Humana 2003 Annual Report Download - page 33

increasing underwriting margins versus achieving enrollment growth. With respect to market conditions, there is
the impact of economies of scale on administrative overhead. As a result of the decline in popularity of tightly
managed HMOs and intensive utilization review procedures, medical costs become increasingly comparable
among the larger competitors, with product design and consumer involvement then becoming the more important
drivers of medical services consumption. As a result, administrative expense efficiency is becoming a primary
driver of commercial margin sustainability. In line with that philosophy, we continue to reduce our
administrative expense structure, realize administrative expense savings through technology tools, and look at
acquisition opportunities that align with our geographic presence and Commercial strategy.
In December 2003, we announced that we had reached a definitive agreement with the Ochsner Clinic
Foundation of New Orleans, Louisiana to acquire Ochsner Health Plan. We believe that this acquisition will
enhance our presence in the Southern United States, an area growing in population and commercial activity. In
addition to creating a new Humana market in New Orleans, the Ochsner Health Plan acquisition is expected to
facilitate sales opportunities in our existing Houston market and is anticipated to make us more attractive to
national accounts.
In our Government segment, there were two significant developments in 2003. First, in August 2003, our
subsidiary, Humana Military Healthcare Services, or HMHS, was awarded the Department of Defense’s
TRICARE contract to support healthcare delivery to active duty and retired service members and their families in
the South Region beginning in 2004. The South Region is one of the three regions in the United States as defined
by the Department of Defense’s new contract alignment. Under the terms of the award, HMHS will be the
Managed Care Support Contractor serving approximately 2.8 million TRICARE beneficiaries in Tennessee,
South Carolina, Georgia, Alabama, Mississippi, Florida, Arkansas, Louisiana, Oklahoma and Texas. Most
importantly, procurement of the South Region contract positions us to continue our TRICARE operating margins
consistent with the levels we have enjoyed since beginning the TRICARE program in July 1996.
Second, in December 2003 President Bush signed Medicare modernization legislation that provides
stabilization funding for the Medicare+Choice program and may provide longer-term opportunities for Humana,
including the potential to (1), expand the Company’s current Medicare+Choice market presence, (2), become a
MedicareAdvantage Regional PPO, (3), add an Interim Drug Discount Card, and (4), become a Prescription Drug
Standalone Plan. We are evaluating these potential opportunities and anticipate completing our analysis during
2004. We believe the new Medicare legislation demonstrates the federal government’s financial commitment to
the private payor program and the commitment to providing health benefits and options to seniors, which should
translate to stable, if not increasing, participation from Humana in this sector.
During 2003, our revenue increased by almost $1 billion to $12.2 billion versus $11.3 billion the previous
year. 80% of the revenue increase was derived from our Commercial segment, primarily a result of underwriting
our premiums commensurate with underlying medical cost inflation. The leveraging of this increase in
underwriting dollars in excess of administrative and overhead expenses was the primary driver of the increase in
our commercial and consolidated pretax profits. During the second quarter of 2003, we completed a transition
from seven service centers to four, which has resulted in continuing administrative efficiencies.
Cash flows from operations generated $413.1 million during 2003, $44.1 million of which was used to
purchase 3.7 million shares of our common stock at an average price of $12.03 per share. We invested
$101.3 million on capital expenditures during 2003.
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, and the primary factors that accounted for those changes, as well as how certain critical
accounting principles and estimates impact our financial statements.
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