Humana 2005 Annual Report Download - page 87

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2003, claim reserve balances at December 31, 2002 ultimately settled during 2003 for $76.1 million
less than the amounts originally estimated, representing 0.8% of medical claim expenses recorded in 2002. The
$17.4 million change in the amounts incurred related to prior years for 2004 as compared to 2003 resulted
primarily from favorable development in our Medicare line of business as a result of less than expected
utilization in the latter half of 2003.
Our TRICARE contract contains risk-sharing provisions with the Department of Defense and with
subcontractors, which effectively limit profits and losses when actual claim experience varies from the targeted
medical claim amount negotiated annually. As a result of these contract provisions, the impact of changes in
estimates for prior year TRICARE medical claims payable on our results of operations is reduced substantially,
whether positive or negative.
We have 52% of our Medicare membership and 97% of our Medicaid membership under risk-sharing
arrangements with providers. Accordingly, the impact of changes in estimates for prior year medical claims
payable on our results from operations that are attributable to our Medicare and Medicaid lines of business may
also be significantly reduced, whether positive or negative.
8. INCOME TAXES
The provision for income taxes consisted of the following for the years ended December 31, 2005, 2004 and
2003:
2005 2004 2003
(in thousands)
Current provision:
Federal ................................. $133,404 $ 77,768 $ 69,643
States and Puerto Rico ..................... 18,189 4,462 13,888
Total current provision ................. 151,593 82,230 83,531
Deferred (benefit) provision ..................... (38,362) 53,608 32,251
Provision for income taxes .............. $113,231 $135,838 $115,782
The provision for income taxes was different from the amount computed using the federal statutory rate for
the years ended December 31, 2005, 2004 and 2003 due to the following:
2005 2004 2003
(in thousands)
Income tax provision at federal statutory rate ....... $147,600 $145,547 $120,650
States, net of federal benefit and Puerto Rico ....... 13,658 14,003 13,365
Tax exempt investment income .................. (11,917) (12,700) (10,546)
Capital loss valuation allowance ................. (5,198) (6,855) (9,492)
Contingent tax benefits ......................... (27,365) (6,409) —
Examination settlements ....................... (3,518) — —
Other, net ................................... (29) 2,252 1,805
Provision for income taxes .................. $113,231 $135,838 $115,782
The $27.4 million reduction in 2005 tax expense primarily related to the recognition of a $22.8 million
contingent tax benefit and associated $3.1 million reversal of accrued interest resulting from the resolution of an
uncertain tax position associated with the 2000 tax year during the first quarter of 2005 in connection with the
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