Humana 2005 Annual Report Download - page 44

the 89,000 member account, commercial medical membership declined 45,300 members, or 1.4%, since
December 31, 2004, primarily due to continued competitive pricing pressures in the small to mid-market
group account partially offset by an increase in ASO membership of 152,400 members.
• We reached an agreement with representatives of more than 700,000 physicians to settle a nationwide
class action suit, subject to court approval. This agreement is more fully-described below and under
“Legal Proceedings” in Note 14 to the consolidated financial statements included in Item 8.—Financial
Statements and Supplementary Data.
• Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of
Hurricane Katrina in August 2005 as more fully-described below.
• The resolution of a contingent tax gain during the first quarter of 2005 contributed to the lower effective
tax rate of 26.9% during 2005 compared to 32.7% during 2004 as more fully-described in Note 8 to the
consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.
• Cash flows from operations increased 79.9% or $277.8 million to $625.6 in 2005 million compared to
$347.8 million in 2004.
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.
Settlement of Class Action Litigation
On October 17, 2005, we reached an agreement with representatives of more than 700,000 physicians to
settle a nationwide class action suit, subject to court approval. In connection with the settlement and other related
litigation costs, we recorded pretax administrative expenses of $71.9 million ($44.8 million after taxes, or $0.27
per diluted common share) in the third quarter of 2005. Of the $71.9 million, $33.4 million is included in the
Government segment results and the remaining $38.5 million is included in the Commercial segment results. The
settlement is more fully-described under “Legal Proceedings” in Note 14 to the consolidated financial statements
included in Item 8.—Financial Statements and Supplementary Data.
Hurricane Katrina
Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of
Hurricane Katrina in August 2005. Expenses related to Hurricane Katrina primarily stem from our efforts, in
cooperation with Departments of Insurance in the affected states, to help our members by offering participating-
provider benefits at non-participating providers’ rates, paying claims for members who were unable at the time to
meet their premium obligations and similar measures. In connection with Hurricane Katrina, we recorded pretax
medical and administrative expenses of $27.0 million ($16.9 million after taxes, or $0.10 per diluted common
share) during the third and fourth quarters of 2005. Of the $27.0 million, $5.9 million is included in the
Government segment results and the remaining $21.1 million is included in the Commercial segment results. We
do not anticipate any significant additional costs for Hurricane Katrina related items in 2006.
Recent Acquisitions
In January 2006, our Commercial segment reached an agreement to acquire CHA Service Company, or
CHA Health, for cash consideration of approximately $60.0 million plus any excess statutory surplus. The
acquisition of CHA Health, a Kentucky health plan, is expected to add approximately 96,800 members to our
Commercial segment medical membership. This transaction, which is subject to regulatory approval, is expected
to close effective in the second quarter of 2006.
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