Humana 2006 Annual Report Download - page 55

attributable to the increase in Medicare Advantage revenues as a percentage of total Government segment
revenues and average per member Medicare Advantage premiums outpacing average per member Medicare
Advantage claim costs.
The Commercial segment’s medical expenses decreased $465.2 million, or 8.0%. This decrease primarily
results from the decrease in fully insured group membership partially offset by the increase in average per
member claims costs. The increase in average per member claims costs for fully insured group members was
approximately 7% to 9% for 2005.
The MER for the Commercial segment of 83.3% in 2005 decreased 60 basis points from the 2004 MER of
83.9%. Higher medical expenses from Hurricane Katrina increased the 2005 MER 30 basis points. After
considering the effect of Hurricane Katrina, the decrease in MER for the 2005 period primarily reflects the
absence of the unprofitable 89,000-member large group account that lapsed on January 1, 2005.
SG&A Expense
Consolidated SG&A expenses increased $301.3 million or 15.9% during 2005 primarily resulting from an
increase in the number of employees due to the Medicare expansion, the class action litigation settlement, and
increased advertising and marketing costs also due to the Medicare expansion. These increases were partially
offset by a decrease in administrative expenses 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 employees added with the CarePlus acquisition.
The consolidated SG&A expense ratio for 2005 was 15.4%, increasing 80 basis points from 14.6% for 2004.
Expenses related to the class action litigation settlement increased the SG&A expense ratio 50 basis points for
2005. After considering the effect of litigation expenses, the SG&A expense ratio increase primarily resulted
from a commercial membership mix shift and increased spending associated with the Medicare expansion.
Our Government and Commercial segments bear direct and indirect overhead SG&A expenses. We allocate
indirect overhead expenses shared by the two segments primarily as a function of revenues. As a result, the
profitability of each segment is interdependent.
SG&A expenses in the Government segment increased $248.1 million, or 34.7% during 2005 due to the
CarePlus acquisition, increased spending associated with the Medicare expansion, and the class action litigation
settlement. These increases were partially offset by a decrease in TRICARE expenses from the transition to the
South Region contract in 2004. The Government segment SG&A expense ratio increased 40 basis points from
12.3% for 2004 to 12.7% for 2005. Expenses related to the class action litigation settlement increased the SG&A
expense ratio 50 basis points for 2005.
The Commercial segment SG&A expenses increased $53.2 million, or 4.5% during 2005. The Commercial
segment SG&A expense ratio increased 200 basis points from 16.5% for 2004 to 18.5% for 2005. Expenses
related to the class action litigation settlement increased the SG&A expense ratio 60 basis points for 2005. After
considering the effect of litigation expenses, this increase resulted from the continued shift in the mix of
membership towards ASO. ASO business bears a significantly higher SG&A ratio than fully insured business.
Depreciation and Amortization
Depreciation and amortization for 2005 totaled $128.9 million compared to $117.8 million for 2004, an
increase of $11.1 million, or 9.4%. Amortization of other intangible assets increased $13.3 million during 2005
primarily as a result of intangible assets recorded in connection with the CarePlus acquisition.
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