Humana 2005 Annual Report Download - page 73

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REPORTING ENTITY
Nature of Operations
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health
benefits companies, based on our 2005 revenues of $14.4 billion. References throughout this document to “we,”
“us,” “our,” “Company,” and “Humana,” mean Humana Inc. and its subsidiaries. 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. We derived approximately 51% of our premiums and
administrative services fees from contracts with the federal government in 2005. Under a federal government
contract with the Department of Defense, we provide health insurance coverage to TRICARE members,
accounting for approximately 17% of our total premiums and administrative services fees in 2005. Under our
federal government contracts with the Centers for Medicare and Medicaid Services, or CMS, we provide health
insurance coverage for Medicare Advantage members in Florida, accounting for approximately 20% of our total
premiums and administrative services fees in 2005.
We manage our business with two segments: Government and Commercial. The Government segment
consists of members enrolled in government-sponsored programs, and includes three lines of business: Medicare
Advantage, TRICARE, and Medicaid. 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. We identified our segments in accordance with the
aggregation provisions of SFAS 131, which is consistent with information used by our Chief Executive Officer in
managing our business. The segment information aggregates products with similar economic characteristics.
These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.
The accounting policies of each segment are the same and are described in Note 2. The results of each
segment are measured by income before income taxes. We allocate all selling, general and administrative
expenses, investment and other income, interest expense, and goodwill, but no other assets or liabilities, to our
segments. Members served by our two segments often utilize the same medical provider networks, enabling us to
obtain more favorable contract terms with providers. Our segments also share overhead costs and assets. As a
result, the profitability of each segment is interdependent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America. Our consolidated financial statements include the accounts of
Humana Inc., and subsidiaries that the Company controls. All significant intercompany balances and transactions
have been eliminated.
The preparation of financial statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. The areas involving the most significant use of estimates are the estimation of medical
expenses payable, the impact of risk sharing provisions related to our TRICARE and Medicare contracts, the
valuation and related impairment recognition of investment securities, and the valuation and related impairment
recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events
and anticipated future events, and accordingly, actual results may ultimately differ materially from those
estimates.
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