Humana 2003 Annual Report Download - page 32

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated financial statements of Humana Inc. in this document present the Company’s financial
position, results of operations and cash flows, and should be read in conjunction with the following discussion
and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its
subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this filing and in future filings with the Securities and Exchange
Commission, in our press releases, investor presentations, and in oral statements made by or with the approval
of one of our executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will
result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify
such forward-looking statements. These forward-looking statements are not guarantees of future performance
and are subject to risks, uncertainties, and assumptions, including, among other things, information set forth in
the “Cautionary Statements” section of this document. Because our pending acquisition has not yet occurred,
these forward looking statements exclude its impact. In light of these risks, uncertainties, and assumptions, the
forward-looking events discussed in this document might not occur. There may also be other risks that we are
unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially
from the results discussed in the forward-looking statements.
Overview
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health
benefits companies, based on our 2003 revenues of $12.2 billion. We offer coordinated health insurance coverage
and related services through a variety of traditional and Internet-based plans for employer groups, government-
sponsored programs, and individuals. As of December 31, 2003, we had approximately 6.8 million members in
our medical insurance programs, as well as approximately 1.7 million members in our specialty products
programs. In 2003, approximately 70% of our premiums and administrative services fees resulted from members
located in Florida, Illinois, Texas, Kentucky, and Ohio. During 2003, we derived approximately 42% of our
premiums and administrative services fees from contracts with the federal government including two federal
government contracts with the Department of Defense to provide health insurance coverage to TRICARE
beneficiaries and our contracts with the Centers for Medicare and Medicaid Services, or CMS, to provide health
insurance coverage for our Medicare+Choice members.
We manage our business with two segments: Commercial and Government. The Commercial segment
consists of members enrolled in products marketed to employer groups and individuals, and includes three lines
of business: fully insured medical, administrative services only, or ASO, and specialty. The Government segment
consists of members enrolled in government-sponsored programs, and includes three lines of business:
Medicare+Choice, Medicaid, and TRICARE. Our Government segment has produced consistent profits and
relatively stable margins for many years. Our business strategy largely revolves around increasing our
Commercial segment profitability while building on our existing strength in the Government segment.
Our strategy to increase Commercial segment profitability focuses on providing solutions for employers to
the rising cost of health care through the use of innovative and consumer-choice product designs which are
supported by service excellence and industry-leading electronic capabilities, including education, tools and
technologies provided primarily through the Internet. To that end, we have developed an innovative suite of
products styled as “Smart” products. We believe that these Smart products offer the best solution for many
employers to the problem of fast rising health care costs for their employees. Although enrollment in our Smart
products is a relatively modest 130,000 members at December 31, 2003, we believe that substantial growth in
these products, which may be competitively priced to produce higher margins, is the key for our continuing
improvement in the Commercial segment. January 2004 sales were approximately 70,000 in our Smart products.
Other important elements which impact our Commercial segment profitability are the competitive pricing
environment and market conditions. With respect to pricing, there is the balancing act between sustaining or
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