Humana 10Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-5975

HUMANA INC.


(Exact name of registrant as specified in its charter)


Delaware						61-0647538
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

500 West Main Street

Louisville, Kentucky 40202

(Address of principal executive offices, including zip code)

(502) 580-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.16 2/3 par value	HUM	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class of Common Stock			Outstanding at September 30, 2021
$0.16 2/3 par value			128,534,291 shares

Table of Contents

Humana Inc.

FORM 10-Q

SEPTEMBER 30, 2021

INDEX


		Page
Part I: Financial Information
Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020	4

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	5

	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59

Item 4.	Controls and Procedures	59

Part II: Other Information

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

	Signatures	63

	Certifications

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2021		December 31, 2020
	(in millions, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	4,304	$	4,673
Investment securities	13,719		12,554
Receivables, less allowance for doubtful accounts of $82 in 2021 and $72 in 2020	1,879		1,138
Other current assets	5,913		5,276
Total current assets	25,815		23,641
Property and equipment, net	2,898		2,371
Long-term investment securities	1,095		1,212
Equity method investments	143		1,170
Goodwill	10,806		4,447
Other long-term assets	4,563		2,128
Total assets	$	45,320	$	34,969
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Benefits payable	$	8,758	$	8,143
Trade accounts payable and accrued expenses	4,957		4,013
Book overdraft	240		320
Unearned revenues	277		318
Short-term debt	795		600
Total current liabilities	15,027		13,394
Long-term debt	11,466		6,060
Other long-term liabilities	2,545		1,787
Total liabilities	29,038		21,241

Stockholders’ equity:
Preferred stock, $1 par; 10,000,000 shares authorized; none issued	—		—
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 198,648,742 shares issued at September 30, 2021 and December 31, 2020	33		33
Capital in excess of par value	3,064		2,705
Retained earnings	23,191		20,517
Accumulated other comprehensive income	145		391
Treasury stock, at cost, 70,114,451 shares at September 30, 2021 and 69,787,614 shares at December 31, 2020	(10,173)		(9,918)
Noncontrolling interests	22		—
Total stockholders’ equity	16,282		13,728
Total liabilities and stockholders’ equity	$	45,320	$	34,969

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in millions, except per share results)
Revenues:
Premiums	$	19,885	$	18,904	$	59,987	$	55,822
Services	845		457		1,802		1,331
Investment (loss) income	(33)		714		221		940
Total revenues	20,697		20,075		62,010		58,093
Operating expenses:
Benefits	17,316		15,611		51,761		45,415
Operating costs	2,603		2,513		6,726		6,984
Depreciation and amortization	150		128		436		362
Total operating expenses	20,069		18,252		58,923		52,761
Income from operations	628		1,823		3,087		5,332

Interest expense	88		75		235		211
Other (income) expense, net	(1,096)		(7)		(562)		63
Income before income taxes and equity in net earnings	1,636		1,755		3,414		5,058
Provision for income taxes	120		450		536		1,485
Equity in net earnings	15		35		69		68
Net income	$	1,531	$	1,340	$	2,947	$	3,641
Less: Net income attributable to noncontrolling interests	—		—		—		—
Net income attributable to Humana	$	1,531	$	1,340	$	2,947	$	3,641
Basic earnings per common share	$	11.91	$	10.12	$	22.90	$	27.53
Diluted earnings per common share	$	11.84	$	10.05	$	22.77	$	27.37

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in millions)
Net income	$	1,531	$	1,340	$	2,947	$	3,641
Other comprehensive income:
Change in gross unrealized investment (losses) gains	(63)		66		(247)		332
Effect of income taxes	14		(15)		56		(78)
Total change in unrealized investment (losses) gains, net of tax	(49)		51		(191)		254
Reclassification adjustment for net realized gains	(16)		(1)		(80)		(48)
Effect of income taxes	4		—		19		10
Total reclassification adjustment, net of tax	(12)		(1)		(61)		(38)
Other comprehensive (loss) gain, net of tax	(61)		50		(252)		216
Comprehensive (loss) income attributable to equity method investments	(10)		3		6		(2)
Comprehensive income (loss) attributable to noncontrolling interests	—		—		—		—
Comprehensive income attributable to Humana	$	1,460	$	1,393	$	2,701	$	3,855

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Capital In Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (loss)		Treasury Stock		Noncontrolling Interests		Total Stockholders’ Equity
	Issued Shares	Amount
	(dollars in millions, share amounts in thousands)
Three months ended September 30, 2021
Balances, June 30, 2021	198,649	$	33	$	3,018	$	21,751	$	216	$	(10,175)	$	—	$	14,843
Net income						1,531						—		1,531
Acquisition												22		22
Other comprehensive loss								(71)						(71)
Common stock repurchases				—						(3)				(3)
Dividends and dividend equivalents						(91)								(91)
Stock-based compensation				48										48
Restricted stock unit vesting	—	—		(3)						3				—
Stock option exercises	—	—		1						2				3

Balances, September 30, 2021	198,649	$	33	$	3,064	$	23,191	$	145	$	(10,173)	$	22	$	16,282

Three months ended September 30, 2020
Balances, June 30, 2020	198,630	$	33	$	2,898	$	19,616	$	317	$	(8,448)	$	—	$	14,416
Net income						1,340						—		1,340
Other comprehensive income								53						53
Common stock repurchases	19			—						(5)				(5)
Dividends and dividend equivalents						(84)								(84)
Stock-based compensation				47										47
Restricted stock unit vesting	—	—		(6)						6				—
Stock option exercises	—	—		1						—				1

Balances, September 30, 2020	198,649	$	33	$	2,940	$	20,872	$	370	$	(8,447)	$	—	$	15,768

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)




	Common Stock			Capital In Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock		Noncontrolling Interests		Total Stockholders’ Equity
	Issued Shares	Amount
	(dollars in millions, share amounts in thousands)
Nine months ended September 30, 2021
Balances, December 31, 2020	198,649	$	33	$	2,705	$	20,517	$	391	$	(9,918)	$	—	$	13,728
Net income						2,947						—		2,947
Acquisition												22		22
Other comprehensive loss								(246)						(246)
Common stock repurchases				263						(299)				(36)
Dividends and dividend equivalents						(273)								(273)
Stock-based compensation				132										132
Restricted stock unit vesting	—	—		(40)						40				—
Stock option exercises	—	—		4						4				8

Balances, September 30, 2021	198,649	$	33	$	3,064	$	23,191	$	145	$	(10,173)	$	22	$	16,282

Nine months ended September 30, 2020
Balances, December 31, 2019	198,630	$	33	$	2,820	$	17,483	$	156	$	(8,455)	$	—	$	12,037
Net income						3,641						—		3,641
Impact of adopting ASC 326 - Current expected credit loss standard (CECL)						(2)						—		(2)
Other comprehensive income								214						214
Common stock repurchases	19			—						(30)				(30)
Dividends and dividend equivalents						(250)								(250)
Stock-based compensation				129										129
Restricted stock unit vesting	—	—		(21)						21				—
Stock option exercises	—	—		12						17				29

Balances, September 30, 2020	198,649	$	33	$	2,940	$	20,872	$	370	$	(8,447)	$	—	$	15,768

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the nine months ended September 30,
	2021		2020
	(in millions)
Cash flows from operating activities
Net income	$	2,947	$	3,641
Adjustments to reconcile net income to net cash provided by operating activities:

Losses (gains) on investment securities, net	18		(696)
Gain on Kindred at Home equity method investment	(1,129)		—
Equity in net earnings	(69)		(68)
Stock-based compensation	132		129
Depreciation	468		390
Amortization	51		66
Benefit for deferred income taxes	—		(3)
Changes in operating assets and liabilities, net of effect of businesses acquired:
Receivables	(294)		(82)
Other assets	(476)		(1,547)
Benefits payable	573		2,204
Other liabilities	207		1,257
Unearned revenues	(84)		40
Other	14		25
Net cash provided by operating activities	2,358		5,356
Cash flows from investing activities

Acquisitions, net of cash and cash equivalents acquired	(3,959)		(709)
Purchases of property and equipment, net	(945)		(668)
Purchases of investment securities	(6,573)		(7,230)
Proceeds from maturities of investment securities	2,103		3,500
Proceeds from sales of investment securities	2,920		2,097
Net cash used in investing activities	(6,454)		(3,010)
Cash flows from financing activities
Receipts (withdrawals) from contract deposits, net	605		(274)
Proceeds from issuance of senior notes, net	2,984		1,088
Proceeds from issuance of commercial paper, net	193		21
Proceeds from term loan	500		1,000
Repayment of term loan	(150)		—
Debt issue costs	(29)		—
Change in book overdraft	(80)		(11)
Common stock repurchases	(36)		(30)
Dividends paid	(263)		(239)
Proceeds from stock option exercises and other, net	3		30
Net cash provided by financing activities	3,727		1,585
(Decrease) increase in cash and cash equivalents	(369)		3,931
Cash and cash equivalents at beginning of period	4,673		4,054
Cash and cash equivalents at end of period	$	4,304	$	7,985

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(Unaudited)


	For the nine months ended September 30,
	2021		2020
	(in millions)
Supplemental cash flow disclosures:
Interest payments	$	183	$	159
Income tax payments, net	$	219	$	778
Details of businesses acquired in purchase transactions:
Fair value of assets acquired, net of cash acquired	$	9,572	$	816
Less: Fair value of liabilities assumed	(3,231)		(107)
Less: Noncontrolling interests acquired	(22)		—
Less: Remeasured existing Kindred at Home equity method investment	(2,360)		—
Cash paid for acquired businesses, net of cash acquired	$	3,959	$	709

See accompanying notes to condensed consolidated financial statements.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS

The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2020, that was filed with the Securities and Exchange Commission, or the SEC, on February 18, 2021. We refer to the Form 10-K as the “2020 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.

The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk adjustment provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2020 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. Since the filing of our 2020 Form 10-K we have acquired noncontrolling interest and indefinite-lived intangible assets as part of our acquisition of Kindred at Home, or KAH, during the third quarter of 2021. See Note 3 for further information. We have updated our accounting policies accordingly.

The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.

Indefinite-lived Assets

We are required to annually compare the fair values of other indefinite-lived intangible assets to their carrying amounts. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of indefinite-lived intangible assets are determined based on the income approach.

Noncontrolling Interests

The consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned affiliates that we control. Accordingly, we record noncontrolling interests in the earnings and equity of such entities. We record adjustments to noncontrolling interests for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon their portion of the subsidiaries they own. Distributions to holders of noncontrolling interests are adjusted to the respective noncontrolling interest holders’ balances. Noncontrolling interests, which relate to the minority ownership held by third party investors in certain of our Home Health Solutions business, are reported below net income under the heading “Net income attributable to noncontrolling interest” in the condensed consolidated statements of income and presented as a component of equity in the condensed consolidated balance sheets.

COVID-19

The emergence and spread of the novel coronavirus, or COVID-19, beginning in the first quarter of 2020 has impacted our business. During periods of increased incidences of COVID-19, non-essential care from a reduction in non-COVID-19 hospital admissions and lower overall healthcare system consumption decreased utilization. Likewise COVID-19 treatment and testing cost increased utilization. The significant disruption in utilization during

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

2020 also impacted our ability to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles, and, as such, is significantly affecting our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans.

Revenue Recognition

Our revenues include premium and service revenues. Service revenues include administrative service fees that are recorded based upon established per member per month rates and the number of members for the month and are recognized as services are provided for the month. Additionally, service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For more information about our revenues, refer to Note 2 to the consolidated financial statements included in our 2020 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements. See Note 14 for disaggregation of revenue by segment and type.

At September 30, 2021, accounts receivable related to services were $578 million. For the three and nine months ended September 30, 2021, we had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet at September 30, 2021.

For the three and nine months ended September 30, 2021, services revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further, services revenue expected to be recognized in any future year related to remaining performance obligations was not material.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2018, the FASB issued new guidance related to accounting for long-duration contracts of insurers which revises key elements of the measurement models and disclosure requirements for long-duration contracts issued by insurers, including the amortization of deferred contract acquisition costs and the measurement of liabilities for future policy benefits using current, rather than locked-in assumptions. The new guidance is effective for us beginning with annual and interim periods in 2023, with earlier adoption permitted, and are to be applied to contracts in force or at the beginning of the earliest period presented, with an option to apply retrospectively with a cumulative effect adjustment to the opening balances of retained earnings as of the earliest period presented. We are currently evaluating the impact on our results of operations, financial position and cash flows.

There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

3. ACQUISITIONS

On August 17, 2021, we acquired the remaining 60% interest in Kindred at Home, or KAH, the nation’s largest home health and hospice provider, from TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, two private equity funds, or the Sponsors, for an enterprise value of $8.2 billion, which includes our equity value of $2.4 billion associated with our 40% minority ownership interest. The remeasurement to fair value of our previously held 40% equity method investment with a carrying value of approximately $1.3 billion, resulted in a $1.1 billion gain recognized in "Other (income) expense, net". KAH has locations in 40 states, providing extensive geographic coverage with approximately 65% overlap with our individual Medicare Advantage membership. We paid the approximate $5.8 billion transaction price (net of our existing equity stake) through a combination of debt financing, the assumption of existing KAH indebtedness and parent company cash. The preliminary fair values of KAH’s assets acquired and liabilities assumed at the date of the acquisition are summarized as follows:


	Kindred at Home
	($ in millions)
Cash and cash equivalents	$	278
Receivables	424
Other current assets	63
Property and equipment	74
Goodwill	5,778
Other intangible assets	2,325
Other long-term assets	172
Total assets acquired	$	9,114
Current liabilities	$	452
Long term debt	2,078
Other long-term liabilities	392
Total liabilities assumed	$	2,922
Non-controlling interests	22
Net assets acquired	$	6,170

The other intangible assets primarily consist of Certificate of Needs (CON) and Medicare licenses which have indefinite lives. Amortizing trade names included in other intangibles assets of approximately $18 million have an estimated weighted average useful life of 10 years. The goodwill, allocated to our Healthcare Services segment, primarily relates to the future economic benefit arising from the assets acquired and is consistent with our integrated care delivery strategy. Approximately $132 million of the goodwill is deductible for tax purposes. The purchase price allocation is preliminary, subject to completion of valuation analyses, including, for example, refining assumptions used to calculate the fair value of other intangible assets. The results of operations and financial condition of KAH have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the acquisition date. In connection with the acquisition, we recognized approximately $45 million of acquisition-related costs, primarily compensation costs as well as banker and other professional fees, in operating costs in our condensed consolidated statements of income. The comparative proforma financial information assuming the acquisition had occurred as of January 1, 2020 was not material to our results of operations.

During 2021 and 2020, we acquired various health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses acquired in 2021 and 2020 have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the respective acquisition dates. Acquisition-related costs recognized in 2021 and 2020 were not material to our results of

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.

4. INVESTMENT SECURITIES

Investment securities classified as current and long-term were as follows at September 30, 2021 and December 31, 2020, respectively:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
September 30, 2021
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	656	$	1	$	(7)	$	650
Mortgage-backed securities	3,699		69		(46)		3,722
Tax-exempt municipal securities	853		35		(2)		886
Mortgage-backed securities:
Residential	392		—		(3)		389
Commercial	1,438		37		(7)		1,468
Asset-backed securities	1,394		7		(1)		1,400
Corporate debt securities	5,493		152		(47)		5,598
Total debt securities	$	13,925	$	301	$	(113)	14,113
Common stock							701
Total investment securities							$	14,814

December 31, 2020
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	616	$	1	$	(1)	$	616
Mortgage-backed securities	3,115		140		(1)		3,254
Tax-exempt municipal securities	1,393		54		—		1,447
Mortgage-backed securities:
Residential	17		—		—		17
Commercial	1,260		59		(1)		1,318
Asset-backed securities	1,364		10		(2)		1,372
Corporate debt securities	4,672		256		(1)		4,927
Total debt securities	$	12,437	$	520	$	(6)	12,951
Common stock							815
Total investment securities							$	13,766

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Gross unrealized losses and fair values aggregated by investment category and length of time of individual debt securities that have been in a continuous unrealized loss position for which no allowances for credit loss has been recorded were as follows at September 30, 2021 and December 31, 2020, respectively:


	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
September 30, 2021
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	261	$	(4)	$	181	$	(3)	$	442	$	(7)
Mortgage-backed securities	2,555		(41)		231		(5)		2,786		(46)
Tax-exempt municipal securities	77		(1)		28		(1)		105		(2)
Mortgage-backed securities:
Residential	348		(3)		—		—		348		(3)
Commercial	340		(6)		98		(1)		438		(7)
Asset-backed securities	296		(1)		277		—		573		(1)
Corporate debt securities	1,589		(39)		223		(8)		1,812		(47)
Total debt securities	$	5,466	$	(95)	$	1,038	$	(18)	$	6,504	$	(113)

December 31, 2020
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	$	225	$	(1)	$	—	$	—	$	225	$	(1)
Mortgage-backed securities	199		(1)		—		—		199		(1)
Tax-exempt municipal securities	16		—		19		—		35		—
Mortgage-backed securities:
Residential	17		—		—		—		17		—
Commercial	193		(1)		43		—		236		(1)
Asset-backed securities	65		—		498		(2)		563		(2)
Corporate debt securities	342		(1)		16		—		358		(1)
Total debt securities	$	1,057	$	(4)	$	576	$	(2)	$	1,633	$	(6)

Approximately 96% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by Standard & Poor's Rating Service, or S&P, at September 30, 2021. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the

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United States with no individual state exceeding 1% of our total debt securities. Our investment policy limits investments in a single issuer and requires diversification among various asset types.

Our unrealized losses from all debt securities were generated from approximately 540 positions out of a total of approximately 1,740 positions at September 30, 2021. All issuers of debt securities we own that were trading at an unrealized loss at September 30, 2021 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time these debt securities were purchased. At September 30, 2021, we did not intend to sell any debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these debt securities before recovery of their amortized cost basis. Additionally, we did not record any material credit allowances for debt securities that were in an unrealized loss position for the three and nine months ended September 30, 2021 and 2020.

The detail of gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2021 and 2020:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(in millions)				(in millions)
Gross gains on investment securities	$	71	$	2	$	180	$	71
Gross losses on investment securities	(1)		—		(1)		(18)
Net (losses) gains on equity securities	(174)		643		(197)		643
Net (losses) gains on investment securities	$	(104)	$	645	$	(18)	$	696

Purchases of and proceeds from investment securities for the three and nine months ended September 30, 2021 and 2020 relate primarily to debt securities.

The contractual maturities of debt securities available for sale at September 30, 2021, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Fair Value
	(in millions)
Due within one year	$	543	$	547
Due after one year through five years	2,185		2,254
Due after five years through ten years	2,919		2,966
Due after ten years	1,355		1,367
Mortgage and asset-backed securities	6,923		6,979
Total debt securities	$	13,925	$	14,113

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5. FAIR VALUE

Financial Assets

The following table summarizes our fair value measurements at September 30, 2021 and December 31, 2020, respectively, for financial assets measured at fair value on a recurring basis:


	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(in millions)
September 30, 2021
Cash equivalents	$	3,894	$	3,894	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	650		—		650		—
Mortgage-backed securities	3,722		—		3,722		—
Tax-exempt municipal securities	886		—		886		—
Mortgage-backed securities:
Residential	389		—		389		—
Commercial	1,468		—		1,468		—
Asset-backed securities	1,400		—		1,400		—
Corporate debt securities	5,598		—		5,598		—
Total debt securities	14,113		—		14,113		—
Common stock	701		701		—		—
Total invested assets	$	18,708	$	4,595	$	14,113	$	—

December 31, 2020
Cash equivalents	$	4,548	$	4,548	$	—	$	—
Debt securities:
U.S. Treasury and other U.S. government corporations and agencies:
U.S. Treasury and agency obligations	616		—		616		—
Mortgage-backed securities	3,254		—		3,254		—
Tax-exempt municipal securities	1,447		—		1,447		—
Mortgage-backed securities:
Residential	17		—		17		—
Commercial	1,318		—		1,318		—
Asset-backed securities	1,372		—		1,372		—
Corporate debt securities	4,927		—		4,927		—
Total debt securities	12,951		—		12,951		—
Common stock	815		815		—		—
Total invested assets	$	18,314	$	5,363	$	12,951	$	—

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Financial Liabilities

Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, net of unamortized debt issuance costs, was $9.0 billion at September 30, 2021 and $6.1 billion at December 31, 2020. The fair value of our senior notes debt was $10.1 billion at September 30, 2021 and $7.4 billion at December 31, 2020. The fair value of our senior notes debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities. Due to the short-term duration, carrying value approximates fair value for our term loans and commercial paper borrowings. The term loans, including the assumption of Kindred at Home's term loan, and commercial paper borrowings were $3.2 billion as of September 30, 2021 and our commercial paper borrowings were $0.6 billion as of December 31, 2020.

Put and Call Options Measured at Fair Value

Effective April 27, 2021, with the signing of the definitive agreement to acquire the remaining 60% interest of KAH, the respective put and call options were terminated. As such, the $63 million put and $440 million call fair values as of the first quarter of 2021 were reduced to zero, resulting in $377 million in "Other (income) expense, net" in our condensed consolidated statements of income for the nine months ended September 30, 2021.

The put and call options were measured at fair value using a Monte Carlo simulation which resulted in fair values of $45 million and $503 million, respectively, at December 31, 2020. The put option was included within other long-term liabilities and the call option included within other long-term assets at December 31, 2020. The change in fair value of the put and call options is reflected as "Other (income) expense, net" in our condensed consolidated statements of income.

Other Assets and Liabilities Measured at Fair Value

Certain assets and liabilities are measured at fair value on a non-recurring basis subject to fair value adjustment only in certain circumstances. As disclosed in Note 3, “Acquisitions”, we completed our acquisition of KAH during the third quarter of 2021. The net assets acquired and resulting goodwill and other intangible assets were recorded at fair value primarily using Level 3 inputs. The net tangible assets including receivables and accrued liabilities were recorded at their carrying value which approximated their fair value due to their short term nature. The fair value of goodwill and other intangible assets were internally estimated based primarily on the income approach. The income approach estimates fair value based on the present value of cash flow that the assets could be expected to generate in the future. We developed internal estimates for expected cash flows in the present value calculation using inputs and significant assumptions that include historical revenues and earnings, revenue growth rates, the amount and timing of future cash flows, discount rates, contributory asset charges and future tax rates, among others. The excess purchase price over the fair value of assets and liabilities acquired is recorded as goodwill.

Other than the assets acquired and liabilities assumed in the KAH and other acquisitions in Note 3, there were no other material assets or liabilities measured at fair value on a recurring or nonrecurring basis during 2021.

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6. MEDICARE PART D

We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described further in Note 2 to the consolidated financial statements included in our 2020 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at September 30, 2021 and December 31, 2020. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers.


	September 30, 2021				December 31, 2020
	Risk Corridor Settlement		CMS Subsidies/ Discounts		Risk Corridor Settlement		CMS Subsidies/ Discounts
	(in millions)
Other current assets	$	170	$	1,681	$	216	$	1,420
Trade accounts payable and accrued expenses	(14)		(1,139)		(39)		(253)
Net current asset	156		542		177		1,167
Other long-term assets	244		—		8		—
Other long-term liabilities	(257)		—		(90)		—
Net long-term liability	(13)		—		(82)		—
Total net asset	$	143	$	542	$	95	$	1,167

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2021 were as follows:


	Retail		Group and Specialty		Healthcare Services		Total
	(in millions)
Balance at January 1, 2021	$	1,535	$	261	$	2,651	$	4,447
Acquisitions	205		—		6,154		6,359


Balance at September 30, 2021	$	1,740	$	261	$	8,805	$	10,806

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The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 2021 and December 31, 2020.


		September 30, 2021						December 31, 2020
	Weighted Average Life	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
		($ in millions)
Other intangible assets:
Certificates of need	Indefinite	$	1,786	$	—	$	1,786	$	—	$	—	$	—
Medicare licenses	Indefinite	522		—		522		—		—		—
Customer contracts/ relationships	9.4 years	876		608		268		849		572		277
Trade names and technology	7.1 years	156		94		62		122		89		33
Provider contracts	11.7 years	70		55		15		69		50		19
Noncompetes and other	7.0 years	34		29		5		29		29		—
Total other intangible assets	9.1 years	$	3,444	$	786	$	2,658	$	1,069	$	740	$	329

For the three months ended September 30, 2021 and 2020, amortization expense for other intangible assets was approximately $17 million and $23 million, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense for other intangible assets was approximately $47 million and $66 million, respectively. The following table presents our estimate of amortization expense remaining for 2021 and each of the five next succeeding years:


	(in millions)
For the years ending December 31,
2021	$	18
2022	66
2023	50
2024	43
2025	42
2026	29

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8. BENEFITS PAYABLE

On a consolidated basis, activity in benefits payable was as follows for the nine months ended September 30, 2021 and 2020:


	For the nine months ended September 30,
		2021		2020
	(in millions)
Balances, beginning of period		$	8,143	$	6,004

Less: Reinsurance recoverables		—		(68)
Balances, beginning of period, net		8,143		5,936
Acquisitions		42		—
Incurred related to:
Current year		52,529		45,693
Prior years		(768)		(278)
Total incurred		51,761		45,415
Paid related to:
Current year		(44,370)		(37,810)
Prior years		(6,818)		(5,334)
Total paid		(51,188)		(43,144)

Reinsurance recoverable		—		1
Balances, end of period		$	8,758	$	8,208

Amounts incurred related to prior periods vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).

Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. 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.

The higher prior year favorable development for the nine months ended September 30, 2021 was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time. The suspension during 2020 was intended to provide financial and administrative relief for providers facing unprecedented strain as a result of the COVID-19 pandemic.

Incurred and Paid Claims Development

The following discussion provides information about incurred and paid claims development for our Retail and Group and Specialty segments as of September 30, 2021 and 2020, net of reinsurance, and the total estimate of benefits payable for claims incurred but not reported, or IBNR, included within the net incurred claims amounts.

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Retail Segment

Activity in benefits payable for our Retail segment was as follows for the nine months ended September 30, 2021 and 2020:


	For the nine months ended September 30,
		2021		2020
	(in millions)
Balances, beginning of period		$	7,428	$	5,363

Less: Reinsurance recoverables		—		(68)
Balances, beginning of period, net		7,428		5,295
Acquisitions		42		—
Incurred related to:
Current year		49,247		42,186
Prior years		(673)		(235)
Total incurred		48,574		41,951
Paid related to:
Current year		(41,721)		(34,946)
Prior years		(6,216)		(4,759)
Total paid		(47,937)		(39,705)

Reinsurance recoverable		—		1
Balances, end of period		$	8,107	$	7,542

At September 30, 2021, benefits payable for our Retail segment included IBNR of approximately $5.4 billion, primarily associated with claims incurred in 2021.

Group and Specialty Segment

Activity in benefits payable for our Group and Specialty segment was as follows for the nine months ended September 30, 2021 and 2020:


	For the nine months ended September 30,
		2021		2020
	(in millions)
Balances, beginning of period		$	715	$	641




Incurred related to:
Current year		3,769		3,929
Prior years		(95)		(43)
Total incurred		3,674		3,886
Paid related to:
Current year		(3,136)		(3,286)
Prior years		(602)		(575)
Total paid		(3,738)		(3,861)


Balances, end of period		$	651	$	666

At September 30, 2021, benefits payable for our Group and Specialty segment included IBNR of approximately $564 million, primarily associated with claims incurred in 2021.

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9. EARNINGS PER COMMON SHARE COMPUTATION

Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 2021 and 2020:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders	$	1,531	$	1,340	$	2,947	$	3,641
Weighted average outstanding shares of common stock used to compute basic earnings per common share	128,518		132,318		128,714		132,234
Dilutive effect of:
Employee stock options	68		105		65		95
Restricted stock	669		773		619		681
Shares used to compute diluted earnings per common share	129,255		133,196		129,398		133,010
Basic earnings per common share	$	11.91	$	10.12	$	22.90	$	27.53
Diluted earnings per common share	$	11.84	$	10.05	$	22.77	$	27.37
Number of antidilutive stock options and restricted stock excluded from computation	136		143		256		311

10. STOCKHOLDERS’ EQUITY

Dividends

The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 2020 and 2021 under our Board approved quarterly cash dividend policy:


Record Date	Payment Date	Amount per Share		Total Amount
				(in millions)
2020 payments
12/31/2019	1/31/2020	$	0.550	$	73
3/31/2020	4/24/2020	0.625		83
6/30/2020	7/31/2020	0.625		83
9/30/2020	10/30/2020	0.625		83
2021 payments
12/31/2020	1/29/2021	$	0.625	$	81
3/31/2021	4/30/2021	0.700		90
6/30/2021	7/30/2021	0.700		90
9/30/2021	10/29/2021	0.700		90

In October 2021, the Board declared a cash dividend of $0.70 per share payable on January 28, 2022 to stockholders of record on December 31, 2021.

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Stock Repurchases

Our Board of Directors may authorize the purchase of our common stock shares. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.

On July 30, 2019, the Board of Directors replaced a previous share repurchase authorization of up to $3 billion (of which approximately $1.03 billion remained unused) with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on June 30, 2022.

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 recorded the payment to Citi as a reduction to stockholders’ equity, consisting of an $800 million increase in treasury stock, which reflects the value of the initial 2.7 million shares received upon initial settlement, and a $200 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi pending final settlement of the July 2019 ASR. Upon final settlement of the July 2019 ASR on December 26, 2019, we received an additional 0.7 million shares as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement, less a discount, of $296.19, bringing the total shares received under the July 2019 ASR to 3.4 million. In addition, upon settlement we reclassified the $200 million value of stock initially held back by Citi from capital in excess of par value to treasury stock.

On December 22, 2020, we entered into separate accelerated stock repurchase agreements, ("the December 2020 ASR Agreements"), with Citibank, N.A., or Citi, and JPMorgan Chase Bank, or JPM, to repurchase $1.75 billion of our common stock as part of the $3 billion repurchase program authorized by the Board of Directors on July 30, 2019. On December 23, 2020, in accordance with the December 2020 ASR Agreements, we made a payment of $1.75 billion ($875 million to Citi and $875 million to JPM) and received an initial delivery of 3.8 million shares of our common stock (1.9 million shares each from Citi and JPM). We recorded the payments to Citi and JPM as a reduction to stockholders’ equity, consisting of an $1.5 billion increase in treasury stock, which reflects the value of the initial 3.8 million shares received upon initial settlement, and a $262.5 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi and JPM pending final settlement of the December 2020 ASR Agreements. Upon final settlement of the December 2020 ASR agreements with Citi and JPM on May 4, 2021 and May 5, 2021, respectively, we received an additional 0.3 million shares and 0.3 million shares, respectively, as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement, less a discount, of $400.07 and $401.49, respectively, bringing the total shares received under the December 2020 ASR agreements to 4.4 million. In addition, upon settlement we reclassified the $262.5 million value of stock initially held back by Citi and JPM from capital in excess of par value to treasury stock.

On February 18, 2021, the Board of Directors replaced the previous share repurchase authorization of up to $3 billion (of which approximately $250 million remained unused) with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring as of February 18, 2024. Our remaining repurchase authorization was $3 billion as of November 2, 2021.

In connection with employee stock plans, we acquired 0.09 million common shares for $36 million and 0.08 million common shares for $30 million during the nine months ended September 30, 2021 and 2020, respectively.

Noncontrolling interests

Noncontrolling interests of $22 million as of September 30, 2021 relate to the minority ownership held by third party investors in certain of our Home Solutions businesses as a result of our Kindred at Home acquisition.

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11. INCOME TAXES

The effective income tax rate was 7.2% and 15.4% for the three and nine months ended September 30, 2021, respectively, compared to 25.2% and 29.0% for the three and nine months ended September 30, 2020, respectively, primarily due to the non-taxable gain we recognized on our previously held Kindred at Home equity method investment from our acquisition of the remaining ownership interest in the business in August 2021 and the termination of the non-deductible health insurance industry fee in 2021.

12. DEBT

The carrying value of debt outstanding, net of unamortized debt issuance costs, was as follows at September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020
	(in millions)
Short-term debt:
Commercial paper	$	795	$	600



Total short-term debt	$	795	$	600

Long-term debt:
Senior notes:
$600 million, 3.15% due December 1, 2022	$	599	$	598
$400 million, 2.90% due December 15, 2022	399		398
$1.5 billion, 0.650% due August 3, 2023	1,491		—
$600 million, 3.85% due October 1, 2024	598		598
$600 million, 4.50% due April 1, 2025	596		595
$750 million, 1.350% due February 3, 2027	742		—
$600 million, 3.95% due March 15, 2027	596		596
$500 million, 3.125% due August 15, 2029	496		495
$500 million, 4.875% due April 1, 2030	495		494
$750 million, 2.150% due February 3, 2032	741		—
$250 million, 8.15% due June 15, 2038	262		262
$400 million, 4.625% due December 1, 2042	396		396
$750 million, 4.95% due October 1, 2044	740		739
$400 million, 4.80% due March 15, 2047	395		396
$500 million, 3.95% due August 15, 2049	492		493
Term loans:
Gentiva term loan, due July 2, 2025	1,928		—
Delayed draw term loan, due May 28, 2024	500		—
Total long-term debt	$	11,466	$	6,060

Senior Notes

Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, our

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senior notes contain a change of control provision that may require us to purchase the notes under certain circumstances.

In August 2021, we issued $1.5 billion of 0.650% unsecured senior notes due August 3, 2023, $750 million of 1.350% unsecured senior notes due February 3, 2027 and $750 million of 2.150% unsecured senior notes due February 3, 2032. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of September 30, 2021 were $2.984 billion. We used the net proceeds, together with cash on hand and borrowings under our $500 million delayed draw term loan, to fund the approximately $5.8 billion purchase price of the acquisition of Kindred at Home, which included the assumption of approximately $2.1 billion of Kindred at Home’s indebtedness and is net of our existing 40% equity interest, and to pay related fees and expenses.

Delayed Draw Term Loan Credit Agreement

In May 2021, we entered into a $500 million unsecured delayed draw term loan credit agreement. Under the term loan credit agreement, loans bear interest at either LIBOR plus a spread or the base rate plus a spread. The loans under the term loan credit agreement mature on the third anniversary of the funding date. The LIBOR spread, currently 125 basis points, varies depending on our credit ratings ranging from 100.0 to 162.5 basis points. The term loan credit agreement provides for the transition from LIBOR and does not require amendment in connection with such transition.

In August 2021, we borrowed $500 million under the delayed draw term loan agreement, which was used, in combination with other debt financing, to fund the approximate $5.8 billion transaction price of Kindred at Home. The term loan credit agreement contains customary restrictive covenants and a financial covenant regarding maximum debt to capitalization of 60%, as well as customary events of default. We are in compliance with this financial covenant, with actual debt to capitalization of 43% as measured in accordance with the term loan credit agreement as of September 30, 2021.

We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the term loan agreement.

Gentiva Credit Agreement

Gentiva Health Services, Inc., or Gentiva, an entity within the Kindred at Home organizational structure, and certain of Gentiva’s subsidiaries are a party to a First Lien Credit Agreement, which we refer to as the Gentiva Credit Agreement. The Gentiva Credit Agreement consists of (i) a term loan facility maturing on July 2, 2025, which we refer to as the Gentiva Term Loan, and (ii) a $350 million revolving credit facility maturing on July 2, 2023, which we refer to as the Gentiva Revolver. As of the closing of the acquisition of Kindred at Home on August 17, 2021, we assumed approximately $2.1 billion of borrowings under the Gentiva Term Loan, and subsequent to the acquisition, we repaid $150 million of borrowings under the Gentiva Term Loan. No borrowings were outstanding under the Gentiva Revolver and the Gentiva Revolver was subsequently terminated on September 30, 2021.

Borrowings under the Gentiva Term Loan bear interest at a rate per annum of 175 basis points over the base rate or 275 basis points over the Eurodollar rate. The Gentiva Term Loan requires certain mandatory prepayments of a percentage of excess cash flow (as defined in the Gentiva Credit Agreement) or following certain events, including certain asset sales and casualty events, and requires quarterly amortization payments of 0.25% of the original principal amount of the term loan. The Gentiva Term Loan is not subject to any financial maintenance covenants.

The Gentiva Credit Agreement imposes certain restrictions including, but not limited to, those that restrict (with certain exceptions) Gentiva’s and its guarantor subsidiaries’ ability to incur additional indebtedness or liens, make certain investments or restricted payments (including dividends), engage in new lines of business, sell assets and engage in certain affiliate transactions. The Gentiva Credit Agreement also contains certain customary representations and warranties, covenants, events of default and acceleration provisions upon the occurrence of an

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event of default (including a change of control). All amounts outstanding under the Gentiva Term Loan were repaid on October 29, 2021, and the Gentiva Credit Agreement was terminated.

October 2021 Term Loan Agreement

On October 29, 2021, we entered into a $2.0 billion term loan credit agreement, which we refer to as the October 2021 Term Loan Agreement, with certain lending banks and other financial institutions. Proceeds of the October 2021 Term Loan Agreement were applied to finance the repayment in full of the outstanding debt under the Gentiva Credit Agreement and for other general corporate purposes.

Loans under the October 2021 Term Loan Agreement bear interest at adjusted Term SOFR, as defined in the October 2021 Term Loan Agreement, or the base rate plus a spread. The loans under the October 2021 Term Loan Agreement will mature on the second anniversary of the closing date, October 29, 2023. The October 2021 Term Loan Agreement contains customary covenants, including a maximum debt to capitalization financial condition covenant, as well as customary events of default. The terms of the October 2021 Term Loan Agreement also include customary representations and warranties. We have other relationships, including financial advisory and banking, with some parties to the October 2021 Term Loan Agreement. The foregoing description of the October 2021 Term Loan Agreement does not purport to be complete. For an understanding of the terms and provisions of the October 2021 Term Loan Agreement, reference should be made to the copy of that agreement attached as Exhibit 10.4 to this Form 10-Q and incorporated by reference herein.

At the time of the repayment in full of the Gentiva Credit Agreement, there was $1.9 billion of outstanding debt thereunder and no prepayment penalty was due.

Revolving Credit Agreements

In June 2021, we entered into two separate revolving credit agreements: (i) a 5-year, $2.5 billion unsecured revolving credit agreement and (ii) a 364-day $1.5 billion unsecured revolving credit agreement. Under the revolving credit agreements, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate based on LIBOR, at our option. The revolving credit agreements provide for the transition from LIBOR and do not require amendment in connection with such transition.

The LIBOR spread, currently 110.0 basis points under the 5-year revolving credit agreements and 115.0 basis points under the 364-day revolving credit agreement, varies depending on our credit ratings ranging from 91.0 to 140.0 basis points under the 5-year revolving credit agreement and from 93.0 to 145.0 basis points under the 364-day revolving credit agreement. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, under the 5-year revolving credit agreement and 10.0 basis points under the 364-day revolving agreement, varies depending on our credit ratings ranging from 9.0 to 22.5 basis points under the 5-year revolving credit agreement and from 7.0 to 17.5 basis points under the 364-day revolving credit agreement.

The terms of the revolving credit agreements include standard provisions related to conditions of borrowing which could limit our ability to borrow additional funds. In addition, the credit agreements contain customary restrictive covenants and a financial covenant regarding maximum debt to capitalization of 60%, as well as customary events of default. We are in compliance with this financial covenant, with actual debt to capitalization of 43% as measured in accordance with the revolving credit agreements as of September 30, 2021. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the revolving credit agreements by up to $750 million in the aggregate, to a maximum of $4.75 billion, across the 5-year and 364-day revolving credit agreements.

At September 30, 2021, we had no borrowings and less than $1 million of letters of credit outstanding under the revolving credit agreements. Accordingly, as of September 30, 2021, we had $2.5 billion of remaining borrowing

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capacity under the 5-year revolving credit agreement and $1.5 billion of remaining borrowing capacity under the 364-day revolving credit agreement (which excludes the uncommitted $750 million of incremental loan facilities), none of which would be restricted by our financial covenant compliance requirement.

We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the revolving credit agreements.

Commercial Paper

Under our commercial paper program we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the nine months ended September 30, 2021 was $1.1 billion, with $795 million outstanding at September 30, 2021 compared to $600 million outstanding at December 31, 2020. The outstanding commercial paper at September 30, 2021 had a weighted average annual interest rate of 0.29%.

Other Short-term Borrowings

We are a member, through one subsidiary, of the Federal Home Loan Bank of Cincinnati, or FHLB. As a member we have the ability to obtain short-term cash advances, subject to certain minimum collateral requirements. At September 30, 2021 we had no outstanding short-term FHLB borrowings.

13. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Government Contracts

Our Medicare products, which accounted for approximately 83% of our total premiums and services revenue for the nine months ended September 30, 2021, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for 2022 and all of our product offerings have been approved.

CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to reflect the health status of our enrolled membership. Under the risk-adjustment methodology, all MA plans must collect from providers and submit the necessary diagnosis code information to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment model. These compliance efforts include the internal contract level audits described in more detail below, as well as ordinary course reviews of our internal business processes.

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CMS is phasing-in the process of calculating risk scores using diagnoses data from the Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter Data System, or EDS. The RAPS process requires MA plans to apply a filter logic based on CMS guidelines and only submit diagnoses that satisfy those guidelines. For submissions through EDS, CMS requires MA plans to submit all the encounter data and CMS will apply the risk adjustment filtering logic to determine the risk scores. For 2020, 50% of the risk score was calculated from claims data submitted through EDS. CMS increased that percentage to 75% for 2021 and will complete the phased-in transition from RAPS to EDS by using only EDS data to calculate risk scores in 2022. The phase-in from RAPS to EDS could result in different risk scores from each dataset as a result of plan processing issues, CMS processing issues, or filtering logic differences between RAPS and EDS, and could have a material adverse effect on our results of operations, financial position, or cash flows.

CMS and the Office of the Inspector General of Health and Human Services, or HHS-OIG, are continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.

In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provided that, in calculating the economic impact of audit results for an MA contract, if any, the results of the RADV audit sample would be extrapolated to the entire MA contract after a comparison of the audit results to a similar audit of the government’s traditional fee-for-service Medicare program, or Medicare FFS. We refer to the process of accounting for errors in FFS claims as the "FFS Adjuster." This comparison of RADV audit results to the FFS error rate is necessary to determine the economic impact, if any, of RADV audit results because the government used the Medicare FFS program data set, including any attendant errors that are present in that data set, to estimate the costs of various health status conditions and to set the resulting adjustments to MA plans’ payment rates in order to establish actuarial equivalence in payment rates as required under the Medicare statute. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the Medicare FFS program dataset).

The final RADV extrapolation methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to CMS RADV contract level audits conducted for contract year 2011 and subsequent years. CMS is currently conducting RADV contract level audits for certain of our Medicare Advantage plans.

Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For Service business which we used to represent a proxy of the FFS Adjuster which has not yet been finalized. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. We report the results of these internal contract level audits to CMS, including identified overpayments, if any.

On October 26, 2018, CMS issued a proposed rule and accompanying materials (which we refer to as the “Proposed Rule”) related to, among other things, the RADV audit methodology described above. If implemented, the Proposed Rule would use extrapolation in RADV audits applicable to payment year 2011 contract-level audits and all subsequent audits, without the application of a FFS Adjuster to audit findings. We believe that the Proposed Rule fails to address adequately the statutory requirement of actuarial equivalence, and have provided substantive comments to CMS on the Proposed Rule as part of the notice-and-comment rulemaking process. Whether, and to what extent, CMS finalizes the Proposed Rule, and any related regulatory, industry or company reactions, could have a material adverse effect on our results of operations, financial position, or cash flows.

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In addition, as part of our internal compliance efforts, we routinely perform ordinary course reviews of our internal business processes related to, among other things, our risk coding and data submissions in connection with the risk adjustment model. These reviews may also result in the identification of errors and the submission of corrections to CMS, that may, either individually or in the aggregate, be material. As such, the result of these reviews may have a material adverse effect on our results of operations, financial position, or cash flows.

We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.

Our state-based Medicaid business, which accounted for approximately 6% of our total premiums and services revenue for the nine months ended September 30, 2021 primarily consisted of serving members enrolled in Medicaid, and in certain circumstances members who qualify for both Medicaid and Medicare, under contracts with various states.

At September 30, 2021, our military services business, which accounted for approximately 1% of our total premiums and services revenue for the nine months ended September 30, 2021, primarily consisted of the TRICARE T2017 East Region contract. The T2017 East Region contract comprising 32 states and approximately 6 million TRICARE beneficiaries, under which delivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 of each year during its term at the government's option.

The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory 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, or increases in member benefits or member eligibility criteria without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.

Legal Proceedings and Certain Regulatory Matters

As previously disclosed, the Civil Division of the United States Department of Justice provided us with an information request in December 2014, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We continue to cooperate with the Department of Justice. These matters are expected to result in additional qui tam litigation.

As previously disclosed, on January 19, 2016, an individual filed a qui tam suit captioned United States of America ex rel. Steven Scott v. Humana, Inc., in United States District Court, Central District of California, Western Division. The complaint alleges certain civil violations by us in connection with the actuarial equivalence of the plan benefits under Humana’s Basic PDP plan, a prescription drug plan offered by us under Medicare Part D. The action seeks damages and penalties on behalf of the United States under the False Claims Act. The court ordered the qui tam action unsealed on September 13, 2017, so that the relator could proceed, following notice from the U.S. Government that it was not intervening at that time. On January 29, 2018, the suit was transferred to the United States District Court, Western District of Kentucky, Louisville Division. We take seriously our obligations to comply with applicable CMS requirements and actuarial standards of practice, and continue to vigorously defend against these allegations since the transfer to the Western District of Kentucky. We have substantially completed discovery with the relator who has pursued the matter on behalf of the United States following its unsealing, and expect the Court to consider our motion for summary judgment.

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Other Lawsuits and Regulatory Matters

Our current and past business practices are subject to review or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance, health care delivery and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, statutory capital requirements, provider contracting, risk adjustment, competitive practices, commission payments, privacy issues, utilization management practices, pharmacy benefits, access to care, and sales practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.

We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business operations, certain of which may be styled as class-action lawsuits. Among other matters, this litigation may include employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate and payment disputes, including disputes over reimbursement rates required by statute, disputes arising from competitive procurement process, general contractual matters, intellectual property matters, and challenges to subrogation practices. Under state guaranty assessment laws, including those related to state cooperative failures in the industry, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do.

As a government contractor, we may also be subject to false claims litigation, such as qui tam lawsuits brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government or related overpayments from the government, including, among other allegations, those resulting from coding and review practices under the Medicare risk adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the individual may continue to prosecute the action on his or her own, on behalf of the government. We also are subject to other allegations of nonperformance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.

A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extra contractual damages, care delivery malpractice, and claims arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.

We record accruals for the contingencies discussed in the sections above to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings, which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting judgments, penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities or as a result of actions by third parties. Nevertheless, it is reasonably possible that any such outcome of litigation, judgments, penalties, fines

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or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.

14. SEGMENT INFORMATION

We manage our business with 3 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 services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and home solutions services, such as home health and other services and capabilities to promote wellness and advance population health, including our non-consolidating minority investment in the strategic partnership with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers. Our home solutions business now includes Kindred at Home.

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 condensed 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 $5.0 billion and $4.4 billion for the three months ended September 30, 2021 and 2020, respectively. For the nine

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months ended September 30, 2021 and 2020 these amounts were $12.9 billion and $11.9 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 $28 million and $33 million for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the amount of this expense was $80 million and $94 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 2020 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home solutions 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 in the tables presenting segment results below.

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Our segment results were as follows for the three and nine months ended September 30, 2021 and 2020:



	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Three months ended September 30, 2021	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	14,642	$	—	$	—	$	—	$	14,642
Group Medicare Advantage	1,737		—		—		—		1,737
Medicare stand-alone PDP	541		—		—		—		541
Total Medicare	16,920		—		—		—		16,920
Fully-insured	185		1,052		—		—		1,237
Specialty	—		432		—		—		432
Medicaid and other	1,296		—		—		—		1,296
Total premiums	18,401		1,484		—		—		19,885
Services revenue:


Home solutions	—		—		374		—		374
Provider	—		—		110		—		110
ASO and other	—		198		—		—		198
Pharmacy	—		—		163		—		163
Total services revenue	—		198		647		—		845
Total external revenues	18,401		1,682		647		—		20,730
Intersegment revenues
Services	1		10		5,087		(5,098)		—
Products	—		—		2,303		(2,303)		—
Total intersegment revenues	1		10		7,390		(7,401)		—
Investment income (loss)	38		3		1		(75)		(33)
Total revenues	18,440		1,695		8,038		(7,476)		20,697
Operating expenses:
Benefits	16,207		1,282		—		(173)		17,316
Operating costs	1,669		421		7,634		(7,121)		2,603

Depreciation and amortization	108		20		46		(24)		150
Total operating expenses	17,984		1,723		7,680		(7,318)		20,069
Income (loss) from operations	456		(28)		358		(158)		628

Interest expense	—		—		—		88		88
Other income, net	—		—		—		(1,096)		(1,096)
Income (loss) before income taxes and equity in net earnings	456		(28)		358		850		1,636
Equity in net earnings	—		—		15		—		15
Segment earnings (loss)	$	456	$	(28)	$	373	$	850	$	1,651
Less: noncontrolling interests	—		—		—		—		—
Segment earnings (loss) attributable to Humana	$	456	$	(28)	$	373	$	850	$	1,651

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	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Three months ended September 30, 2020	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	12,949	$	—	$	—	$	—	$	12,949
Group Medicare Advantage	1,880		—		—		—		1,880
Medicare stand-alone PDP	622		—		—		—		622
Total Medicare	15,451		—		—		—		15,451
Fully-insured	177		1,169		—		602		1,948
Specialty	—		424		—		—		424
Medicaid and other	1,081		—		—		—		1,081
Total premiums	16,709		1,593		—		602		18,904
Services revenue:


Home solutions	—		—		26		—		26
Provider	—		—		81		—		81
ASO and other	4		189		—		—		193
Pharmacy	—		—		157		—		157
Total services revenue	4		189		264		—		457
Total external revenues	16,713		1,782		264		602		19,361
Intersegment revenues
Services	—		9		4,852		(4,861)		—
Products	—		—		2,013		(2,013)		—
Total intersegment revenues	—		9		6,865		(6,874)		—
Investment income	28		3		2		681		714
Total revenues	16,741		1,794		7,131		(5,591)		20,075
Operating expenses:
Benefits	14,224		1,481		—		(94)		15,611
Operating costs	1,877		452		6,871		(6,687)		2,513

Depreciation and amortization	87		21		46		(26)		128
Total operating expenses	16,188		1,954		6,917		(6,807)		18,252
Income (loss) from operations	553		(160)		214		1,216		1,823

Interest expense	—		—		—		75		75
Other income, net	—		—		—		(7)		(7)
Income (loss) before income taxes and equity in net earnings	553		(160)		214		1,148		1,755
Equity in net earnings	—		—		35		—		35
Segment earnings (loss)	$	553	$	(160)	$	249	$	1,148	$	1,790
Less: noncontrolling interests	—		—		—		—		—
Segment earnings (loss) attributable to Humana	$	553	$	(160)	$	249	$	1,148	$	1,790

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	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Nine months ended September 30, 2021	(in millions)
External revenues
Premiums:
Individual Medicare Advantage	$	44,042	$	—	$	—	$	—	$	44,042
Group Medicare Advantage	5,267		—		—		—		5,267
Medicare stand-alone PDP	1,867		—		—		—		1,867
Total Medicare	51,176		—		—		—		51,176
Fully-insured	545		3,229		—		—		3,774
Specialty	—		1,298		—		—		1,298
Medicaid and other	3,739		—		—		—		3,739
Total premiums	55,460		4,527		—		—		59,987
Services revenue:


Home solutions	—		—		423		—		423
Provider	—		—		298		—		298
ASO and other	17		582		—		—		599
Pharmacy	—		—		482		—		482
Total services revenue	17		582		1,203		—		1,802
Total external revenues	55,477		5,109		1,203		—		61,789
Intersegment revenues
Services	1		30		14,838		(14,869)		—
Products	—		—		6,716		(6,716)		—
Total intersegment revenues	1		30		21,554		(21,585)		—
Investment income	155		11		3		52		221
Total revenues	55,633		5,150		22,760		(21,533)		62,010
Operating expenses:
Benefits	48,574		3,674		—		(487)		51,761
Operating costs	4,653		1,227		21,749		(20,903)		6,726

Depreciation and amortization	320		63		127		(74)		436
Total operating expenses	53,547		4,964		21,876		(21,464)		58,923
Income (loss) from operations	2,086		186		884		(69)		3,087

Interest expense	—		—		—		235		235
Other income, net	—		—		—		(562)		(562)
Income before income taxes and equity in net earnings	2,086		186		884		258		3,414
Equity in net earnings	—		—		69		—		69
Segment earnings	$	2,086	$	186	$	953	$	258	$	3,483
Less: noncontrolling interests	—		—		—		—		—
Segment earnings attributable to Humana	$	2,086	$	186	$	953	$	258	$	3,483

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)



	Retail		Group and Specialty		Healthcare Services		Eliminations/ Corporate		Consolidated
Nine months ended September 30, 2020	(in millions)
External Revenues
Premiums:
Individual Medicare Advantage	$	38,748	$	—	$	—	$	—	$	38,748
Group Medicare Advantage	5,867		—		—		—		5,867
Medicare stand-alone PDP	2,108		—		—		—		2,108
Total Medicare	46,723		—		—		—		46,723
Fully-insured	509		3,606		—		602		4,717
Specialty	—		1,278		—		—		1,278
Medicaid and other	3,104		—		—		—		3,104
Total premiums	50,336		4,884		—		602		55,822
Services revenue:


Home solutions	—		—		80		—		80
Provider	—		—		236		—		236
ASO and other	14		576		—		—		590
Pharmacy	—		—		425		—		425
Total services revenue	14		576		741		—		1,331
Total external revenues	50,350		5,460		741		602		57,153
Intersegment revenues
Services	—		22		14,514		(14,536)		—
Products	—		—		5,900		(5,900)		—
Total intersegment revenues	—		22		20,414		(20,436)		—
Investment income	114		12		2		812		940
Total revenues	50,464		5,494		21,157		(19,022)		58,093
Operating expenses:
Benefits	41,939		3,886		—		(410)		45,415
Operating costs	5,047		1,316		20,274		(19,653)		6,984

Depreciation and amortization	251		60		135		(84)		362
Total operating expenses	47,237		5,262		20,409		(20,147)		52,761
Income from operations	3,227		232		748		1,125		5,332

Interest expense	—		—		—		211		211
Other expense, net	—		—		—		63		63
Income before income taxes and equity in net earnings	3,227		232		748		851		5,058
Equity in net earnings	—		—		68		—		68
Segment earnings	$	3,227	$	232	$	816	$	851	$	5,126
Less: noncontrolling interests	—		—		—		—		—
Segment earnings attributable to Humana	$	3,227	$	232	$	816	$	851	$	5,126

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Humana Inc.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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 2020 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent to February 18, 2021, 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.

Kindred at Home Acquisition

COVID-19

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non-COVID-19 hospital admissions and lower overall healthcare system consumption decreased utilization. Likewise COVID-19 treatment and testing cost increased utilization. The significant disruption in utilization during 2020 also impacted our ability to implement clinical initiatives to manage health care costs and chronic conditions of our members, and appropriately document their risk profiles, and, as such, is significantly affecting our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans.

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 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 home solutions 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

COVID-19 disrupted the pattern of our quarterly earnings and operating cash flows largely due to the temporary deferral of non-essential care which resulted in reductions in non-COVID-19 hospital admissions and lower overall healthcare system utilization during higher levels of COVID-19 hospital admissions. Likewise, during periods of increased incidences of COVID-19, COVID-19 treatment and testing costs increase. Similar impacts and seasonal disruptions from either higher or lower utilization are expected to persist as we respond to and recover from the COVID-19 global health crisis.

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

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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 standalone 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.

2021 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, 2021, approximately 2,979,800 members, or 68%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 2,605,900 members, or 66%, at September 30, 2020. Medicare Advantage and dual demonstration program membership enrolled in a Humana care management program was 963,500 at September 30, 2021, an increase of 5.0% from 917,200 at September 30, 2020. These members may not be unique to each program since members have the ability to enroll in multiple programs. The increase is primarily driven by growth in Special Needs Plans, or SNP, membership, partially offset by improved predictive modeling leading to a reduction in members being managed by legacy care management programs.

•Net income was $1.5 billion, or $11.84 per diluted common share, and $1.3 billion, or $10.05, for the three months ended September 30, 2021, and 2020, respectively. Net income was $2.9 billion, or $22.77 per diluted common share, and $3.6 billion, or $27.37 per diluted common share for the nine months ended September 30, 2021, and 2020, respectively. These comparisons were significantly impacted by the gain on our equity method investment in Kindred at Home upon completion of our acquisition of the business, put/call valuation adjustments associated with certain equity method investments, the change in the fair value of publicly-traded equity securities, transaction and integration costs associated with the Kindred at Home acquisition, and the receipt of unpaid risk corridor payments in the third quarter of 2020 that were previously written off. The put/call valuation adjustments included the impact of the termination of the put/call agreement related to Kindred at Home as a result of the transaction announced on April 27, 2021. 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 2021 quarter and period.

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	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Consolidated income before income taxes and equity in net earnings:
Gain on Kindred at Home equity method investment	$	1,129	$	—	$	1,129	$	—
Change in the fair value of publicly-traded equity securities	(174)		643		(197)		$	643
Receipt of commercial risk corridor receivables previously written off, net	—		578		—		578
Put/call valuation adjustments	(33)		7		(567)		(63)
Transaction and integration costs associated with Kindred at Home acquisition	(71)		—		(93)		—
Total	$	851	$	1,228	$	272	$	1,158

	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Diluted earnings per common share:
Gain on Kindred at Home equity method investment	$	8.74	$	—	$	8.73	$	—
Change in the fair value of publicly-traded equity securities	(1.04)		3.72		(1.18)		3.73
Receipt of commercial risk corridor receivables previously written off, net	—		3.35		—		3.35
Put/call valuation adjustments	(0.20)		0.03		(3.38)		(0.37)
Transaction and integration costs associated with Kindred at Home acquisition	(0.39)		—		(0.52)		—
Total	$	7.11	$	7.10	$	3.65	$	6.71

Excluding these adjustments, comparisons of our results of operations were materially impacted by the significant, temporary deferral of care in 2020 resulting from stay-at-home orders, physical distancing measures, and other restrictions implemented to reduce the spread of COVID-19, as well as the impact of COVID-19 testing and treatment costs, which on a net basis significantly and favorably impacted the 2020 results, in particular to the second quarter of 2020, when compared to the 2021 period results. In addition, the third quarter of 2021 reflects the impact of lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response effort, the build-out of infrastructure necessary to support employees working remotely and charitable contribution cost to support the communities served by us.

In addition, our results of operations for 2021 were favorably impacted by individual Medicare Advantage and state-based contract membership growth and improved operating performance in our Healthcare Services segment, including the consolidation of Kindred at Home operations upon completion of the acquisition of the remaining 60% interest in Kindred at Home in August 2021. Further, 2021 was also favorably impacted by the lower tax rate resulting from the termination of the non-deductible health insurance industry fee in 2021, as well as a lower number of shares used to compute dilutive earnings per common share, primarily reflecting share repurchases.

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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 not deductible for income tax purposes and significantly increased our effective tax rate, was in effect for 2020, but was 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 the Families First Coronavirus Response Act (the "Families First Act"), the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other legislative or regulatory action taken in response to 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 home solutions 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 2021 and 2020

The following discussion primarily deals with our results of operations for the three months ended September 30, 2021, or the 2021 quarter, and the three months ended September 30, 2020, or the 2020 quarter, the nine months ended September 30, 2021, or the 2021 period, and the nine months ended September 30, 2020, or the 2020 period.

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Consolidated



	For the three months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail	$	18,401		$	16,709		$	1,692	10.1	%
Group and Specialty	1,484			1,593			(109)		(6.8)	%
Corporate	—			602			(602)		(100.0)	%
Total premiums	19,885			18,904			981		5.2	%
Services:
Retail	—			4			(4)		(100.0)	%
Group and Specialty	198			189			9		4.8	%
Healthcare Services	647			264			383		145.1	%
Total services	845			457			388		84.9	%
Investment (loss) income	(33)			714			(747)		(104.6)	%
Total revenues	20,697			20,075			622		3.1	%
Operating expenses:
Benefits	17,316			15,611			1,705		10.9	%
Operating costs	2,603			2,513			90		3.6	%
Depreciation and amortization	150			128			22		17.2	%
Total operating expenses	20,069			18,252			1,817		10.0	%
Income from operations	628			1,823			(1,195)		(65.6)	%
Interest expense	88			75			13		17.3	%
Other income, net	(1,096)			(7)			1,089		15,557.1	%
Income before income taxes and equity in net earnings	1,636			1,755			(119)		(6.8)	%
Provision for income taxes	120			450			(330)		(73.3)	%
Equity in net earnings	15			35			(20)		(57.1)	%
Net income	$	1,531		$	1,340		$	191	14.3	%
Diluted earnings per common share	$	11.84		$	10.05		$	1.79	17.8	%
Benefit ratio (a)	87.1		%	82.6		%			4.5	%
Operating cost ratio (b)	12.6		%	13.0		%			(0.4)	%
Effective tax rate	7.2		%	25.2		%			(18.0)	%

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	For the nine months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(dollars in millions, except per common share results)
Revenues:
Premiums:
Retail	$	55,460		$	50,336		$	5,124	10.2	%
Group and Specialty	4,527			4,884			(357)		(7.3)	%
Corporate	—			602			(602)		(100.0)	%
Total premiums	59,987			55,822			4,165		7.5	%
Services:
Retail	17			14			3		21.4	%
Group and Specialty	582			576			6		1.0	%
Healthcare Services	1,203			741			462		62.3	%
Total services	1,802			1,331			471		35.4	%
Investment income	221			940			(719)		(76.5)	%
Total revenues	62,010			58,093			3,917		6.7	%
Operating expenses:
Benefits	51,761			45,415			6,346		14.0	%
Operating costs	6,726			6,984			(258)		(3.7)	%
Depreciation and amortization	436			362			74		20.4	%
Total operating expenses	58,923			52,761			6,162		11.7	%
Income from operations	3,087			5,332			(2,245)		(42.1)	%
Interest expense	235			211			24		11.4	%
Other (income) expense, net	(562)			63			625		992.1	%
Income before income taxes and equity in net earnings	3,414			5,058			(1,644)		(32.5)	%
Provision for income taxes	536			1,485			(949)		(63.9)	%
Equity in net earnings	69			68			1		1.5	%
Net income	$	2,947		$	3,641		$	(694)	(19.1)	%
Diluted earnings per common share	$	22.77		$	27.37		$	(4.60)	(16.8)	%
Benefit ratio (a)	86.3		%	81.4		%			4.9	%
Operating cost ratio (b)	10.9		%	12.2		%			(1.3)	%
Effective tax rate	15.4		%	29.0		%			(13.6)	%

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

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

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Premiums Revenue

Consolidated premiums increased $1.0 billion, or 5.2%, from $18.9 billion in the 2020 quarter to $19.9 billion in the 2021 quarter and increased $4.2 billion, or 7.5%, from $55.8 billion in the 2020 period to $60.0 billion in the 2021 period. These increases were primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher per member individual Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment, or MRA, headwinds resulting from COVID-19 related utilization disruption in 2020. These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership. The comparison was further impacted by 2020 quarter impact of the receipt of commercial risk corridor receivables that were previously written off.

Services Revenue

Consolidated services revenue increased $388 million, or 84.9%, from $457 million in the 2020 quarter to $845 million in the 2021 quarter and increased $471 million, or 35.4%, from $1.3 billion in the 2020 period to $1.8 billion in the 2021 period. These increases were primarily due to higher home solutions revenues associated with our Kindred at Home acquisition.

Investment Income

Investment income decreased $747 million, or 104.6%, from $714 million in the 2020 quarter to a $33 million loss in the 2021 quarter. Investment income decreased $719 million, or 76.5%, from $940 million in the 2020 period to $221 million in the 2021 period. The decline in both the quarter and period primarily reflects a significant decrease in the fair value of our common stock investments.

Benefit Expense

Consolidated benefits expense increased $1.7 billion, or 10.9%, from $15.6 billion in the 2020 quarter to $17.3 billion in the 2021 quarter and increased $6.3 billion, or 14.0%, from $45.4 billion in the 2020 period to $51.8 billion in the 2021 period. The consolidated benefit ratio increased 450 basis points from 82.6% for the 2020 quarter to 87.1% for the 2021 quarter and increased 490 basis points from 81.4% for the 2020 period to 86.3% for the 2021 period. These increases reflect the 2020 quarter impact of the receipt of commercial risk corridor receivables that were previously written off, the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, COVID-19 impacts, including the impact of the deferral of non-essential care, net of COVID-19 treatment and testing costs and our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020, and the impact in 2021 associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development in 2021.

The higher favorable prior-period medical claims reserve development was primarily attributable to the reversal of actions taken in 2020, including the suspension of certain financial recovery programs for a period of time. The suspension during 2020 was intended to provide financial and administrative relief for provider facing unprecedented strain as a result of the COVID-19 pandemic. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2021 quarter whereas the favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 20 basis points in the 2020 quarter. The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 130 basis points in the 2021 period versus approximately 50 basis points in the 2020 period.

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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 $90 million, or 3.6%, from $2.5 billion in the 2020 quarter to $2.6 billion in the 2021 quarter and decreased $258 million, or 3.7%, from $7.0 billion in the 2020 period to $6.7 billion in the 2021 period. The consolidated operating cost ratio decreased 40 basis points from 13.0% for the 2020 quarter to 12.6% for the 2021 quarter and decreased 130 basis points from 12.2% for the 2020 period to 10.9% for the 2021 period. These ratio decreases were primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021 compared to 2020. Administrative costs in 2020 included costs associated with personal protective equipment, member response efforts, and the build-out of infrastructure necessary to support employees working remotely. These decreases were further impacted by scale efficiencies associated with growth in our Medicare Advantage membership and operating cost efficiencies in 2021 from previously implemented productivity initiatives. These factors were partially offset by the impact of Kindred at Home operations as the business has a significantly higher operating cost ratio than our historical consolidated operating cost ratio, continued strategic investments made to position us for long-term success, transaction and integration costs associated with the Kindred at Home transaction, and the 2020 quarter receipt of the commercial risk corridor receivables that were previously written off. The period decrease was further impacted by a $200 million contribution to the Humana Foundation in the first half of 2020 to support communities served by the company, 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 $22 million, or 17.2%, from $128 million in the 2020 quarter to $150 million in the 2021 quarter and increased $74 million, or 20.4%, from $362 million in the 2020 period to $436 million in the 2021 period primarily due to capital expenditures.

Interest Expense

Interest expense increased $13 million, or 17.3%, from $75 million in the 2020 quarter to $88 million in the 2021 quarter and increased $24 million, or 11.4%, from $211 million in the 2020 period to $235 million in the 2021 period from borrowings to fund the KAH acquisition.

Income Taxes

The effective income tax rate was 7.2% and 25.2% for the three months ended September 30, 2021, and 2020, respectively and was 15.4% and 29.0% for the nine months ended September 30, 2021 and 2020, respectively. The decreases were primarily due to the non-taxable gain we recognized on our previously held Kindred at Home equity method investment from our acquisition of the remaining ownership interest in the business in August 2021 and the termination of the non-deductible health insurance industry fee in 2021.

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Retail Segment


	September 30,		Change
	2021	2020	Members	Percentage
Membership:
Medical membership:
Individual Medicare Advantage	4,397,300	3,935,100	462,200	11.7	%
Group Medicare Advantage	559,800	612,000	(52,200)	(8.5)	%
Medicare stand-alone PDP	3,638,400	3,892,200	(253,800)	(6.5)	%
Total Retail Medicare	8,595,500	8,439,300	156,200	1.9	%

State-based Medicaid and other	909,100	730,100	179,000	24.5	%
Medicare Supplement	332,000	331,300	700	0.2	%
Total Retail medical members	9,836,600	9,500,700	335,900	3.5	%



	For the three months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage	$	14,642		$	12,949		$	1,693	13.1	%
Group Medicare Advantage	1,737			1,880			(143)		(7.6)	%
Medicare stand-alone PDP	541			622			(81)		(13.0)	%
Total Retail Medicare	16,920			15,451			1,469		9.5	%
State-based Medicaid and other	1,296			1,081			215		19.9	%
Medicare Supplement	185			177			8		4.5	%
Total premiums	18,401			16,709			1,692		10.1	%
Services	—			4			(4)		(100.0)	%
Total premiums and services revenue	18,401			16,713			$	1,688	10.1	%
Segment earnings	$	456		$	553		$	(97)	(17.5)	%
Benefit ratio	88.1		%	85.1		%			3.0	%
Operating cost ratio	9.1		%	11.2		%			(2.1)	%

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	For the nine months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Premiums and Services Revenue:
Premiums:
Individual Medicare Advantage	$	44,042		$	38,748		$	5,294	13.7	%
Group Medicare Advantage	5,267			5,867			(600)		(10.2)	%
Medicare stand-alone PDP	1,867			2,108			(241)		(11.4)	%
Total Retail Medicare	51,176			46,723			4,453		9.5	%
State-based Medicaid and other	3,739			3,104			635		20.5	%
Medicare Supplement	545			509			36		7.1	%
Total premiums	55,460			50,336			5,124		10.2	%
Services	17			14			3		21.4	%
Total premiums and services revenue	$	55,477		$	50,350		$	5,127	10.2	%
Segment earnings	$	2,086		$	3,227		$	(1,141)	(35.4)	%
Benefit ratio	87.6		%	83.3		%			4.3	%
Operating cost ratio	8.4		%	10.0		%			(1.6)	%

Segment Earnings

•Retail segment earnings decreased $97 million, or 17.5%, from $553 million in the 2020 quarter to $456 million in the 2021 quarter and decreased $1.1 billion, or 35.4%, from $3.2 billion in the 2020 period to $2.1 billion in the 2021 period. These decreases primarily resulted from the same factors that led to the segment's higher benefit ratio, partially offset by the segment's lower operating cost ratio as more fully described below.

Enrollment

•Individual Medicare Advantage membership increased 462,200 members, or 11.7%, from September 30, 2020 to September 30, 2021, primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries. The membership growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, members. The OEP sales period, which ran from January 1 to March 31, 2021 added approximately 36,000 members compared to the 2020 OEP that added approximately 30,000 members. Individual Medicare Advantage membership includes 561,300 D-SNP members as of September 30, 2021, a net increase of 170,200, or 43.5%, from 391,100 as of September 30, 2020.

•Group Medicare Advantage membership decreased 52,200, or 8.5%, from September 30, 2020 to September 30, 2021, primarily due to the net loss of certain large accounts in January 2021, partially offset by continued growth in small group accounts.

•Medicare stand-alone PDP membership decreased 253,800 members, or 6.5%, from September 30, 2020 to September 30, 2021, primarily due to anticipated declines as a result of the Walmart Value plan no longer being the low cost leader in 2021.

•State-based Medicaid membership increased 179,000 members, or 24.5%, from September 30, 2020 to September 30, 2021, primarily reflecting additional enrollment as a result of the suspension of state eligibility redetermination efforts due to the currently enacted Public Health Emergency, as well as the recently completed acquisition in Wisconsin.

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Premiums Revenue

•Retail segment premiums increased $1.7 billion, or 10.1%, from $16.7 billion in the 2020 quarter to $18.4 billion in the 2021 quarter and increased $5.1 billion, or 10.2%, from $50.3 billion in the 2020 period to $55.5 billion in the 2021 period. These increases were primarily due to higher premiums as a result of individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of MRA headwinds resulting from COVID-19 related utilization disruption in 2020. These favorable items were partially offset by the decline in membership in our stand-alone PDP and group Medicare Advantage offerings. The 2021 period was further impacted by the Medicare sequestration relief in the first quarter of 2021 that was not enacted until the second quarter of 2020.

Benefits Expense

•The Retail segment benefit ratio increased 300 basis points from 85.1% for the 2020 quarter to 88.1% for the 2021 quarter and increased 430 basis points from 83.3% for the 2020 period to 87.6% for the 2021 period. These increases were primarily due to the termination in 2021 of the non-deductible health insurance industry fee which, along with a portion of the related tax benefit, which was contemplated in the pricing and benefit design of our products, COVID-19 impacts, including the impact of the deferral of non-essential care, net of COVID-19 treatment and testing costs and our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVD-19 related utilization disruption in 2020, as well as the impact in 2021 associated with the competitive nature of the group Medicare Advantage business, particularly in large group accounts that were recently procured, as well as in the stand-alone PDP business. These factors were partially offset by higher favorable prior-period medical claims reserve development.

•The Retail segment's benefits expense for the 2021 quarter includes $54 million in favorable prior-period medical claims reserve development versus $30 million in favorable prior-period medical claims development in the 2020 quarter. For the 2021 period, the Retail segment’s benefit expense includes the beneficial effect of $673 million in favorable prior-period medical claims reserve development versus $235 million in the 2020 period. Prior-period medical claims reserve development decreased the Retail segment's benefit ratio by approximately 30 basis points in the 2021 quarter and decreased the Retail segment's benefit ratio by approximately 20 basis points in the 2020 quarter. Favorable prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 120 basis points in the 2021 period versus approximately 50 basis points in the 2020 period.

Operating Costs

•The Retail segment operating cost ratio decreased 210 basis points from 11.2% for the 2020 quarter to 9.1% for the 2021 quarter and decreased 160 basis points from 10.0% for the 2020 period to 8.4% for the 2021 period. These decreases were primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in the 2021 quarter, as previously discussed, scale efficiencies associated with growth in our individual Medicare Advantage membership, and operating cost efficiencies in the 2021 quarter driven by previously implemented productivity initiatives. These improvements were partially offset by continued strategic investments made to position us for long-term success. The non-deductible health insurance industry fee impacted the operating cost ratio by 160 basis points in the 2020 quarter and period.

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Group and Specialty Segment


	September 30,		Change
	2021	2020	Members	Percentage
Membership:
Medical membership:
Fully-insured commercial group	690,000	799,500	(109,500)	(13.7)	%
ASO	496,500	502,100	(5,600)	(1.1)	%
Military services	6,051,700	6,016,400	35,300	0.6	%
Total group medical members	7,238,200	7,318,000	(79,800)	(1.1)	%
Specialty membership (a)	5,313,100	5,325,600	(12,500)	(0.2)	%

(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.



	For the three months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group	$	1,052		$	1,169		$	(117)	(10.0)	%
Group specialty	432			424			8		1.9	%
Total premiums	1,484			1,593			(109)		(6.8)	%
Services	198			189			9		4.8	%
Total premiums and services revenue	$	1,682		$	1,782		$	(100)	(5.6)	%
Segment loss	$	(28)		$	(160)		$	132	82.5	%
Benefit ratio	86.4		%	93.0		%			(6.6)	%
Operating cost ratio	24.9		%	25.2		%			(0.3)	%



	For the nine months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Premiums and Services Revenue:
Premiums:
Fully-insured commercial group	$	3,229		$	3,606		$	(377)	(10.5)	%
Group specialty	1,298			1,278			20		1.6	%
Total premiums	4,527			4,884			(357)		(7.3)	%
Services	582			576			6		1.0	%
Total premiums and services revenue	$	5,109		$	5,460		$	(351)	(6.4)	%
Segment earnings	$	186		$	232		$	(46)	(19.8)	%
Benefit ratio	81.2		%	79.6		%			1.6	%
Operating cost ratio	23.9		%	24.0		%			(0.1)	%

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Segment Earnings

•Group and Specialty segment losses decreased $132 million, or 82.5%, from a $160 million loss in the 2020 quarter to a $28 million loss in the 2021 quarter. The quarter over quarter improvement reflects the segments lower benefit and operating ratios as more fully described below. Segment earnings decreased $46 million, or 19.8%, from $232 million in the 2020 period to $186 million in the 2021 period. The period over period decline reflects the same factors that resulted in a higher benefit ratio, partially offset by a decreased operating cost ratio, as more fully described below.

Enrollment

•Fully-insured commercial group medical membership decreased 109,500 members, or 13.7%, from September 30, 2020 to September 30, 2021 reflecting lower small group quoting activity and sales attributable to depressed economic activity from the COVID-19 pandemic, partially offset by higher retention of existing customers, particularly in larger groups. The portion of group fully-insured commercial medical membership in small group accounts was approximately 51% at September 30, 2021 and 56% at September 30, 2020.

•Group ASO commercial medical membership decreased 5,600 members, or 1.1%, from September 30, 2020 to September 30, 2021. Small group membership comprised 44% of group ASO medical membership at September 30, 2021 and 45% at September 30, 2020. The membership change reflects intensified competition for small group accounts, partially offset by strong retention among large group accounts.

•Military services membership increased 35,300 members, or 0.6%, from September 30, 2020 to September 30, 2021. 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 12,500 members, or 0.2%, from September 30, 2020 to September 30, 2021 due primarily to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of group fully-insured commercial medical membership described above. The decrease also reflects the impact of the economic downturn driven by the COVID-19 pandemic.

Premiums Revenue

•Group and Specialty segment premiums decreased $109 million, or 6.8%, from $1.6 billion in the 2020 quarter to $1.5 billion in the 2021 quarter and decreased $357 million, or 7.3%, from $4.9 billion in the 2020 period to $4.5 billion in the 2021 period. These decreases were primarily due to the decline in our fully-insured group commercial membership, partially offset by higher per member premiums across the fully-insured commercial business.

Services Revenue

•Group and Specialty segment services revenue increased $9 million, or 4.8%, from $189 million in the 2020 quarter to $198 million in the 2021 quarter and increased $6 million, or 1.0%, from $576 million in the 2020 period to $582 million in the 2021 period.

Benefits Expense

•The Group and Specialty segment benefit ratio decreased 660 basis points from 93.0% in the 2020 quarter to 86.4% in the 2021 quarter. The decrease reflects the negative impact on the 2020 quarter as a result of 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 dental providers. Comparisons were favorably impacted by the deliberate pricing and benefit design efforts for 2021 to increase profitability and position the commercial business for

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long-term success and the impact of lower specialty utilization, primarily related to dental services. These favorable comparisons were partially offset by the termination in 2021 of the non-deductible health insurance industry fee in which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products, and the impact of unfavorable prior-period medical claims reserve development in the 2021 quarter.

The Group and Specialty segment benefit ratio increased 160 basis points from 79.6% in the 2020 period to 81.2% in the 2021 period primarily due to the termination in 2021 of the non-deductible HIF which, along with a portion of the related tax benefit, was contemplated in the pricing and benefit design of our products and the significant impact of the deferral of non-essential care, primarily in the second quarter of 2020, net of COVID-19 treatment and testing cost and our pandemic relief efforts in the 2020 period. These unfavorable factors were partially offset by the impact of higher favorable prior period development in the 2021 period and the deliberate pricing and benefit design efforts for 2021 to increase profitability and position the commercial business for long-term success.

•The Group and Specialty segment's benefits expense included $5 million in unfavorable prior-period medical claims reserve development in the 2021 quarter versus $13 million in favorable prior-period medical claims reserve development in the 2020 quarter. This prior-period medical claims reserve development increased the Group and Specialty segment benefit ratio by approximately 30 basis points in the 2021 quarter but decreased the Group Specialty segment benefit ratio by approximately 80 basis points in the 2020 quarter. The Group and Specialty segment's benefits expense included the effect of a favorable prior-period medical claims reserve development of $95 million in the 2021 period versus $43 million in the 2020 period. The favorable prior period medical claims reserve development for the 2021 period decreased the Group and Specialty segment benefit ratio by approximately 210 basis points and 90 basis points in the 2020 period.

Operating Costs

•The Group and Specialty segment operating cost ratio decreased 30 basis points from 25.2% for the 2020 quarter to 24.9% for the 2021 quarter and decreased 10 basis points from 24.0% in the 2020 period to 23.9% in the 2021 period. These decreases primarily reflect the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021, as previously discussed, and operating cost efficiencies driven by previously implemented productivity initiatives. These were partially offset by continued strategic investments made to position us for long-term success. The non-deductible health insurance industry fee impacted the operating cost ratio by 130 basis points in the 2020 quarter and period.

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Healthcare Services Segment




	For the three months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Revenues:
Services:


Home solutions	$	374		$	26		348		1338.5	%
Pharmacy solutions	$	163		$	157		$	6	3.8	%
Provider services	110			81			29		35.8	%
Total services revenues	647			264			383		145.1	%
Intersegment revenues:


Home solutions	191			134			57		42.5	%
Pharmacy solutions	6,569			6,158			411		6.7	%
Provider services	630			573			57		9.9	%
Total intersegment revenues	7,390			6,865			525		7.6	%
Total services and intersegment revenues	$	8,037		$	7,129		$	908	12.7	%
Segment earnings	$	373		$	249		$	124	49.8	%
Operating cost ratio	95.0		%	96.4		%			(1.4)	%



	For the nine months ended September 30,						Change
	2021			2020			Dollars		Percentage
	(in millions)
Revenues:
Services:


Home solutions	423			80			343		428.8	%
Pharmacy solutions	482			425			57		13.4	%
Provider services	298			236			62		26.3	%
Total services revenues	1,203			741			462		62.3	%
Intersegment revenues:


Home solutions	452			415			37		8.9	%
Pharmacy solutions	19,244			18,275			969		5.3	%
Provider services	1,858			1,724			134		7.8	%
Total intersegment revenues	21,554			20,414			1,140		5.6	%
Total services and intersegment revenues	$	22,757		$	21,155		$	1,602	7.6	%
Segment earnings	$	953		$	816		$	137	16.8	%
Operating cost ratio	95.6		%	95.8		%			(0.2)	%

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Segment Earnings

•Healthcare Services segment earnings increased $124 million, or 49.8%, from $249 million in the 2020 quarter to $373 million in the 2021 quarter and increased $137 million, or 16.8%, from $816 million in the 2020 period to $953 million in the 2021 period primarily due to higher earnings from our Kindred at Home acquisition and the factors that drove the segment declining operating cost ratio as more fully described below.

Script Volume

•Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis increased to approximately 130 million in the 2021 quarter, up 8.6%, versus scripts of approximately 119 million in the 2020 quarter. For the 2021 period, script volumes increased to approximately 384 million, up 8.0%, versus scripts of approximately 356 million in the 2020 period. These increases were primarily due to higher individual Medicare Advantage and state-based contracts membership, partially offset by the decline in stand-alone PDP and group Medicare Advantage membership.

Services Revenues

•Services revenues increased $383 million, or 145.1%, from $264 million in the 2020 quarter to $647 million in the 2021 quarter and increased $462 million, or 62.3%, from $741 million in the 2020 period to $1.2 billion in the 2021 period. These increases were primarily due to higher revenues associated with our Kindred at Home acquisition. The 2021 period further reflects additional pharmacy revenues associated with the acquisition of Enclara which was closed during the first quarter of 2020.

Intersegment Revenues

•Intersegment revenues increased $525 million, or 7.6%, from $6.9 billion in the 2020 quarter to $7.4 billion in the 2021 quarter and increased $1.1 billion, or 5.6%, from $20.4 billion in the 2020 period to $21.6 billion in the 2021 period. These increases were primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher revenues associated with our provider business. These increases were partially offset by the loss of intersegment revenues associated with the decline in stand-alone PDP and group Medicare Advantage membership as previously discussed.

Operating Costs

•The Healthcare Services segment operating cost ratio decreased 140 basis points from 96.4% for the 2020 quarter to 95.0% for the 2021 quarter and decreased 20 basis points from 95.8% for the 2020 period to 95.6% for the 2021 period. These decreases primarily result from the the impact of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the impact on the third quarter 2020 ratio associated with COVID-19 administrative related costs, including expenses associated with additional safety measures taken for our pharmacy, provider, and home solutions teams who continued to provide services to members throughout the crisis, as well as operational improvements in our provider services business, largely related to Conviva, along with operating cost efficiencies driven by previously implemented productivity initiatives. These factors contributing to a decrease in the operating cost ratio were partially offset by increased administrative cost in the pharmacy operations as a result of incremental spend to accelerate growth within the business, additional shipping costs incurred in pharmacy operations to ensure members’ timely receipt of prescriptions, and increased utilization levels in our provider business in the 2021 quarter compared to levels in the 2020 quarter amid the COVID-19 pandemic.

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

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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 2020 Form 10-K and Item 1A of Part II of this document.

Cash and cash equivalents decreased to approximately $4.3 billion at September 30, 2021 from $4.7 billion at December 31, 2020. The change in cash and cash equivalents for the nine months ended September 30, 2021 and 2020 is summarized as follows:


	Nine Months Ended
	2021		2020
	(in millions)
Net cash provided by operating activities	$	2,358	$	5,356
Net cash used in investing activities	(6,454)		(3,010)
Net cash provided by financing activities	3,727		1,585
(Decrease) increase in cash and cash equivalents	$	(369)	$	3,931

Cash Flow from Operating Activities

Cash flows provided by operations of $2.4 billion in the 2021 period decreased $3.0 billion from cash flows provided by operations of $5.4 billion in the 2020 period primarily due to the negative impact of working capital items and lower earnings in the 2021 period compared to the 2020 period. Our 2021 period operating cash flows were significantly impacted by changes to working capital levels, primarily as a result of prior year disruptions caused by COVID-19. These impacts include paying down claims inventory and capitation for provider surplus amounts earned in 2020 as well as additional provider support. These factors were partially offset by the favorable impact of the termination of the non-deductible HIF in 2021.

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.

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The detail of benefits payable was as follows at September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020		2021 Period Change		2020 Period Change
	(in millions)
IBNR (1)	$	5,973	$	5,290	$	683	$	999
Reported claims in process (2)	1,201		816		385		539

Other benefits payable (3)	1,584		2,037		(453)		666
Total benefits payable	$	8,758	$	8,143	$	615	$	2,204
Payables from acquisition					(42)		—
Change in benefits payable per cash flow statement resulting in cash from operations					$	573	$	2,204

(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 in 2021 was primarily due to higher IBNR and an increase in reported claims in process partially offset by a reduction in capitation accruals. IBNR increased primarily as a result of individual Medicare Advantage membership growth partially offset by paying down claim inventories. Higher reported claims in process was a function of timing of month-end cutoff. The 2020 period was significantly impacted by higher capitation accruals as significantly lower utilization caused by COVID-19 resulted in higher surplus accruals to providers. These higher surplus accrual to providers were paid down during 2021.

The detail of total net receivables was as follows at September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020		2021 Period Change		2020 Period Change
	(in millions)
Medicare	$	1,182	$	928	$	254	$	28
Commercial and other	612		122		490		47
Military services	167		160		7		13
Allowance for doubtful accounts	(82)		(72)		(10)		(9)
Total net receivables	$	1,879	$	1,138	$	741	$	79
Reconciliation to cash flow statement:
Receivables from acquisition					(447)		3
Change in receivables per cash flow statement resulting in cash from operations					$	294	$	82

The changes in Medicare receivables for both the 2021 period and the 2020 period reflect individual Medicare Advantage membership growth and the typical pattern caused by the timing of accruals and related collections

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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. We received the 2021 $1.3 billion mid-year settlement in July 2021. The increase in Commercial and other receivables and the allowance for doubtful accounts primarily relates to the Kindred at Home acquisition.

Cash Flow from Investing Activities

During 2021, we acquired Kindred at Home and other various health and wellness related businesses for cash consideration of approximately $4.0 billion, net of cash received.

During 2020, we acquired privately held Enclara Healthcare for cash consideration of approximately $709 million, net of cash received.

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 $945 million in the 2021 period and $668 million in the 2020 period.

Net purchases of investment securities were $1.6 billion in both the 2021 and 2020 periods.

Cash Flow from Financing Activities

Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claim payments by $625 million in the 2021 period and claim payments were higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk by $283 million in the 2020 period.

Under our administrative services only TRICARE contracts, health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by $20 million in the 2021 period and reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by $9 million in the 2020 period.

Net proceeds from the issuance of commercial paper were $193 million in the 2021 period and $21 million in the 2020 period. The maximum principal amount outstanding at any one time during the 2021 period was $1.1 billion.

In August 2021, we issued $1,500 million of 0.650% unsecured senior notes due August 3, 2023, $750 million of 1.350% unsecured senior notes due February 3, 2027 and $750 million of 2.150% unsecured senior notes due February 3, 2032. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of September 30, 2021 were $2.984 billion.

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 2021, we borrowed $500 million under the delayed draw term loan agreement. In March 2020, we drew $1 billion on our existing term loan commitment, which was repaid in November 2020.

As of the closing of the acquisition of Kindred at Home on August 17, 2021, we assumed approximately $2.1 billion of borrowings under the Gentiva Term Loan, and subsequent to the acquisition, we repaid $150 million of borrowings under the Gentiva Term Loan.

We acquired common shares in connection with employee stock plans for an aggregate cost of $36 million in the 2021 period and $30 million in the 2020 period.

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We paid dividends to stockholders of $263 million during the 2021 period and $239 million during the 2020 period.

The remainder of the cash used in or provided by financing activities in 2021 and 2020 primarily resulted from debt issuance costs, proceeds from stock option exercises and the change in book overdraft.

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 loans, credit agreements, commercial paper program, and other short-term borrowings, please refer to Note 12 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, 2021 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 $1.2 billion at September 30, 2021 compared to $772 million at December 31, 2020. This increase primarily was due to net proceeds from the senior notes and term loans, dividends received from regulated subsidiaries, earnings in non-regulated Healthcare Services subsidiaries, and the issuance of commercial paper, partially offset by acquisitions, capital expenditures, cash dividends to shareholders, and capital contributions to certain subsidiaries. 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

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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, 2021, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $9.6 billion, which exceeded aggregate minimum regulatory requirements of $7.2 billion. The amount of ordinary dividends paid to our parent company was approximately $1.3 billion during the nine months ended September 30, 2021 compared to $360 million during the nine months ended September 30, 2020. The amount, timing and mix of ordinary and extraordinary dividend payments will vary due to state regulatory requirements, the level of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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, 2021. Our net unrealized position decreased $326 million from a net unrealized gain position of $514 million at December 31, 2020 to a net unrealized gain position of $188 million at September 30, 2021. At September 30, 2021, we had gross unrealized losses of $113 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, 2021. 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 3.5 years as of September 30, 2021 and approximately 3.0 years as of December 31, 2020. The increase in the average duration is reflective of various portfolio management activities and the decreased holdings of cash and cash equivalents. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $632 million at September 30, 2021.

Item 4. Controls and Procedures

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, 2021.

Based on our evaluation, which excluded the impact of the acquisition of Kindred at Home, or KAH, discussed below, 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.

On August 17, 2021, we acquired the remaining 60% interest in KAH. At September 30, 2021, KAH's assets represented approximately 20% of consolidated assets. For the three and nine months ended September 30, 2021, KAH's revenues represented approximately 2% and 1% of consolidated revenues, respectively, and income before income taxes represented approximately 2% and 1% of consolidated income before income taxes, respectively. We currently exclude, and are in the process of working to incorporate, KAH in our evaluation of internal controls over financial reporting and related disclosure controls and procedures.

Other than the acquisition mentioned above, there have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

For a description of the legal proceedings pending against us and certain other pending or threatened litigation, investigations, or other matters, see “Legal Proceedings and Certain Regulatory Matters” in Note 13 to the condensed consolidated financial statements of this Form 10-Q.

Item 1A. Risk Factors

There have been no changes to the risk factors included in our 2020 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)None.

(b)N/A

(c)The following table provides information about our purchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2021:

Period

Total Number
of Shares
Purchased (1)(2)

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)(2)

Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)

July 2021

—

August 2021

—

September 2021

—

Total

—

(1)On December 22, 2020, we entered into separate accelerated stock repurchase agreements, ("the December 2020 ASR Agreements"), with Citibank, N.A., or Citi, and JPMorgan Chase Bank, or JPM, to repurchase $1.75 billion of our common stock as part of the $3 billion repurchase program authorized by the Board of Directors on July 30, 2019. On December 23, 2020, in accordance with the December 2020 ASR Agreements, we made a payment of $1.75 billion ($875 million to Citi and $875 million to JPM) and received an initial delivery of 3.8 million shares of our common stock (1.9 million shares each from Citi and JPM). We recorded the payments to Citi and JPM as a reduction to stockholders’ equity, consisting of an $1.5 billion increase in treasury stock, which reflects the value of the initial 3.8 million shares received upon initial settlement, and a $262.5 million decrease in capital in excess of par value, which reflects the value of stock held back by Citi and JPM pending final settlement of the December 2020 ASR Agreements. Upon final settlement of the December 2020 ASR agreements with Citi and JPM on May 4, 2021 and May 5, 2021, respectively, we received an additional 0.3 million shares and 0.3 million shares, respectively, as determined by the average daily volume weighted-averages share price of our common stock during the term of the agreement, less a discount, of $400.07 and 401.49, respectively, bringing the total shares received under the December 2020 ASR agreements to 4.4 million. In addition, upon settlement we reclassified the $262.5 million value of stock initially held back by Citi and JPM from capital in excess of par value to treasury stock. On February 18, 2021, the Board of Directors replaced the previous share repurchase authorization of up to $3 billion (of which approximately $250 million remained unused) with a new authorization for repurchases of up to $3 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring as of February 18, 2024. Our remaining repurchase authorization was $3 billion as of September 30, 2021.

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(2)Excludes 90,000 shares repurchased in connection with employee stock plans.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On October 29, 2021, we entered into a $2.0 billion term loan credit agreement with the several banks and other financial institutions from time to time parties thereto, JPMorgan Chase Bank, N.A. as Agent, Bank of America, N.A., as Syndication Agent, PNC Capital Markets, LLC, U.S. Bank, National Association, Wells Fargo Securities, LLC, Citibank, N.A., and Truist Bank, as Documentation Agents, and JPMorgan Chase Bank, N.A., BofA Securities, Inc. and JPMorgan Chase Bank, N.A., BofA Securities, Inc., PNC Capital Markets LLC, U.S. Bank, National Association, Wells Fargo Securities, LLC, Citibank, N.A., and Truist Securities, Inc., as Joint Lead Arrangers and Joint Bookrunners (the “October 2021 Term Loan Agreement”). Proceeds of the October 2021 Term Loan Agreement were applied to finance the repayment in full of the outstanding debt under the Gentiva Credit Agreement and for other general corporate purposes.

At the time of the repayment in full of the Gentiva Credit Agreement, there was $1.9 billion of outstanding debt thereunder and no prepayment penalty was due.

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Item 6: Exhibits


3(i)			Restated Certificate of Incorporation of Humana Inc. filed with the Secretary of State of Delaware on November 9, 1989, as restated to incorporate the amendment of January 9, 1992, and the correction of March 23, 1992 (incorporated herein by reference to Exhibit 4(i) to Humana Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994).
3(ii)			By-Laws of Humana Inc., as amended on December 14, 2017 (incorporated herein by reference to Exhibit 3(b) to Humana Inc.’s Current Report on Form 8-K, filed December 14, 2017).
10.1			Eighteenth Supplemental Indenture, dated August 3, 2021, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.2 to Humana Inc.’s Current Report on Form 8-K filed on August 3, 2021).
10.2			Nineteenth Supplemental Indenture, dated August 3, 2021, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.4 to Humana Inc.’s Current Report on Form 8-K filed on August 3, 2021).
10.3			Twentieth Supplemental Indenture, dated August 3, 2021, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.6 to Humana Inc.’s Current Report on Form 8-K filed on August 3, 2021).
10.4			$2.0 Billion Term Loan Credit Agreement, dated as of October 29, 2021, among Humana Inc., and JPMorgan Chase Bank, N.A. as Agent, Bank of America, N.A., as Syndication Agent, PNC Capital Markets, LLC, U.S. Bank, National Association, Wells Fargo Securities, LLC, Citibank, N.A., and Truist Bank, as Documentation Agents, and JPMorgan Chase Bank, N.A., BofA Securities, Inc. and JPMorgan Chase Bank, N.A., BofA Securities, Inc., PNC Capital Markets LLC, U.S. Bank, National Association, Wells Fargo Securities, LLC, Citibank, N.A., and Truist Securities, Inc., as Joint Lead Arrangers and Joint Bookrunners.
31.1			Principal Executive Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
31.2			Principal Financial Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
32			Principal Executive Officer and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			The following materials from Humana Inc.'s Quarterly Report on Form 10-Q formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020; (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iv) the Consolidated Statements of Equity for the three and nine months ended September 30, 2021 and 2020; (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020; and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104			Cover Page Interactive Data File formatted in Inline XBRL and contained in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			HUMANA INC.
			(Registrant)

Date:	November 3, 2021	By:	/s/ CYNTHIA H. ZIPPERLE
			Cynthia H. Zipperle
			Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

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