Humana 2007 Annual Report Download - page 49

administrative costs associated with increased business for our mail order pharmacy. For 2007, 46.8% of our
Commercial segment average medical membership was related to ASO business compared to 44.5% for 2006.
Likewise, at December 31, 2007, 29.3% of our Commercial segment average medical membership was related to
individual and small group accounts compared to 27.7% at December 31, 2006. Fee based ASO business carries
a higher SG&A expense ratio than fully-insured business since there is no benefit expense or offsetting premium
revenue. Additionally, individual and smaller group accounts carry a higher SG&A expense ratio due to higher
distribution costs compared to larger group accounts.
Depreciation and Amortization
Depreciation and amortization for 2007 totaled $184.8 million compared to $148.6 million for 2006, an
increase of $36.2 million, or 24.4%. The increase primarily resulted from increased capital expenditures related
to the Medicare expansion.
Interest Expense
Interest expense was $68.9 million for 2007, compared to $63.1 million for 2006, an increase of $5.8
million, primarily due to higher average outstanding debt partially offset by lower interest rates.
Income Taxes
Our effective tax rate for 2007 of 35.3% compared to the effective tax rate of 36.0% for 2006. The decrease
is primarily due to a lower state tax rate. The lower state tax rate results from a shift in the geographic mix of
revenues to states with lower tax rates. See Note 9 to the consolidated financial statements included in Item 8.—
Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the
effective tax rate. We expect the 2008 effective tax rate to be in the range of 35.5% to 36.0%.
Comparison of Results of Operations for 2006 and 2005
Year over year comparisons have been impacted by litigation and Hurricane Katrina expenses in 2005 that
did not recur in 2006, as more fully discussed in the following sections.
2005 Settlement of Class Action Litigation
On October 17, 2005, we reached an agreement with representatives of more than 700,000 physicians to
settle a nationwide class action suit. In connection with the settlement and other related litigation costs, we
recorded pretax administrative expenses of $71.9 million ($44.8 million after taxes, or $0.27 per diluted common
share) in the third quarter of 2005. Of the $71.9 million, $33.4 million was included in the Government segment
results and the remaining $38.5 million was included in the Commercial segment results. These amounts were
paid in 2006.
2005 Hurricane Katrina
Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of
Hurricane Katrina in August 2005. Expenses related to Hurricane Katrina primarily stemmed from our efforts, in
cooperation with Departments of Insurance in the affected states, to help our members by offering participating-
provider benefits at non-participating providers’ rates, paying claims for members who were unable at the time to
meet their premium obligations and similar measures. In connection with Hurricane Katrina, we recorded pretax
medical and administrative expenses of $27.0 million ($16.9 million after taxes, or $0.10 per diluted common
share) during the third and fourth quarters of 2005. Of the $27.0 million, $5.9 million was included in the
Government segment results and the remaining $21.1 million was included in the Commercial segment results.
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