# Humana Inc: Form 10-Q for the period ended Sep 30, 2020

- Company: [Humana Inc](/companies/hum.md) (CIK 49071)
- Form: 10-Q
- Filed: 2020-11-03
- Accepted by EDGAR: Nov 3, 2020, 14:01 ET
- Period: 2020-09-30
- Accession: 0000049071-20-000135
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/49071/000004907120000135/hum-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/49071/000004907120000135/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $20.07bn | us-gaap:Revenues |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $58.09bn | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $2.51bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $6.98bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $1.82bn | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $5.33bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $75.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $211.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $450.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $1.49bn | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $1.34bn | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $3.64bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $10.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $27.37 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $10.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $27.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 133,196,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 133,010,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $5.36bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $668.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $239.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $30.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $7.99bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $27.03bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $38.48bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $14.90bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $22.71bn | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $6.06bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $1.72bn | us-gaap:DebtCurrent |
| Shareholders' equity | at 2020-09-30 | $15.77bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2020-09-30 | 132,341,451 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 72,113 characters.

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the Securities and Exchange Commission, or SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “believes,” “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. – Risk Factors in our 2019 Form 10-K, as modified by any changes to those risk factors included in this document including the potential impacts of risks related to the spread of, and response to, the COVID-19 pandemic as further discussed in Part II of this report and in other reports we filed subsequent to February 20, 2020, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.*

### Executive Overview

### General

Humana Inc., headquartered in Louisville, Kentucky, is 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 well being 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 in home 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.

Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking

total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.

### COVID-19

We have continued to take actions to protect, inform, and care for our members, providers, employees, and other stakeholders associated with the outbreak of the novel coronavirus, or COVID-19. Specifically, we have taken the following actions to support our members:

- waiving all cost sharing for in-network primary care, outpatient behavioral health, and telehealth visits for the remainder of 2020 for our Medicare Advantage members, to reduce financial barriers to members seeking to re-engage with their providers, while continuing to encourage the use of telehealth;
- delivering meals to our senior members in need;
- making it easier for members to be tested for COVID-19 by offering at-home testing, as well as collaborating with other providers to deploy drive-thru testing at hundreds of sites throughout the country;
- mailing in-home screening kits to members, to encourage members to seek preventative care that may have been delayed during the pandemic;
- proactively delivering safety kits, including face masks, to members and employee homes to facilitate access to care and support visits to providers safely;
- continuing to extend grace periods for premium payments for our fully-insured commercial group members, to ensure continuity of coverage during times of financial stress; and
- establishing a clinical outreach team to proactively engage with our most vulnerable members.

In addition, we took steps to support our provider partners and boost system viability:

- increasing provider funding, simplifying and expanding claims processing and releasing advanced funding to providers, to get reimbursement payments to providers as quickly as possible and ease financial concerns so that members are able to continue to access the care and information they need; and
- expanding modifications to certain utilization management processes, to ease administrative stress and make sure providers are able to most efficiently care for their patients.

Finally, we continued to support the communities we serve by donating $200 million during the first half of 2020 to the Humana Foundation to address social determinants of health in an effort to promote more health days and encourage greater health equity.

The temporary deferral of non-essential care resulting from stay-at-home and physical distancing orders and other restrictions on movement and economic activity implemented throughout the country beginning in the second half of March 2020 to reduce the spread of the novel coronavirus, or COVID-19, has impacted our business. Hospital admissions and utilization were significantly depressed in April and increased throughout May and June. Utilization continued to rebound throughout the third quarter of 2020, reaching approximately 95% of historic baseline levels at the close of the third quarter. The impact of the deferral of non-essential care was partially offset by COVID-19 testing and treatment costs, as well as our ongoing pandemic relief efforts.

We significantly increased our liquidity position during March 2020 with the issuance of $1.1 billion in senior notes and a $1 billion draw under the prior one-year term loan bank commitment. At September 30, 2020, we held $2.4 billion of cash and short-term investments at our parent company and access to an additional $2.0 billion under our credit agreement.

For the remainder of 2020, we expect our year to date 2020 performance will be further offset by the impact of increasing utilization, COVID-19 testing and treatment costs and the continued support for our constituents. A number of significant variables and uncertainties will impact these trends including, among others, the severity and duration of the pandemic, continued actions taken to mitigate the spread of COVID-19 and in turn, relax those restrictions, the timing and degree in resumption of demand for deferred health care services, the ability of our commercial members to pay their premium, the nature, level and cost of diagnostic testing, the cost and timing of new therapeutic treatments and vaccines, all of which are difficult to predict. As such, our response to this global health crisis and the subsequent recovery will continue to evolve over the coming months to support the needs of our stakeholders.

### Recent Transactions

In the first quarter of 2020, we purchased privately held Enclara, one of the nation’s largest hospice pharmacy and benefit management providers, for cash consideration of approximately $709 million, net of cash received.

We have entered into a strategic partnership with WCAS to accelerate the expansion of our primary care model. The WCAS partnership is expected to open approximately 50 payor-agnostic, senior-focused primary care centers over 3 years beginning in 2020.

These transactions are more fully discussed in Note 3 to the condensed consolidated financial statements.

### Business Segments

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.

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, 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 our services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as home health and other services and capabilities to promote wellness and advance population health, including our minority investment in Kindred at Home and the strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers.

The results of each segment are measured by segment earnings, and for our Healthcare Services Segment, also include equity in net earnings from our equity method investees. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care 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

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 stand-alone PDP products affects the quarterly benefit ratio pattern.

In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.

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.

### 2020 Highlights

- Our strategy offers our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At September 30, 2020, approximately 2,605,900 members, or 66%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,340,600 members, or 66%, at September 30, 2019. Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 917,200 at September 30, 2020, an increase of 4% from 882,800 at September 30, 2019. These members may not be unique to each program since members have the ability to enroll in multiple programs. The increase is driven by our improved process for identifying and enrolling members in the appropriate program at the right time, coupled with growth in Special Needs Plans, or SNP, membership.
- In October, 2020, the Centers for Medicare and Medicaid Services, or CMS, issued its preliminary 2022 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 rates on or before April 5, 2021, or the Final Notice, and indicated that the Final Notice may be published early in light of the challenges posed by the uncertainty associated with the COVID-19 pandemic. In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 2.82 percent 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. Based on our preliminary analysis using the same factors CMS included in its estimate, the components of which are detailed on CMS’ website, we anticipate the proposals in the Advance Notice would result in a change generally in line with CMS’ estimate, with the exception of our Medicare Star Ratings for bonus year 2022, as more fully described below, that led our peers. We will be drawing upon our program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact upon Medicare beneficiaries’ quality of care and service to our members through the Medicare Advantage program.
- In October 2020, CMS published its updated Medicare Star Ratings for bonus year 2022.We have 4.1 million members, or approximately 92 percent of our Medicare Advantage membership as of September 2020, enrolled in 15 contracts that received a 4-star rating or above. In addition, we received a 5 out of 5-star rating for our CarePlus Health Plans, Inc. contract in Florida for the third consecutive year and received a 4.5-star rating for three Medicare Advantage contracts offered in 7 states, which cover approximately 796,000 members. Additionally, over 99 percent of retirees in our group Medicare Advantage plans remain in 4-star or above contracts for bonus year 2022. Our Star Ratings continue to reflect our focus on quality in both member experience and clinical outcomes.
- Net income was $1.3 billion, or $10.05 per diluted common share, for the three months ended September 30, 2020, or the 2020 quarter, compared to $689 million, or $5.14 per diluted common share, for the three months ended September 30, 2019, or the 2019 quarter, and was $3.6 billion, or $27.37 per diluted

common share, for the nine months ended September 30, 2020, or the 2020 period, compared to $2.2 billion, or $16.24 per diluted common share, for the nine months ended September 30, 2019, or the 2019 period. These comparisons were significantly impacted by the change in the fair value of publicly-traded equity securities, the net receipt of commercial risk corridor receivables previously written off, and the put/call valuation adjustments associated with certain equity method investments. The change in the fair value of our publicly-traded equity securities relates primarily to our common stock holdings, including both the gain resulting from the initial conversion of our prior ownership interest in certain privately held companies, primarily in Oak Street Health, Inc., or OSH, into common stock upon such companies' initial public offering, or IPO, during the third quarter of 2020, and the subsequent changes in the market value of such securities from their IPO through the end of the period. In September 2020, we received $578 million, net of related fees and expenses pursuant to the U.S. Supreme Court ruling that the government is obligated to pay the losses under the risk corridor program. The receipt of the risk corridor payments was associated with losses incurred under the Health Care Reform business in 2014 to 2016. The receipt of these risk corridor payments accounted for less than half of our accumulated losses before income taxes from this business during that time period. The impact of these adjustments to our consolidated income before income taxes and equity in net earnings and diluted earnings per common share was as follows for the 2020 quarter and period.

| Consolidated income before income taxes and equity in net earnings: | For the three months ended September 30, 2020 2019 | For the nine months ended September 30, 2020 2019 |
| --- | ---: | ---: |
| Change in the fair value of publicly-traded equity securities | $643 $— | $643 $— |
| Receipt of commercial risk corridor receivables previously written off, net | 578 — | 578 — |
| Put/call valuation adjustments | 7 82 | (63) 217 |
| Total | $1,228 $82 | $1,158 $217 |
|  | **For the three months ended September 30,** | **For the nine months ended September 30,** |
|  | **2020** **2019** | **2020** **2019** |
| **Diluted earnings per common share:** |  |  |
| Change in the fair value of publicly-traded equity securities | $3.72 $— | $3.73 $— |
| Receipt of commercial risk corridor receivables previously written off, net | 3.35 — | 3.35 — |
| Put/call valuation adjustments | 0.03 0.47 | (0.37) 1.23 |
| Total | $7.10 $0.47 | $6.71 $1.23 |

Excluding these adjustments, our results of operations reflect the impact of the ongoing COVID-19 pandemic. Utilization continued to rebound throughout the 2020 quarter, reaching approximately 95% of historic baseline levels by end of the third quarter. As such, our 2020 quarter results of operations comparisons were impacted by increasing utilization, COVID-19 testing and treatment costs, as well as the financial impact of our ongoing crisis relief efforts. Our 2020 period results reflect historically low utilization levels in the first six months of the year from the temporary deferral of non-essential care amid the COVID-19 pandemic.

These changes were also favorably impacted by a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share repurchases completed during 2019, partially offset by a higher tax rate resulting from the return of the non-deductible health insurance industry free in 2020.

- Contributing to our Retail segment revenue growth was our individual Medicare Advantage membership, which increased 382,600 members, or 10.8%, from September 30, 2019 to September 30, 2020.
- Our operating cash flows for the 2020 period of $5.4 billion increased from the 2019 period of $4.8 billion primarily due primarily to higher income from operations.

### 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 industry fee, which was suspended in 2019, but has resumed for calendar year 2020, is not deductible for income tax purposes and significantly increases our effective tax rate. We paid the federal government $1.2 billion in September 2020 for this fee. Under current law, the health industry fee will be permanently repealed beginning in 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 legislative and regulatory changes associated with 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 clinical care services, to our Retail and Group and Specialty segment customers and are described in Note 14 to the condensed consolidated financial statements included in this report.

### Comparison of Results of Operations for 2020 and 2019

The following discussion primarily deals with our results of operations for the three months ended September 30, 2020, or the 2020 quarter, and the three months ended September 30, 2019, or the 2019 quarter, the nine months ended September 30, 2020, or the 2020 period, and the nine months ended September 30, 2019, or the 2019 period.

### Consolidated

*(dollars in millions, except per common share results)*

| Revenues: Premiums: | For the three months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Retail | $16,709 | $14,034 | $2,675 | 19.1% |
| Group and Specialty | 1,593 | 1,678 | (85) | (5.1)% |
| Corporate | 602 | — | 602 | 100.0% |
| Total premiums | 18,904 | 15,712 | 3,192 | 20.3% |
| Services: |  |  |  |  |
| Retail | 4 | 4 | — | —% |
| Group and Specialty | 189 | 200 | (11) | (5.5)% |
| Healthcare Services | 264 | 189 | 75 | 39.7% |
| Total services | 457 | 393 | 64 | 16.3% |
| Investment income | 714 | 136 | 578 | 425.0% |
| Total revenues | 20,075 | 16,241 | 3,834 | 23.6% |
| Operating expenses: |  |  |  |  |
| Benefits | 15,611 | 13,357 | 2,254 | 16.9% |
| Operating costs | 2,513 | 1,889 | 624 | 33.0% |
| Depreciation and amortization | 128 | 127 | 1 | 0.8% |
| Total operating expenses | 18,252 | 15,373 | 2,879 | 18.7% |
| Income from operations | 1,823 | 868 | 955 | 110.0% |
| Interest expense | 75 | 62 | 13 | 21.0% |
| Other income, net | (7) | (82) | (75) | (91.5)% |
| Income before income taxes and equity in net earnings | 1,755 | 888 | 867 | 97.6% |
| Provision for income taxes | 450 | 200 | 250 | 125.0% |
| Equity in net earnings | 35 | 1 | 34 | 3,400.0% |
| Net income | $1,340 | $689 | $651 | 94.5% |
| Diluted earnings per common share | $10.05 | $5.14 | $4.91 | 95.5% |
| Benefit ratio (a) | 82.6% | 85.0% |  | (2.4)% |
| Operating cost ratio (b) | 13.0% | 11.7% |  | 1.3% |
| Effective tax rate | 25.2% | 22.5% |  | 2.7% |

41

*(dollars in millions, except per common share results)*

| Revenues: Premiums: | For the nine months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Retail | $50,336 | $42,106 | $8,230 | 19.5% |
| Group and Specialty | 4,884 | 5,033 | (149) | (3.0)% |
| Corporate | 602 | — | 602 | 100.0% |
| Total premiums | 55,822 | 47,139 | 8,683 | 18.4% |
| Services: |  |  |  |  |
| Retail | 14 | 14 | — | —% |
| Group and Specialty | 576 | 587 | (11) | (1.9)% |
| Healthcare Services | 741 | 502 | 239 | 47.6% |
| Total services | 1,331 | 1,103 | 228 | 20.7% |
| Investment income | 940 | 351 | 589 | 167.8% |
| Total revenues | 58,093 | 48,593 | 9,500 | 19.6% |
| Operating expenses: |  |  |  |  |
| Benefits | 45,415 | 40,168 | 5,247 | 13.1% |
| Operating costs | 6,984 | 5,252 | 1,732 | 33.0% |
| Depreciation and amortization | 362 | 343 | 19 | 5.5% |
| Total operating expenses | 52,761 | 45,763 | 6,998 | 15.3% |
| Income from operations | 5,332 | 2,830 | 2,502 | 88.4% |
| Interest expense | 211 | 184 | 27 | 14.7% |
| Other expense (income), net | 63 | (217) | 280 | 129.0% |
| Income before income taxes and equity in net earnings | 5,058 | 2,863 | 2,195 | 76.7% |
| Provision for income taxes | 1,485 | 684 | 801 | 117.1% |
| Equity in net earnings | 68 | 16 | 52 | 325.0% |
| Net income | $3,641 | $2,195 | $1,446 | 65.9% |
| Diluted earnings per common share | $27.37 | $16.24 | $11.13 | 68.5% |
| Benefit ratio (a) | 81.4% | 85.2% |  | (3.8)% |
| Operating cost ratio (b) | 12.2% | 10.9% |  | 1.3% |
| Effective tax rate | 29.0% | 23.8% |  | 5.2% |

(a) Represents benefits expense as a percentage of premiums revenue.

(b) Represents operating costs as a percentage of total revenues less investment income.

#### Premiums Revenue

Consolidated premiums increased $3.2 billion, or 20.3%, from $15.7 billion in the 2019 quarter to $18.9 billion in the 2020 quarter and increased $8.7 billion, or 18.4%, from $47.1 billion in the 2019 period to $55.8 billion in the 2020 period. These increases were primarily due to higher premiums in the Retail segment, mainly resulting from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums, and the receipt of commercial risk corridor receivables previously written off, partially offset by the impact of declining stand-alone PDP membership as more fully described in the detailed segment results discussion that follows.

Consolidated services revenue increased $64 million, or 16.3%, from $393 million in the 2019 quarter to $457 million in the 2020 quarter and increased $228 million, or 20.7%, from $1.1 billion in the 2019 period to $1.3 billion in the 2020 period. These increases were primarily due to an increase in services revenue in the Healthcare Services segment associated with higher external pharmacy revenues resulting from the Enclara acquisition in the first quarter of 2020.

#### Investment Income

Investment income increased $578 million, or 425.0%, from $136 million in the 2019 quarter to $714 million in the 2020 quarter and increased $589 million, or 167.8%, from $351 million in the 2019 period to $940 million in the 2020 period. These increases were primarily due to the $643 million change in fair value of publicly-traded equity securities during the 2020 quarter.

#### Benefit Expense

Consolidated benefits expense increased $2.3 billion, or 16.9%, from $13.4 billion in the 2019 quarter to $15.6 billion in the 2020 quarter and increased $5.2 billion, or 13.1%, from $40.2 billion in the 2019 period to $45.4 billion in the 2020 period. The consolidated benefit ratio decreased 240 basis points from 85.0% for the 2019 quarter to 82.6% for the 2020 quarter and decreased 380 basis points from 85.2% for the 2019 period to 81.4% for the 2020 period. These comparisons reflect the receipt of the commercial risk corridor receivables previously written off, the change in quarterly utilization patterns from the COVID-19 pandemic and the reinstatement of the non-deductible health insurance industry fee in 2020 that was contemplated in the pricing and benefit design of our products.These factors were were partially offset by COVID-19 testing and treatment costs along with our ongoing pandemic relief efforts.

The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2020 quarter versus approximately 40 basis points in the 2019 quarter. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 50 basis points in the 2020 period versus approximately 70 basis points in the 2019 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 $624 million, or 33.0%, from $1.9 billion in the 2019 quarter to $2.5 billion in the 2020 quarter and increased $1.7 billion, or 33.0% from $5.3 billion in the 2019 period to $7.0 billion in the 2020 period.

The consolidated operating cost ratio increased 130 basis points from 11.7% for the 2019 quarter to 13.0% for the 2020 quarter and increased 130 basis points from 10.9% for the 2019 period to 12.2% for the 2020 period. These increases were primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020 and COVID-19 related administrative costs, including those associated with purchasing personal protective equipment for our clinicians, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. These increases were partially offset by scale efficiencies associated with growth in our Medicare Advantage membership, significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives, charges associated with workforce optimization in the 2019 quarter that did not recur in the 2020 quarter, and the net impact of the receipt of the commercial risk corridor receivables previously written off. The 2020 period was further impacted by a $200 million contribution during the first half of 2020 to the Humana Foundation to support the communities served by us, particularly those with social and health disparities. The non-deductible health insurance industry fee impacted the operating cost ratio by 150 basis points in the 2020 quarter and period.

#### Depreciation and Amortization

Depreciation and amortization increased $1 million, or 0.8%, from $127 million in the 2019 quarter to $128 million in the 2020 quarter and increased $19 million, or 5.5%, from $343 million in the 2019 period to $362 million in the 2020 period.

#### Interest Expense

Interest expense increased $13 million, or 21.0%, from $62 million in the 2019 quarter to $75 million in the 2020 quarter and increased $27 million, or 14.7%, from $184 million in the 2019 period to $211 million in the 2020 period.

#### Income Taxes

The effective income tax rate was 25.2% and 29.0% for the three and nine months ended September 30, 2020, respectively, compared to 22.5% and 23.8% for the three and nine months ended September 30, 2019, respectively. These increases were primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020.

### Retail Segment

| Membership: Medical membership: | September 30, 2020 | 2019 | Change Members | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Individual Medicare Advantage | 3,935,100 | 3,552,500 | 382,600 | 10.8% |
| Group Medicare Advantage | 612,000 | 523,900 | 88,100 | 16.8% |
| Medicare stand-alone PDP | 3,892,200 | 4,379,800 | (487,600) | (11.1)% |
| Total Retail Medicare | 8,439,300 | 8,456,200 | (16,900) | (0.2)% |
| State-based Medicaid | 730,100 | 469,000 | 261,100 | 55.7% |
| Medicare Supplement | 331,300 | 286,600 | 44,700 | 15.6% |
| Total Retail medical members | 9,500,700 | 9,211,800 | 288,900 | 3.1% |

44

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the three months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Individual Medicare Advantage | $12,949 | $10,752 | $2,197 | 20.4% |
| Group Medicare Advantage | 1,880 | 1,609 | 271 | 16.8% |
| Medicare stand-alone PDP | 622 | 781 | (159) | (20.4)% |
| Total Retail Medicare | 15,451 | 13,142 | 2,309 | 17.6% |
| State-based Medicaid | 1,081 | 742 | 339 | 45.7% |
| Medicare Supplement | 177 | 150 | 27 | 18.0% |
| Total premiums | 16,709 | 14,034 | 2,675 | 19.1% |
| Services | 4 | 4 | — | —% |
| Total premiums and services revenue | 16,713 | $14,038 | $2,675 | 19.1% |
| **Segment earnings** | $553 | $639 | $(86) | (13.5)% |
| Benefit ratio | 85.1% | 85.9% |  | (0.8)% |
| Operating cost ratio | 11.2% | 9.3% |  | 1.9% |

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the nine months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Individual Medicare Advantage | $38,748 | $32,254 | $6,494 | 20.1% |
| Group Medicare Advantage | 5,867 | 4,867 | 1,000 | 20.5% |
| Medicare stand-alone PDP | 2,108 | 2,408 | (300) | (12.5)% |
| Total Retail Medicare | 46,723 | 39,529 | 7,194 | 18.2% |
| State-based Medicaid | 3,104 | 2,143 | 961 | 44.8% |
| Medicare Supplement | 509 | 434 | 75 | 17.3% |
| Total premiums | 50,336 | 42,106 | 8,230 | 19.5% |
| Services | 14 | 14 | — | —% |
| Total premiums and services revenue | $50,350 | $42,120 | $8,230 | 19.5% |
| **Segment earnings** | $3,227 | $1,960 | $1,267 | 64.6% |
| Benefit ratio | 83.3% | 86.4% |  | (3.1)% |
| Operating cost ratio | 10.0% | 8.7% |  | 1.3% |

#### Segment Earnings

- Retail segment earnings decreased $86 million, or 13.5%, from $639 million in the 2019 quarter to $553 million in the 2020 quarter primarily due to a higher operating cost ratio, partially offset by a lower benefit ratio as more fully described below. Retail segment earnings increased $1.3 billion, or 64.6%, from $2.0 billion in the 2019 period to $3.2 billion in the 2020 period, primarily due to the net favorable impact of a lower benefit ratio, partially offset by a higher operating cost ratio as more fully described below.

#### Enrollment

- Individual Medicare Advantage membership increased 382,600 members, or 10.8%, from September 30, 2019 to September 30, 2020, primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The OEP sales period, which ran from January 1 to March 31, 2020 added approximately 30,000 members. Since the conclusion of the 2020 OEP, enrollment continued to increase due to special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, members. Individual Medicare Advantage membership includes 391,100 D-SNP members as of September 30, 2020, a net increase of 110,400, or 39.3%, from 280,700 as of September 30, 2019.
- Group Medicare Advantage membership increased 88,100, or 16.8%, from September 30, 2019 to September 30, 2020, primarily due to the addition of a large account in January 2020, along with net membership additions associated with the previous AEP for Medicare beneficiaries.
- Medicare stand-alone PDP membership decreased 487,600 members, or 11.1%, from September 30, 2019 to September 30, 2020 primarily reflecting net declines during the previous AEP for Medicare beneficiaries. The anticipated decline primarily resulted from terminations driven by premium and benefit adjustments experienced by members that were previously enrolled in our 2019 Humana Walmart Rx plan and the 2019 Humana Enhanced plan, which were consolidated into the Premier Rx plan in 2020. The expected PDP losses were partially offset by growth in the new low-price Humana Walmart Value Rx plan, driven by both new sales and plan to plan changes.
- State-based Medicaid membership increased 261,100 members, or 55.7%, from September 30, 2019 to September 30, 2020. This increase primarily reflects the impact of discontinuing the reinsurance agreement with CareSource and the assumption of full financial risk for the existing Kentucky Medicaid contract as of January 1, 2020, as well as additional enrollment, particularly in Florida, resulting from the current economic downturn due to the COVID-19 pandemic.

#### Premiums Revenue

- Retail segment premiums increased $2.7 billion, or 19.1%, from $14.0 billion in the 2019 quarter to $16.7 billion in the 2020 quarter and increased $8.2 billion, or 19.5%, from $42.1 billion in the 2019 period to $50.3 billion in the 2020 period. These increases primarily reflect higher premiums as a result of Medicare Advantage and state-based contracts membership growth and higher per member Medicare Advantage premiums. These favorable items were partially offset by the decline in membership in our stand-alone PDP offerings.

#### Benefits Expense

- The Retail segment benefit ratio decreased 80 basis points from 85.9% for the 2019 quarter to 85.1% for the 2020 quarter primarily due to the impact of the temporary deferral of non-essential care amid the COVID-19 pandemic, and the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products. These were partially offset by COVID-19 testing and treatment costs, as well as our ongoing pandemic relief efforts, including the waiver of all cost sharing for in-network primary care, outpatient behavioral health, and telehealth visits for our Medicare Advantage members, continued delivery of meals to senior members in need, the distribution of in-home preventative screening kits to members, establishment of a clinical outreach team to proactively engage with our most vulnerable members, and various provider initiatives. The 2020 quarter was further impacted by a shift in Medicare membership mix due to the loss of stand-alone PDP members and significant growth in the Medicare Advantage membership as well as lower favorable prior-period medical claims reserve development. The benefit ratio for stand-alone PDP members generally decreases as the year progresses. The Retail segment benefit ratio decreased 310 basis points from 86.4% for the 2019 period to 83.3% for the 2020 period primarily reflecting significantly depressed utilization experienced in the first

half of 2020 as well as the same factors as discussed above with the exception of the impact from a shift in Medicare membership mix.

- The Retail segment's benefits expense for the 2020 quarter included $30 million in favorable prior-period medical claims reserve development versus $55 million in the 2019 quarter. For the 2020 period, the Retail segment’s benefit expense included the beneficial effect of $235 million in favorable prior-period medical claims reserve development versus $366 million in the 2019 period. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 20 basis points in the 2020 quarter versus approximately 40 basis points in the 2019 quarter. Favorable prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 50 basis points in the 2020 period versus approximately 90 basis points in the 2019 period.

#### Operating Costs

- The Retail segment operating cost ratio increased 190 basis points from 9.3% for the 2019 quarter to 11.2% for the 2020 quarter and increased 130 basis points from 8.7% for the 2019 period to 10.0% for the 2020 period. These increases were primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020 and COVID-19 related administrative costs as previously discussed, partially offset by scale efficiencies associated with growth in our Medicare Advantage membership and significant operating cost efficiencies driven by previously disclosed productivity initiatives. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 quarter and period.

### Group and Specialty Segment

| Membership: Medical membership: | September 30, 2020 | 2019 | Change Members | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Fully-insured commercial group | 799,500 | 927,400 | (127,900) | (13.8)% |
| ASO | 502,100 | 516,800 | (14,700) | (2.8)% |
| Military services | 6,016,400 | 5,998,700 | 17,700 | 0.3% |
| Total group medical members | 7,318,000 | 7,442,900 | (124,900) | (1.7)% |
| Specialty membership (a) | 5,325,600 | 5,411,400 | (85,800) | (1.6)% |

(a) Specialty products include dental, vision, and other supplemental health. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the three months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Fully-insured commercial group | $1,169 | $1,278 | $(109) | (8.5)% |
| Group specialty | 424 | 400 | 24 | 6.0% |
| Total premiums | 1,593 | 1,678 | (85) | (5.1)% |
| Services | 189 | 200 | (11) | (5.5)% |
| Total premiums and services revenue | $1,782 | $1,878 | $(96) | (5.1)% |
| **Segment (losses) earnings** | $(160) | $4 | $(164) | (4100.0)% |
| Benefit ratio | 93.0% | 86.3% |  | 6.7% |
| Operating cost ratio | 25.2% | 21.9% |  | 3.3% |

*(in millions)*

| Premiums and Services Revenue: Premiums: | For the nine months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Fully-insured commercial group | $3,606 | $3,873 | $(267) | (6.9)% |
| Group specialty | 1,278 | 1,160 | 118 | 10.2% |
| Total premiums | 4,884 | 5,033 | (149) | (3.0)% |
| Services | 576 | 587 | (11) | (1.9)% |
| Total premiums and services revenue | $5,460 | $5,620 | $(160) | (2.8)% |
| **Segment earnings** | $232 | $174 | $58 | 33.3% |
| Benefit ratio | 79.6% | 83.0% |  | (3.4)% |
| Operating cost ratio | 24.0% | 21.9% |  | 2.1% |

#### Segment Earnings

- Group and Specialty segment earnings decreased $164 million, from $4 million segment earnings in the 2019 quarter to $160 million segment loss in the 2020 quarter primarily due to higher benefit and operating cost ratios as more fully described below. Group and Specialty segment earnings increased $58 million, or 33.3%, from $174 million in the 2019 period to $232 million in the 2020 period primarily due to the net favorable impact of a lower benefit ratio, partially offset by a higher operating cost ratio as more fully described below.

#### Enrollment

- Fully-insured commercial group medical membership decreased 127,900 members, or 13.8%, from September 30, 2019 to September 30, 2020. These anticipated declines primarily reflect lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products, as well as the loss of certain large group accounts due to disciplined pricing in the competitive environment. Additionally, the declines in membership were impacted by the current economic downturn driven by the COVID-19 pandemic resulting in higher unemployment rates and loss of coverage for fully-insured commercial group members. The portion of group fully-insured commercial medical membership in small group accounts was approximately 56% at September 30, 2020 and 60% at September 30, 2019.
- Group ASO commercial medical membership decreased 14,700 members, or 2.8%, from September 30, 2019 to September 30, 2020 primarily reflecting the loss of certain large group accounts due to continued discipline in pricing of services for self-funded accounts amid a highly competitive environment and the impact of the current economic downturn driven by the COVID-19 pandemic as previously discussed, partially offset by more small group accounts selecting level-funded ASO products. Small group membership comprised 45% of group ASO medical membership at September 30, 2020 versus 39% at September 30, 2019.
- Military services membership increased 17,700 members, or 0.3%, from September 30, 2019 to September 30, 2020. 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 85,800 members, or 1.6%, from September 30, 2019 to September 30, 2020 primarily due the loss of certain group accounts offering stand-alone dental and vision products, as well as the impact of the current economic downturn driven by the COVID-19 pandemic as previously discussed.

#### Premiums Revenue

- Group and Specialty segment premiums decreased $85 million, or 5.1%, from $1.7 billion in the 2019 quarter to $1.6 billion in the 2020 quarter and decreased $149 million, or 3.0%, from $5.0 billion in the 2019 period to $4.9 billion in the 2020 period. These decreases were primarily due to the decline in our fully-insured group commercial membership, partially offset by higher stop-loss revenues related to our level-funded ASO accounts resulting from membership growth in this product and higher per member premiums across the fully-insured commercial business.

#### Services Revenue

- Group and Specialty segment services revenue decreased $11 million, or 5.5%, from $200 million in the 2019 quarter to $189 million in the 2020 quarter and decreased $11 million, or 1.9%, from $587 million in the 2019 period to $576 million the 2020 period. These decreases were primarily due to lower ASO membership described previously.

#### Benefits Expense

- The Group and Specialty segment benefit ratio increased 670 basis points from 86.3% in the 2019 quarter to 93.0% in the 2020 quarter primarily due to ongoing pandemic relief efforts, primarily surrounding initiatives to ease administrative and financial stress for providers and employers, including premium rate relief for select employer groups and the payment of monthly stipends to support participating dental providers, and meaningful COVID-19 testing and treatment costs for fully-insured commercial group medical members as several of our key commercial markets were located in areas more significantly impacted by COVID-19. These items were partially offset by the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products, the temporary deferral of non-essential care as previously discussed, and higher favorable prior-period medical claims reserve development. Utilization returned faster for fully-insured commercial group members as compared to members in the Retail segment, but remained below historic baseline levels at the close of the 2020 quarter.
- The Group and Specialty segment benefit ratio decreased 340 basis points from 83.0% in the 2019 period to 79.6% in the 2020 period primarily as the result of significantly depressed utilization levels experienced during the first half of 2020 as previously discussed, the reinstatement of the non-deductible health insurance industry fee in 2020 which was contemplated in the pricing and benefit design of our products, as well as higher favorable prior-period medical claims development. These items were partially offset by COVID-19 testing and treatments costs, and our ongoing pandemic relief efforts as previously described.
- The Group and Specialty segment's benefits expense included $13 million in favorable prior-period medical claims reserve development in the 2020 quarter versus $1 million in the 2019 quarter. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 80 basis points in the 2020 quarter and by approximately 10 basis points in the 2019 quarter. The Group and Specialty segment's benefits expense included the effect of a favorable prior-period medical claims reserve development of $43 million in the 2020 period versus an unfavorable prior-period medical claims reserve development of $35 million in the 2019 period. The favorable prior-period medical claims reserve development for the 2020 period decreased the Group and Specialty segment benefit ratio by approximately 90 basis points and the unfavorable development for the 2019 period increased the Group and Specialty segment benefit ratio 70 basis points.

#### Operating Costs

- The Group and Specialty segment operating cost ratio increased 330 basis points from 21.9% for the 2019 quarter to 25.2% for the 2020 quarter and increased 210 basis points from 21.9% for the 2019 period to 24.0% for the 2020 period. These increases were primarily due to the reinstatement of the non-deductible health insurance industry fee in 2020 and COVID-19 related administrative costs as previously discussed. These increases were partially offset by significant operating cost efficiencies driven by previously disclosed productivity initiatives. The non-deductible health insurance industry fee impacted the operating cost ratio by 130 basis points in the 2020 quarter and period.

### Healthcare Services Segment

*(in millions)*

| Revenues: Services: | For the three months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Provider services | $81 | $104 | $(23) | (22.1)% |
| Pharmacy solutions | 157 | 53 | 104 | 196.2% |
| Clinical care services | 26 | 32 | (6) | (18.8)% |
| Total services revenues | 264 | 189 | 75 | 39.7% |
| Intersegment revenues: |  |  |  |  |
| Pharmacy solutions | 6,158 | 5,673 | 485 | 8.5% |
| Provider services | 573 | 591 | (18) | (3.0)% |
| Clinical care services | 134 | 149 | (15) | (10.1)% |
| Total intersegment revenues | 6,865 | 6,413 | 452 | 7.0% |
| Total services and intersegment revenues | $7,129 | $6,602 | $527 | 8.0% |
| **Segment earnings** | $249 | $212 | $37 | 17.5% |
| Operating cost ratio | 96.4% | 96.2% |  | 0.2% |

*(in millions)*

| Revenues: Services: | For the nine months ended September 30, 2020 | 2019 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Pharmacy solutions | $425 | $134 | $291 | 217.2% |
| Provider services | 236 | 265 | (29) | (10.9)% |
| Clinical care services | 80 | 103 | (23) | (22.3)% |
| Total services revenues | 741 | 502 | 239 | 47.6% |
| Intersegment revenues: |  |  |  |  |
| Pharmacy solutions | 18,275 | 16,335 | 1,940 | 11.9% |
| Provider services | 1,724 | 1,792 | (68) | (3.8)% |
| Clinical care services | 415 | 457 | (42) | (9.2)% |
| Total intersegment revenues | 20,414 | 18,584 | 1,830 | 9.8% |
| Total services and intersegment revenues | $21,155 | $19,086 | $2,069 | 10.8% |
| **Segment earnings** | $816 | $611 | $205 | 33.6% |
| Operating cost ratio | 95.8% | 96.3% |  | (0.5)% |

51

#### Segment Earnings

- Healthcare Services segment earnings increased $37 million, or 17.5%, from $212 million in the 2019 quarter to $249 million in the 2020 quarter and increased $205 million, or 33.6%, from $611 million in the 2019 period to $816 million in the 2020 period. These increases were primarily due to operational improvements and reduced utilization resulting from COVID-19 in our provider services business. These improvements were partially offset by COVID-19 administrative related costs, including expenses associated with additional safety measures for our provider and clinical teams who have continued to provide services to members during the COVID-19 pandemic. The 2020 period was further impacted by higher earnings from our pharmacy operations.

#### Script Volume

- Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 119 million in the 2020 quarter, up 3%, versus scripts of approximately 116 million in the 2019 quarter. For the 2020 period, script volumes increased to approximately 356 million, up 5%, versus scripts of approximately 339 million in the 2019 period. These increases were primarily due to the growth associated with higher individual Medicare Advantage and state-based contracts membership along with the impact of early prescription refills as members prepared for extended supply needs in response to COVID-19. These increases were partially offset by the decline in stand-alone PDP membership.

#### Services Revenues

- Services revenues increased $75 million, or 39.7%, from $189 million in the 2019 quarter to $264 million in the 2020 quarter and increased $239 million, or 47.6%, from $502 million in the 2019 period to $741 million in the 2020 period. These increases were primarily due to the additional pharmacy revenues associated with the acquisition of Enclara in the 2020 period.

#### Intersegment Revenues

- Intersegment revenues increased $452 million, or 7.0%, from $6.4 billion in the 2019 quarter to $6.9 billion in the 2020 quarter and increased $1.8 billion, or 9.8%, from $18.6 billion in the 2019 period to $20.4 billion in the 2020 period. These increases were primarily due to strong Medicare Advantage membership growth, partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP membership. The 2020 period was also impacted by the modest increase in pharmacy revenues as a result of us allowing early prescription refills to permit members to prepare for extended supply needs in response to COVID-19 and a slight shift by members to 90-day mail supply.

#### Operating Costs

- The Healthcare Services segment operating cost ratio increased 20 basis points from 96.2% for the 2019 quarter to 96.4% for the 2020 quarter primarily due to COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and clinical teams who have continued to provide services to members during the COVID-19 pandemic. The increase further reflects higher costs incurred in the pharmacy business to ensure timely delivery of prescriptions amid the COVID-19 pandemic. These costs were partially offset by operational improvements and reduced utilization resulting from COVID-19 in our provider services business, as well as significant operating cost efficiencies in the 2020 quarter driven by previously disclosed productivity initiatives. The Healthcare Services segment operating cost ratio decreased 50 basis points from 96.3% for the 2019 period to 95.8% for the 2020 period as a result of the net favorable impact of the same factors affecting the 2020 quarter.

### 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 additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our 2019 Form 10-K and Item 1A of Part II of this document.

Cash and cash equivalents increased to approximately $8.0 billion at September 30, 2020 from $4.1 billion at December 31, 2019. The change in cash and cash equivalents for the nine months ended September 30, 2020 and 2019 is summarized as follows:

*(in millions)*

|  | Nine Months Ended 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $5,356 | $4,772 |
| Net cash used in investing activities | (3,010) | (477) |
| Net cash provided by (used in) financing activities | 1,585 | (1,111) |
| Increase in cash and cash equivalents | $3,931 | $3,184 |

### Cash Flow from Operating Activities

Our operating cash flows for the 2020 period increased from the 2019 period due primarily to higher income from operations.

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 September 30, 2020 and December 31, 2019:

*(in millions)*

|  | September 30, 2020 | December 31, 2019 | 2020 Period Change | 2019 Period Change |
| --- | ---: | ---: | ---: | ---: |
| IBNR (1) | $5,149 | $4,150 | $999 | $656 |
| Reported claims in process (2) | 1,167 | 628 | 539 | 467 |
| Other benefits payable (3) | 1,892 | 1,226 | 666 | 235 |
| Total benefits payable | $8,208 | $6,004 | $2,204 | $1,358 |

(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 primarily include amounts owed to providers under capitated and risk sharing arrangements.

The increase in benefits payable from December 31, 2019 to September 30, 2020 was primarily due to an increase in IBNR primarily as a result of Medicare Advantage membership growth, as well as increases in amounts owed to providers under the capitated and risk sharing arrangements, which were affected by the response to COVID-19 and resulting deferral of care impact on medical claims reserves, and an increase in the amount of processed but unpaid claims which fluctuate due to month-end cutoff. The increases in benefits payable from December 31, 2018 to September 30, 2019 were due to an increase in IBNR primarily as a result of Medicare Advantage membership growth and an increase in the amount of processed but unpaid claims which fluctuate due to month-end cutoff.

The detail of total net receivables was as follows at September 30, 2020 and December 31, 2019:

*(in millions)*

|  | September 30, 2020 | December 31, 2019 | 2020 Period Change | 2019 Period Change |
| --- | ---: | ---: | ---: | ---: |
| Medicare | $863 | $835 | $28 | $(198) |
| Commercial and other | 209 | 162 | 47 | 17 |
| Military services | 141 | 128 | 13 | 8 |
| Allowance for doubtful accounts | (78) | (69) | (9) | 6 |
| Total net receivables | $1,135 | $1,056 | $79 | $(167) |
| Reconciliation to cash flow statement: |  |  |  |  |
| Receivables from disposition (acquisition) of business |  |  | 3 | (12) |
| Change in receivables per cash flow statement resulting in cash from operations |  |  | $82 | $(179) |

The changes in Commercial and other receivables for the 2020 period were primarily as a result of Medicaid membership growth. The changes in Medicare receivables for both the 2020 period and the 2019 period reflect the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter.

### Cash Flow from Investing Activities

In the first quarter of 2020, we acquired privately held Enclara for cash consideration of approximately $709 million, net of cash received as discussed in Note 3 to the condensed consolidated financial statements.

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 $668 million in the 2020 period and $506 million in the 2019 period.

Net purchases of investment securities in the 2020 period were $1.6 billion as compared to net proceeds from investment securities sales and maturities of $29 million in the 2019 period.

### Cash Flow from Financing Activities

Claims payments were $283 million higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk in the 2020 period and receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claims payments by $113 million in the 2019 period.

Under our administrative services only TRICARE contracts, reimbursements from the federal government exceeded health care cost payments for which we do not assume risk by $9 million in the 2020 period and health care cost payments for which we do not assume risk exceeded reimbursements from the federal government by $102 million in the 2019 period.

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' discount and commission and offering expenses paid as of September 30, 2020 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' discount and commission and offering expenses paid as of September 30, 2019 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.

On July 31, 2019, we entered into an accelerated stock repurchase agreement, the July 2019 ASR, with Citibank, N.A., or Citi, to repurchase $1 billion of our common stock. On August 2, 2019, we made a payment of $1 billion to Citi and received an initial delivery of 2.7 million shares of our common stock. We also acquired common shares in connection with employee stock plans for an aggregate cost of $30 million in the 2020 period and $10 million in the 2019 period.

In March 2020, we drew $1 billion on our existing term loan commitment.

Net proceeds from the issuance of commercial paper were $21 million in the 2020 period and net repayments from the issuance of commercial paper were $358 million in the 2019 period. The maximum principal amount outstanding at any one time during the 2020 period was $600 million.

We paid dividends to stockholders of $239 million during the 2020 period and $216 million during the 2019 period.

### Future Sources and Uses of Liquidity

### Dividends

For a detailed discussion of dividends to stockholders, please refer to Note 10 to the condensed consolidated financial statements.

### Stock Repurchases

For a detailed discussion of stock repurchases, please refer to Note 10 to the condensed consolidated financial statements.

### Debt

For a detailed discussion of our debt, including our senior notes, term loan, credit agreement and commercial paper program, please refer to Note 12 to the condensed consolidated financial statements.

### Acquisitions and Divestitures

During the 2020 period, we completed the acquisition of privately held Enclara, one of the nation’s largest hospice pharmacy and benefit management providers for cash consideration of approximately $709 million, net of cash received. For a detailed discussion of this transaction, please refer to Note 3 to the condensed consolidated financial statements.

### Liquidity Requirements

We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares.

Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at September 30, 2020 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 less than $1 million, up to a maximum 100 basis points, or annual interest expense by $3 million.

In addition, we operate as a holding company in a highly regulated industry. Humana Inc., our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were $2.4 billion at September 30, 2020 compared to $1.4 billion at December 31, 2019. This increase primarily was due to the net proceeds from the issuance of senior notes, proceeds from a term loan, and commercial paper issuance. The increase was further impacted by regulated subsidiary dividends and non-regulated subsidiary earnings in our Healthcare Services segment. These increases were partially offset by the Enclara acquisition, capital expenditures, cash dividends to shareholders, and other working capital changes. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by departments of insurance (or comparable state regulators).

### Regulatory Requirements

Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, or ordinary dividends, is limited based on the entity’s level of statutory income and statutory capital and surplus. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an extraordinary dividend requiring prior regulatory approval. In most states, prior notification is provided before paying a dividend even if approval is not required.

Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of June 30, 2020, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $9.3 billion, which exceeded aggregate minimum regulatory requirements of $6.4 billion. The amount of dividends paid to our parent company was approximately $360 million during the nine months ended September 30, 2020 compared to $1.4 billion during the nine months ended September 30, 2019. Actual dividends paid may vary year over year due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.

## Market risk

As filed, 2,275 characters.

Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.

Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AA at September 30, 2020. Our net unrealized position increased $280 million from a net unrealized gain position of $211 million at December 31, 2019 to a net unrealized gain position of $491 million at September 30, 2020. At September 30, 2020, we had gross unrealized losses of $14 million on our investment portfolio primarily due to an increase in market interest rates since the time the securities were purchased. There were no material credit allowances during the nine months ended September 30, 2020. While we believe that these securities in an unrealized loss will recover in value over time and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or credit allowances may be recorded in future periods.

Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately 2.1 years as of September 30, 2020 and approximately 2.5 years as of December 31, 2019. The decline in the average duration is reflective of the increased holdings of cash and cash equivalents, along with other portfolio management activities. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $452 million at September 30, 2020.

## Controls and procedures

As filed, 1,301 characters.

Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended September 30, 2020.

Based on our evaluation, our CEO, CFO, and our Principal Accounting Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 5,228 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and the risk factor set forth below.

***The spread of, and response to, the novel coronavirus, or COVID-19, underscores certain risks we face, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019, and the rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19.***

In December 2019, a novel strain of coronavirus (COVID-19) emerged which was declared a pandemic by the World Health Organization on March 11, 2020, and has now spread globally including throughout the United States. The spread of COVID-19 underscores certain risks we face in our business, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019.

Governmental and non-governmental organizations may not effectively combat the spread and severity of COVID-19, increasing the potential for harm for our members. If the spread of COVID-19 is not contained, the premiums we charge may prove to be insufficient to cover the cost of health care services delivered to our members, which may increase significantly as a result of higher utilization rates of medical facilities and services and other increases in associated hospital and pharmaceutical costs. Over time, we may also experience increased costs or decreased revenues if, as a result of our members being unable to see their providers due to actions taken to mitigate the spread of COVID-19, we are unable to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles. In addition, we are offering our members expanded benefit coverage, such as waiving out of pocket costs for COVID-19 diagnostic testing and treatment, certain additional coverages have been mandated by governmental action and we are taking actions designed to help provide financial and administrative relief for the health care provider community. Such measures and any further steps taken by us, or governmental action, to continue to respond to and to address the ongoing impact of COVID-19, including further expansion or modification of the services delivered to our members, the adoption or modification of regulatory requirements associated with those services and the costs and challenges associated with ensuring timely compliance with such requirements, to provide further relief for the health care provider community, or in connection with the relaxation of stay-at-home and physical distancing orders and other restrictions on movement and economic activity, including the potential for widespread testing and therapeutic treatments and a vaccine, once available, as a component of lifting these measures, could adversely impact our profitability.

The spread and impact of COVID-19, or actions taken to mitigate this spread, could have material and adverse effects on our ability to operate effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in public and private infrastructure, including communications, availability of in-person sales and marketing channels, financial services and supply chains, could materially and adversely disrupt our normal business operations. We have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of COVID-19, as have a number of our third-party service providers, which may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our members or other third-parties. The outbreak of COVID-19 has severely impacted global economic activity, including the businesses of some of our commercial customers, and caused significant volatility and negative pressure in the financial markets. In addition to disrupting our operations, these developments may adversely affect the timing of commercial customer premium collections and corresponding claim payments, the value of our investment portfolio, or future liquidity needs.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19. We are continuing to monitor the spread of COVID-19, changes to our benefit coverages, the ongoing costs and business impacts of dealing with COVID-19, including the potential costs and impacts associated with lifting, or reimposing restrictions on movement and economic activity and related risks. The magnitude and duration of the pandemic and its ultimate impact on our business, results of operations, financial position, and cash flows is uncertain as this continues to evolve globally, but such impacts could be material to our business, results of operations, financial position and cash flows.

Filed Nov 3, 2020.
Source: SEC EDGAR, the filing index for accession 0000049071-20-000135. Last ingested by Listed: Nov 6, 2026, 14:15 ET. No prices; not investment advice.