| Notes to Financial Statements | |
| 6 Months Ended
Jun. 30, 2009
USD / shares
|
| Notes to Financial Statements [Abstract] | |
| 1. BASIS OF PRESENTATION |
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December31, 2008, that was filed with the Securities and Exchange Commission, or the SEC, on February20, 2009. References throughout this document to we, us, our, Company, and Humana mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare and TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December31, 2008 for information on accounting policies that the Company considers in preparing its consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. |
| 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board, or FASB, issued two FASB Staff Positions, or FSPs, to address concerns about (1)measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2)recording impairment charges on investments in debt securities. The FASB also issued a third FSP to require disclosures of fair values of certain financial instruments in interim financial statements.
FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. This FSP also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).
FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, changed (1)the trigger for determining whether an other-than-temporary impairment exists and (2)the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity is required to assess the likelihood of selling a security prior to recovering its cost basis. This is a change from the previous requirement for an entity to assess whether it had the intent and ability to hold a security to recovery or maturity. This FSP also expands and increases the frequency of existing disclosure about other-than-temporary impairments and requires new disclosures of the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.
FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures from annual to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments.
We adopted these FSPs for the quarter ended June30, 2009. Refer to Note 4, Note 5 and Note 12 to these condensed consolidated financial statements for disclosures related to these FSPs.
In May 2009, the FASB issued FASB Statement No.165, Subsequent Events, or SFAS 165, which establishes general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard is based on the same principles that currently exist in the auditing standards. SFAS 165 requires disclosure of the date through which subsequent events have been evaluated and for certain nonrecognized subsequent events, the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made. We adopted SFAS 165 for the quarter ended June30, 2009. Refer to Note 15 to these condensed consolidated financial statements for the relat |
| 3. ACQUISITIONS |
3. ACQUISITIONS
On October31, 2008, we acquired PHP Companies, Inc. (d/b/a Cariten Healthcare), or Cariten, for cash consideration of approximately $256.1 million. The Cariten acquisition increased our commercial fully-insured and ASO presence as well as our Medicare HMO presence in eastern Tennessee. During the first quarter of 2009, we continued our review of the fair value estimate of certain other intangible and net tangible assets acquired. This review resulted in a decrease of $27.1 million in the fair value of other intangible assets, primarily related to the fair value assigned to the customer contracts acquired. There was a corresponding adjustment to goodwill and deferred income taxes.
On August29, 2008, we acquired Metcare Health Plans, Inc., or Metcare, for cash consideration of approximately $14.9 million. The acquisition expanded our Medicare HMO membership in central Florida.
On May22, 2008, we acquired OSF Health Plans, Inc., or OSF, a managed care company serving both Medicare and commercial members in central Illinois, for cash consideration of approximately $87.3 million. This acquisition expanded our presence in Illinois, broadening our ability to serve multi-location employers with a wider range of products including our specialty offerings.
On April30, 2008, we acquired UnitedHealth Groups Las Vegas, Nevada individual SecureHorizons Medicare Advantage HMO business, or SecureHorizons, for cash consideration of approximately $185.3 million, plus subsidiary capital and surplus requirements of $40 million. The acquisition expanded our presence in the Las Vegas market.
The Cariten, OSF, and Metcare purchase agreements contain provisions under which there may be future contingent consideration paid or received, primarily related to balance sheet settlements associated with medical claims runout and Medicare reconciliations with the Centers for Medicare and Medicaid Services, or CMS. Any contingent consideration paid or received will be recorded as an adjustment to goodwill when the contingencies are resolved. During the first quarter of 2009, we paid $3.3 million to settle a purchase price contingency associated with the acquisition of OSF. |
| 4. INVESTMENT SECURITIES |
4. INVESTMENT SECURITIES
Investment securities have been categorized as available for sale and, as a result, are stated at fair value. Unrealized holding gains and losses, net of applicable deferred taxes, are included as a component of stockholders equity and comprehensive income until realized from a sale or other-than-temporary impairment, or OTTI.
Investment securities classified as current and long-term were as follows at June30, 2009 and December31, 2008, respectively:
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
(in thousands)
June30, 2009
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations $ 587,649 $ 7,326 $ (1,801 ) $ 593,174
Mortgage-backed securities 1,101,796 20,476 (2,908 ) 1,119,364
Tax-exempt municipal securities 1,848,234 35,622 (28,026 ) 1,855,830
Mortgage-backed securities:
Residential 386,333 1,812 (80,770 ) 307,375
Commercial 292,118 834 (33,579 ) 259,373
Asset-backed securities 151,735 1,504 (770 ) 152,469
Corporate debt securities 1,523,525 35,222 (48,638 ) 1,510,109
Redeemable preferred stock 19,474 1,650 21,124
Total debt securities 5,910,864 104,446 (196,492 ) 5,818,818
Equity securities 4,909 (107 ) 4,802
Total $ 5,915,773 $ 104,446 $ (196,599 ) $ 5,823,620
December31, 2008
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations $ 587,207 $ 12,759 $ (68 ) $ 599,898
Mortgage-backed securities 1,268,956 28,974 (225 ) 1,297,705
Tax-exempt municipal securities 1,702,026 27,649 (40,213 ) 1,689,462
Mortgage-backed securities:
Residential 450,867 1,565 (105,124 ) 347,308
Commercial 313,933 (53,634 ) 260,299
Asset-backed securities 156,618 27 (12,275 ) 144,370
Corporate debt securities 930,707 10,532 (99,842 ) 841,397
Redeemable preferred stock 18,052 1,650 19,702
Total debt securities 5,428,366 83,156 (311,381 ) 5,200,141
Equity securities 16,956 (1,655 ) 15,301
Total $ 5,445,322 $ 83,156 $ (313,036 ) $ 5,215,442
We participate in a securities lending program where we loan certain investment securities f short periods of time in exchange for collateral, consisting of cash or U.S. Government securities, initially equal to at least 102% of the fair value of the investment securities on loan. Investment securities with a fair value of $295.6 million at June30, 2009 and $437.1 million at December31, 2008 were |
| 5. FAIR VALUE |
5. FAIR VALUE
The following table summarizes our fair value measurements at June30, 2009 and December31, 2008, respectively, for financial assets measured at fair value on a recurring basis:
Fair Value Measurements Using
Fair Value QuotedPricesin Active Markets for Identical Assets (Level 1) SignificantOther Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(in thousands)
June30, 2009
Cash equivalents $ 1,490,501 $ 1,490,501 $ $
Investment securities 5,823,620 5,732,461 91,159
Securities lending invested collateral 270,120 270,120
Total invested assets $ 7,584,241 $ 1,490,501 $ 6,002,581 $ 91,159
December31, 2008
Cash equivalents $ 1,549,966 $ 1,549,966 $ $
Investment securities 5,215,442 5,123,516 91,926
Securities lending invested collateral 402,399 402,399
Total invested assets $ 7,167,807 $ 1,549,966 $ 5,525,915 $ 91,926
During the six months ended June30, 2009 and 2008, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:
Forthesixmonthsended June30,
2009 2008
(in thousands)
Beginning balance at January1 $ 91,926 $ 18,698
Total gains or losses:
Realized in earnings 39 27
Unrealized in other comprehensive income 171 697
Purchases, sales, issuances, and settlements, net (802 ) (1,133 )
Transfers in and/or out of Level 3 605
Balance at March31 91,939 18,289
Total gains or losses:
Realized in earnings 16 45
Unrealized in other comprehensive income 222 (953 )
Purchases, sales, issuances, and settlements, net (1,018 ) 1,702
Transfers in and/or out of Level 3 95,523
Balance at June30 $ 91,159 $ 114,606
Level 3 assets primarily include auction rate securities. Auction rate securities are debt instruments with interest rates that reset through periodic short-term auctions. The auction rate securities we own, which had a fair value of $73.2 million at June30, 2009, or less than 1% of our total invested assets, primarily consist of tax-exempt bonds rated AAA and AA and collateralized by federally guaranteed student loans. Liquidity issues in the global credit markets led to failed auctions. A failed auction is not a default of the debt instrument, but does set a new, generally higher interest rate in accordance with the original terms of the debt instrument. Liquidation of auction rate securities results when (1)a successful auction occurs, (2)the securities are called or refinanced by the issuer, (3)a buyer is found outside the auction process, or (4)the security matures. We continue to receive income on all auction rate secur |
| 6. MEDICARE PART D |
6. MEDICARE PART D
The condensed consolidated balance sheets include the following amounts associated with Medicare Part D as of June30, 2009 and December31, 2008. The risk corridor settlement includes amounts classified as long-term because settlement associated with the 2009 provision will exceed 12 months as of June30, 2009.
June30, 2009 December31, 2008
Risk Corridor Settlement CMS Subsidies Risk Corridor Settlement CMS Subsidies
(in thousands)
Other current assets $ 88,454 $ 384,955 $ 78,728 $ 322,108
Trade accounts payable and accrued expenses (18,896 ) (593,888 ) (23,311 ) (219,676 )
Net current asset (liability) 69,558 (208,933 ) 55,417 102,432
Other long-term assets 1,296
Other long-term liabilities (33,288 )
Net long-term liability (31,992 )
Total net asset (liability) $ 37,566 $ (208,933 ) $ 55,417 $ 102,432
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| 7. GOODWILL AND OTHER INTANGIBLE ASSETS |
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill, by operating segment, for the six months ended June30, 2009 were as follows:
Commercial Government Total
(in thousands)
Balance at December31, 2008 $ 1,266,919 $ 696,192 $ 1,963,111
Purchase price allocation adjustments related to prior year acquisitions 10,907 15,598 26,505
Contingent purchase price settlements related to prior year acquisitions 1,819 1,489 3,308
Balance at June30, 2009 $ 1,279,645 $ 713,279 $ 1,992,924
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at June30, 2009 and December31, 2008:
Weighted AverageLife at 6/30/09 June30, 2009 December31, 2008
Cost Accumulated Amortization Net Cost Accumulated Amortization Net
(in thousands)
Other intangible assets:
Customer contracts 11.1yrs $ 321,385 $ 102,919 $ 218,466 $ 341,085 $ 86,288 $ 254,797
Provider contracts 18.0 yrs 36,253 5,942 30,311 36,253 4,903 31,350
Trade names and other 10.7 yrs 18,196 5,384 12,812 22,486 7,345 15,141
Total other intangible assets 11.7 yrs $ 375,834 $ 114,245 $ 261,589 $ 399,824 $ 98,536 $ 301,288
Amortization expense for other intangible assets was approximately $19.1 million for the six months ended June30, 2009 and $17.3 million for the six months ended June30, 2008. The following table presents our estimate of amortization expense for 2009 and for each of the five succeeding fiscal years:
(inthousands)
For the years ending December 31,
2009 $ 37,307
2010 $ 33,764
2011 $ 32,101
2012 $ 30,413
2013 $ 26,614
2014 $ 23,848 |
| 8. COMPREHENSIVE INCOME |
8. COMPREHENSIVE INCOME
The following table presents details supporting the computation of comprehensive income for the three and six months ended June30, 2009 and 2008:
Three months ended June30, Six months ended June30,
2009 2008 2009 2008
(in thousands)
Net income $ 281,780 $ 209,896 $ 487,497 $ 290,066
Net unrealized investment gains (losses) and other, net of tax 88,368 (58,437 ) 88,687 (65,146 )
Comprehensive income, net of tax $ 370,148 $ 151,459 $ 576,184 $ 224,920
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| 9. EARNINGS PER COMMON SHARE COMPUTATION |
9. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and six months ended June30, 2009 and 2008:
Three months ended June30, Six months ended June30,
2009 2008 2009 2008
(in thousands, except per share results)
Net income available for common stockholders $ 281,780 $ 209,896 $ 487,497 $ 290,066
Weighted average outstanding shares of common stock used to compute basic earnings per common share 167,301 167,146 167,172 167,668
Dilutive effect of:
Employee stock options 588 1,165 610 1,365
Restricted stock 780 686 882 766
Shares used to compute diluted earnings per common share 168,669 168,997 168,664 169,799
Basic earnings per common share $ 1.68 $ 1.26 $ 2.92 $ 1.73
Diluted earnings per common share $ 1.67 $ 1.24 $ 2.89 $ 1.71
Number of antidilutive stock options and restricted stock excluded from computation 6,635 3,769 6,850 2,590 |
| 10. STOCK REPURCHASE PLAN |
10. STOCK REPURCHASE PLAN
In the third quarter of 2008, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. The shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain restrictions on volume, pricing and timing. During the six months ended June30, 2009, no shares were repurchased pursuant to the program and, accordingly, as of August3, 2009, the remaining authorized amount totaled $250 million. The share repurchase program expires on December31, 2009.
In connection with employee stock plans, we acquired 0.2million common shares for $6.0 million and 0.2million common shares for $12.1 million during the six months ended June30, 2009 and 2008, respectively. |
| 11. INCOME TAXES |
11. INCOME TAXES
The effective income tax rate was 36.0% and 33.6%, respectively, for the three and six months ended June30, 2009 compared to 35.4% for the three and six months ended June30, 2008. The decrease in the rate for the six months ended June30, 2009 primarily is due to the reduction of the $16.8 million liability for unrecognized tax benefits as a result of settlements associated with the completion of the audit of our U.S. income tax returns for 2005 and 2006 during the first quarter of 2009. |
| 12. DEBT |
12. DEBT
The carrying value of long-term debt outstanding was as follows at June30, 2009 and December31, 2008:
June30, 2009 December31, 2008
(in thousands)
Long-term debt:
Senior notes $ 1,644,856 $ 1,648,964
Credit agreement 250,000
Other long-term borrowings 37,798 38,068
Total long-term debt $ 1,682,654 $ 1,937,032
During the six months ended June30, 2009, we repaid $250.0 million of amounts previously borrowed under our $1.0 billion credit agreement to fund the acquisition of Cariten. As of June30, 2009, there were no borrowings outstanding under our $1.0 billion credit agreement. The fair value of our long-term debt was $1,416.0 million at June30, 2009 and $1,503.4 million at December31, 2008. The fair value of our long-term debt is determined based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current rates estimated to be available to us for debt with similar terms and remaining maturities. |
| 13. GUARANTEES AND CONTINGENCIES |
13. GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare business, which accounted for approximately 62% of our total premiums and ASO fees for the six months ended June30, 2009, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a one-year term each December31 unless CMS notifies us of its decision not to renew by August1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2010.
CMS is performing audits of selected Medicare Advantage plans to validate the provider coding practices under the risk-adjustment model used to reimburse Medicare Advantage plans. Several Humana contracts are included in audits being undertaken by CMS. Some of these audits involve a comprehensive review of medical records and CMS has notified us that such audits might result in contract-level payment adjustments to premium payments made to a health plan pursuant to its Medicare contract with CMS or other payment reductions. The first of these audits focuses on risk-adjustment data for 2006 used to determine 2007 payment amounts. Based on audit results, CMS may make contract-level payment adjustments that could occur during 2009, and adjustments might occur prior to our or other Medicare Advantage plans having the opportunity to appeal audit findings. We primarily rely on providers to appropriately document risk-adjustment data in their medical records and appropriately code their claim submissions, which we send to CMS as the basis for our risk-adjustment model premium. We are working with CMS and our industry group to develop an orderly audit process, for which CMS has not yet indicated the complete details. Therefore, we are unable to predict the complete audit methodology to be used by CMS, the outcome of these audits, or whether these audits would result in a payment adjustment. However, it is reasonably possible that a payment adjustment as a result of these audits could occur, and that any such adjustment could have a material adverse effect on our results of operations, financial position, and cash flows.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the six months ended June30, 2009, consisted of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Our Medicaid contracts with the Puerto Rico Insurance Administration for the East and Southeast regions were extended for four months to October31, 2009 with no change in terms. In July 2009, the Puerto Rico Insurance Administration issued a formal request for proposal for new contracts to be effective November1, 2009 for five regions. The request for proposal excluded the Metro North, Northeast and Southeast regions. We expect to bid on all regions under the request for proposal.
The loss of any of the contracts above or significant changes in t |
| 14. SEGMENT INFORMATION |
14. SEGMENT INFORMATION
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. We identified our segments in accordance with the aggregation provisions of SFAS 131, which aggregates products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended December31, 2008. The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
Our segment results were as follows for the three and six months ended June30, 2009 and 2008:
Government Segment
ThreemonthsendedJune30, Six months endedJune30,
2009 2008 2009 2008
(in thousands)
Revenues:
Premiums:
Medicare Advantage $ 4,145,129 $ 3,491,824 $ 8,205,588 $ 6,659,541
Medicare stand-alone PDP 638,813 905,071 1,234,496 1,780,070
Total Medicare 4,783,942 4,396,895 9,440,084 8,439,611
Military services 924,308 806,976 1,795,479 1,617,635
Medicaid 160,529 141,976 317,189 285,656
Total premiums 5,868,779 5,345,847 11,552,752 10,342,902
Administrative services fees 23,155 19,456 43,488 42,162
Investment income 47,176 38,775 87,958 87,093
Other revenue 522 462 1,716 861
Total revenues 5,939,632 5,404,540 11,685,914 10,473,018
Operating expenses:
Benefits 4,934,617 4,611,992 9,868,530 9,111,704
Selling, general and administrative 550,939 507,516 1,148,150 1,045,524
Depreciation and amortization 33,176 29,617 65,745 58,463
Total operating expenses 5,518,732 5,149,125 11,082,425 10,215,691
Income from operations 420,900 255,415 603,489 257,327
Interest expense 16,225 5,966 32,713 11,115
Inc |
| 15. SUBSEQUENT EVENTS |
15. SUBSEQUENT EVENTS
We have evaluated subsequent events through August3, 2009, the date the condensed consolidated financial statements were issued.
Our military services business primarily consists of the TRICARE South Region contract which covers benefits for healthcare services provided to beneficiaries through March31, 2010. In July 2009, we were notified by the Department of Defense that we were not awarded the third generation TRICARE program contract for the South Region which had been subject to competing bids. We have filed a protest with the Government Accountability Office in connection with the award to another bidder but are not yet able to make a reasonable determination of the outcome of such protest. In our protest, we cited discrepancies between the award criteria and procedures prescribed in the request for proposals issued by the DoD and those that appear to have been used by the DoD in making its contractor selection. For the six months ended June30, 2009, premiums and ASO fees associated with the TRICARE South Region contract were $1.8 billion, or 11.7% of our total premiums and ASO fees. We currently are evaluating issues associated with our military services businesses such as potential impairment of certain assets primarily consisting of goodwill which had a carrying value of $50 million at June30, 2009, potential exit costs, possible asset sales, and a strategic assessment of ancillary businesses. We cannot yet determine a reasonable estimate of the impact of such issues on our earnings. |
