What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 340 added, 265 removed, 399 unchanged (60% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this 2021 Form 10-K, refer to "Item 7.

For discussion of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this 2022 10-K and were not impacted by our segment realignment, refer to "Item 7.

– Management Discussion and Analysis of Financial Condition and Results of Operations" found in our Form 10-K for the year ended December 31, 2021, that was filed with the Securities and Exchange Commission on February 17, 2022.

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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.

Sale of Hospice and Personal Care Divisions

On August 11, 2022, we completed the sale of a 60% i nterest in Humana’s Kindred at Home Hospice subsidiary, or KAH Hospice, to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from KAH Hospice to Humana of $1.9 billion.

In connection with the sale we recognized a pre-tax gain, net of transaction costs, of $237 million which is reported as a gain on sale of KAH Hospice in the accompanying consolidated statements of income for the year ended December 31, 2022.

Kindred at Home Acquisition

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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.

During periods of increased incidences of COVID-19, a reduction in non-COVID-19 hospital admissions for non-emergent and elective medical care have resulted in lower overall healthcare system utilization.

At the same time, COVID-19 treatment and testing costs 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, significantly affected our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans.

During 2022, we experienced lower overall utilization of the healthcare system than anticipated, as the reduction in COVID-19 utilization following the increased incidence associated with the Omicron variant outpaced the increase in non-COVID-19 utilization.

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, significantly affected our 2021 revenue under the risk adjustment payment model for Medicare Advantage plans.

Finally, changes in utilization patterns and actions taken in 2020 and 2021 as a result of the COVID-19 pandemic, including the suspension of certain financial recovery programs for a period of time and shifting the timing of claim payments and provider capitation surplus payments, impacted our claim reserve development and operating cash flows for 2020 and 2021.

Value Creation Initiatives

During 2022, in order to create capacity to fund growth and investment in our Medicare Advantage business and further expansion of our healthcare services capabilities in 2023, we committed to drive additional value for the enterprise through cost saving, productivity initiatives, and value acceleration from previous investments.

As a result of these initiatives, we recorded charges of $473 million included within operating costs in the consolidated statement of income for the year ended December 31, 2022.

These charges primarily relate to $248 million in asset impairments, including software and abandonment, and $116 million of severance charges in connection with workforce optimization.

The remainder of the charges primarily relate to external consulting fees.

These charges were recorded at the corporate level and not allocated to the segments.

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.

During December 2022, we realigned our businesses into two distinct segments:

Insurance and CenterWell.

The Insurance segment includes the businesses that were previously included in the Retail and Group and Specialty segments, as well as the Pharmacy Benefit Manager, or PBM, business which was previously included in the Healthcare Services segment.

The CenterWell segment (formerly Healthcare Services) represents our payor-agnostic healthcare services offerings, including pharmacy dispensing services, provider services, and home services.

In addition to the new segment classifications being utilized to assess performance and allocate resources, we believe this simpler structure will create greater collaboration across the Insurance and CenterWell businesses and will accelerate work that is underway to centralize and integrate operations within the organization.

Prior period segment financial information has been recast to conform to the 2022 presentation.

For a recast of prior period segment financial information, refer to Note 18 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Our two reportable segments, Insurance and CenterWell, 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.

See Note 18 to the consolidated financial statements included in Item 8.

- Financial Statements and Supplementary Data for segment financial information.

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 demonstration, 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 pharmacy, provider, and home services, along with other services and capabilities to promote wellness and advance population health.

The operations of the recently acquired full ownership of Kindred at Home, as well as the company's strategic partnership with Welsh, Carson, Anderson & Stowe (WCAS) to develop and operate senior-focused, payor-agnostic, primary care centers are also included in the Healthcare Services segment.

The results of each segment are measured by income before income taxes and equity in net earnings from equity method investments, or segment earnings.

Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and home services, to our Retail and Group and Specialty segment customers.

For segment financial information, refer to Note 18 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

The Insurance segment consists of Medicare benefits, marketed to individuals or directly via group Medicare accounts, as well as 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 demonstration, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts.

This segment also includes products consisting 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.

In addition, our Insurance segment includes our military services business, primarily our T-2017 East Region contract, as well as the operations of our PBM business.

The CenterWell segment includes our pharmacy, provider services, and home solutions operations.

The segment also includes our strategic partnerships with WCAS to develop and operate senior-focused, payor-agnostic, primary care centers, as well as our minority ownership interest in hospice operations.

Services offered by this segment are designed to enhance the overall healthcare experience.

These services may lead to lower utilization associated with improved member health and/or lower drug costs.

The results of each segment are measured by income before income taxes and equity in net (losses) earnings from equity method investments, or segment earnings.

Transactions between reportable segments primarily consist of sales of services rendered by our CenterWell segment, primarily pharmacy, provider, and home services, to our Insurance segment customers.

Intersegment sales and expenses are recorded at fair value and eliminated in consolidation.

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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.

One of the product offerings of our Insurance segment is Medicare stand-alone prescription drug plans, or PDP, under the Medicare Part D program.

Our quarterly Insurance 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 stages of a member’s plan period, which begins annually on January 1 for renewals.

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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.

The Insurance segment also experiences seasonality in the fully-insured product offering.

The effect on the Insurance's segment benefit ratio is opposite of the Medicare stand-alone PDP impact, with the benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.

In addition, the Insurance 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 strategy offers our members affordable health care combined with a positive consumer experience in growing markets.

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At December 31, 2022, approximately 3,175,500 members, or 70%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 3,009,600 members, or 68%, at December 31, 2021.

• In order to create capacity to fund growth and investment in our Medicare Advantage business and further expand our Healthcare Services capability in 2023, we committed to efforts to create additional value through cost savings, productivity initiatives and value acceleration from previous investments.

As a result of these initiatives, we anticipate that we may incur certain charges in 2022.

• On February 1, 2023, Centers for Medicare & Medicaid Services, or CMS, issued its preliminary 2024 Medicare Advantage and Part D payment rates and proposed policy changes, collectively, the Advance Notice.

CMS has invited public comment on the Advance Notice before publishing final rate on or before April 4, 2022, or the Final Notice.

In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 4.48% increase in benchmark funding based on proposals included therein.

CMS has invited public comment on the Advance Notice before publishing final rates on or before April 3, 2023, or the Final Notice.

In the Advance Notice, CMS estimates Medicare Advantage plans across the sector will, on average, experience a 2.27% decrease in benchmark funding based on proposals included therein.

As indicated by CMS, its estimate excludes the impact of fee-for-service county rebasing/re-pricing since the related impact is dependent upon finalization of certain data, which will be available with the publication of the Final Notice.

Further the benchmark increase excludes MA risk score trend as individual plans’ experience will vary.

The company will be drawing upon its program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact on Medicare beneficiaries’ quality of care and service to its members through the Medicare Advantage program.

Further the benchmark decrease excludes MA risk score trend as individual plans’ experience will vary.

Based on the company’s preliminary analysis using the same factors CMS included in its estimate, the components of which are detailed on CMS’s website, we anticipate the proposals in the Advance Notice would result, on average, in a change relatively in line with CMS’ estimate, with the exception of Humana's Medicare Star Ratings for bonus year 2024, which led the company’s peers, as well as the Risk Model Revision and Normalization Adjustment, which the company continues to analyze.

With respect to the Risk Model Revision and Normalization adjustment, CMS provided detail to the company indicating an average impact to Humana relatively in line with the average negative 3.12% industry impact.

The company continues to analyze the Advance Notice, including CMS’ estimate of the Humana specific impact related to the Risk Model Revision and Normalization adjustment, which is likely to have a more negative impact on individual plans and specific membership cohorts with greater risk score trend, and will be drawing upon its program expertise to provide CMS formal commentary on the impact of the Advance Notice and the related impact on Medicare beneficiaries’ quality of care and service to its members through the Medicare Advantage program.

• Net income was $2.8 billion, or $22.08 per diluted common share, and $2.9 billion, or $22.67 per diluted common share, in 2022 and 2021, respectively.

This comparison was 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 our non consolidating minority interest 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 signing of the definitive agreement for the transaction 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 2021.

This comparison was significantly impacted by the gain on KAH equity method investment recognized in August 2021, put/call valuation adjustments associated with non-consolidating minority interest investments, transaction and integration costs, the change in the fair value of publicly-traded equity securities, charges associated with productivity initiatives related to previously disclosed $1 billion value creation plan, and the net gain on the sale of KAH Hospice.

The impact of these adjustments to our consolidated income before income taxes and equity in net (losses) earnings and diluted earnings per common share was as follows for the 2022 and 2021 periods:

(in millions)

Consolidated income before income taxes and equity in net earnings:

Consolidated income before income taxes and equity in net (losses) earnings:

Gain on Kindred at Home equity method investment $ — $ (1,129)

Put/call valuation adjustments associated with company's non consolidating minority interest investments (597) (103)

Transaction and integration costs associated with Kindred at Home acquisition (128) —

Gain on sale of KAH Hospice (237) —

Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan 473 —

Put/call valuation adjustments associated with our non consolidating minority interest investments 68 597

Transaction and integration costs 105 128

Change in the fair value of publicly-traded equity securities 123 341

Receipt of commercial risk corridor receivables previously written-off — 578

Diluted earnings per common share:

Gain on Kindred at Home equity method investment $ — $ (8.73)

Put/call valuation adjustments associated with company's non consolidating minority interest investments (3.56) (0.60)

Transaction and integration costs associated with Kindred at Home acquisition (0.72) —

Gain on sale of KAH Hospice (1.86) —

Charges associated with productivity initiatives related to the previously disclosed $1 billion value creation plan 3.72 —

Put/call valuation adjustments associated with our non consolidating minority interest investments 0.53 4.62

Transaction and integration costs 0.83 0.99

Change in the fair value of publicly-traded equity securities 0.97 2.63

Receipt of commercial risk corridor receivables previously written-off — 3.35

Tax impact of all transactions (1.52) (1.93)

$ 2.67 $ (2.42)

◦ 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 period results when compared to the 2021 period results.

In addition, the 2021 period results reflect 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.

Combined, the COVID-19 impacts described previously resulted in lower operating results in 2021 compared to 2020.

◦ Partially offsetting the COVID-19 financial headwind that we experienced in 2021, 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.

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 is not deductible for income tax purposes and significantly increases our effective tax rate, was in effect for calendar year 2020 and 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);

We are and will continue to be regularly subject to new laws and regulations, changes to existing laws and regulations, and judicial determinations that impact the interpretation and applicability of those laws and regulations.

The Health Care Reform Law, the Families First Act, the CARES Act, and the Inflation Reduction Act, and related regulations, are examples of laws which have enacted significant reforms to various aspects of the U.S.

health insurance industry, including, 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, and changes to the Part D prescription drug benefit design .

It is reasonably possible that these laws and regulations, as well as other current or future legislative, judicial or regulatory changes (including further 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);

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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 CenterWell segment, primarily pharmacy, provider services, and home solutions, to our Insurance segment customers and are described in Note 18 to the audited Consolidated Financial Statements included in Item 8.

– Financial Statements and Supplementary Data in this 2022 Form 10-K.

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common share results)

Retail $ 73,820 $ 67,124 $ 6,696 10.0 %

Group and Specialty 6,002 6,460 (458) (7.1) %

Insurance $ 87,712 $ 79,822 $ 7,890 9.9 %

Total premiums revenue 87,712 79,822 7,890 9.9 %

Insurance 850 853 (3) (0.4) %

CenterWell 3,926 2,202 1,724 78.3 %

Total services revenue 4,776 3,055 1,721 56.3 %

Investment income 382 187 195 104.3 %

Total revenues 92,870 83,064 9,806 11.8 %

Operating expenses:

Benefits 75,690 69,199 6,491 9.4 %

Operating costs 12,671 10,121 2,550 25.2 %

Depreciation and amortization 709 596 113 19.0 %

Total operating expenses 89,070 79,916 9,154 11.5 %

Income from operations 3,800 3,148 652 20.7 %

Gain on sale of KAH Hospice (237) — 237 100.0 %

Interest expense 401 326 75 23.0 %

Other expense (income), net 68 (532) 600 112.8 %

Income before income taxes and equity in net (losses) earnings 3,568 3,354 214 6.4 %

Provision for income taxes 762 485 277 57.1 %

Equity in net (losses) earnings (4) 65 (69) (106.2) %

Net income $ 2,802 $ 2,934 $ (132) (4.5) %

Diluted earnings per common share $ 22.08 $ 22.67 $ (0.59) (2.6) %

Benefit ratio (a) 86.3 % 86.7 % (0.4) %

Operating cost ratio (b) 13.7 % 12.2 % 1.5 %

Effective tax rate 21.4 % 14.2 % 7.2 %

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

(b) Represents total operating costs, excluding depreciation and amortization, as a percentage of total revenues less investment income.

Premiums Revenue

Consolidated premiums revenue increased $7.9 billion, or 9.9%, from $79.8 billion in the 2021 period to $87.7 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage and commercial fully-insured medical premiums, partially offset by declining year-over-year membership associated with the group commercial medical products and the phase-out of COVID-19 sequestration relief in the 2022 period.

Services Revenue

Consolidated services revenue increased $1.7 billion, or 56.3%, from $3.1 billion in the 2021 period to $4.8 billion in the 2022 period primarily due to the impact of our home solutions revenues which reflect the acquisition of the remaining 60% interest in KAH during August 2021 partially offset by the divestiture of the 60% ownership interest in KAH Hospice during August 2022.

Investment Income

Investment income increased $195 million, or 104.3%, from $187 million in the 2021 period to $382 million in the 2022 period p rimarily due to lower mark to market losses on our publicly traded equity securities during the 2022 period compared to the 2021 period.

Benefits Expense

Consolidated benefits expense increased $6.5 billion, or 9.4%, from $69.2 billion in the 2021 period to $75.7 billion in the 2022 period.

The consolidated benefit ratio decreased 40 basis points from 86.7% in the 2021 period to 86.3% in the 2022 period primarily due to higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business.

These factors were partially offset by lower favorable prior-period medical claims reserve development.

Further, the 2022 period ratio reflects a shift in line of business mix, with continued growth in certain government programs, which carry a higher benefits expense ratio, combined with a decline in Medicare stand-alone PDP, which has a lower benefits expense ratio.

Consolidated benefits expense included $415 million of favorable prior-period medical claims reserve development in the 2022 period and $825 million of favorable prior-period medical claims reserve development in the 2021 period.

Prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 50 basis points in the 2022 period and decreased the consolidated benefit ratio by approximately 100 basis points in the 2021 period.

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 $2.6 billion, or 25.2%, from $10.1 billion in the 2021 period to $12.7 billion in the 2022 period.

The consolidated operating cost ratio increased 150 basis points from 12.2% in the 2021 period to 13.7% in the 2022 period.

The ratio increase was primarily due to the impact of the consolidation of KAH operations, which have a significantly higher operating cost ratio than our historical consolidated operating cost ratio, the net impact of charges associated with initiatives undertaken associated with our value creation initiatives, as well as the impact of higher marketing spend in 2022 to support individual Medicare Advantage growth.

These increases were partially offset by scale efficiencies associated with growth in individual Medicare Advantage membership.

Depreciation and Amortization

Depreciation and amortization increased $113 million, or 19.0%, from $596 million in the 2021 period to $709 million in the 2022 period primarily due to capital expenditures.

Interest Expense

Interest expense increased $75 million, or 23.0%, from $326 million in the 2021 period to $401 million in the 2022 period primarily due to higher average borrowings outstanding partially offset by lower interest rates.

Our effective tax rate during 2022 was 21.4% compared to the effective tax rate of 14.2% in 2021.

The year-over-year increase in the effective income tax rates is primarily due to the impact of the August 2021 acquisition of the remaining 60% interest in KAH.

In that period, we recognized a $1.1 billion mark-to-market gain related to our previously held 40% investment in KAH.

This unrealized gain was not taxable, thereby reducing the effective income tax rate for the 2021 period.

The increase is partially offset by the August 2022 disposition of our 60% interest in KAH Hospice, which resulted in an increase to our tax basis in both the shares sold and the shares retained, thereby reducing the effective income tax rate for the 2022 period.

For a complete reconciliation of the federal statutory rate to the effective tax rate, refer to Note 12 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Insurance Segment

2022 2021 Members %

Individual Medicare Advantage 4,565,600 4,409,100 156,500 3.5 %

Group Medicare Advantage 565,100 560,600 4,500 0.8 %

Medicare stand-alone PDP 3,551,300 3,606,200 (54,900) (1.5) %

Total Medicare 8,682,000 8,575,900 106,100 1.2 %

Medicare Supplement 313,600 331,900 (18,300) (5.5) %

Commercial fully-insured 556,300 674,600 (118,300) (17.5) %

Total fully-insured 869,900 1,006,500 (136,600) (13.6) %

Medicaid and other 1,137,300 940,100 197,200 21.0 %

Military services 5,959,900 6,049,000 (89,100) (1.5) %

ASO 430,100 495,500 (65,400) (13.2) %

Total Medical Membership 17,079,200 17,067,000 12,200 0.1 %

Total Specialty Membership 5,194,800 5,294,300 (99,500) (1.9) %

2022 2021 $ %

(in millions)

Premiums and Services Revenue:

Individual Medicare Advantage $ 65,591 $ 58,654 $ 6,937 11.8 %

Group Medicare Advantage 7,297 6,955 342 4.9 %

Medicare stand-alone PDP 2,269 2,371 (102) (4.3) %

Total Medicare 75,157 67,980 7,177 10.6 %

Medicare Supplement 743 731 12 1.6 %

Commercial fully-insured 3,733 4,271 (538) (12.6) %

Total fully-insured 4,476 5,002 (526) (10.5) %

Medicaid and other 6,376 5,109 1,267 24.8 %

Specialty 1,703 1,731 (28) (1.6) %

Total premiums revenue 87,712 79,822 7,890 9.9 %

Services revenue 850 853 (3) (0.4) %

Total premiums and services revenue $ 88,562 $ 80,675 $ 7,887 9.8 %

Income from operations $ 3,022 $ 2,412 $ 610 25.3 %

Benefit ratio 86.6 % 87.2 % (0.6) %

Operating cost ratio 10.4 % 10.3 % 0.1 %

Income from operations

Insurance segment income from operations increased $0.6 billion, or 25.3%, from $2.4 billion in the 2021 period to $3.0 billion in the 2022 period primarily due to the same factors impacting the segment's lower benefit ratio offset by the same factors impacting the segment's higher operating cost ratio as more fully described below.

Individual Medicare Advantage membership increased 156,500 members, or 3.5%, from 4,409,100 members as of December 31, 2021 to 4,565,600 members as of December 31, 2022 primarily due to membership additions associated with the 2022 Annual Election Period, or AEP.

The year-over-year growth was further impacted by continued enrollment resulting from special elections, age-ins, and Dual Eligible Special Need Plans, or D-SNP, membership.

I ndividual Medicare Advantage membership includes 668,900 D-SNP members as of December 31, 2022, a net increase of 92,800 members, or 16.1%, from 576,100 members as of December 31, 2021.

For the full year 2023, we anticipate a net membership growth in our individual Medicare Advantage offerings of at least 625,000 members.

Group Medicare Advantage membership increased 4,500 members, or 0.8% , from 560,600 members as of December 31, 2021 to 565,100 members as of December 31, 2022 reflectin g smaller account sales and organic growth in concurrent accounts with no large accounts won or lost for the period.

For the full year 2023, we anticipate a net membership decline in our group Medicare Advantage offerings of approximately 60,000 members.

Medic are stand-alone PDP membership decreased 54,900 members, or 1.5% , from 3,606,200 members as of December 31, 2021 to 3,551,300 members as of December 31, 2022 primarily due to continued intensified competition for Medicare stand-alone PDP offerings.

For the full year 2023, we anticipate a net membership decline in our Medicare stand-alone PDP offerings of approximately 800,000 members.

Medicaid and other membership increased 197,200 members, or 21.0%, from 940,100 members as of December 31, 2021 to 1,137,300 members as of December 31, 2022 reflecting the suspension of state eligibility redetermination efforts due to the currently enacted public health emergency, or PHE .

For the full year 2023, we anticipate a net membership growth in our state-based contracts of approximately 25,000 to 100,000 members.

Commercial fully-insured medical membership decreased 118,300 members, or 17.5%, from 674,600 members as of December 31, 2021 to 556,300 members as of December 31, 2022 reflecting the impact of pricing discipline to address COVID-19 and improve profitability.

ASO commercial medical membership decreased 65,400 members, or 13.2%, from 495,500 members as of December 31, 2021 to 430,100 members as of December 31, 2022 reflecting continued intensified competition for small group accounts, partially offset by strong retention among large group accounts.

For the full year 2023, we anticipate a net membership decline in our group commercial medical offerings, which includes fully-insured and ASO, of approximately 300,000 members.

Military services membership decreased 89,100 members, or 1.5%, from 6,049,000 members as of December 31, 2021 to 5,959,900 members as of December 31, 2022.

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 99,500 members, or 1.9%, from 5,294,300 members as of December 31, 2021 to 5,194,800 members as of December 31, 2022 primarily due to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of group fully-insured commercial medical membership above.

In addition, current membership reflects the economic impact of the COVID-19 pandemic.

Premiums revenue

Insurance segment premiums revenue increased $7.9 billion, or 9.9%, from $79.8 billion in the 2021 period to $87.7 billion in the 2022 period primarily due to individual Medicare Advantage and state-based contracts membership growth and higher per member individual Medicare Advantage and commercial fully-insured medical premiums, partially offset by declining year-over-year membership associated with the group commercial medical products and the phase-out of COVID-19 sequestration relief in the 2022 period.

Services revenue

Insurance segment services revenue decreased $3 million, or 0.4%, from $853 million in the 2021 period to $850 million in the 2022 period.

Benefits expense

The Insurance segment benefit ratio decreased 60 basis points from 87.2% in the 2021 period to 86.6% in the 2022 period primarily due to higher per member individual Medicare Advantage premiums and lower inpatient utilization associated with the individual Medicare Advantage business.

These factors were partially offset by lower favorable prior-period medical claims reserve development.

The Insurance segment benefits expense included $415 million of favorable prior-period medical claims reserve development in the 2022 period and $825 million of favorable prior-period medical claims reserve development in the 2021 period.

Prior-period medical claims reserve development decreased the Insurance's segment benefit ratio by approximately 50 basis points in the 2022 period and decreased the Insurance's segment benefit ratio by approximately 100 basis points in the 2021 period.

Operating costs

The Insurance segment operating cost ratio increased 10 basis points from 10.3% in the 2021 period to 10.4% in the 2022 period primarily due to strategic investments to position the segment for long-term success, including the impact of higher marketing spend in the 2022 period to support individual Medicare Advantage growth.

These factors were partially offset by scale efficiencies associated with growth in the individual Medicare Advantage membership.

CenterWell Segment

2022 2021 Dollars Percentage

(in millions)

Home solutions $ 2,333 $ 1,166 $ 1,167 100.1 %

Pharmacy 1,025 623 402 64.5 %

Provider services 568 413 155 37.5 %

Total services revenue 3,926 2,202 1,724 78.3 %

Intersegment revenues:

Home solutions 553 352 201 57.1 %

Pharmacy 9,841 9,024 817 9.1 %

Provider services 2,979 2,476 503 20.3 %

Total intersegment revenues 13,373 11,852 1,521 12.8 %

Total services and intersegment revenues $ 17,299 14,054 3,245 23.1 %

Income from operations $ 1,291 $ 938 $ 353 37.6 %

Operating cost ratio 91.5 % 92.3 % (0.8) %

Income from operations

CenterWell segment income from operations increased $353 million, or 37.6%, from $938 million in the 2021 period to $1.3 billion in the 2022 period primarily due primarily due to the same factors impacting the increase in services revenue and intersegment revenues as well as the same factors impacting the segment's lower operating cost ratio in the 2022 period as more fully described below.

Services revenue

CenterWell segment services revenue increased $1.7 billion, or 78.3%, from $2.2 billion in the 2021 period to $3.9 billion in the 2022 period primarily due to the impact of our home solutions revenues which reflect the acquisition of the remaining 60% interest in KAH during August 2021 partially offset by the divestiture of the 60% ownership interest in KAH Hospice during August 2022.

Intersegment revenues

CenterWell segment intersegment revenues increased $1.5 billion, or 12.8%, from $11.9 billion in the 2021 period to $13.4 billion in the 2022 period primarily due to individual Medicare Advantage membership growth, combined with the impact of greater mail-order pharmacy penetration for Medicare Advantage members, which lead to higher pharmacy revenues, as well as higher revenues associated with growth in our provider business.

Operating costs

The CenterWell segment operating cost ratio decreased 80 basis points from 92.3% in the 2021 period to 91.5% in the 2022 period primarily represents the consolidation of KAH operations for the entire 2022 period compared to the partial 2021 period due to timing of the previously disclosed transaction.

The KAH operations have a lower operating cost ratio than other businesses within the segment.

The year-over-year favorability was further impacted by our pharmacy operations partially offset by investments in KAH to abate the pressures of the current nursing labor environment as well as the divestiture of the 60% interest in KAH Hospice during August 2022.

Comparison of Results of Operations for 2021 and 2020

Certain financial data on a consolidated basis and for our segments reflect our segment realignment and are recast as follows for the years ended December 31, 2021 and 2020:

2021 2020 Dollars Percentage

(dollars in millions, except per

common share results)

Insurance $ 79,822 $ 73,584 $ 6,238 8.5 %

Corporate — 602 (602) (100.0) %

Total premiums 79,822 74,186 5,636 7.6 %

Retail 23 19 4 21.1 %

Group and Specialty 816 780 36 4.6 %

Healthcare Services 2,216 1,016 1,200 118.1 %

Total services 3,055 1,815 1,240 68.3 %

Total premiums revenue 79,822 74,186 5,636 7.6 %

Insurance 853 813 40 4.9 %

CenterWell 2,202 1,002 1,200 119.8 %

Total services revenue 3,055 1,815 1,240 68.3 %

Investment income 187 1,154 (967) (83.8) %

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Consolidated premiums increased $5.6 billion, or 7.6%, from $74.2 billion in the 2020 period to $79.8 billion in the 2021 period primarily due to higher premium revenues from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment (MRA) headwinds resulting from COVID-19 related utilization disruption in 2020, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020.

These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership as more fully described in the detailed segment results discussion that follows, as well as the 2020 impact of the receipt of commercial risk corridor receivables previously written off.

These increases were partially offset by declining stand-alone PDP, group commercial medical, and group Medicare Advantage membership, as well as the 2020 impact of the receipt of commercial risk corridor receivables previously written off.

Services Revenue

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The change was 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.

See Note 12 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.

Retail Segment

2021 2020 Members Percentage

Medical membership:

Insurance Segment

2021 2020 Members %

Individual Medicare Advantage 4,409,100 3,962,700 446,400 11.3 %

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Medicare stand-alone PDP 3,606,200 3,866,700 (260,500) (6.7) %

Total Retail Medicare 8,575,900 8,442,600 133,300 1.6 %

State-based Medicaid 940,100 772,400 167,700 21.7 %

Total Medicare 8,575,900 8,442,600 133,300 1.6 %

Medicare Supplement 331,900 335,600 (3,700) (1.1) %

Total Retail medical members 9,847,900 9,550,600 297,300 3.1 %

2021 2020 Dollars Percentage

Commercial fully-insured 674,600 777,400 (102,800) (13.2) %

Total fully-insured 1,006,500 1,113,000 (106,500) (9.6) %

Medicaid and other 940,100 772,400 167,700 21.7 %

Military services 6,049,000 5,998,700 50,300 0.8 %

ASO 495,500 504,900 (9,400) (1.9) %

Total Medical Membership 17,067,000 16,831,600 235,400 1.4 %

Total Specialty Membership 5,294,300 5,310,300 (16,000) (0.3) %

2021 2020 $ %

(in millions)

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Medicare stand-alone PDP 2,371 2,742 (371) (13.5) %

Total Retail Medicare 67,980 62,213 5,767 9.3 %

State-based Medicaid 5,109 4,223 886 21.0 %

Total Medicare 67,980 62,213 5,767 9.3 %

Medicare Supplement 731 688 43 6.3 %

Total premiums 73,820 67,124 6,696 10.0 %

Services 23 19 4 21.1 %

Commercial fully-insured 4,271 4,761 (490) (10.3) %

Total fully-insured 5,002 5,449 (447) (8.2) %

Medicaid and other 5,109 4,223 886 21.0 %

Specialty 1,731 1,699 32 1.9 %

Total premiums revenue 79,822 73,584 6,238 8.5 %

Services revenue 853 813 40 4.9 %

Total premiums and services revenue $ 80,675 $ 74,397 $ 6,278 8.4 %

Segment earnings $ 1,937 $ 3,017 $ (1,080) (35.8) %

Income from operations $ 2,412 $ 3,120 $ (708) (22.7) %

Benefit ratio 87.2 % 84.1 % 3.1 %

Operating cost ratio 10.3 % 12.3 % (2.0) %

Segment Earnings

• Retail segment earnings decreased $1.1 billion, or 35.8%, from $3.0 billion in the 2020 period to $1.9 billion in the 2021 period primarily due to the same factors reflecting the segment's higher benefit ratio, partially offset by the segment's lower operating cost ratio as more fully described below.

Income from operations

Insurance segment income from operations decreased $0.7 billion, or 22.7%, from $3.1 billion in the 2020 period to $2.4 billion in the 2021 period primarily due to the same factors impacting the segment's higher benefit ratio offset by the same factors impacting the segment's lower operating cost ratio as more fully described below.

Individual Medicare Advantage membership increased 446,400 members, or 11.3%, from 3,962,700 members as of December 31, 2020 to 4,409,100 members as of December 31, 2021 primarily due to membership additions associated with the previous Annual Election Period, or AEP, and Open Election Period, or OEP, for Medicare beneficiaries.

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I ndividual Medicare Advantage membership includes 576,100 D-SNP members as of December 31, 2021, a net increase of 170,000 members, or 42%, from 406,100 members as of December 31, 2020.

For the full year 2022, we anticipate a net membership growth in our individual Medicare Advantage offerings of approximately 150,000 to 200,000 members.

Group Medicare Advantage membership decreased 52,600 members, or 8.6% , from 613,200 members as of December 31, 2020 to 560,600 members as of December 31, 2021 primarily due to the net loss of certain large accounts in January 2021, partially offset by continued growth in small group accounts.

For the full year 2022, we anticipate relatively flat membership growth.

Medic are stand-alone PDP membership decreased 260,500 members, or 6.7% , from 3,866,700 members as of December 31, 2020 to 3,606,200 members as of December 31, 2021 primarily due to anticipated declines as a result of the Walmart Value plan no longer being the low cost leader in 2021.

For the full year 2022, we anticipate a net membership decline in our Medicare stand-alone PDP offerings of approximately 125,000 members.

• State-based Medicaid membership increased 167,700 members, or 21.7%, from 772,400 members as of December 31, 2020 to 940,100 members as of December 31, 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 of our remaining 50% ownership interest in Wisconsin health care company iCare.

For the full year 2022, we anticipate a net membership decline in our state-based contracts of approximately 50,000 to 100,000 members assuming the Public Health Emergency will end in April 2022.

Premiums revenue

• Retail segment premiums increased $6.7 billion, or 10.0%, from $67.1 billion in the 2020 period to $73.8 billion in the 2021 period primarily due to higher premiums as a result of individual Medicare Advantage and state-based contracts membership growth, 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, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020.

These favorable items were partially offset by the decline in membership in our stand-alone PDP and group Medicare Advantage offerings.

Benefits expense

• The Retail segment benefit ratio increased 370 basis points from 84.2% in the 2020 period to 87.9% in the 2021 period 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, 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 meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVD-19 related utilization disruption in 2020.

Also contributing to the higher benefit ratio was the 2021 impact of 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 period includes the beneficial effect of $729 million in favorable prior-year medical claims reserve development versus $266 million in 2020.

This favorable prior-year medical claims reserve development decreased the Retail segment benefit ratio by approximately 100 basis points in 2021 versus approximately 40 basis points in 2020.

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 impacting our claim payment patterns.

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.

Operating costs

• The Retail segment operating cost ratio decreased 180 basis points from 11.0% in the 2020 period to 9.2% in the 2021 period primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs, as previously discussed, scale efficiencies associated with growth in our individual Medicare Advantage membership, as well as operating cost efficiencies driven by previously implemented productivity initiatives.

These improvements were partially offset by continued strategic investments made in 2021 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 period.

Group and Specialty Segment

2021 2020 Members Percentage

Medical membership:

Fully-insured commercial group 674,600 777,400 (102,800) (13.2) %

ASO 495,500 504,900 (9,400) (1.9) %

Military services 6,049,000 5,998,700 50,300 0.8 %

Total group medical members 7,219,100 7,281,000 (61,900) (0.9) %

Specialty membership (a) 5,294,300 5,310,300 (16,000) (0.3) %

(a) Specialty products include dental, vision, and life insurance benefits.

Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.

2021 2020 Dollars Percentage

(in millions)

Premiums and Services Revenue:

Fully-insured commercial group $ 4,271 $ 4,761 $ (490) (10.3) %

Specialty 1,731 1,699 32 1.9 %

Total premiums 6,002 6,460 (458) (7.1) %

Services 816 780 36 4.6 %

Total premiums and services revenue $ 6,818 $ 7,240 $ (422) (5.8) %

Segment earnings (loss) $ 149 $ (143) $ 292 204.2 %

Benefit ratio 82.5 % 85.6 % (3.1) %

Operating cost ratio 24.6 % 25.0 % (0.4) %

Segment Earnings

• Group and Specialty segment earnings increased $292 million, or 204.2%, from a $143 million loss in the 2020 period to $149 million of earnings in the 2021 period primarily due to the same factors reflecting the segment's lower benefit ratio and operating cost ratio as more fully described below.

• Fully-insured commercial group medical membership decreased 102,800 members, or 13.2%, from 777,400 members as of December 31, 2020 to 674,600 members as of December 31, 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 50% at December 31, 2021 and 54% at December 31, 2020.

• Group ASO commercial medical membership decreased 9,400 members, or 1.9%, from 504,900 members as of December 31, 2020 to 495,500 members as of December 31, 2021.

S mall group membership comprised 43% of group ASO medical membership at December 31, 2021 and 45% at December 31, 2020.

Medicaid and other membership increased 167,700 members, or 21.7%, from 772,400 members as of December 31, 2020 to 940,100 members as of December 31, 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 our acquisition of the remaining 50% ownership interest in Wisconsin health care company iCare.

Commercial fully-insured medical membership decreased 102,800 members, or 13.2%, from 777,400 members as of December 31, 2020 to 674,600 members as of December 31, 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 commercial fully-insured medical membership in small group accounts was approximately 50% at December 31, 2021 and 54% at December 31, 2020.

ASO commercial medical membership decreased 9,400 members, or 1.9%, from 504,900 members as of December 31, 2020 to 495,500 members as of December 31, 2021.

S mall group membership comprised 43% of ASO commercial medical membership at December 31, 2021 and 45% at December 31, 2020.

The membership change reflects intensified competition for small group accounts, partially offset by strong retention among large group accounts.

For the full year 2022, we anticipate a net membership decline in our group commercial medical offerings, which includes fully-insured and ASO, of approximately 125,000 to 165,000 members .

Military services membership increased 50,300 members, or 0.8%, from 5,998,700 members as of December 31, 2020 to 6,049,000 members as of December 31, 2021.

Membership includes military service members, retirees, and their families to whom we are providing healthcare services under the current TRICARE East Region contract.

• S p ecialty membership decreased 16,000 members, or 0.3%, from 5,310,300 members as of December 31, 2020 to 5,294,300 members as of December 31, 2021 primarily due 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.

Specialty membership decreased 16,000 members, or 0.3%, from 5,310,300 members as of December 31, 2020 to 5,294,300 members as of December 31, 2021 primarily due to the loss of dental and vision groups cross-sold with medical, as reflected in the loss of commercial fully-insured 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 $458 million, or 7.1%, from $6.5 billion in the 2020 period to $6.0 billion in the 2021 period 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.

Insurance segment premiums increased $6.2 billion, or 8.5%, from $73.6 billion in the 2020 period to $79.8 billion in the 2021 period primarily due to higher premium revenues from Medicare Advantage and state-based contracts membership growth, higher per member Medicare Advantage premiums as a result of the improving CMS benchmark rate for 2021, net of Medicare Risk Adjustment (MRA) headwinds resulting from COVID-19 related

utilization disruption in 2020, as well as the additional quarter impact of Medicare sequestration relief in 2021 that was not enacted until the second quarter of 2020.

These increases were partially offset by declining Medicare stand-alone PDP, commercial fully insured, and group Medicare Advantage membership.

Services revenue

• Group and Specialty segment services revenue increased $36 million, or 4.6%, from $780 million in the 2020 period to $816 million in the 2021 period primarily due to higher TRICARE services revenue partially offset by lower ASO membership described previously.

Insurance segment services revenue increased $40 million, or 4.9%, from $813 million in the 2020 period to $853 million in the 2021 period primarily due to higher TRICARE services revenue partially offset by lower ASO membership described previously.

Benefits expense

• The Group and Specialty segment benefit ratio decreased 310 basis points from 85.6% in the 2020 period to 82.5% in the 2021 period.

The decrease reflects the negative COVID-19 impacts in 2020 including meaningful COVID-19 treatment and testing costs along with our ongoing pandemic relief efforts, primarily surrounding initiatives to ease administrative and financial stress for providers and employers, net of the impact of the deferral of non-essential care.

The comparison was further impacted by the deliberate pricing and benefit design efforts in 2021 to increase profitability and position the commercial business for long-term success, lower specialty utilization, primarily related to dental services in 2021, as well as the beneficial impact of higher favorable prior-period medical claims reserve development in the 2021 period.

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.

• The Group and Specialty segment’s benefits expense includes the beneficial effect of $96 million in prior-period medical claims reserve development in 2021 versus $47 million in 2020.

This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 160 basis points in 2021 versus approximately 70 basis points in 2020.

The Insurance segment benefit ratio increased 310 basis points from 84.1% in the 2020 period to 87.2% in the 2021 period.

This increase reflects 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, and COVID-19 impacts, including the impact of the deferral of non-essential care, net of meaningful COVID-19 treatment and testing costs, our pandemic relief efforts in 2020, as well as 2021 MRA headwinds resulting from this COVID-19 related utilization disruption in 2020.

The year over year increase further reflects the 2021 impact 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 Insurance segment benefits expense included $825 million of favorable prior-period medical claims reserve development in the 2021 period and $313 million of favorable prior-period medical claims reserve development in the 2021 period.

Prior-period medical claims reserve development decreased the Insurance's segment benefit ratio by approximately 100 basis points in the 2021 period and decreased the Insurance's segment benefit ratio by approximately 40 basis points in the 2020 period.

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.

Operating costs

• The Group and Specialty segment operating cost ratio decreased 40 basis points from 25.0% in the 2020 period to 24.6% in the 2021 period primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs in 2021, as previously discussed, as well as 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 Insurance segment operating cost ratio decreased 200 basis points from 12.3% in the 2020 period to 10.3% in the 2022 period primarily due to the termination of the non-deductible health insurance industry fee in 2021, lower COVID-19 related administrative costs, as previously discussed, scale efficiencies associated with growth in our individual Medicare Advantage membership, as well as operating cost efficiencies driven by previously implemented productivity initiatives.

These improvements were partially offset by continued strategic investments made in 2021 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 period.

Healthcare Services Segment

CenterWell Segment

2021 2020 Dollars Percentage

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Home solutions $ 1,166 $ 107 $ 1,059 989.7 %

Pharmacy solutions 637 581 56 9.6 %

Pharmacy 623 567 56 9.9 %

Provider services 413 328 85 25.9 %

Total services revenues 2,216 1,016 1,200 118.1 %

Total services revenue 2,202 1,002 1,200 119.8 %

Intersegment revenues:

Home solutions 352 279 73 26.2 %

Pharmacy solutions 25,855 24,587 1,268 5.2 %

Pharmacy 9,024 7,928 1,096 13.8 %

Provider services 2,476 2,268 208 9.2 %

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Total services and intersegment revenues 14,054 11,477 2,577 22.5 %

Segment earnings $ 1,329 $ 944 $ 385 40.8 %

Income from operations $ 938 $ 624 $ 314 50.3 %

Operating cost ratio 92.3 % 93.3 % (1.0) %

Segment Earnings

• Healthcare Services segment earnings increased $385 million, or 40.8%, from $944 million in the 2020 period to $1.3 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings, individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy revenues, higher revenues associated with growth in the company's provider business, as well as the factors that drove the segment declining operating cost ratio as more fully described below.

Script Volume

• Humana Pharmacy Solutions ® script volumes for the Retail and Group and Specialty segment membership increased to approximately 515 million in 2021, up 7.7% versus scripts of approximately 478 million in 2020 primarily due to growth in Medicare Advantage Prescription Drug and state-based contracts membership, partially offset by the decline in stand-alone PDP membership.

Income from operations

CenterWell segment income from operations increased $314 million, or 50.3%, from $624 million in the 2020 period to $938 million in the 2021 period primarily due to consolidation of Kindred at Home earnings, individual Medicare Advantage and state-based contracts membership growth leading to higher pharmacy revenues, higher revenues associated with growth in our provider business, as well as the factors that drove the segment declining operating cost ratio as more fully described below.

Services revenue

• Services revenues increased $1.2 billion, or 118.1%, from $1.0 billion in the 2020 period to $2.2 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings.

CenterWell segment services revenue increased $1.2 billion, or 119.8%, from $1.0 billion in the 2020 period to $2.2 billion in the 2021 period primarily due to consolidation of Kindred at Home earnings.

The 2021 period further reflects higher revenue from growth in the number of primary care clinics serving third party payors, and additional pharmacy revenues associated with the acquisition of Enclara which was closed during the first quarter of 2020.

Intersegment revenues

• Intersegment revenues increased $1.6 billion, or 5.8%, from $27.4 billion in the 2020 period to $29.0 billion in the 2021 period primarily due to individual Medicare Advantage and state-based contracts membership growth, as well as higher revenues associated with our provider business.

CenterWell segment intersegment revenues increased $1.4 billion, or 13.1%, from $10.5 billion in the 2020 period to $11.9 billion in the 2021 period 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 90 basis points from 96.3% in the 2020 period to 95.4% in the 2021 period primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the 2020 impact 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 in 2021.

The CenterWell segment operating cost ratio decreased 100 basis points from 93.3% in the 2020 period to 92.3% in the 2021 period primarily due to consolidation of Kindred at Home operations which have a lower operating cost ratio than other businesses within the segment, the 2020 impact 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 in 2021.

The decrease further reflects the impact of additional investments in the segment's provider business during 2020 related to marketing and AEP initiatives.

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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).

Our use of cash flows derived from our non-insurance subsidiaries, such as in our CenterWell segment, is generally not restricted by state departments of insurance (or comparable state regulators).

For additional information on our liquidity risk, please refer to Item 1A.

– Risk Factors in this 2022 Form 10-K.

Cash and cash equivalents decreased to $3.4 billion at December 31, 2021 from $4.7 billion at December 31, 2020.

Cash and cash equivalents increased to $5.1 billion at December 31, 2022 from $3.4 billion at December 31, 2021.

The change in cash and cash equivalents for the years ended December 31, 2022, 2021 and 2020 is summarized as follows:

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Net cash used in investing activities (1,006) (6,556) (3,065)

Net cash provided by (used in) financing activities 3,015 (1,955) (2,295)

(Decrease) increase in cash and cash equivalents $ (1,279) $ 619 $ 1,711

Net cash (used in) provided by financing activities (1,914) 3,015 (1,955)

Increase (decrease) in cash and cash equivalents $ 1,667 $ (1,279) $ 619

Cash Flow from Operating Activities

Cash flows provided by operations of $2.3 billion in the 2021 period decreased $3.4 billion from cash flows provided by operations of $5.6 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.

Cash flows provided by operations of $4.6 billion in the 2022 period increased $2.3 billion from cash flows provided by operations of $2.3 billion in the 2021 period primarily due to higher earnings in 2022, exclusive of the gain on the sale of KAH Hospice recognized in the 2022 period and the gain on the KAH equity method investment recognized in the 2021 period, combined with positive working capital impacts in 2022, and the 2021 period impact associated with the pay down of claims inventory and capitation for provider surplus amounts earned in 2020 and additional provider support.

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.

The detail of benefits payable was as follows at December 31, 2021, 2020 and 2019:

Change Change

2021 2020 2019 2021 2020

(in millions)

IBNR (1) $ 5,695 $ 5,290 $ 4,150 $ 405 $ 1,140

Reported claims in process (2) 907 816 628 91 188

Other benefits payable (3) 1,687 2,037 1,226 (350) 811

Total benefits payable $ 8,289 $ 8,143 $ 6,004 146 2,139

Reconciliation to cash flow statement:

Change in payables from acquisition of business (42) —

Changes in benefits payable per cash flow statement resulting in cash from operations $ 104 $ 2,139

(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 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.

Benefits expense includes claim payments, capitation payments, pharmacy costs net of rebates, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well as estimates of future payments to hospitals and others for medical care and other supplemental benefits provided on or prior to the balance sheet date.

For additional information regarding our benefits payable and benefits expense recognition, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

The detail of total net receivables was as follows at December 31, 2022, 2021 and 2020:

Change Change

2022 2021 2020 2022 2021

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Reconciliation to cash flow statement:

Change in receivables from (acquisition) disposition of business (396) 3

Change in receivables per cash flow statement

resulting in cash used by operations $ 280 $ 85

Change in receivables from disposition (acquisition) of business 194 (396)

Change in receivables per cash flow statement resulting in

cash used by operations

The changes in Medicare receivables for both the 2022 period and the 2021 period reflect individual Medicare Advantage membership growth and the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model.

The decrease in Commercial and other receivables and the allowance for doubtful accounts for 2022 primarily relates to the KAH Hospice disposition.

The increase in Commercial and other receivables in 2021 primarily relates to the Kindred at Home acquisition.

Cash Flow from Investing Activities

During 2022, we acquired various businesses totaling to approximately $337 million, net of cash received.

During 2021, we acquired Kindred at Home and other primary care businesses for cash consideration of approximately $4.2 billion, net of cash received.

During 2020, we acquired Enclara Healthcare, a hospice, pharmacy and benefit provider, for cash consideration of approximately $709 million, net of cash received.

During 2022, we completed the sale of a 60% i nterest in Humana’s Kindred at Home Hospice subsidiary, or KAH Hospice, to Clayton, Dubilier & Rice, or CD&R, for cash proceeds of approximately $2.7 billion, net of cash disposed, including debt repayments from KAH Hospice to Humana of $1.9 billion.

In connection with the sale, we recognized a pre-tax gain, net of transaction costs, of $237 million which is reported as a gain on sale of KAH Hospice in the accompanying consolidated statement of income for the year ended December 31, 2022.

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 $1.3 billion, $964 million and $736 million in the 2021, 2020 and 2019 periods, respectively.

Net purchases of investment securities were $1.1 billion, $1.4 billion, $542 million in the 2021, 2020 and 2019 periods, respectively.

Total capital expenditures, excluding acquisitions, were $1.1 billion, $1.3 billion and $964 million in the 2022, 2021 and 2020 periods, respectively.

Net purchases of investment securities were $2.3 billion, $1.1 billion, $1.4 billion in the 2022, 2021 and 2020 periods, respectively.

Cash Flow from Financing Activities

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Settlement of the reinsurance and low-income cost subsidies is based on a reconciliation made approximately 9 months after the close of each calendar year.

Claim payments were higher than receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk by $261 million, $938 million and $560 million in the 2021, 2020 and 2019 periods, respectively.

Our net receivable from CMS for subsidies and brand name prescription drug discounts was $1.4 billion at December 31, 2021 compared to a net receivable of $1.2 billion at December 31, 2020.

Under our administrative services only TRICARE contract, health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by $45 million, $1 million and $63 million in the 2021, 2020 and 2019 periods, respectively.

Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claim payments by $2 billion in the 2022 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 $261 million and $938 million in the 2021 and 2020 periods, respectively.

Our net payable from CMS for subsidies and brand name prescription drug discounts was $540 million at December 31, 2022 compared to a net receivable of $1.4 billion at December 31, 2021.

Under our administrative services only TRICARE contract, reimbursements from the federal government exceeded health care costs payments for which we do not assume risk by $25 million in the 2022 period and health care costs payments for which we do not assume risk exceeded reimbursements from the federal government by $45 million and $1 million in the 2021 and 2020 periods, respectively.

In December 2022, we repaid $600 million aggregate principal amount of our 3.150% senior notes due on their maturity date of December 1, 2022 and $400 million aggregate principal amount of our 2.900% senior notes due on their maturity date of December 15, 2022.

In November 2022, we issued $500 million of 5.750% unsecured senior notes due March 1, 2028 and $750 million of 5.875% unsecured senior notes due March 1, 2033.

Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $1.2 billion.

In March 2022, we issued $750 million of 3.700% unsecured senior notes due March 23, 2029.

Our net proceeds, reduced for the underwriters' discounts and commissions paid, were $744 million.

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' discounts and commissions paid, were $2,984 million.

As of the closing of the acquisition of Kindred at Home in August 2021, we assumed approximately $2.1 billion of borrowings, and subsequently repaid $150 million of borrowings.

In October 2021, we entered into a $2.0 billion term loan agreement and applied the proceeds to finance the repayment in full of the outstanding assumed Kindred at Home debt.

In May 2021, we entered into a $500 million unsecured delayed draw term loan credit agreement.

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.

In December 2020, we repaid $400 million aggregate principal amount of our 2.500% senior notes due on their maturity date of December 15, 2020.

In March 2020, we drew $1 billion on the existing term loan commitment at the time, which was repaid in November 2020.

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' discounts and commissions and offering expenses paid, were $1,088 million.

In August 2019, we issued $500 million of 3.125% senior notes due August 15, 2029 and $500 million of 3.950% senior notes due August 15, 2049.

Our net proceeds, reduced for the underwriters' discounts and commissions and offering expenses paid, were $987 million.

We used the net proceeds from this offering, together with available cash, to repay the $650 million outstanding amount due under our term note in August 2019, and the $400 million aggregate principal amount of our 2.625% senior notes due on its maturity date of October 1, 2019.

We repurchased common shares for $0.08 billion, $1.82 billion and $1.07 billion in 2021, 2020 and 2019, respectively, under share repurchase plans authorized by the Board of Directors and in connection with employee stock plans.

We paid dividends to stockholders of $354 million in 2021, $323 million in 2020, and $291 million in 2019.

In August 2022, we repaid the $2.0 billion October 2021 Term Loan Agreement without a prepayment penalty due.

In October 2021, we entered into a $2.0 billion term loan agreement and applied the proceeds to finance the repayment in full of the outstanding assumed Kindred at Home debt.

In March 2020, we drew $1 billion on the existing term loan commitment at the time, which was repaid in November 2020.

We entered into a commercial paper program in October 2014.

Net proceeds from issuance of commercial paper were $352 million in 2021 and the maximum principal amount outstanding at any one time during 2021 was $1.2 billion.

Net proceeds from the issuance of commercial paper were $295 million in 2020 and the maximum principal amount outstanding at any one time during 2020 was $600 million.

Net repayments from issuance of commercial paper were $360 million in 2019 and the maximum principal amount outstanding at any one time during 2019 was $801 million.

Net repayments from issuance of commercial paper were $376 million in 2022 and the maximum principal amount outstanding at any one time during 2022 was $1.5 billion.

Net proceeds from the issuance of commercial paper were $352 million in 2021 and the maximum principal amount outstanding at any one time during 2021 was $1.2 billion.

Net proceeds from issuance of commercial paper were $295 million in 2020 and the maximum principal amount outstanding at any one time during 2020 was $600 million.

We repurchased common shares for $2.10 billion, $79 million and $1.82 billion in 2022, 2021 and 2020, respectively, under share repurchase plans authorized by the Board of Directors and in connection with employee stock plans.

We paid dividends to stockholders of $392 million in 2022, $354 million in 2021, and $323 million in 2020.

The remainder of the cash used in or provided by financing activities in 2022, 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

For a detailed discussion of dividends to stockholders, please refer to Note 16 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of dividends to stockholders, please refer to Note 16 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Stock Repurchases

For a detailed discussion of stock repurchases, please refer to Note 16 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of our debt, including our senior notes, term loans, credit agreement and commercial paper program, please refer to Note 13 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of stock repurchases, please refer to Note 16 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

For a detailed discussion of our debt, including our senior notes, term loans, credit agreement and commercial paper program, please refer to Note 13 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Liquidity Requirements

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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 increased to $1.3 billion at December 31, 2021 from $772 million at December 31, 2020.

This increase primarily reflects 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 contributions to certain subsidiaries, capital expenditures, and cash dividends to shareholders.

Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by regulators.

Cash, cash equivalents, and short-term investments at the parent company decreased to $0.9 billion at December 31, 2022 from $1.3 billion at December 31, 2021.

This decrease primarily reflects common stock repurchases, repayment of the October 2021 Term Loan Agreement, repayment of maturing senior notes, capital expenditures, repayment of borrowings under the commercial paper program, capital contributions to certain subsidiaries, cash dividends to shareholders and acquisitions, partially offset by net proceeds from the senior notes, proceeds from the sale of investment securities, dividends from insurance subsidiaries, and cash from certain non-insurance subsidiaries within our CenterWell segment.

Our use of operating cash derived from our non-insurance subsidiaries, such as our CenterWell segment, is generally not restricted by regulators.

Our regulated insurance subsidiaries paid dividends to our parent company of $1.3 billion in 2022, $1.6 billion in 2021, and $1.3 billion in 2020.

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Regulatory Requirements

For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to our parent, please refer to Note 16 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of our regulatory requirements, including aggregate statutory capital and surplus as well as dividends paid from the subsidiaries to our parent, please refer to Note 16 to the to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Off-Balance Sheet Arrangements

As of December 31, 2022, we were not involved in any special purpose entity, or SPE, transactions.

For a detailed discussion of off-balance sheet arrangements, please refer to Note 17 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of off-balance sheet arrangements, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Guarantees and Indemnifications

For a detailed discussion of our guarantees and indemnifications, please refer to Note 17 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of our guarantees and indemnifications, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Government Contracts

For a detailed discussion of our government contracts, including our Medicare, Military, and Medicaid and state-based contracts, please refer to Note 17 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For a detailed discussion of our government contracts, including our Medicare, Military, and Medicaid and state-based contracts, please refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Critical Accounting Policies and Estimates

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Benefits expense is recognized in the period in which services are provided and includes an estimate of the cost of services which have been incurred but not yet reported, or IBNR.

IBNR represents a substantial portion of our benefits payable as follows:

December 31, 2021 Percentage

of Total December 31, 2020 Percentage

(dollars in millions)

IBNR $ 5,695 68.7 % $ 5,290 65.0 %

Reported claims in process 907 10.9 % 816 10.0 %

Other benefits payable 1,687 20.4 % 2,037 25.0 %

Total benefits payable $ 8,289 100.0 % $ 8,143 100.0 %

Our reserving practice is to consistently recognize the actuarial best point estimate within a level of confidence required by actuarial standards.

For further discussion of our reserving methodology, including our use of completion and claims per member per month trend factors to estimate IBNR, refer to Note 2 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data.

For further discussion of our reserving methodology, including our use of completion and claims per member per month trend factors to estimate IBNR, refer to Note 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

The completion and claims per member per month trend factors are the most significant factors impacting the IBNR estimate.

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0.30% $196 2.00% $274

0.20% $131 1.75% $239

0.10% $65 1.50% $205

0.05% $33 1.25% $171

0.03% $16 1.00% $137

(a) Reflects estimated potential changes in benefits payable at December 31, 2022 caused by changes in completion factors for incurred months prior to the most recent two months.

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Components of the total incurred claims for each year include amounts accrued for current year estimated benefits expense as well as adjustments to prior year estimated accruals.

Refer to Note 11 to the consolidated financial statements included in Item 8.

– Financial Statements and Supplementary Data for Retail and Group and Specialty segment tables including information about incurred and paid claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of IBNR included within the net incurred claims amounts.

Refer to Note 11 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for information about incurred and paid claims development as of December 31, 2022, net of reinsurance, as well as cumulative claim frequency and the total of IBNR included within the net incurred claims amounts.

2022 2021 2020

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We experienced favorable medical claims reserve development related to prior fiscal years of $415 million in 2022, $825 million in 2021, and $313 million in 2020.

The table below details our favorable medical claims reserve development related to prior fiscal years by segment for 2021, 2020, and 2019.

(Favorable) Unfavorable Medical Claims Reserve

Development Change

2021 2020 2019 2021 2020

(in millions)

Retail Segment $ (729) $ (266) $ (386) $ (463) $ 120

Group and Specialty Segment (96) (47) 50 (49) (97)

Total $ (825) $ (313) $ (336) $ (512) $ 23

The favorable medical claims reserve development for 2022, 2021, and 2020 primarily reflects the consistent application of trend and completion factors estimated using an assumption of moderately adverse conditions.

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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.

Our favorable development for each of the years presented above is discussed further in Note 11 to the consolidated financial statements included in Item 8.

Our favorable development for each of the years presented above is discussed further in Note 11 to the audited Consolidated Financial Statements included in Item 8.

– Financial Statements and Supplementary Data.

We continually adjust our historical trend and completion factor experience with our knowledge of recent events that may impact current trends and completion factors when establishing our reserves.

Because our reserving practice is to consistently recognize the actuarial best point estimate using an assumption of moderately adverse conditions as required by actuarial standards, there is a reasonable possibility that variances between actual trend and completion factors and those assumed in our December 31, 2021 estimates would fall towards the middle of the ranges previously presented in our sensitivity table.

Because our reserving practice is to consistently recognize the actuarial best point estimate using an assumption of moderately adverse

conditions as required by actuarial standards, there is a reasonable possibility that variances between actual trend and completion factors and those assumed in our December 31, 2022 estimates would fall towards the middle of the ranges previously presented in our sensitivity table.

Revenue Recognition

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Medicare Risk-Adjustment Provisions

CMS utilizes a risk-adjustment model which apportions premiums paid to Medicare Advantage, or MA, plans according to health severity.

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 for enrollees with predictably higher costs.

CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members.

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 account for certain demographic characteristics and health status of our enrolled members.

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 this diagnosis data to calculate the risk-adjusted premium payment to MA plans.

Rates paid to MA plans are established under an actuarial bid model, including a process that bases our payments on a comparison of our beneficiaries’ risk scores, derived from medical diagnoses, to those enrolled in the government’s Medicare FFS 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 providers to appropriately document all medical data, including the diagnosis data submitted with claims.

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 2021, 75% of the risk score was calculated from claims data submitted through EDS.

CMS 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.

We estimate risk-adjustment revenues based on medical diagnoses for our membership.

The risk-adjustment model, including CMS changes to the submission process, is more fully described in Item 1.

– Business under the section titled “Individual Medicare,” and in Item 1A.

- Risk Factors.

The CMS risk-adjustment model uses the diagnosis data, collected from providers, to calculate the health status-related risk-adjusted premium payment to MA plans, which CMS further adjusts for coding pattern differences between the health plans and the government fee-for-service (FFS) 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 health status-adjusted 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.

For additional information, refer to Note 17 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" and Part I, Item 1A, "Risk Factors" of this Form 10-K.

Investment Securities

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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 United States with no individual state exceeding 1% of our total debt securities.

Our general obligation bonds are diversified across the 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.

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Total debt securities $ 4,419 $ (270) $ 8,962 $ (1,431) $ 13,381 $ (1,701)

Prior to January 1, 2020, we applied the other-than-temporary impairment model for securities in an unrealized loss position which did not result in any material impairments for 2019.

Beginning on January 1, 2020, we adopted the new current expected credit losses, or CECL, model which retained many similarities from the previous other-than-temporary impairment model except eliminating from consideration in the impairment analysis the length of time over which the fair value had been less than cost.

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The expected credit loss cannot exceed the full difference between the amortized cost basis and the fair value.

The risks inherent in assessing the impairment of an investment include the risk that market factors may differ from our expectations, facts and circumstances factored into our assessment may change with the passage of time, or we may decide to subsequently sell the investment.

we may decide to subsequently sell the investment.

The determination of whether a decline in the value of an investment is related to a credit event requires us to exercise significant diligence and judgment.

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At December 31, 2022, 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 at December 31, 2021 or 2020 There were no material other-than-temporary impairments in 2019.

Additionally, we did not record any material credit allowances for debt securities that were in an unrealized loss position at December 31, 2022, 2021 or 2020.

Goodwill, Indefinite-lived and Long-lived Assets

At December 31, 2022, goodwill, indefinite-lived and other long-lived assets represented 33% of total assets and 92% of total stockholders’ equity, compared to 38% and 104%, respectively, at December 31, 2021.

The increase in goodwill, indefinite-lived and other long-lived assets is primarily attributable to our August 2021 KAH acquisition.

The decrease in goodwill, indefinite-lived and other long-lived assets is primarily attributable to our August 2022 sale of KAH Hospice.

For goodwill, we are required to test at least annually for impairment at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.

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The fair value of our reporting units with significant goodwill exceeded carrying amounts by a substantial margin.

However, unfavorable changes in key assumptions or combinations of assumptions including a significant increase in the discount rate, decrease in the long-term growth rate or substantial reduction in our underlying cash flow assumptions, including revenue growth rates, medical and operating cost trends, and projected operating income could have a significant negative impact on the estimated fair value of our home solutions and provider reporting units, which accounted for $6.6 billion and $933 million of goodwill, respectively.

Our home solutions reporting unit includes approximately $5.8 billion of goodwill from our August 2021 KAH acquisition.

However, unfavorable changes in key assumptions or combinations of assumptions including a significant increase in the discount rate, decrease in the long-term growth rate or substantial reduction in our underlying cash flow assumptions, including revenue growth rates, medical and operating cost trends, and projected operating income could have a significant negative impact on the estimated fair value of our home solutions and provider reporting units, which accounted for $4.3 billion and $1.1 billion of goodwill, respectively.

Impairment tests completed for 2022, 2021, and 2020 did not result in an impairment loss.

Indefinite-lived intangible assets relate to Certificate of Needs (CON) and Medicare licenses acquired in connection with our August 2021 KAH acquisition with a carrying value of $1.4 billion at December 31, 2022.

Like goodwill, we are required to test at least annually for impairment and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.

goodwill, we are required to test at least annually for impairment and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.

These tests are performed, at a minimum, annually in the fourth quarter.

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Fair values of indefinite-lived intangible assets are determined based on the income approach.

Impairment tests completed for 2022 did not result in a material impairment loss.

These charges reflect the amount by which the carrying value exceeded its estimated fair value.

Impairment tests completed for 2021 did not result in an impairment loss.

Long-lived assets consist of property and equipment and other finite-lived intangible assets.

The fair values of the assets were measured using Level 3 inputs, such as projected revenues and operating cash flows.

Long-lived assets consist of property and equipment and other definite-lived intangible assets.

These assets are depreciated or amortized over their estimated useful life, and are subject to impairment reviews.

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If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating depreciation or amortization for these assets.

There were no material impairment losses in the last three years.

Other than the $248 million of asset impairment charges as a result of our value creation initiatives as described in Footnote 2 to the audited Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K, there were no other impairment losses in the last three years.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis