Operating costs – The consolidated operating cost ratio (operating costs as a percent of total revenues less investment income) of 14.7 percent for 3Q12 compares to 14.8 percent in 3Q11 primarily reflecting substantially improved operating leverage nearly offset by the impact of the accounting for the company’s new South Region TRICARE contract in the company’s Other Businesses.
The YTD12 consolidated operating cost ratio of 14.3 percent increased by 40 basis points from that for YTD11 of 13.9 percent as the negative impact of the accounting for the company’s new South Region TRICARE contract was partially offset by improvements in operating leverage.
Retail Segment Highlights
- Retail Segment pretax income of $424 million in 3Q12 decreased by $117 million from $541 million in 3Q11. For YTD12, pretax earnings for the Retail Segment of $906 million decreased by $355 million versus YTD11 pretax earnings for the segment of $1.26 billion. These decreases were primarily driven by year-over-year increases in the segment’s benefit ratios during 3Q12 and YTD12.
- Pretax income for the Retail Segment also included the beneficial impact of favorable prior-year medical claims reserve development of approximately $38 million in 3Q12 compared to $32 million in 3Q11. YTD12 pretax income included the beneficial impact of favorable prior-year medical claims reserve development of $95 million compared to $104 million in YTD11.
- Individual Medicare Advantage membership was 1,911,800 at September 30, 2012, an increase of 298,400 members, or 18 percent from 1,613,400 at September 30, 2011 primarily due to a successful enrollment season associated with the 2012 plan year as well as age-in enrollment throughout the year. Individual Medicare Advantage membership has increased 271,500, or 17 percent, through September 30, 2012 from 1,640,300 at December 31, 2011.
- The individual Medicare Advantage membership changes described above include 12,100 members associated with the acquisition of MD Care effective December 30, 2011 and 62,600 members from the acquisition of Arcadian Management Services, Inc. (Arcadian) effective March 31, 2012. As previously announced, the company expects to divest approximately 12,600 members acquired with Arcadian effective January 1, 2013 in accordance with the company’s previously disclosed agreement with the United States Department of Justice.
- Membership in the company’s individual stand-alone PDPs was 2,947,200 at September 30, 2012, up 469,100, or 19 percent, compared to 2,478,100 at September 30, 2011 and up 406,800, or 16 percent, from 2,540,400 at December 31, 2011. These increases resulted primarily from growth in the company’s Humana-Walmart plan offering.
- HumanaOne® medical membership increased to 443,400 at September 30, 2012, an increase of 19,400, or 5 percent, from 424,000 at September 30, 2011 and an increase of 9,800, or 2 percent, from 433,600 at December 31, 2011.
- Membership in individual specialty products (a) of 940,800 at September 30, 2012 increased by 185,200, or 25 percent, from 755,600 at September 30, 2011 and up 158,300, or 20 percent, from 782,500 at December 31, 2011. Both the sequential and year-over-year increases were primarily driven by increased sales in dental offerings.
- 3Q12 premiums and services revenue for the Retail Segment was $6.14 billion, an increase of 14 percent from $5.40 billion in 3Q11. The increase was primarily the result of year-over-year membership growth for individual Medicare Advantage plans.
- The 3Q12 benefit ratio for the Retail Segment was 82.3 percent, an increase of 360 basis points from 78.7 percent in 3Q11. The increase was primarily driven by a higher Medicare Advantage benefit ratio associated with new members and increased outpatient utilization for both new and existing members.
- Retail Segment prior-year favorable medical claims reserve development lowered the related benefit ratios by 60 basis points in both 3Q12 and 3Q11.
- The Retail Segment’s operating cost ratio of 10.7 percent in 3Q12 decreased 50 basis points from 11.2 percent in 3Q11 reflecting cost efficiencies resulting from higher membership together with the company’s continued focus on operating cost efficiencies.
- Employer Group Segment pretax income of $43 million in 3Q12 compares to $46 million in 3Q11. For YTD12, pretax earnings for the Employer Group Segment of $278 million decreased by $15 million versus YTD11 pretax earnings for the segment of $293 million. These decreases primarily reflected year-over-year increases in this segment’s benefit ratio partially offset by lower operating cost ratios.
- Pretax income for the Employer Group Segment also included the beneficial impact of favorable prior-year medical claims reserve development of approximately $14 million in 3Q12 compared to $9 million in 3Q11. YTD12 pretax income included $4 million in unfavorable prior-year medical claims reserve development versus the beneficial impact of $42 million in favorable medical claims reserve development in YTD11.
- Group Medicare Advantage membership was 395,700 at September 30, 2012, an increase of 80,200 members, or 25 percent, from 315,500 at September 30, 2011, and an increase of 77,500, or 24 percent, from 318,200 at December 31, 2011.
- Group fully-insured commercial medical membership increased to 1,204,500 at September 30, 2012, an increase of 23,200, or 2 percent, from 1,181,300 at September 30, 2011, and an increase of 24,300, or 2 percent, from 1,180,200 at December 31, 2011. Third quarter year-over-year and year-to-date changes primarily reflected growth in small group membership being partially offset by declines in large group business.
- Group ASO commercial medical membership was 1,231,100 at September 30, 2012, a decrease of 55,900, or 4 percent, from 1,287,000 at September 30, 2011, and a decrease of 61,200, or 5 percent, from 1,292,300 at December 31, 2011. This decline reflected a continuation of discipline in pricing services for self-funded accounts amid a highly competitive environment.
- Membership in Employer Group specialty products (a) of 7,088,600 at September 30, 2012 increased 10 percent from 6,419,300 at September 30, 2011, and increased 556,000, or 9 percent, from 6,532,600 at December 31, 2011. Membership increases were primarily due to increased cross-sales of the company’s specialty products to its medical membership and growth in stand-alone specialty product sales.
- 3Q12 premiums and services revenue for the Employer Group Segment were $2.64 billion, an increase of $325 million, or 14 percent, from $2.32 billion in 3Q11 due primarily to the result of increased group Medicare Advantage membership year-over-year.
- 3Q12 benefit ratio for the Employer Group Segment was 85.3 percent, an increase of 180 basis points, from 83.5 percent for 3Q11. The year-over-year increase in the benefit ratio due to higher average group Medicare membership year-over-year. Group Medicare benefit plans generally carry a higher benefit ratio than commercial group medical products.
- Employer Group Segment prior-year favorable medical claims reserve development lowered the related benefit ratios by 60 basis points in 3Q12 and 40 basis points in 3Q11.
- The Employer Group Segment’s operating cost ratio of 15.6 percent in 3Q12 improved 190 basis points from 17.5 percent in 3Q11 reflecting increased year-over-year membership in the company’s group Medicare Advantage products (which generally carry a lower operating cost ratio than the company’s fully-insured commercial group products) as well as savings associated with operating cost reduction initiatives.
- Health and Well-Being Services Segment pretax income of $148 million in 3Q12 compared to $83 million in 3Q11. For YTD12, pretax earnings for the Health and Well-Being Services Segment of $411 million increased by $143 million versus YTD11 pretax earnings for the segment of $268 million. These increases primarily reflected growth in the company’s pharmacy solutions business, including higher script volumes within the company’s RightSourceRx® mail-order pharmacy.
- Script volumes for the Retail and Employer Group Segments’ membership increased to approximately 60 million in 3Q12, up 8 million, or 15 percent, versus 3Q11 scripts of approximately 52 million. The year-over-year increase primarily reflects growth associated with higher average medical membership for 3Q12 than in 3Q11 together with an increase in mail order penetration for the company’s medical membership year over year.
- Services revenue of $3.20 billion in 3Q12 for the Health and Well-Being Services Segment increased 13 percent from $2.83 billion in 3Q11. This increase was primarily driven by growth in the company’s Medicare Advantage membership, who use the company’s pharmacy benefit management services under its health plan offerings, as well as higher script volumes for RightSourceRx mail-order pharmacy by the company’s membership across all product lines.
- The Health and Well-Being Services Segment’s operating cost ratio of 94.6 percent in 3Q12 decreased 170 basis points from 96.3 percent in 3Q11. The decrease primarily reflects better operating cost leverage associated with higher script volumes in the company’s RightSourceRx mail-order pharmacy.
- On April 1, 2012, the company’s new South Region TRICARE contract became effective with the Department of Defense (DoD). The company’s new contract is structured similar to self-funded products versus a fully-insured structure for the company’s previous South Region TRICARE contract with the DoD. This change resulted in significant volatility in year-over-year comparisons for the company’s Other Businesses during 3Q12 and YTD12.
- At September 30, 2012, the company had cash, cash equivalents, and investment securities of $11.26 billion, a decrease of $2.28 billion, or 17 percent, from $13.53 billion at June 30, 2012 primarily driven by the timing of the Medicare premium payment from the Centers for Medicare and Medicaid Services (CMS).
- Parent company cash and short-term investments of $522 million at September 30, 2012 decreased $758 million from $1.28 billion at June 30, 2012 primarily due to the 3Q12 share repurchase activity and cash dividends paid to stockholders during 3Q12. Completion of the SeniorBridge and certain other smaller acquisitions also contributed to the sequential decline in parent company cash and investments during 3Q12.
- Days in claims payable were 51.6 at September 30, 2012, up slightly from 51.0 at June 30, 2012.
- Debt-to-total capitalization at September 30, 2012 was 15.7 percent, down 40 basis points compared to 16.1 percent at June 30, 2012 primarily driven by higher capitalization associated with 3Q12 earnings.
- Cash flows used in operations for 3Q12 of $1.33 billion compared to cash flows provided by operations of $2.92 billion in 3Q11. Cash flows provided by operations for YTD12 totaled $1.72 billion compared to $3.88 billion in YTD11. The company also evaluates operating cash flows on a non-GAAP basis:
| Net cash (used in) provided by operating activities
|Timing of premium payment from CMS (b)||2,133||(1,796)||
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