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2Annual Report 2006 1
A
nnual Report 2006
Clinical
Programs and
Forecasting
Financial
Analysis and
Forecasting
Product
Design
Consumer
Education
Integrating ideas and tools for better solutions
Humana
Guidance Solution

Table of contents

  • Page 1
    Annual Report 2006 Integrating ideas and tools for better solutions Humana Guidance Solution Product Design Clinical Programs and Forecasting Financial Analysis and Forecasting Consumer Education 2Annual Report 2006 1

  • Page 2
    ... Guidance Solution Consumer Education Financial Analysis and Forecasting • Clinical solutions that offer guidance for all stages of life • Financial tools that enable greater cost control • Consumer education resources designed to lead to member confidence and success 2 Annual Report...

  • Page 3
    ...340,300 652,200 2,992,500 6,647,100 Risk Mix Progression Commercial Segment Fully Insured Administrative Services Only Total Commercial Medical Membership 53% 47% 100% 63% 37% 100% 69% 31% 100% 77% 23% 100% 78% 22% 100% Specialty Membership Dental Other Total Specialty Membership 1,452,000 450,800...

  • Page 4
    ... from a regional competitor to a national leader, now active in all 50 states, with a strong, well-respected brand. How did we achieve this success? • We established Humana as one of the top two competitors in the new Medicare Prescription Drug Plan (PDP) arena, vastly exceeding our membership...

  • Page 5
    ... to establish ourselves as the thought leader in Medicare, and therefore executed an early, aggressive national media strategy, positioning Humana as the "go-to" company on questions of plan design, senior preferences and public policy. Leadership in Health Benefits Beyond pacesetting growth, an...

  • Page 6
    ... nation are saving billions of dollars in drug costs, and the program is costing the government less than anticipated - about $113 billion less over the next ten years, according to a recent report by actuaries from the Centers for Medicare and Medicaid Services. As we entered the 2007 PDP selling...

  • Page 7
    ... and coming-to-market transparency tools, a Towers Perrin health care consultant recently remarked that Humana is "eons ahead of the competition." Commercial Medical Membership December 31 2006 Portfolio Individual & Small Group Other Fully Insured ASO Our leadership in consumerism is enabling...

  • Page 8
    ... tracks the health services members used, what those services cost and what members could do to save money in the future for all benefits covered by the plan. Leveraging Medicare success to enhance Commercial growth. As we have secured new physician and hospital network arrangements for...

  • Page 9
    ...of data. Health plans are at the center of the health system's dataï¬,ow. While protecting members' privacy, we are uniquely able to aggregate, analyze and draw insights from data that is sent to us from every point in the system - hospitals, pharmacies, laboratories, doctors and specialty providers...

  • Page 10
    ...use technology to enable new products and services, providing guidance and total solutions for employers and consumers. We engage in research and development to foster constant innovation, unexcelled service and positive consumer behavior change. Our board of directors is a focused, independent team...

  • Page 11
    ... Transplant Management Utilization Management Concurrent Review Case Management HumanaBeginnings HumanaFirst Humana Health Assessment Personal Nurse MyHumana personal Web page Maximize Your Benefit Predictive modeling Pharmacy Rx Mentor Team SM ® ® SM Product design Traditional plans Real-time...

  • Page 12
    ...cer - Humana Inc. James J. O'Brien Chairman of the Board and Chief Executive Officer - Ashland Inc. W. Ann Reynolds, Ph.D. Former President - University of Alabama, Birmingham; Former Chancellor - City University of New York and California State University System James O. Robbins Retired President...

  • Page 13
    ... as specified in its charter) HUMANA INC. Delaware (State of incorporation) 61-0647538 (I.R.S. Employer Identification Number) 500 West Main Street Louisville, Kentucky (Address of principal executive offices) 40202 (Zip Code) Registrant's telephone number, including area code: (502) 580-1000...

  • Page 14
    ... Part III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Part...

  • Page 15
    ...in government-sponsored programs, and includes three lines of business: Medicare, TRICARE, and Medicaid. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes two lines of business: medical (fully and self insured) and specialty. We...

  • Page 16
    ... for Part A and Part B coverage under traditional Medicare are still required to pay out-of-pocket deductibles and coinsurance. Prescription drug benefits are provided under Part D. CMS, an agency of the United States Department of Health and Human Services, administers the Medicare program. 4

  • Page 17
    ..., tools to guide members in their health care decisions, disease management programs, wellness and prevention programs, and a reduced monthly Part B premium. Since 2006, Medicare beneficiaries have had more health plan options, including a prescription drug benefit option and greater access to a PPO...

  • Page 18
    ... qualified bidders who apply for entry to the program. In either case, the contractual relationship with a state generally is for a one-year period. Under these contracts, we receive a fixed monthly payment from a government agency for which we are required to provide health insurance coverage to 6

  • Page 19
    ... indemnity option, participants may enroll in an HMO-like plan with a point-of-service option or take advantage of reduced copayments by using a network of preferred providers, similar to a PPO. We have participated in the TRICARE program since 1996 under contracts with the United States Department...

  • Page 20
    .... Generally, the member's primary care physician must approve access to certain specialty physicians and other health care providers. These other health care providers include, among others, hospitals, nursing homes, home health agencies, pharmacies, mental health and substance abuse centers...

  • Page 21
    ..., or 17.4% of our total premiums and ASO fees. ASO In addition to fully insured consumer-choice, HMO and PPO products, we also offer ASO products to employers who self-insure their employee health plans. We receive fees to provide administrative services which generally include the processing of...

  • Page 22
    ... our total medical membership at December 31, 2006, by market and product: Government Commercial Medicare Stand-alone PDP Medicaid TRICARE PPO HMO ASO (in thousands) Medicare Advantage Total Percent of Total Florida ...Texas ...Kentucky ...Illinois ...Ohio ...Puerto Rico ...Wisconsin ...Missouri...

  • Page 23
    ... underwriting profitability and is computed by taking total medical expenses as a percentage of premium revenues. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers...

  • Page 24
    ... Segment Medicare Medicare Stand-alone TRICARE Total Fully Total Total Advantage PDP TRICARE ASO Medicaid Segment Insured ASO Segment Medical Medical Membership: December 31, 2006 Capitated HMO hospital system based ...29,800 - - - - 29,800 33,600 - 33,600 63,400 Capitated HMO physician group based...

  • Page 25
    ... all of our commercial HMO markets except Puerto Rico and in select PPO markets. AAHC/URAC performs reviews for utilization management standards and for health plan and health network standards in quality management, credentialing, rights and responsibilities, and network management. We continue to...

  • Page 26
    ... market and include other managed care companies, national insurance companies, and other HMOs and PPOs, including HMOs and PPOs owned by Blue Cross/Blue Shield plans. Many of our competitors have larger memberships and/or greater financial resources than our health plans in the markets in which...

  • Page 27
    ... We provide centralized management services to each of our health plans and both of our business segments from our headquarters and service centers. These services include management information systems, product development and administration, finance, human resources, accounting, law, public...

  • Page 28
    ... include claims payments, capitation payments, and various other costs incurred to provide health insurance coverage to our members. These costs also include estimates of future payments to hospitals and others for medical care provided to our members. Generally, premiums in the health care business...

  • Page 29
    ... Drug Coverage and Medicare Advantage Health Plan with Prescription Drug Coverage in addition to our other product offerings. We have been approved to offer the Medicare prescription drug plan in 50 states as well as Puerto Rico and the District of Columbia. The growth in our Medicare membership...

  • Page 30
    ... a quality e-business organization by enhancing interactions with customers, brokers, agents, and other stakeholders through web-enabling technology. Our strategy includes sales and distribution of health benefit products through the Internet, and implementation of advanced self-service capabilities...

  • Page 31
    ...business activities; provider disputes over compensation and termination of provider contracts; disputes related to ASO business, including actions alleging claim administration errors; claims related to the failure to disclose some business practices; claims relating to customer audits and contract...

  • Page 32
    ... on our business; at December 31, 2006, under our contracts with the Puerto Rico Health Insurance Administration, we provided health insurance coverage to approximately 523,100 Medicaid members in Puerto Rico. These contracts accounted for approximately 2% of our total premiums and ASO fees for the...

  • Page 33
    ... our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums...

  • Page 34
    ... care industry in general, and health insurance, particularly HMOs and PPOs are subject to substantial federal and state government regulation. Our licensed subsidiaries are subject to regulation under state insurance holding company and Puerto Rico regulations. These regulations generally require...

  • Page 35
    ... Puerto Rico) in which we operate our HMOs, PPOs and other health insurance-related services regulate our operations, including the scope of benefits, rate formulas, delivery systems, utilization review procedures, quality assurance, complaint systems, enrollment requirements, claim payments...

  • Page 36
    ... insurance access and affordability; e-connectivity; universal health coverage; disclosure of provider fee schedules and other data about payments to providers, sometimes called transparency; disclosure of provider quality information; and formation of regional/national association health plans...

  • Page 37
    ... payments, or take other actions that could result in higher health care costs for us, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician specialty groups, physician...

  • Page 38
    ..., 500 West Main Street, Louisville, Kentucky 40202. In addition to this property, our other principal operating facilities are located in Louisville, Kentucky, Green Bay, Wisconsin, Tampa Bay, Florida, Cincinnati, Ohio and San Juan, Puerto Rico, all of which are used for customer service, enrollment...

  • Page 39
    ... obligations to providers, members, and others, including failure to properly pay claims, challenges to our implementation of the new Medicare prescription drug program and other litigation. Personal injury claims and claims for extracontractual damages arising from medical benefit denials...

  • Page 40
    ... pay dividends, and we currently plan to retain our earnings for future operations and growth of our businesses. d) Equity Compensation Plan The information required by this part of Item 5 is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled...

  • Page 41
    ... the our common stock to the Standard & Poor's Composite 500 Index ("S&P 500") and the Morgan Stanley Health Care Payer Index ("Peer Group") for the five years ended December 31, 2006. The graph assumes an investment of $100 in each of our common stock, the S&P 500, and the Peer Group on December 31...

  • Page 42
    ...PDP ...Total Medicare ...TRICARE ...TRICARE ASO ...Total TRICARE ...Medicaid ...Medicaid ASO ...Total Medicaid ...Total Government ...Commercial: Fully insured ...Administrative services only ...Total Commercial ...Total medical membership ...Commercial Specialty Membership: Dental ...Other ...Total...

  • Page 43
    ...in government-sponsored programs, and includes three lines of business: Medicare, TRICARE, and Medicaid. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes two lines of business: medical (fully and self insured) and specialty. We...

  • Page 44
    ... a decline in our fully insured group membership. ASO membership at December 31, 2006 was up 31% from December 31, 2005. Individual membership increased 15% and consumer-choice membership increased 13% during 2006. These three areas, together with our small group business, now represent more than 84...

  • Page 45
    ... paid in January 2007. This acquisition strengthens our position in the Kentucky market. The acquisition of CHA Health added approximately 60,100 fully insured group members and 28,300 ASO members to our Commercial segment medical membership. This transaction did not have a material impact on...

  • Page 46
    ... enhances our Medicare market position in South Florida. On April 1, 2004, we acquired Ochsner Health Plan, or Ochsner, from the Ochsner Clinic Foundation for $157.1 million in cash. Ochsner, a Louisiana health plan, added approximately 152,600 commercial medical members, primarily in fully insured...

  • Page 47
    ... stand-alone PDP ...Total Medicare ...TRICARE ...Medicaid ...Total Government ...Fully insured ...Specialty ...Total Commercial ...Total ...Administrative services fees: Government ...Commercial ...Total ...Income before income taxes(a): Government ...Commercial ...Total ...Medical expense ratios...

  • Page 48
    ... medical members: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...TRICARE ...TRICARE ASO ...Total TRICARE ...Medicaid ...Medicaid ASO ...Total Medicaid ...Total Government ...Commercial segment medical members: Fully insured ...ASO ...Total Commercial ...Total medical membership...

  • Page 49
    ...2005. Additionally, our new Medicare stand-alone PDP products added 3,536,600 members and $3.1 billion in new premium revenues during 2006. Medicaid membership increased 111,200 members from December 31, 2005 due primarily to the award of a new Puerto Rico regional ASO contract in the fourth quarter...

  • Page 50
    ... the 2005 MER 30 basis points. The decrease in MER primarily reflects improving medical cost utilization trends and an increase in the percentage of individual and small group members comprising our total fully insured block. Individual and smaller group accounts generally carry a lower MER than...

  • Page 51
    ... from an increase in the percentage of small group members comprising our total fully insured membership as well as the continued shift in the mix of membership towards ASO. At December 31, 2005, 37% of our Commercial segment medical membership related to ASO business compared to 47% at December 31...

  • Page 52
    ... Percentage Premium revenues: Medicare Advantage ...TRICARE ...Medicaid ...Total Government ...Fully insured ...Specialty ...Total Commercial ...Total ...Administrative services fees: Government ...Commercial ...Total ...Income before income taxes(a): Government ...Commercial ...Total ...Medical...

  • Page 53
    ... primarily to the South Florida CarePlus acquisition. TRICARE premium revenues increased 13.2% in 2005, reflecting the transition to the new South Region contract during 2004 which included a temporary loss of approximately 1 million members for 4 months in 2004. Medicaid membership declined by 20...

  • Page 54
    ... the fully insured group accounts, partially offset by membership gains in the individual and consumer-choice product lines. Average per member premiums for our fully insured group medical members increased approximately 7.4% in 2005. Administrative Services Fees Our administrative services fees for...

  • Page 55
    ... associated with transitioning to the TRICARE South Region contract in 2004. During 2005, the number of employees increased 5,000 to 18,700 at December 31, 2005, primarily in the sales and customer service functions associated with the growth in the Medicare business, as well as approximately 1,200...

  • Page 56
    ..., capital expenditures, acquisitions, and payments on borrowings. Because premiums generally are collected in advance of claim payments by a period of up to several months in many instances, our business should normally produce positive cash flows during a period of increasing enrollment. Conversely...

  • Page 57
    ... drivers of changes in our working capital are typically the timing of receipts for premiums and ASO fees and payments of medical expenses. We illustrate these changes with the following summary of receivables and medical and other expenses payable. The detail of total net receivables was as follows...

  • Page 58
    ... (1) growth in Medicare membership, (2) medical claims inflation, (3) the transition to the new South region contract, (4) an increase in the TRICARE payable resulting from an increase in claims inventory at our third party claims processing vendor as discussed under the total net receivables table...

  • Page 59
    ... our service centers in Jacksonville and San Antonio, including the sale of the Jacksonville office tower in 2004 for $14.8 million. Cash Flow from Financing Activities During 2006, we issued $500 million of 6.45% senior notes due June 1, 2016. Our net proceeds, reduced for the discount and cost of...

  • Page 60
    ...to 80 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 10 basis points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization fee of 10 basis points is payable for any day in which borrowings...

  • Page 61
    ... is provided before paying a dividend even if approval is not required. As of December 31, 2006, we maintained aggregate statutory capital and surplus of $2,066.0 million in our state regulated subsidiaries. Each of these subsidiaries was in compliance with applicable statutory requirements which...

  • Page 62
    ... subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered...

  • Page 63
    ... health care costs associated with these programs could have a material adverse effect on our business. Our Medicaid business, which accounted for approximately 3% of our total premiums and ASO fees for the year ended December 31, 2006, consisted of contracts in Puerto Rico and Florida. Our Medicaid...

  • Page 64
    ... overall financial position. Accordingly, it represents a critical accounting estimate. Most medical claims are paid within a few months of the member receiving service from a physician or other health care provider. As a result, these liabilities generally are described as having a "short-tail". As...

  • Page 65
    ... advertising for prescription drugs and medical services, an aging population, catastrophes, and epidemics also may impact medical cost trends. Internal factors such as system conversions, claims processing cycle times, changes in medical management practices and changes in provider contracts also...

  • Page 66
    ... claim overpayment recovery levels versus our historical overpayment recovery rate. In our TRICARE line of business, both our trend factor and completion factor assumptions ultimately developed favorable versus our original estimate primarily due to the utilization of hospital and physician services...

  • Page 67
    .... The payments we receive monthly from CMS and members, which are determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We recognize premium revenues for providing this insurance coverage ratably over the term of our annual contract. Our CMS payment is...

  • Page 68
    ...The capitation amount represents a fixed monthly amount per member to provide prescription drug coverage in the catastrophic layer. We chose the demonstration payment option for all of our enhanced benefit plans. This capitation amount, derived from our annual bid submissions, is recorded as premium...

  • Page 69
    ...TRICARE revenues consist generally of (1) an insurance premium for assuming underwriting risk for the cost of civilian health care services delivered to eligible beneficiaries; (2) health care services provided to beneficiaries which are in turn reimbursed by the federal government; and (3) ASO fees...

  • Page 70
    ... of valuation methodologies where an observable quoted market price does not exist. Such methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying...

  • Page 71
    ... to a market-based weighted-average cost of capital. Key assumptions, including changes in membership, premium yields, medical cost trends and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. If these assumptions...

  • Page 72
    ...by both our debt position and the short-term duration of the fixed income investment portfolio. We evaluated the impact on our investment income and debt expense resulting from a hypothetical change in interest rates of 100, 200 and 300 basis points over the next twelve-month period, as reflected in...

  • Page 73
    ......Current portion of long-term debt ...Total current liabilities ...Long-term debt ...Other long-term liabilities ...Total liabilities ...Commitments and contingencies Stockholders' equity: Preferred stock, $1 par; 10,000,000 shares authorized; none issued ...Common stock, $0.16 2⁄ 3 par; 300,000...

  • Page 74
    Humana Inc. CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 2006 2005 2004 (in thousands, except per share results) Revenues: Premiums ...Administrative services fees ...Investment income ...Other revenue ...Total revenues ...Operating expenses: Medical ...Selling, general and ...

  • Page 75
    ... Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Issued Shares Amount Capital In Excess of Par Value Accumulated Other Total Retained Comprehensive Treasury Stockholders' Earnings Income (Loss) Stock Equity (in thousands) Balances, January 1, 2004 ...173,909 $28,984 $1,102,057...

  • Page 76
    ...senior notes ...Debt issue costs ...Change in book overdraft ...Change in securities lending payable ...Common stock repurchases ...Tax benefit from stock-based compensation ...Proceeds from stock option exercises and other ...Net cash provided by (used in) financing activities ...Increase (decrease...

  • Page 77
    ... for administering the Medicare program. Under a federal government contract with the Department of Defense, we provide health insurance coverage to TRICARE members, accounting for approximately 12% of our total premiums and administrative services fees in 2006. We manage our business with two...

  • Page 78
    ... of valuation methodologies where an observable quoted market price does not exist. Such methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying...

  • Page 79
    ... one-year commercial membership contracts with employer groups, subject to cancellation by the employer group on 30-day written notice. Our TRICARE contract with the federal government and our contracts with various state Medicaid programs generally are multi-year contracts subject to annual renewal...

  • Page 80
    ...provider networks and clinical programs, and responding to customer service inquiries from members of self-funded groups. Under ASO contracts, self-funded employers retain the risk of financing substantially all of the cost of health benefits. However, most ASO customers purchase stop loss insurance...

  • Page 81
    ... costs related to our employer-group prepaid health services policies as incurred in accordance with the Health Care Organization Audit and Accounting Guide. These short-duration employer-group prepaid health services policies typically have a one-year term and may be cancelled upon 30 days notice...

  • Page 82
    ... for medical care provided prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to primary care physicians and other providers who are responsible for providing medical care to members. Pharmacy costs represent payments for members' prescription drug...

  • Page 83
    ... using the Black-Scholes option-pricing model. In addition, we report certain tax effects of stock-based compensation as a financing activity rather than an operating activity in the consolidated statement of cash flows. Additional detail regarding our stock-based compensation plans is included in...

  • Page 84
    ...157 will have a material impact on our financial position or results of operations. 3. ACQUISITIONS On May 1, 2006, our Commercial segment acquired CHA Service Company, or CHA Health, a health plan serving employer groups in Kentucky, for cash consideration of $67.5 million, including a $1.7 million...

  • Page 85
    Humana Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) On April 1, 2004, we acquired Ochsner Health Plan, or Ochsner, from the Ochsner Clinic Foundation for $157.1 million in cash. During 2006, we paid $5.8 million in contingent purchase price settlements related to the Corphealth, ...

  • Page 86
    ...preferred stocks ...724 Common stocks ...861 Equity securities ...1,585 Long-term investment securities ...$413,237 $ 63 90 120 116 4,750 5,139 - - - $5,139 $(1,789) (1,140) (265) (304) - (3,498) (1) - (1) $(3,499) 2005 Gross Gross Fair Amortized Unrealized Unrealized Fair Value Cost...-term investment...

  • Page 87
    ......Tax exempt municipal securities ...Corporate and other securities ...Mortgage-backed securities ...Redeemable preferred stocks ...Debt securities ...Non-redeemable preferred stocks ...Total investment securities ... Less than 12 months Fair Unrealized Value Losses $ 611,683 470,477 248,016 51,921...

  • Page 88
    ... prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. Other current assets and trade accounts...software more fully described below. Accelerated Depreciation in 2004 After finalizing plans during the third quarter of 2004 to abandon some enrollment software...

  • Page 89
    ... sheets at December 31, 2006 and 2005: Weighted Average Life 2006 Accumulated Amortization 2005 Accumulated Amortization Cost Net Cost (in thousands) Net Other intangible assets: Subscriber contracts ...10.2 yrs $114,944 Provider contracts ...14.5 yrs 11,500 Licenses and other ...16.7 yrs 11,602...

  • Page 90
    ... in electronic claims submissions, and (5) an increase in claim overpayment recovery levels versus our historical overpayment recovery rate. The favorable development experienced in our TRICARE line of business primarily was due to the utilization of hospital and physician services during the...

  • Page 91
    ... changes in estimates for prior year TRICARE medical claims payable on our results of operations is reduced substantially, whether positive or negative. Certain of our Medicare Advantage and Medicaid members are also under risk-sharing arrangements with providers. Accordingly, the impact of changes...

  • Page 92
    ... unamortized discount of $86 at December 31, 2005 ...Fair value of interest rate swap agreements ...Deferred gain from interest rate swap exchange ...Total senior notes ...Credit agreement ...Other long-term borrowings ...Total debt ...Less: Current portion of long-term debt ...Total long-term debt...

  • Page 93
    ...to 80 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 10 basis points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization fee of 10 basis points is payable for any day in which borrowings...

  • Page 94
    .... Stock-Based Compensation We have plans under which options to purchase our common stock and restricted stock awards have been granted to executive officers, directors, key employees and consultants. The terms and vesting schedules for stock-based awards vary by type of grant. Generally, the...

  • Page 95
    ... the date of grant. Our stock plans, as approved by the Board of Directors and stockholders, define average market value as the average of the highest and lowest stock prices reported by the New York Stock Exchange on a given date. Exercise provisions vary, but most options vest in whole or in part...

  • Page 96
    ... include executive officers, directors, and all other employees. We value the stock options based on the unique assumptions for each of these employee groups. We calculate the expected term for our employee stock options based on historical employee exercise behavior. The increase in our stock price...

  • Page 97
    Humana Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Restricted Stock Awards Restricted stock awards are granted with a fair value equal to the market price of our common stock on the date of grant. Compensation expense is recorded straight-line over the vesting period, generally three...

  • Page 98
    ... SHARE COMPUTATION Detail supporting the computation of basic and diluted ...results) Net income available for common stockholders ...Weighted average outstanding shares of common stock used to compute basic earnings per common share ...Dilutive effect of: Employee stock options ...Restricted stock...

  • Page 99
    ... is provided before paying a dividend even if approval is not required. As of December 31, 2006, we maintained aggregate statutory capital and surplus of $2,066.0 million in our state regulated subsidiaries. Each of these subsidiaries was in compliance with applicable statutory requirements which...

  • Page 100
    ... subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered...

  • Page 101
    ... health care costs associated with these programs could have a material adverse effect on our business. Our Medicaid business, which accounted for approximately 3% of our total premiums and ASO fees for the year ended December 31, 2006, consisted of contracts in Puerto Rico and Florida. Our Medicaid...

  • Page 102
    ...in government-sponsored programs, and includes three lines of business: Medicare, TRICARE, and Medicaid. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes two lines of business: medical (fully and self insured) and specialty. We...

  • Page 103
    ...2006 Commercial Segment 2005 (in thousands) 2004 Revenues: Premiums: Fully insured: PPO ...HMO ...Total fully insured ...Specialty ...Total premiums ...Administrative services fees ...Investment and other income ...Total revenues ...Operating expenses: Medical ...Selling, general and administrative...

  • Page 104
    ... administrative functions, including premium collections and claim payments, related to these policies has been ceded to a third-party. Coinsurance is a form of reinsurance. We acquired these policies and the related reinsurance agreements with the purchase of the stock of the companies in which the...

  • Page 105
    ...our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal...

  • Page 106
    ... for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions...

  • Page 107
    ..., except per share results) Total revenues ...Income before income taxes ...Net income ...Basic earnings per common share...Payment, or SFAS 123R, on January 1, 2006. We have adjusted prior period amounts to reflect the effect of expensing stock awards under the modified retrospective application...

  • Page 108
    ...such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations. The Audit Committee of the Board of Directors, which is composed solely...

  • Page 109
    ... public accounting firm who also audited the Company's consolidated financial statements included in our Annual Report on Form 10-K, as stated in their report which appears on page 93. Michael B. McCallister President and Chief Executive Officer James H. Bloem Senior Vice President and Chief...

  • Page 110
    .../01(12) (2) (3) (4) (5) (6) (7) (8) Mr. McCallister was elected President, Chief Executive Officer and a member of the Board of Directors in February 2000. Prior to that, Mr. McCallister served as Senior Vice President-Health System Management from January 1998 to February 2000. Mr. McCallister...

  • Page 111
    ...web site www.humana.com and upon a written request addressed to Humana Inc. Corporate Secretary at 500 West Main Street, 27th Floor, Louisville, Kentucky 40202. Any waiver of the application of the Humana Inc. Principles of Business Ethics to directors or executive officers must be made by the Board...

  • Page 112
    ... Code of Ethics for the Chief Executive Officer and Senior Financial Officers will be promptly displayed on our web site. The Company will provide any of these documents in print without charge to any stockholder who makes a written request to: Corporate Secretary, Humana Inc., 500 West Main Street...

  • Page 113
    ...Statement for the Annual Meeting of Stockholders scheduled to be held on April 26, 2007 appearing under the captions "Certain Transactions with Management and Others" and "Independent Directors" of such Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this...

  • Page 114
    ... the holders of such indebtedness not otherwise filed as an Exhibit to the Form 10-K to the Commission upon request. 1989 Stock Option Plan for Non-Employee Directors. Exhibit B to the Company's Proxy Statement covering the Annual Meeting of Stockholders held on January 11, 1990, is incorporated by...

  • Page 115
    ... herein. The Humana Inc. Deferred Compensation Plan for Non-Employee Directors. Exhibit 10(s) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, is incorporated by reference herein. Severance policy. Exhibit 10 to the Company's Quarterly Report on Form 10-Q for...

  • Page 116
    ...with Company officers concerning health insurance availability. Exhibit 10(mm) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, is incorporated by reference herein. Executive Long-Term Disability Program. Exhibit 10(a) to the Company's Quarterly Report on Form...

  • Page 117
    ... Providing for the Operation of a Medicare Advantage Regional Coordinated Care Plan. Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein. Explanatory Note regarding Medicare Prescription Drug Plan Contracts...

  • Page 118
    ... of long-term debt ...Total current liabilities ...Long-term debt ...Notes payable to operating subsidiaries ...Other ...Total liabilities ...Commitments and contingencies Stockholders' equity: Preferred stock, $1 par; 10,000,000 shares authorized; none issued ...Common stock, $0.16 2⁄ 3 par...

  • Page 119
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF OPERATIONS For the year ended December 31, 2006 2005 2004 (in thousands) Revenues: Management fees charged to operating subsidiaries ...Investment income and other income, net ...Expenses: Selling, general and ...

  • Page 120
    ...senior notes ...Debt issue costs ...Change in book overdraft ...Change in securities lending payable ...Common stock repurchases ...Tax benefit from stock-based compensation ...Proceeds from stock option exercises and other ...Net cash provided by (used in) financing activities ...Increase (decrease...

  • Page 121
    ... in the Annual Report on Form 10-K. 2. TRANSACTIONS WITH SUBSIDIARIES Management Fee Through intercompany service agreements approved, if required, by state regulatory authorities, Humana Inc., our parent company, charges a management fee for reimbursement of certain centralized services provided to...

  • Page 122
    ... is provided before paying a dividend even if approval is not required. As of December 31, 2006, we maintained aggregate statutory capital and surplus of $2,066.0 million in our state regulated subsidiaries. Each of these subsidiaries was in compliance with applicable statutory requirements which...

  • Page 123
    Humana Inc. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2006, 2005, and 2004 (in thousands) Additions Charged (Credited) to Charged to Costs and Other Expenses Accounts(1) Balance at Beginning of Period Acquired Balances Deductions or Write-offs Balance at End ...

  • Page 124
    ... to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. HUMANA INC. By: /s/ JAMES H. BLOEM James H. Bloem Senior Vice President and Chief Financial Officer...

  • Page 125
    ... of the Company's Internet site at Humana.com or by writing: Regina C. Nethery Vice President of Investor Relations Humana Inc. Post Office Box 1438 Louisville, Kentucky 40201-1438 Transfer Agent National City Bank Shareholder Services - LOC 5352 Post Office Box 92301 Cleveland, Ohio 44101-4301...

  • Page 126
    12 Annual Report 2006