Humana 2015 Annual Report Download - page 73

65
Intersegment revenues
• Intersegment revenues increased $4.2 billion, or 28.3%, from 2013 to $18.8 billion for 2014 primarily due to
growth in our Medicare membership which resulted in higher utilization of our pharmacy solutions and home
based services businesses.
Operating costs
• The Healthcare Services segment operating cost ratio of 95.6% for 2014 decreased 20 basis points from 95.8%
for 2013 primarily due to an improvement in the ratio for our pharmacy solutions business partially offset by
our investment in home based services and other businesses across the segment.
Other Businesses
Our Other Businesses pretax income of $1 million for 2014 compared to a pretax loss of $289 million for 2013.
The pretax loss in 2013 included net expense of $243 million for reserve strengthening for our closed-block of long-
term care insurance policies further discussed in Note 18 to the consolidated financial statements included in Item 8.
– Financial Statements and Supplementary Data. Year-over-year comparisons also reflect the loss of our Medicaid
contracts in Puerto Rico effective September 30, 2013.
Liquidity
The Merger Agreement includes customary restrictions on the conduct of our business prior to the completion of
the Merger, generally requiring us to conduct our business in the ordinary course and subjecting us to a variety of
specified limitations absent Aetna’s prior written consent. 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, borrowings, and proceeds from sales of businesses. Our 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
operating 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 operating 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).
The effect of the commercial risk adjustment, risk corridor, and reinsurance provisions of the Health Care Reform
Law impact the timing of our operating cash flows, as we build receivables for each coverage year that are expected
to be collected in subsequent coverage years. On June 30, 2015 we received notification from CMS of risk adjustment
and reinsurance settlement amounts for 2014. During 2015, we collected $392 million net for risk adjustment and
reinsurance recoverable settlements associated with the 2014 coverage year. In addition, during 2015, we received our
interim settlement associated with our risk corridor receivables for the 2014 coverage year. The interim settlement,
representing only 12.6% of risk corridor receivables for the 2014 coverage year, was funded by HHS in accordance
with previous guidance, utilizing funds HHS collected from us and other carriers under the 2014 risk corridor program.
We collected $25 million net of payments for risk corridor associated with the 2014 coverage year during 2015. HHS
provided guidance under the three year risk corridor program that future collections will first be applied to any shortfalls
from previous coverage years before application to current year obligations. Risk corridor payables to issuers are
obligations of the United States Government under the Health Care Reform law which requires the Secretary of HHS
to make full payments to issuers. In the event of a shortfall at the end of the three year program, HHS has asserted it
will explore other sources of funding for risk corridor payments, subject to the availability of appropriations. The