HUMANA INC - 10-Q filing on 2016-11-04

SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2016

We manage our business with three reportable segments: Retail, Group, and Healthcare Services. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles. These 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 to assess performance and allocate resources.

The Retail segment consists of Medicare benefits, marketed to individuals or directly via group accounts, as well as individual commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products. 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, collectively our state-based contracts. The Group segment consists of employer group commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and voluntary insurance benefits, as well as administrative services only, or ASO products. In addition, our Group segment includes our health and wellness products (primarily marketed to employer groups) and military services business, primarily our TRICARE South Region contract. The Healthcare Services segment includes services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, home based services, and clinical programs, as well as services and capabilities to advance population health. We report under the category of Other Businesses those businesses which do not align with the reportable segments described above, primarily our closed-block long-term care insurance policies.

Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions^®, or HPS, and includes the operations of Humana Pharmacy, Inc., our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, contracting with retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in the arrangement on behalf of members in our other segments. As principal, our Healthcare Services segment reports revenues on a gross basis including co-share amounts from members collected by third party retail pharmacies at the point of service.

In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based and non risk-based managed care agreements with our health plans. Under risk based agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services. Under non risk-based agreements, our health plans retain the economic risk of funding the assigned members' healthcare services. Our Healthcare Services segment reports provider services revenues associated with risk-based agreements on a gross basis, whereby capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services. Provider services revenues associated with non risk-based agreements are presented net of associated healthcare costs.

We present our consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of $3.6 billion and $3.3 billion for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015 these amounts were $9.7 billion and $8.8 billion, respectively. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our provider services and pharmacy operations, are included with benefits expense. The amount of this expense was $31 million and $23 million for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the amount of this expense was $85 million and $68 million, respectively.

Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our 2015 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home based services as well as clinical programs, to our Retail and Group 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 in the tables presenting segment results below.

Our segment results were as follows for the three and nine months ended September 30, 2016 and 2015:



	Retail		Group		Healthcare Services		Other Businesses			Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended September 30, 2016
Revenues - external customers
Premiums:
Individual Medicare Advantage	$	7,977	$	—	$	—	$	—		$	—		$	7,977
Group Medicare Advantage	1,067		—		—		—			—			1,067
Medicare stand-alone PDP	1,004		—		—		—			—			1,004
Total Medicare	10,048		—		—		—			—			10,048
Fully-insured	991		1,350		—		—			—			2,341
Specialty	65		253		—		—			—			318
Medicaid and other	652		2		—		10			—			664
Total premiums	11,756		1,605		—		10			—			13,371
Services revenue:
Provider	—		12		57		—			—			69
ASO and other	3		146		—		1			—			150
Pharmacy	—		—		8		—			—			8
Total services revenue	3		158		65		1			—			227
Total revenues - external customers	11,759		1,763		65		11			—			13,598
Intersegment revenues
Services	—		23		4,708		—			(4,731		)	—
Products	—		—		1,580		—			(1,580		)	—
Total intersegment revenues	—		23		6,288		—			(6,311		)	—
Investment income	25		4		8		17			42			96
Total revenues	11,784		1,790		6,361		28			(6,269		)	13,694
Operating expenses:
Benefits	9,771		1,327		—		26			(224		)	10,900
Operating costs	1,308		430		6,040		4			(6,023		)	1,759
Depreciation and amortization	61		21		33		—			(29		)	86
Total operating expenses	11,140		1,778		6,073		30			(6,276		)	12,745
Income (loss) from operations	644		12		288		(2		)	7			949
Interest expense	—		—		—		—			47			47
Income (loss) before income taxes	$	644	$	12	$	288	$	(2	)	$	(40	)	$	902



	Retail		Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended September 30, 2015
Revenues - external customers
Premiums:
Individual Medicare Advantage	$	7,316	$	—	$	—	$	—	$	—		$	7,316
Group Medicare Advantage	1,396		—		—		—		—			1,396
Medicare stand-alone PDP	927		—		—		—		—			927
Total Medicare	9,639		—		—		—		—			9,639
Fully-insured	1,056		1,362		—		—		—			2,418
Specialty	66		260		—		—		—			326
Medicaid and other	592		6		—		6		—			604
Total premiums	11,353		1,628		—		6		—			12,987
Services revenue:
Provider	—		9		61		—		—			70
ASO and other	1		162		—		5		—			168
Pharmacy	—		—		8		—		—			8
Total services revenue	1		171		69		5		—			246
Total revenues - external customers	11,354		1,799		69		11		—			13,233
Intersegment revenues
Services	—		24		4,558		—		(4,582		)	—
Products	—		—		1,271		—		(1,271		)	—
Total intersegment revenues	—		24		5,829		—		(5,853		)	—
Investment income	38		7		—		16		69			130
Total revenues	11,392		1,830		5,898		27		(5,784		)	13,363
Operating expenses:
Benefits	9,777		1,341		—		22		(244		)	10,896
Operating costs	1,241		426		5,584		3		(5,566		)	1,688
Depreciation and amortization	49		24		30		—		(19		)	84
Total operating expenses	11,067		1,791		5,614		25		(5,829		)	12,668
Income from operations	325		39		284		2		45			695
Interest expense	—		—		—		—		47			47
Income (loss) before income taxes	$	325	$	39	$	284	$	2	$	(2	)	$	648




	Retail		Group		Healthcare Services		Other Businesses			Eliminations/ Corporate			Consolidated
	(in millions)
Nine months ended September 30, 2016
Revenues - external customers
Premiums:
Individual Medicare Advantage	$	24,054	$	—	$	—	$	—		$	—		$	24,054
Group Medicare Advantage	3,229		—		—		—			—			3,229
Medicare stand-alone PDP	3,058		—		—		—			—			3,058
Total Medicare	30,341		—		—		—			—			30,341
Fully-insured	3,118		4,044		—		—			—			7,162
Specialty	196		761		—		—			—			957
Medicaid and other	1,960		12		—		29			—			2,001
Total premiums	35,615		4,817		—		29			—			40,461
Services revenue:
Provider	—		38		176		—			—			214
ASO and other	7		499		—		7			—			513
Pharmacy	—		—		22		—			—			22
Total services revenue	7		537		198		7			—			749
Total revenues - external customers	35,622		5,354		198		36			—			41,210
Intersegment revenues
Services	—		67		14,198		—			(14,265		)	—
Products	—		—		4,373		—			(4,373		)	—
Total intersegment revenues	—		67		18,571		—			(18,638		)	—
Investment income	77		13		22		48			131			291
Total revenues	35,699		5,434		18,791		84			(18,507		)	41,501
Operating expenses:
Benefits	30,581		3,794		—		82			(651		)	33,806
Operating costs	3,825		1,300		17,894		12			(17,778		)	5,253
Depreciation and amortization	175		69		97		—			(78		)	263
Total operating expenses	34,581		5,163		17,991		94			(18,507		)	39,322
Income (loss) from operations	1,118		271		800		(10		)	—			2,179
Interest expense	—		—		—		—			141			141
Income (loss) before income taxes	$	1,118	$	271	$	800	$	(10	)	$	(141	)	$	2,038




	Retail		Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Nine months ended September 30, 2015
Revenues - external customers
Premiums:
Individual Medicare Advantage	$	22,183	$	—	$	—	$	—	$	—		$	22,183
Group Medicare Advantage	4,188		—		—		—		—			4,188
Medicare stand-alone PDP	2,915		—		—		—		—			2,915
Total Medicare	29,286		—		—		—		—			29,286
Fully-insured	3,263		4,125		—		—		—			7,388
Specialty	195		795		—		—		—			990
Medicaid and other	1,742		16		—		25		—			1,783
Total premiums	34,486		4,936		—		25		—			39,447
Services revenue:
Provider	—		29		590		—		—			619
ASO and other	7		485		—		10		—			502
Pharmacy	—		—		22		—		—			22
Total services revenue	7		514		612		10		—			1,143
Total revenues - external customers	34,493		5,450		612		35		—			40,590
Intersegment revenues
Services	—		68		13,357		—		(13,425		)	—
Products	—		—		3,654		—		(3,654		)	—
Total intersegment revenues	—		68		17,011		—		(17,079		)	—
Investment income	96		18		—		53		171			338
Total revenues	34,589		5,536		17,623		88		(16,908		)	40,928
Operating expenses:
Benefits	29,781		3,908		—		66		(602		)	33,153
Operating costs	3,708		1,323		16,774		10		(16,365		)	5,450
Depreciation and amortization	140		69		112		—		(54		)	267
Total operating expenses	33,629		5,300		16,886		76		(17,021		)	38,870
Income from operations	960		236		737		12		113			2,058
Gain on sale of business	—		—		—		—		267			267
Interest expense	—		—		—		—		140			140
Income before income taxes	$	960	$	236	$	737	$	12	$	240		$	2,185