Humana 2002 Annual Report Download - page 35

Goodwill is no longer amortized but must be tested 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. A reporting unit is one level below our Commercial and Government segments. The
Commercial segment’s two reporting units consist of fully and self-insured medical and specialty. The Government
segment’s three reporting units consist of Medicare+Choice, TRICARE and Medicaid. Goodwill was assigned to
the reporting unit that was expected to benefit from a specific acquisition. If goodwill was expected to benefit
multiple reporting units, we allocated goodwill in connection with our transitional impairment test as of January 1,
2002 based upon the reporting units’ relative fair value. This process resulted in the allocation of $633.2 million of
goodwill to the Commercial segment and $143.7 million of goodwill to the Government segment.
Our long-range business plan and annual planning process supports our goodwill impairment tests. These
tests are based primarily on an evaluation of future discounted cash flows under several scenarios. We used a
range of discount rates that correspond to our weighted-average cost of capital. Key assumptions including
changes in membership, premium yields, medical cost trends and certain government contract extensions are
consistent with those utilized in our long-range business plan and annual planning process. If these assumptions
differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected.
Long-lived assets consist of property and equipment and other intangible assets. These assets are
depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically
review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the
asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future
cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also
must estimate and make assumptions regarding the useful life we assign to our long-lived assets. 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 for these assets. In 2002, we recognized long-lived
asset impairment losses of $2.4 million as a result of our decision to eliminate three customer service centers. We
expect to recognize additional long-lived asset impairment losses of approximately $30.7 million in 2003 related
to these service center consolidation initiatives. See “Restructuring Charge” section and Note 14 to the
consolidated financial statements.
Recent Transactions
Acquisitions
On May 31, 2001, we acquired the outstanding shares of common stock of a newly-formed Anthem Health
Insurance Company subsidiary responsible for administering TRICARE benefits in Regions 2 and 5 for
$43.5 million in cash, net of direct transaction costs.
During 2000, in separate transactions, we acquired a Houston-based health plan, two operating shell entities
for future business initiatives, and a hospital in-patient management services firm for $76.3 million in cash, net of
direct transaction costs.
We accounted for each of these acquisitions under the purchase method of accounting and accordingly, our
consolidated results of operations include the results of the acquired businesses from the date of acquisition. For
each acquisition, we allocated the purchase price to net tangible and other intangible assets based upon their fair
values. Any remaining value not assigned to net tangible or other intangible assets was then allocated to
goodwill. Other intangible assets primarily relate to government, subscriber and provider contracts and the cost
of the acquired licenses. Goodwill and other intangible assets recorded in connection with the acquisitions were
$44.8 million in 2001 and $52.1 million in 2000. The other intangible assets are being amortized over periods
ranging from 2 to 20 years, with a weighted average life of 5.7 years. Unaudited pro forma results of operations
information have not been presented because the effects of these acquisitions, individually or in the aggregate,
were not significant to our results of operations or financial position.
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