Humana 2007 Annual Report Download - page 76

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REPORTING ENTITY
Nature of Operations
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health and
supplemental benefits companies, based on our 2007 revenues of $25.3 billion. References throughout this
document to “we,” “us,” “our,” “Company,” and “Humana,” mean Humana Inc. and its subsidiaries. We are a
full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for
employer groups, government benefit programs, and individuals. We derived approximately 71% of our
premiums and administrative services fees from contracts with the federal government in 2007. Under our federal
government contracts with the Centers for Medicare and Medicaid Services, or CMS, we provide health
insurance coverage for Medicare members in Florida, accounting for approximately 17% of our total premiums
and administrative services fees in 2007. CMS is the federal government’s agency responsible 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 2007.
We manage our business with two segments: Government and Commercial. The Government segment
consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare,
Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty
products marketed to employer groups and individuals. We identified our segments in accordance with the
aggregation provisions of SFAS 131,which aggregates products with similar economic characteristics. These
characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements.
These segment groupings are consistent with information used by our Chief Executive Officer.
The accounting policies of each segment are the same and are described in Note 2. The results of each
segment are measured by income before income taxes. We allocate all selling, general and administrative
expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our
segments. Members served by our two segments often utilize the same medical provider networks, enabling us to
obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets.
As a result, the profitability of each segment is interdependent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America. Our consolidated financial statements include the accounts of
Humana Inc. and subsidiaries that the Company controls. All significant intercompany balances and transactions
have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The areas involving the most significant use of
estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare and
TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation
and related impairment recognition of long-lived assets, including goodwill. These estimates are based on
knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ
materially from those estimates.
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