HUMANA INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

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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 ended December 31, 2020, that
was filed with the Securities and Exchange Commission on February 18, 2021.

Executive Overview

General

Humana Inc., headquartered in Louisville, Kentucky, is a leading health and
well-being company committed to helping our millions of medical and specialty
members achieve their best health. Our successful history in care delivery and
health plan administration is helping us create a new kind of integrated care
with the power to improve health and 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

On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home,
or KAH, the nation's largest home health and hospice provider, from TPG Capital
and Welsh, 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.



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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, and Long-Term Support
Services benefits, which we refer to collectively as our state-based contracts.
The Group and Specialty segment consists of employer group commercial
fully-insured medical and specialty health insurance benefits marketed to
individuals and employer groups, including dental, vision, and other
supplemental health benefits, as well as administrative services only, or ASO
products. In addition, our Group and Specialty segment includes our military
services business, primarily our TRICARE T2017 East Region contract. The
Healthcare Services segment includes pharmacy, provider, and home services,
along with other services and capabilities to promote wellness and advance
population health. The operations of the recently acquired full ownership of
Kindred at Home, as well as the company's strategic partnership with Welsh,
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 our Retail and Group and Specialty segment customers.
Intersegment sales and expenses are recorded at fair value and eliminated in
consolidation. Members served by our segments often use the same provider
networks, enabling us in some instances to obtain more favorable contract terms
with providers. Our segments also share indirect costs and assets. As a result,
the profitability of each segment is interdependent. We allocate most operating
expenses to our segments. Assets and certain corporate income and expenses are
not allocated to the segments, including the portion of investment income not
supporting segment operations, interest expense on corporate debt, and certain
other corporate expenses. These items are managed at a corporate level. These
corporate amounts are reported separately from our reportable segments and are
included with intersegment eliminations.

Seasonality

COVID-19 disrupted the pattern of our quarterly earnings and operating cash
flows largely due to the temporary deferral of non-essential care which resulted
in reductions in non-COVID-19 hospital admissions and lower overall healthcare
system utilization during higher levels of COVID-19 hospital admissions. 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 on January 1 for renewals. These plan designs
generally result in us sharing a greater portion of the responsibility for total
prescription drug costs in the early stages and less in the latter stages. As a
result, the PDP benefit ratio generally decreases as the year progresses. In
addition, the number of low income senior members as well as year-over-year
changes in the mix of membership in our standalone PDP products affects the
quarterly benefit ratio pattern.

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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.
At December 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%, at
December 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.

•On February 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 before April 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 on April 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.

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                                                                         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

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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 our Retail 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.


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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 December 31, 2021 and 2020:

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.



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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

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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 the Humana 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 $107 millioni.e. 21.9%, of $489
million
in the period 2020 for $596 million over the 2021 period mainly due to
capital expenditure.

Interest Expense

Interest expense increased $43 millioni.e. 15.2%, of $283 million in the 2020
period to $326 million over the 2021 borrowing period to finance the KAH
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 in August
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  %


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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 of December 31, 2020 to 4,409,100 members as of
December 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 from January 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 of December 31, 2021, a net increase of
170,000 members, or 42%, from 406,100 members as of December 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 of December 31, 2020 to 560,600 members as of December 31,
2021 primarily due to the net loss of certain large accounts in January 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 of December 31, 2020 to 3,606,200 members as of
December 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 of December 31, 2020 to 940,100 members as of December 31,
2021 primarily reflecting additional

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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 in
Wisconsin 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 in April 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 of December 31, 2020 to 674,600 members as of
December 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% at December 31, 2021 and 54% at
December 31, 2020.

•Group ASO commercial medical membership decreased 9,400 members, or 1.9%, from
504,900 members as of December 31, 2020 to 495,500 members as of December 31,
2021. Small group membership comprised 43% of group ASO medical membership at
December 31, 2021 and 45% at December 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
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•Military services membership increased 50,300 members, or 0.8%, from 5,998,700
members as of December 31, 2020 to 6,049,000 members as of December 31, 2021.
Membership includes military service members, retirees, and their families to
whom we are providing healthcare services under the current TRICARE East Region
contract.

•Specialty membership decreased 16,000 members, or 0.3%, from 5,310,300 members
as of December 31, 2020 to 5,294,300 members as of December 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.

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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 $31,238 28,435

 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 the Retail 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.

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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 to Conviva, 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 at December 31, 2021 from
$4.7 billion at December 31, 2020. The change in cash and cash equivalents for
the years ended December 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 

$1,711

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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 at December 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.
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The detail of total net receivables was as follows at December 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 $4.2 billionnet of cash received.

In 2020, we acquired Enclara Healtha hospice, a pharmacy and services
supplier, for a cash consideration of approximately $709 millionnet of cash
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 $1.1 billion, $1.4 billion, $542
million
respectively for the periods 2021, 2020 and 2019.

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 at December 31, 2021 compared to a net receivable of
$1.2 billion at December 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 $45 million, $1 million and $63 million in 2021, 2020
and 2019, respectively.

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In August 2021, we issued $1.5 billion of 0.650% unsecured senior notes due
August 3, 2023, $750 million of 1.350% unsecured senior notes due February 3,
2027 and $750 million of 2.150% unsecured senior notes due February 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 in August 2021, we
assumed approximately $2.1 billion of borrowings, and subsequently repaid
$150 million of borrowings. In October 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.

In May 2021, we entered into a $500 million unsecured delayed draw term loan
credit agreement. In August 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 December 2020have been paid $400 million aggregate principal amount of our 2.5%
Senior Notes due on their maturity date on December 15, 2020.

In March 2020We were drawing $1 billion on the existing term loan commitment at the
time, which was reimbursed in November 2020.

In March 2020, we issued $600 million of 4.500% senior notes due April 1, 2025
and $500 million of 4.875% senior notes due April 1, 2030. Our net proceeds,
reduced for the underwriters' discounts and commissions and offering expenses
paid, were $1,088 million.

In August 2019, we issued $500 million of 3.125% senior notes due August 15,
2029 and $500 million of 3.950% senior notes due August 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 in August 2019, and the $400 million aggregate principal
amount of our 2.625% senior notes due on its maturity date of October 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 $354 million in 2021, $323 million in 2020,
and $291 million in 2019.

We entered into a commercial paper program in October 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

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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 at December 31, 2021 was BBB+ according to
Standard & Poor's Rating Services, or S&P, and Baa3 according to Moody's
Investors Services, Inc., or Moody's. A downgrade by S&P to BB+ or by Moody's to
Ba1 triggers an interest rate increase of 25 basis points with respect to $250
million of our senior notes. Successive one notch downgrades increase the
interest rate an additional 25 basis points, or annual interest expense by $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 at December 31, 2021 from $772 million at
December 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 of December 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
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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 in the 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.

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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 December 31, 2021
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 for Retail and Group and Specialty segment tables including
information about incurred and paid claims development as of December 31, 2021,
net of reinsurance, as well as cumulative claim frequency and the total of IBNR
included within the net incurred claims amounts.

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                                                    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.

                                                                       

Favorable development by changes in key assumptions

                                                      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



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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 ended December 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 our December 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

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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)

we Treasury and other we government

  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 at December 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 in
the 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
across the 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.



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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 at December 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)

we Treasury and other we government

  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 to January 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 on January 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.

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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 at
December 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. At
December 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 at December 31, 2021 or 2020 There were no material
other-than-temporary impairments in 2019.

Good willIndefinite and long-lived assets

At December 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, at December 31, 2020. The increase in goodwill,
indefinite-lived and other long-lived assets is primarily attributable to our
August 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 our August 2021 KAH acquisition. Impairment tests
completed for 2021, 2020, and 2019 did not result in an impairment loss.

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Indefinite-lived intangible assets relate to Certificate of Needs (CON) and
Medicare licenses acquired in connection with our August 2021 KAH acquisition
with a carrying value of $2.3 billion at December 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.
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