Humana 2004 Annual Report Download - page 8

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Senior฀products:฀Opportunity฀for฀the฀experienced
Medicare฀is฀an฀excellent฀business฀for฀those,฀like฀Humana,฀who฀stayed฀with฀it฀and฀understand฀how฀to฀both฀
work฀with฀the฀federal฀government฀and฀serve฀the฀senior฀citizen฀customer.฀While฀Medicare฀is฀a฀large฀growth฀
opportunity฀in฀2005,฀ we฀think฀the฀biggest฀ opportunities฀lie฀in฀2006฀ and฀2007,฀when฀the฀ program’s฀new฀
regional฀PPOs฀and฀prescription฀drug฀plans฀(PDPs)฀are฀in฀effect.฀We’ve฀built฀into฀our฀2005฀financials฀the฀cost฀
to฀prepare฀for฀our฀expanded฀programs฀in฀2006.
PPOs,฀ favored฀ by฀ many฀ consumers,฀ offer฀ an฀ especially฀ large฀ opportunity฀ for฀ Humana,฀ both฀ in฀ terms฀ of฀
expanding฀our฀local฀Medicare฀PPOs฀and฀participating฀in฀regional฀PPOs฀in฀2006฀and฀beyond.฀
฀
Commercial฀portfolio฀migration
In฀the฀commercial฀business,฀the฀key฀story฀is฀also฀one฀of฀growth.฀2004฀was฀a฀pivotal฀year฀in฀our฀commercial฀
business฀as฀we฀exited฀unprofitable฀business฀and฀pursued฀our฀strategy฀of฀growing฀revenues฀only฀when฀we฀can฀
show฀commensurate฀improvements฀in฀profitability.฀฀Larger-group฀fully฀insured฀accounts฀often฀require฀carriers฀
to฀accept฀“slice”฀business,฀an฀area฀that฀will฀not฀be฀a฀primary฀focus฀for฀our฀growth.฀We฀intend฀instead฀to฀direct฀
our฀larger-group฀efforts฀toward฀maximizing฀growth฀in฀full-replacement฀ASO฀accounts.฀We฀also฀expect฀our฀
individual฀insured฀products฀to฀continue฀to฀achieve฀substantial฀growth.฀
Where฀ we฀ see฀ more฀ opportunity฀ for฀ full-replacement,฀ fully฀ insured฀ growth฀ is฀ in฀ our฀ small-฀ to฀ mid-sized฀
business.฀ ฀ We฀ believe฀ there฀ is฀ still฀ an฀ unmet฀ need฀ in฀ the฀ marketplace฀ and฀ anticipate฀ that฀ a฀ far฀ greater฀
percentage฀of฀our฀future฀commercial฀portfolio฀will฀consist฀of฀members฀in฀this฀segment.฀฀The฀feedback฀from฀
the฀brokerage฀community฀related฀to฀SmartExpress฀has฀been฀excellent฀and฀we฀anticipate฀growing฀adoption฀
once฀the฀progressive฀market฀rollout฀is฀completed฀in฀the฀first฀half฀of฀2005.
Also,฀our฀higher-margin฀SmartSuite฀and฀SmartSelect฀products฀for฀larger฀employers฀will฀continue฀to฀grow฀and฀
contribute฀to฀the฀bottom฀line.฀We฀see฀these฀products฀as฀being฀very฀appealing฀in฀the฀300฀to฀3,000฀employee฀
market.฀While฀Smart฀products฀remain฀a฀relatively฀small฀part฀of฀our฀overall฀commercial฀portfolio,฀they฀continue฀
to฀gain฀traction.฀These฀products฀have฀proven฀their฀ability฀to฀reduce฀trend฀for฀employers฀to฀mid-single-digits฀
and฀have฀an฀excellent฀reputation฀in฀the฀market.฀฀
As฀noted฀above,฀recently฀we’ve฀seen฀some฀mitigation฀in฀aggressive฀pricing฀by฀our฀competitors.฀฀While฀it’s฀too฀
early฀to฀call฀this฀a฀trend,฀we฀think฀it฀indicates฀that฀rational฀pricing฀will฀return฀to฀our฀markets฀sooner฀rather฀
than฀later.฀฀We฀believe฀this฀will฀have฀the฀most฀noticeable฀impact฀on฀our฀Smart฀products.฀฀When฀competitors฀
are฀not฀pricing฀overly฀aggressively,฀the฀“consultative฀sale”฀associated฀with฀this฀non-commodity,฀long-term฀
solution฀brings฀its฀differentiating฀aspects฀into฀focus,฀and฀is฀more฀likely฀to฀result฀in฀a฀successful฀close.฀฀
Expanding฀an฀already฀robust฀presence
In฀ 2005,฀ we฀ expect฀ to฀ use฀ our฀ product฀ mix฀ diversification฀ to฀ expand฀ our฀ medical฀ provider฀ network฀ and฀
create฀new฀ growth฀opportunities.฀฀While฀we฀believe฀that฀this฀industry฀will฀continue฀to฀consolidate,฀large฀
mergers฀have฀a฀mixed฀history฀relative฀to฀execution฀and,฀ultimately,฀shareholder฀value.฀For฀Humana,฀targeted฀
acquisitions฀that฀enhance฀geographic฀and฀product฀strength฀are฀likely฀areas฀of฀focus฀going฀forward.฀Last฀year’s฀
Ochsner฀acquisition,฀which฀was฀very฀successful฀and฀very฀smoothly฀integrated,฀reestablished฀us฀in฀the฀industry฀
as฀an฀excellent฀partner฀for฀quality฀niche฀companies฀looking฀for฀a฀home.฀The฀CarePlus฀acquisition฀looks฀to฀be฀
the฀same,฀and฀enabled฀us฀to฀significantly฀raise฀earnings฀guidance฀when฀it฀closed฀on฀February฀16,฀2005.฀As฀
always,฀we’ll฀be฀alert฀to฀similar฀opportunities฀that฀can฀be฀accomplished฀at฀the฀right฀price.฀฀
Importantly,฀there฀are฀other฀ways฀in฀addition฀to฀acquisition฀to฀expand฀our฀market฀footprint.฀While฀Humana฀
is฀often฀viewed฀as฀a฀super-regional฀firm,฀we฀actually฀have฀geographic฀coverage฀as฀extensive฀as฀some฀of฀the฀
largest฀ participants฀ in฀ the฀ industry,฀ and฀ we฀ compete฀ with฀ them฀ in฀ multiple฀ markets.฀ In฀ addition฀ to฀ fill-in฀
geographic฀acquisitions,฀such฀as฀Ochsner,฀we฀are฀using฀our฀product฀leadership฀in฀markets฀to฀help฀expand฀our฀
geographic฀footprint.฀We฀believe฀that฀there฀are฀certain฀niches฀where฀we฀can฀increase฀our฀geographic฀scope฀
based฀on฀providing฀innovative฀products฀that฀may฀not฀be฀otherwise฀available.฀We฀expect฀our฀footprint฀to฀grow฀
as฀providers฀see฀the฀benefit฀of฀facilitating฀Humana’s฀competitiveness฀in฀their฀markets.