In its Q4 earnings call on Wednesday, Humana said its consolidated pretax income for the fourth quarter increased to $490 million from $486 million a year earlier.
Adjusted consolidated pretax income was $576 million, a decline of 17% from the prior period. Humana said the drop from $694 million was connected to lower earnings in its retail and healthcare services segments.
- For the quarter, Humana beat profit expectations but missed on revenue.
The company’s consolidated pretax income for 2017 jumped 159% to $4 billion. The increase was due to the $1 billion breakup fee after its failed merger with Aetna in the first quarter of 2017, better earnings in individual, commercial, retail, group and specialty segments and improved reserves for long-term care.
Humana’s consolidated revenues for the quarter were $13.19 billion, a 2.4% increase over a year earlier. That was connected to the retail segment, mainly from Medicare Advantage (MA) and the group and specialty segments. That was partially offset by lower individual commercial revenues. Adjusted consolidated revenues for fourth quarter was $13 billion compared to $12.61 billion a year earlier.
CFO Brian Kane said Humana remains committed to reaching a 5% margin target in the long-term. He said new MA members are usually not profitable the first year until Humana is able to get them into its clinical programs, and warned that the new members might cost more and the flu impact may also cut into profits in 2018.
Kane said Medicare Advantage led the way in exceeding expectations. "This membership growth, coupled with productivity initiatives undertaken in 2017 and the reduction of our corporate income tax rate under the tax reform law, provide a solid foundation for significant earnings growth in 2018 and beyond.”
Humana purchased 40% of Kindred at Home, which is the largest home care provider in the U.S. President and CEO Bruce Broussard said there’s 65% geographic overlap between Kindred and Humana’s MA population, which will help the payer serve those members.
Broussard said Humana is interested in growth opportunities in the dual eligible population. Kindred at Home can help Humana growth that business. He added Humana through Kindred at Home will continue to build out its geographic presence in the home health market over time. That may happen through Kindred purchasing smaller agencies, he said.
Total premiums and services revenues declined to $53.36 billion in 2017, decreasing $628 million, or 1%, from $54 billion in 2016. The decrease came from lower individual commercial segment revenues, which were offset by higher retail segment revenues.
Humana’s fourth quarter medical loss ratio fell from 89.2% to 83%. The large drop came from writing off about $583 million in receivables associated with the risk corridor premium stabilization program a year earlier, leaving individual and MA markets with higher benefit ratios, adding to reserves for long-term care in the quarter in 2016 and lower than expected medical costs in MA.
On enrollment, Humana’s individual MA membership ended the year at 2.86 million, which was a 1% increase from the end of 2016. In January 2018, Humana’s individual MA membership grew to slightly more than 3 million members.
Group MA membership increased 24% and ended the year with 441,400 members. The large increase was related to the addition of a large account in January 2017. The group membership further increased to 495,000 members in January 2018.
Due to the stronger than expected MA enrollment and improved retention in January 2018, Humana raised its expected MA growth for 2018 to between 180,000 to 200,000 new MA members. About 40% of the MA individual market growth came from competitors and Broussard highlighted market share gains in Texas, Arizona, Florida and Illinois.
Broussard said Humana remains focused on the individual MA market, which experiences more consistent growth. The group MA market, on the other hand, is a “very lumpy business,” which is prone to large fluctuations depending on signing up employers, he said.
Broussard added many employers are moving their membership to the individual MA market and providing a subsidy to members rather than continuing the group market, which is another reason Humana prefers the individual market.
Kane said Humana is expected to save $550 million annually from recent tax cuts passed by Congress. Humana will use part of the tax cut to increase wages to at least $15 per hour and create an incentive bonus program that’s aligned to organization performance for the 28,000 employees that didn't have that benefit.
Other parts of the tax savings will go to investments that Humana had already planned, such as technology and analytics.
During Wednesday’s earnings call, Broussard spoke positively about Humana’s new entity Conviva, which swallowed some other brands.
Conviva, which is focused in South Florida and Texas, brings an integrated model that is physician-centric focused. He added Conviva will ease administrative burden so providers can focus on clinical management and better experience for patients.
Broussard said Conviva will serve about 30% of MA HMO members in South Florida and 50% of MA HMO members in Texas. “We believe this new simplified structure will help us build trust across the South Florida and Texas markets,” Broussard said.
Humana launched 15 new clinics in seven markets in 2017 and now operates 195 locations across 27 markets with 1,500 employed of affiliated physicians. Broussard said the launch of Conviva and Humana’s other provider-based locations will help “build a national footprint of high-performing, senior-focused primary care physicians.”
Broussard said Humana will look for more opportunities to expand its primary care footprint in areas with a large Humana MA population.
For 2018, Humana projects its GAAP EPS at between $13.16 and $13.66, which is lower than the $16.81 in FY17.