Humana 2004 Annual Report Download - page 36

benefits and options to seniors and has started the resurgence of Medicare as a business line that should bring us
accelerating growth in 2005 and 2006. We already have established Medicare Private Fee-For-Service plans in
eleven new states, and recently have received approvals from CMS establishing Local Medicare PPO plans in
many of our existing markets where we have established competitive networks. Medicare Private Fee-For-
Service plans generally offer additional benefits compared to traditional Medicare in exchange for a monthly
premium paid by the member. These plans typically include a prescription drug benefit with no provider network
restrictions. Local Medicare PPO plans typically will offer an even higher level of benefits to members, including
a prescription drug benefit and a lower level of member cost-sharing on many benefits while seeking medical
services from in-network providers. These products are more fully-described beginning on page 6. We continue
to evaluate additional states and local markets where we believe we can be competitive with these products and
anticipate further expansion during 2005. Accordingly, we anticipate an organic increase in our Medicare
Advantage enrollment of 10% to 15% during 2005. Including the February 2005 acquisition of CarePlus Health
Plans of Florida, as more fully described below, we anticipate having approximately 470,000 to 485,000
Medicare Advantage members at December 31, 2005.
Although still under evaluation, we believe we are well-positioned to participate in Medicare Regional PPO
plans and the Medicare Prescription Drug Plan, as established by the MMA, beginning in 2006. In connection
herewith, we have notified CMS of our intent to bid on these programs. As a long-time successful participant in
the Medicare program, we believe that we possess (1) the business competencies and management experience
with senior product design, (2) a robust and scalable multi-channel distribution system, (3) an established and
competitive network including a national retail pharmacy network, and (4) an established brand awareness with
seniors; all of which will enable us to compete for market share in this expanding business line over the next
several years.
Other highlights include the following:
• On April 1, 2004, we acquired Ochsner Health Plan for $157.1 million in cash, establishing a new
market in New Orleans, Louisiana for our Commercial and Medicare lines of business and on February
16, 2005, we acquired CarePlus Health Plans of Florida, increasing our Medicare presence in South
Florida. These transactions are more fully-described below and in Note 3 to the consolidated financial
statements.
• Diluted earnings per share of $1.72 for 2004, an increase of 22.0% from $1.41 per share in 2003.
• The Government segment pretax earnings for 2004 of $273.8 million increased $50.1 million, or 22.4%,
from $223.7 million during 2003. The Commercial segment pretax earnings of $142.0 million in 2004
were 17.4% higher compared to pretax earnings of $121.0 million in 2003.
• Consolidated revenues for 2004 of $13.1 billion increased 7.2% from $12.2 billion for 2003 resulting
from the Ochsner acquisition and an increase in per member premiums.
• The consolidated medical expense ratio in 2004 of 84.1% increased from 83.5% in 2003 while the
consolidated SG&A expense ratio of 14.5% in 2004 declined from 15.4% in 2003.
• Cash flows from operations of $347.8 million in 2004 decreased from $413.1 million in the prior year
primarily due to the timing of Medicare Advantage premium remittances more fully discussed in the
liquidity section on page 35.
• During 2004, we repurchased 3.8 million common shares for $67.0 million at an average price of $17.83
per share.
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.
Recent Acquisitions
On February 16, 2005, we acquired CarePlus Health Plans of Florida, or CarePlus, as well as its affiliated 10
medical centers and pharmacy company for approximately $450 million in cash including the acquisition of
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