow statement: Change in receivables from (acquisition) disposition of business (396) 3 Change in receivables per cash flow statement resulting in cash used by operations$ 280 $ 85 The changes in Medicare receivables for both the 2021 period and the 2020 period reflect individual Medicare Advantage membership growth and the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. The increase in Commercial and other receivables in 2021 primarily relates to the Kindred at Home acquisition.
Cash flow from investing activities
In 2021, we acquired Kindred at Home and other primary care businesses to
cash consideration of approximately
In 2020, we acquired
supplier, for a cash consideration of approximately
has received.
Our ongoing capital expenditures primarily relate to our information technology initiatives, support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were$1.3 billion ,$964 million and$736 million in the 2021, 2020 and 2019 periods, respectively.
Net purchases of marketable securities were
million
Cash flow from financing activities
Our financing cash flows are significantly impacted by the timing of claims payments and the related receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. Settlement of the reinsurance and low-income cost subsidies is based on a reconciliation made approximately 9 months after the close of each calendar year. Claim payments were higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk by$261 million ,$938 million and$560 million in the 2021, 2020 and 2019 periods, respectively. Our net receivable from CMS for subsidies and brand name prescription drug discounts was$1.4 billion atDecember 31, 2021 compared to a net receivable of$1.2 billion atDecember 31, 2020 .
As part of our administrative services only TRICARE contract, health costs
the payments for which we assume no risk exceeded the refunds of the
federal government by
and 2019, respectively.
56 -------------------------------------------------------------------------------- InAugust 2021 , we issued$1.5 billion of 0.650% unsecured senior notes dueAugust 3, 2023 ,$750 million of 1.350% unsecured senior notes dueFebruary 3, 2027 and$750 million of 2.150% unsecured senior notes dueFebruary 3, 2032 . Our net proceeds, reduced for the underwriters' discounts and commissions paid, were$2,984 million . As of the closing of the acquisition of Kindred at Home inAugust 2021 , we assumed approximately$2.1 billion of borrowings, and subsequently repaid$150 million of borrowings. InOctober 2021 , we entered into a$2.0 billion term loan agreement and applied the proceeds to finance the repayment in full of the outstanding assumed Kindred at Home debt. InMay 2021 , we entered into a$500 million unsecured delayed draw term loan credit agreement. InAugust 2021 , we borrowed$500 million under the delayed draw term loan agreement, which was used, in combination with other debt financing, to fund the approximate$5.8 billion transaction price of Kindred at Home.
In
Senior Notes due on their maturity date on
In
time, which was reimbursed in
InMarch 2020 , we issued$600 million of 4.500% senior notes dueApril 1, 2025 and$500 million of 4.875% senior notes dueApril 1, 2030 . Our net proceeds, reduced for the underwriters' discounts and commissions and offering expenses paid, were$1,088 million . InAugust 2019 , we issued$500 million of 3.125% senior notes dueAugust 15, 2029 and$500 million of 3.950% senior notes dueAugust 15, 2049 . Our net proceeds, reduced for the underwriters' discounts and commissions and offering expenses paid, were$987 million . We used the net proceeds from this offering, together with available cash, to repay the$650 million outstanding amount due under our term note inAugust 2019 , and the$400 million aggregate principal amount of our 2.625% senior notes due on its maturity date ofOctober 1, 2019 . We repurchased common shares for$0.08 billion ,$1.82 billion and$1.07 billion in 2021, 2020 and 2019, respectively, under share repurchase plans authorized by the Board of Directors and in connection with employee stock plans.
We paid dividends to shareholders of
and
We entered into a commercial paper program inOctober 2014 . Net proceeds from issuance of commercial paper were$352 million in 2021 and the maximum principal amount outstanding at any one time during 2021 was$1.2 billion . Net proceeds from the issuance of commercial paper were$295 million in 2020 and the maximum principal amount outstanding at any one time during 2020 was$600 million . Net repayments from issuance of commercial paper were$360 million in 2019 and the maximum principal amount outstanding at any one time during 2019 was$801 million . The remainder of the cash used in or provided by financing activities in 2021, 2020, and 2019 primarily resulted from debt issuance costs, proceeds from stock option exercises and the change in book overdraft.
Sources and future uses of liquidity
Dividends
For a detailed discussion of dividends to shareholders, please refer to Note 16
to the consolidated financial statements listed in point 8. – Financial
Additional Statements and Data.
Share buybacks
57 -------------------------------------------------------------------------------- For a detailed discussion of stock repurchases, please refer to Note 16 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. Debt For a detailed discussion of our debt, including our senior notes, term loans, credit agreement and commercial paper program, please refer to Note 13 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. 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 atDecember 31, 2021 was BBB+ according toStandard & Poor's Rating Services , or S&P, and Baa3 according toMoody'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 increased to$1.3 billion atDecember 31, 2021 from$772 million atDecember 31, 2020 . This increase primarily reflects net proceeds from the senior notes and term loans, dividends received from regulated subsidiaries, earnings in non-regulated Healthcare Services subsidiaries, and the issuance of commercial paper, partially offset by acquisitions, capital contributions to certain subsidiaries, capital expenditures, and cash dividends to shareholders. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by regulators. Our regulated insurance subsidiaries paid dividends to our parent company of$1.6 billion in 2021,$1.3 billion in 2020, and$1.8 billion in 2019. Subsidiary capital requirements from significant premium growth has impacted the amount of regulated subsidiary dividends over the last two years. Refer to our parent company financial statements and accompanying notes in Schedule I - Parent Company Financial Information. The amount of ordinary dividends that may be paid to our parent company in 2022 is approximately$1.5 billion , in the aggregate. Actual dividends paid may vary due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.
Regulatory requirements
For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to our parent, please refer to Note 16 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data.
Off-balance sheet arrangements
As ofDecember 31, 2021 , we were not involved in any special purpose entity, or SPE, transactions. For a detailed discussion of off-balance sheet arrangements, please refer to Note 17 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. 58 --------------------------------------------------------------------------------
Warranties and Indemnifications
For a detailed discussion of our warranties and indemnifications, please see
in note 17 of the appendix to the consolidated financial statements appearing in point 8. –
Financial statements and additional data.
Government contracts
For a detailed discussion of our government contracts, including our Medicare, Military, and Medicaid and state-based contracts, please refer to Note 17 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data.
Significant Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements and accompanying notes requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We continuously evaluate our estimates and those critical accounting policies primarily related to benefits expense and revenue recognition as well as accounting for impairments related to our investment securities, goodwill, indefinite-lived and long-lived assets. These estimates are based on knowledge of current events and anticipated future events and, accordingly, actual results ultimately may differ from those estimates. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Accounting for employee benefit expenses
Benefits expense is recognized in the period in which services are provided and
includes an estimate of the cost of services which have been incurred but not
yet reported, or IBNR. IBNR represents a substantial portion of our benefits
payable as follows:
December 31, Percentage December 31, Percentage
2021 of Total 2020 of Total
(dollars in millions)
IBNR $ 5,695 68.7 % $ 5,290 65.0 %
Reported claims in process 907 10.9 % 816 10.0 %
Other benefits payable 1,687 20.4 % 2,037 25.0 %
Total benefits payable $ 8,289 100.0 % $ 8,143 100.0 %
Our reserving practice is to consistently recognize the actuarial best point
estimate within a level of confidence required by actuarial standards. For
further discussion of our reserving methodology, including our use of completion
and claims per member per month trend factors to estimate IBNR, refer to Note 2
to the consolidated financial statements included in Item 8. - Financial
Statements and Supplementary Data.
59
--------------------------------------------------------------------------------
The completion and claims per member per month trend factors are the most
significant factors impacting the IBNR estimate. The portion of IBNR estimated
using completion factors for claims incurred prior to the most recent two months
is generally less variable than the portion of IBNR estimated using trend
factors. The following table illustrates the sensitivity of these factors
assuming moderately adverse experience and the estimated potential impact on our
operating results caused by reasonably likely changes in these factors based on
December 31, 2021 data:
Completion Factor (a): Claims Trend Factor (b):
Factor Decrease in Factor Decrease in
Change (c) Benefits Payable Change (c) Benefits Payable
(dollars in millions)
0.70% $(421) 3.00% $(379)
0.60% $(361) 2.75% $(347)
0.50% $(301) 2.50% $(316)
0.40% $(241) 2.25% $(284)
0.30% $(180) 2.00% $(252)
0.20% $(120) 1.75% $(221)
0.10% $(60) 1.50% $(189)
(a)Reflects estimated potential changes in benefits payable at December 31, 2021
caused by changes in completion factors for incurred months prior to the most
recent two months.
(b) Reflects estimated potential variations in benefits payable as of
caused by changes in the annualized loss trend used for the estimation of
member per month has incurred claims in the past two months.
(c) The factor change shown represents the change in percentage points.
The following table provides a historical perspective regarding the accrual and payment of our benefits payable. Components of the total incurred claims for each year include amounts accrued for current year estimated benefits expense as well as adjustments to prior year estimated accruals. Refer to Note 11 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data forRetail and Group and Specialty segment tables including information about incurred and paid claims development as ofDecember 31, 2021 , net of reinsurance, as well as cumulative claim frequency and the total of IBNR included within the net incurred claims amounts. 60 --------------------------------------------------------------------------------
2021 2020 2019
(in millions)
Balances at January 1 $ 8,143 $ 6,004 $ 4,862
Less: Reinsurance recoverables - (68) (95)
Balances at January 1, net 8,143 5,936 4,767
Acquisitions 42 - -
Incurred related to:
Current year 70,024 61,941 54,193
Prior years (825) (313) (336)
Total incurred 69,199 61,628 53,857
Paid related to:
Current year (62,149) (54,003) (48,421)
Prior years (6,946) (5,418) (4,267)
Total paid (69,095) (59,421) (52,688)
Reinsurance recoverable - - 68
Balances at December 31 $ 8,289 $ 8,143 $ 6,004
The following table summarizes the changes in estimate for incurred claims
related to prior years attributable to our key assumptions. As previously
described, our key assumptions consist of trend and completion factors estimated
using an assumption of moderately adverse conditions. The amounts below
represent the difference between our original estimates and the actual benefits
expense ultimately incurred as determined from subsequent claim payments.
2021 2020 2019
Factor Factor Factor
Amount Change (a) Amount Change (a) Amount Change (a)
(dollars in millions)
Trend factors$ (361) (3.3) %$ (167) (1.9) %$ (233) (3.1) % Completion factors (464) (0.9) % (146) (0.3) % (103) (0.3) % Total$ (825) $ (313) $ (336)
(a) The factor change shown represents the change in percentage points.
As previously discussed, our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant. We experienced favorable medical claims reserve development related to prior fiscal years of$825 million in 2021,$313 million in 2020, and$336 million in 2019. The table below details our favorable medical claims reserve development related to prior fiscal years by segment for 2021, 2020, and 2019. (Favorable) Unfavorable Medical Claims Reserve Development Change 2021 2020 2019 2021 2020 (in millions) Retail Segment $ (729)$ (266) $ (386) $ (463) $ 120 Group and Specialty Segment (96) (47) 50 (49) (97) Total $ (825)$ (313) $ (336) $ (512) $ 23 61
-------------------------------------------------------------------------------- The favorable medical claims reserve development for 2021, 2020, and 2019 primarily reflects the consistent application of trend and completion factors estimated using an assumption of moderately adverse conditions. In addition, the higher prior year favorable development for the year endedDecember 31, 2021 was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time impacting our claim payment patterns. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic. Our favorable development for each of the years presented above is discussed further in Note 11 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. We continually adjust our historical trend and completion factor experience with our knowledge of recent events that may impact current trends and completion factors when establishing our reserves. Because our reserving practice is to consistently recognize the actuarial best point estimate using an assumption of moderately adverse conditions as required by actuarial standards, there is a reasonable possibility that variances between actual trend and completion factors and those assumed in ourDecember 31, 2021 estimates would fall towards the middle of the ranges previously presented in our sensitivity table.
Revenue recognition
We generally establish one-year commercial membership contracts with employer groups, subject to cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military services contracts with the federal government and certain contracts with various state Medicaid programs generally are multi-year contracts subject to annual renewal provisions. We receive monthly premiums from the federal government and various states according to government specified payment rates and various contractual terms. We bill and collect premiums from employer groups and members in our Medicare and other individual products monthly. Changes in premium revenues resulting from the periodic changes in risk-adjustment scores derived from medical diagnoses for our membership are estimated by projecting the ultimate annual premium and recognized ratably during the year with adjustments each period to reflect changes in the ultimate premium. Premiums revenue is estimated by multiplying the membership covered under the various contracts by the contractual rates. Premiums revenue is recognized as income in the period members are entitled to receive services, and is net of estimated uncollectible amounts, retroactive membership adjustments, and adjustments to recognize rebates under the minimum benefit ratios required under the Health Care Reform Law. We estimate policyholder rebates by projecting calendar year minimum benefit ratios for the small group and large group markets, as defined by the Health Care Reform Law using a methodology prescribed by HHS, separately by state and legal entity. Medicare Advantage products are also subject to minimum benefit ratio requirements under the Health Care Reform Law. Estimated calendar year rebates recognized ratably during the year are revised each period to reflect current experience. Retroactive membership adjustments result from enrollment changes not yet processed, or not yet reported by an employer group or the government. We routinely monitor the collectability of specific accounts, the aging of receivables, historical retroactivity trends, estimated rebates, as well as prevailing and anticipated economic conditions, and reflect any required adjustments in current operations. Premiums received prior to the service period are recorded as unearned revenues.
Medicare risk adjustment provisions
CMS utilizes a risk-adjustment model which apportions premiums paid to Medicare
Advantage, or MA, plans according to health severity. The risk-adjustment model,
which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the
Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more for
enrollees with predictably higher costs. Under the risk-adjustment methodology,
all MA plans must collect from providers and submit the necessary diagnosis code
information to CMS within prescribed deadlines. The CMS risk-adjustment model
uses this diagnosis data to calculate the risk-adjusted premium payment to MA
plans. Rates paid to MA plans are established under an actuarial bid model,
including a process that bases our payments on a comparison of our
beneficiaries' risk scores, derived from medical diagnoses, to those enrolled in
the government's Medicare FFS program. We generally rely on providers, including
certain providers in our network who are our
62
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employees, to code their claim submissions with appropriate diagnoses, which we
send to CMS as the basis for our payment received from CMS under the actuarial
risk-adjustment model. We also rely on providers to appropriately document all
medical data, including the diagnosis data submitted with claims. CMS is
phasing-in the process of calculating risk scores using diagnoses data from the
Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter
Data System, or EDS. The RAPS process requires MA plans to apply a filter logic
based on CMS guidelines and only submit diagnoses that satisfy those guidelines.
For submissions through EDS, CMS requires MA plans to submit all the encounter
data and CMS will apply the risk adjustment filtering logic to determine the
risk scores. For 2021, 75% of the risk score was calculated from claims data
submitted through EDS. CMS will complete the phased-in transition from RAPS to
EDS by using only EDS data to calculate risk scores in 2022. The phase-in from
RAPS to EDS could result in different risk scores from each dataset as a result
of plan processing issues, CMS processing issues, or filtering logic differences
between RAPS and EDS, and could have a material adverse effect on our results of
operations, financial position, or cash flows. We estimate risk-adjustment
revenues based on medical diagnoses for our membership. The risk-adjustment
model, including CMS changes to the submission process, is more fully described
in Item 1. - Business under the section titled "Individual Medicare," and in
Item 1A. - Risk Factors.
Investment Securities
Investment securities totaled $14.0 billion , or 31% of total assets at
December 31, 2021 , and $13.8 billion , or 39% of total assets at December 31,
2020 . The investment portfolio was primarily comprised of debt securities,
detailed below, at December 31, 2021 and December 31, 2020 . The fair value of
investment securities were as follows at December 31, 2021 and 2020:
Percentage Percentage
12/31/2021 of Total 12/31/2020 of Total
(dollars in millions)
corporations and agencies: U.S. Treasury and agency obligations$ 602 4.3 %$ 616 4.5 % Mortgage-backed securities 3,229 23.1 % 3,254 23.6 % Tax-exempt municipal securities 841 6.0 % 1,447 10.5 % Mortgage-backed securities: Residential 367 2.6 % 17 0.1 % Commercial 1,410 10.1 % 1,318 9.6 % Asset-backed securities 1,348 9.7 % 1,372 10.0 % Corporate debt securities 5,700 40.8 % 4,927 35.8 % Total debt securities 13,497 96.6 % 12,951 94.1 % Common stock 475 3.4 % 815 5.9 % Total investment securities$ 13,972 100.0 %$ 13,766 100.0 % Approximately 95% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by S&P atDecember 31, 2021 . Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities inthe United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified acrossthe United States with no individual state exceeding 1% of our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types. 63 -------------------------------------------------------------------------------- Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows atDecember 31, 2021 : Less than 12 months 12 months or more Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (in millions)
corporations and agencies: U.S. Treasury and agency obligations$ 201 $ (3) $ 355 $ (7) $ 556 $ (10) Mortgage-backed securities 2,082 (49) 556 (20) 2,638 (69) Tax-exempt municipal securities 68 (1) 34 (1) 102 (2) Mortgage-backed securities: Residential 358 (6) 8 - 366 (6) Commercial 295 (4) 400 (7) 695 (11) Asset-backed securities 530 (3) 425 (1) 955 (4) Corporate debt securities 1,456 (28) 769 (31) 2,225 (59) Total debt securities$ 4,990 $ (94) $ 2,547 $ (67) $ 7,537 $ (161) Prior toJanuary 1, 2020 , we applied the other-than-temporary impairment model for securities in an unrealized loss position which did not result in any material impairments for 2019. Beginning onJanuary 1, 2020 , we adopted the new current expected credit losses, or CECL, model which retained many similarities from the previous other-than-temporary impairment model except eliminating from consideration in the impairment analysis the length of time over which the fair value had been less than cost. Also, under the CECL model, expected losses on available for sale debt securities are recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. For debt securities whose fair value is less than their amortized cost which we do not intend to sell or are not required to sell, we evaluate the expected cash flows to be received as compared to amortized cost and determine if an expected credit loss has occurred. In the event of an expected credit loss, only the amount of the impairment associated with the expected credit loss is recognized in income with the remainder, if any, of the loss recognized in other comprehensive income. To the extent we have the intent to sell the debt security or it is more likely than not we will be required to sell the debt security before recovery of our amortized cost basis, we recognize an impairment loss in income in an amount equal to the full difference between the amortized cost basis and the fair value. Potential expected credit loss impairment is considered using a variety of factors, including the extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a debt security; changes in the quality of the debt security's credit enhancement; payment structure of the debt security; changes in credit rating of the debt security by the rating agencies; failure of the issuer to make scheduled principal or interest payments on the debt security and changes in prepayment speeds. For debt securities, we take into account expectations of relevant market and economic data. For example, with respect to mortgage and asset-backed securities, such data includes underlying loan level data and structural features such as seniority and other forms of credit enhancements. We estimate the amount of the expected credit loss component of a debt security as the difference between the amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of future cash flows discounted at the implicit interest rate at the date of purchase. The expected credit loss cannot exceed the full difference between the amortized cost basis and the fair value. 64 -------------------------------------------------------------------------------- The risks inherent in assessing the impairment of an investment include the risk that market factors may differ from our expectations, facts and circumstances factored into our assessment may change with the passage of time, or we may decide to subsequently sell the investment. The determination of whether a decline in the value of an investment is related to a credit event requires us to exercise significant diligence and judgment. The discovery of new information and the passage of time can significantly change these judgments. The status of the general economic environment and significant changes in the national securities markets influence the determination of fair value and the assessment of investment impairment. There is a continuing risk that declines in fair value may occur and additional material realized losses from sales or expected credit loss impairments may be recorded in future periods. All issuers of debt securities we own that were trading at an unrealized loss atDecember 31, 2021 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the debt securities were purchased. AtDecember 31, 2021 , we did not intend to sell any debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these debt securities before recovery of their amortized cost basis. Additionally, we did not record any material credit allowances for debt securities that were in an unrealized loss position atDecember 31, 2021 or 2020 There were no material other-than-temporary impairments in 2019.
AtDecember 31, 2021 , goodwill, indefinite-lived and other long-lived assets represented 38% of total assets and 104% of total stockholders' equity, compared to 20% and 52%, respectively, atDecember 31, 2020 . The increase in goodwill, indefinite-lived and other long-lived assets is primarily attributable to ourAugust 2021 KAH acquisition. For goodwill, we are required to test at least annually for impairment at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A reporting unit either is our operating segments or one level below the operating segments, referred to as a component, which comprise our reportable segments. A component is considered a reporting unit if the component constitutes a business for which discrete financial information is available that is regularly reviewed by management. We are required to aggregate the components of an operating segment into one reporting unit if they have similar economic characteristics.Goodwill is assigned to the reporting unit that is expected to benefit from a specific acquisition. We perform a quantitative assessment to review goodwill for impairment to determine both the existence and amount of goodwill impairment, if any. Our strategy, long-range business plan, and annual planning process support our goodwill impairment tests. These tests are performed, at a minimum, annually in the fourth quarter, and are based on an evaluation of future discounted cash flows. We rely on this discounted cash flow analysis to determine fair value. However outcomes from the discounted cash flow analysis are compared to other market approach valuation methodologies for reasonableness. We use discount rates that correspond to a market-based weighted-average cost of capital and terminal growth rates that correspond to long-term growth prospects, consistent with the long-term inflation rate. Key assumptions in our cash flow projections, including changes in membership, premium yields, medical and operating cost trends, and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. If these assumptions differ from actual, including the impact of the Health Care Reform Law or changes in government reimbursement rates, the estimates underlying our goodwill impairment tests could be adversely affected. The fair value of our reporting units with significant goodwill exceeded carrying amounts by a substantial margin. However, unfavorable changes in key assumptions or combinations of assumptions including a significant increase in the discount rate, decrease in the long-term growth rate or substantial reduction in our underlying cash flow assumptions, including revenue growth rates, medical and operating cost trends, and projected operating income could have a significant negative impact on the estimated fair value of our home solutions and provider reporting units, which accounted for$6.6 billion and$933 million of goodwill, respectively. Our home solutions reporting unit includes approximately$5.8 billion of goodwill from ourAugust 2021 KAH acquisition. Impairment tests completed for 2021, 2020, and 2019 did not result in an impairment loss. 65
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Indefinite-lived intangible assets relate to Certificate of Needs (CON) and Medicare licenses acquired in connection with ourAugust 2021 KAH acquisition with a carrying value of$2.3 billion atDecember 31, 2021 . Like goodwill, we are required to test at least annually for impairment and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. These tests are performed, at a minimum, annually in the fourth quarter. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of indefinite-lived intangible assets are determined based on the income approach. Impairment tests completed for 2021 did not result in an impairment loss. Long-lived assets consist of property and equipment and other finite-lived intangible assets. These assets are depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating depreciation or amortization for these assets. There were no material impairment losses in the last three years.
