Humana 2006 Annual Report Download - page 49

increase in Medicare Advantage members since December 31, 2005. At December 31, 2006, approximately 47%
of the company’s Medicare Advantage members were in PFFS plans versus 22% at December 31, 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 of 2006 partially offset
by eligible Puerto Rico Medicaid members choosing to move into the Medicare program.
Commercial segment premium revenues decreased 5.3% to $6.1 billion for 2006 compared to $6.5 billion
for 2005. Lower premium revenues primarily resulted from a reduction of fully insured membership. Our fully
insured membership decreased 12.3%, or 245,600 members, to 1,754,200 at December 31, 2006 compared to
1,999,800 at December 31, 2005 primarily as a result of continued attrition within the fully insured group
accounts, partially offset by membership gains from the CHA acquisition, and membership increases in the
individual and consumer-choice product lines. Attrition in the fully insured group accounts results from a
competitive pricing environment. Average per member premiums for our fully insured group medical members
increased approximately 5.7% from 2005 to 2006. The average per member premium increase reflects a shift in
the mix in our fully insured group membership from large groups to individuals and small groups as large groups
continue to move to an administrative services only offering. Average per member premiums are lower for
individuals and small groups than large groups.
Administrative Services Fees
Our administrative services fees for 2006 were $341.2 million, an increase of $81.8 million, or 31.5%, from
$259.4 million for 2005. The increase was due to increases in our Commercial segment administrative services
fees.
For the Commercial segment, administrative services fees increased $82.4 million, or 39.4%, from $209.4
million for 2005 to $291.8 million for 2006. This increase resulted from increased membership. ASO
membership of 1,171,000 members at December 31, 2005 increased 30.6% to 1,529,600 at December 31, 2006.
Average per member fees increased approximately 19% in 2006. ASO fees from our Commercial segment
represent 86% of total ASO fees.
Investment Income
Investment income totaled $291.9 million for 2006, an increase of $148.9 million from $143.0 million for
2005. The increase in investment income for 2006 primarily resulted from higher venture capital gains, and
higher average invested balances and interest rates. Investment income for 2006 includes $75.7 million in net
realized gains related to venture capital investments compared to $5.7 million in 2005.
Other Revenue
Other revenue totaled $54.3 million for 2006, an increase of $40.2 million from $14.1 million for 2005. The
increase primarily was attributable to revenue from our new in-house mail order pharmacy operations in 2006.
Medical Expense
Consolidated medical expense was $17.4 billion for 2006, an increase of $5.7 billion, or 48.7%, from $11.7
billion for 2005. The increase was primarily driven by the increase in the number of members, particularly higher
cost Medicare members, and an increase in average per member claims costs primarily from the effects of health
care inflation.
The consolidated MER for 2006 was 84.0%, an 80 basis point increase from 83.2% for 2005. Higher
medical expenses from Hurricane Katrina increased the 2005 MER 20 basis points. An improvement in the
Commercial segment MER was more than offset by a higher Government segment MER impacted by the new
Medicare stand-alone PDP offerings.
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