Humana 2007 Annual Report Download - page 42

Government Segment
Our strategy and commitment to the expanded Medicare programs, including new product choices and
pharmacy benefits for seniors, has led to significant growth. Medicare Advantage membership increased to
1,143,000 members at December 31, 2007, up 14.0% from 1,002,600 at December 31, 2006 and up 104.9% from
557,800 at December 31, 2005, primarily due to sales of Private Fee-For-Service, or PFFS, products. Average
Medicare Advantage membership was 26.4% higher for the year ended December 31, 2007 compared to the year
ended December 31, 2006, and average stand-alone PDP membership was 19.5% higher. Likewise, Medicare
premium revenues have increased $3.3 billion, or 28.5%, to $14.8 billion for the year ended December 31, 2007
from $11.5 billion for the year ended December 31, 2006. We expect Medicare Advantage membership to
continue to grow into 2008, adding between 200,000 and 250,000 members by December 31, 2008, with a shift
in sales mix towards our PPO and HMO offerings.
Our quarterly Government segment earnings are particularly impacted by the Medicare Part D benefit
design and changes in the composition of our membership. The Medicare Part D benefit design results in
coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s
plan period which begins January 1 for renewals. These plan designs generally result in us sharing a greater
portion of the responsibility for total pharmacy costs in the early stages and less in the latter stages. As a result
the Government segment’s benefits ratio generally improves as the year progresses. In addition, the number of
low-income senior members as well as year over year changes in the mix of membership in our stand-alone PDP
products, Standard, Enhanced, and Complete, affect the quarterly benefits ratio pattern. We expect the
combination of these items will result in a greater proportion of earnings for 2008 to be earned in the first half
versus the second half when compared to the quarterly earnings pattern in 2007.
Commercial Segment
We continue to increase the diversification of our Commercial segment membership base and continue to
exercise pricing discipline relative to our fully-insured accounts. Commercial segment medical membership
increased by 167,800 members from December 31, 2006 to 3,451,600 at December 31, 2007 primarily as a result
of the acquisition of KMG America Corporation, discussed more fully below, which added approximately 95,900
members, primarily ASO. The remaining increase primarily was due to enrollment gains in strategic areas of
commercial growth including Smart plans and other consumer offerings, individual, small group, and ASO
products, partially offset by a decline in the fully-insured larger group product membership. Membership changes
from exercising pricing discipline and sales focused on strategic growth areas resulted in a decline in the benefits
ratio to 80.5% for the year ended December 31, 2007 compared to 81.7% for the year ended December 31, 2006.
In addition, we are diversifying our Commercial segment revenues through expanded and new specialty
product offerings with the acquisitions of CompBenefits Corporation and KMG America Corporation in the
fourth quarter of 2007, each discussed further below. These acquisitions significantly increased our dental
membership and added new product offerings including vision and other supplemental health and life benefit
plans primarily sold on a voluntary basis. The supplemental health plans cover, for example, some of the costs
associated with cancer and critical illness. Along with our 2005 acquisition of Corphealth, Inc., a behavioral
health care management company, these specialty acquisitions are anticipated to enhance our Commercial
segment margins and our ability to appeal to more customers.
Other Highlights
• Earnings increased 69% to $4.91 per diluted common share in 2007 from $2.90 per diluted common
share in 2006, primarily due to increased premium revenue from higher average Medicare membership.
• Year over year comparisons were impacted by changes in estimates associated with our 2006 Medicare
Part D reconciliation with CMS and the settlement of some TRICARE contractual provisions related to
prior years which increased our Government segment’s results by $68.9 million pretax, or $0.25 per
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