Humana 2013 Annual Report Download - page 56

April 1, 2012, which is accounted for similar to an administrative services fee only agreement as
described in Note 2 to the consolidated financial statements included in Item 8. – Financial Statements
and Supplementary Data. Our previous contract was accounted for similar to our fully-insured
products.
• As more fully described herein under the section titled “Benefits Expense Recognition” actuarial
standards require the use of assumptions based on moderately adverse experience, which generally
results in favorable reserve development, or reserves that are considered redundant. We experienced
favorable medical claims reserve development related to prior fiscal years of $474 million in 2013,
$257 million in 2012, and $372 million in 2011. Year-over-year comparisons of the benefit ratio were
positively impacted by the $217 million increase in favorable prior-period medical claims reserve
development from 2012 to 2013.
• Year-over-year comparisons of diluted earnings per common share are favorably impacted by a lower
number of shares used to compute diluted earnings per common share reflecting the impact of share
repurchases.
• Our operating cash flow of $1.7 billion for the year ended December 31, 2013 compared to operating
cash flow of $1.9 billion for the year ended December 31, 2012. Our operating cash flows for 2013
reflect earnings and enrollment activity, including increased marketing and distribution costs during the
annual election period for Medicare beneficiaries resulting in higher sales, as well as investment
spending for health care exchanges and new state-based contracts, and higher Medicare Part D risk
corridor payments related to settlements for prior years, including $158 million related to the 2011
contract year. For 2014, the effect of the commercial risk adjustment, risk corridor, and reinsurance
provisions of the Health Care Reform Law will impact the timing of our operating cash flows, as we
expect to build a receivable in 2014 that will be collected in 2015. It is reasonably possible that the
receivable could be material to our operating cash flow in 2014. In 2014, we expect our operating cash
flows to decline from 2013.
• During the year ended December 31, 2013, we repurchased 5.8 million shares in open market
transactions for $502 million and paid dividends to stockholders of $168 million.
• In July 2013, we amended and restated our 5-year $1.0 billion unsecured revolving credit agreement to,
among other things, extend its maturity to July 2018 from November 2016 as described under the
section titled “Future Sources and Uses of Liquidity – Credit Agreement.”
• In 2014, we expect to pay the federal government in the range of $525 million to $575 million for the
annual health insurance industry fee. This fee is not deductible for tax purposes, which will
significantly increase our effective income tax rate in 2014. We expect to offset the impact of the
health insurance industry fee on our results of operations in 2014 through pretax income improvement,
however, there can be no assurances that we will be able to do so. The health insurance industry fee is
further described below under the section titled “Health Care Reform.”
Retail Segment
• In a December 2013 call, CMS updated the medical cost trend assumptions that are used to determine
Medicare Advantage funding changes for 2015. Based on the preliminary fee-for-service medical cost
trend estimates from CMS, the impact of payment cuts associated with the Health Care Reform Law,
quality bonuses, sunset of the Star quality CMS demo in 2015, risk coding and recalibration, and the
impact of the health insurance industry fee, we estimate 2015 Medicare Advantage rate reductions of
6% to 7%. We expect the CMS preliminary rate announcement for calendar year 2015 to be issued on
February 21, 2014. We expect to seek alternatives to minimize the disruption to Medicare beneficiaries
this level of rate decline may cause, however, there can be no assurances that we will be able to do so.
Such alternatives include additional investments in clinical management programs, operating cost
efficiencies, benefit changes, market exits and other operating strategies.
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