Humana 2010 Annual Report Download

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2010
ANNUAL REPORT

Table of contents

  • Page 1
    2010 ANNUAL REPORT

  • Page 2
    ...Flow from Operations $2,242 $1,422 $982 $1,224 $1,687 Medical Membership Government Segment Medicare Advantage Medicare stand-alone PDPs Medicaid Military Services Commercial Segment Fully-Insured Administrative Services Only Total Medical Membership 1,762,000 1,758,800 572,400 3,027,800 7,121...

  • Page 3
    ... the enterprise while becoming the nation's pre-eminent consumer-focused health care company. Our 2010 earnings per share of $6.47, compared with $6.15 per share in 2009, reï¬,ected strength in key areas of strategic focus as well as unusually low commercial medical cost trends industry-wide. Our...

  • Page 4
    ... few years. These opportunities will emerge not just in our Medicare Advantage and stand-alone Prescription Drug Plan (PDP) products, but also in ancillary businesses like diabetic supplies, mail-order pharmacy through our increasingly successful ® Humana RightSourceRx business, and chronic-care...

  • Page 5
    ...the lowest of any national plan. January 2011 PDP membership increased by more than 630,000 versus December 31, 2010, primarily driven by new sales associated with the Humana Walmart Plan. Medicare Advantage and PDP membership growth has positively impacted our pharmacy operations and will continue...

  • Page 6
    ... at-risk members through our Humana Cares program. As it evolves, our clinical program is increasingly aligned with CMS' Star rating system in anticipation of coming changes in the Medicare Advantage revenue model. Such alignment has already yielded progress. From 2010 to 2011, Humana's Star rating...

  • Page 7
    ... in Medicare to capture opportunities in the individual market, while working through some initial volatility from health insurance reform. Our Commercial segment operations in 2010 featured continued growth in our direct-to-consumer HumanaOne® product. For the group Commercial business, medical...

  • Page 8
    ... years. medical facilities. Through its affiliated clinicians, Concentra delivers occupational medicine, urgent care, physical therapy, and wellness services to workers and the general public in 42 states. The geographic fit with Humana is ideal; nearly three million Humana medical members live...

  • Page 9
    ... near-term use of capital to ensure long-term value appreciation for our shareholders. As we pursue our growth strategy through the remainder of 2011 - our company's 50th year - and beyond, we will be guided by the enhanced board involvement of Kurt J. Hilzinger. In August 2010 Kurt accepted the...

  • Page 10
    ... Capital Partners, LP; Lead Director Humana Inc. Marissa T. Peterson Former Executive Vice President Worldwide Operations, Services and Customer Advocacy Sun Microsystems, Inc. William E. Mitchell Managing Partner Sequel Capital Management, LLC Frank A. D'Amelio Executive Vice President, Business...

  • Page 11
    ... Commission file number 1-5975 (Exact name of registrant as specified in its charter) HUMANA INC. Delaware (State of incorporation) 61-0647538 (I.R.S. Employer Identification Number) 500 West Main Street Louisville, Kentucky (Address of principal executive offices) 40202 (Zip Code) Registrant...

  • Page 12
    HUMANA INC. INDEX TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 2010 Page Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business ...Risk Factors ...Unresolved Staff Comments ...Properties ...Legal Proceedings ...Removed and Reserved ...Part II Item 5. Item 6. Item 7. Item...

  • Page 13
    ...our Medicare Advantage CMS contracts in Florida, we provide health insurance coverage to approximately 378,700 members as of December 31, 2010. Humana Inc. was organized as a Delaware corporation in 1964. Our principal executive offices are located at 500 West Main Street, Louisville, Kentucky 40202...

  • Page 14
    ... 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. When identifying our...

  • Page 15
    ... health care, including cost savings that occur from making positive behavior changes that result in living healthier. Medicare is a federal program that provides persons age 65 and over and some disabled persons under the age of 65 certain hospital and medical insurance benefits. CMS, an agency...

  • Page 16
    ... guide members in their health care decisions, disease management programs, wellness and prevention programs and, in some instances, a reduced monthly Part B premium. Most Medicare Advantage plans offer the prescription drug benefit under Part D as part of the basic plan, subject to cost sharing and...

  • Page 17
    ..., or 58.1%, of our total premiums and ASO fees for the year ended December 31, 2010. Under our Medicare Advantage contracts with CMS in Florida, we provided health insurance coverage to approximately 378,700 members. These contracts accounted for premium revenues of approximately $5.5 billion, which...

  • Page 18
    ... premiums and ASO fees for the year ended December 31, 2010, consists of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Military Services Under our TRICARE South Region contract with the United States Department of Defense, or DoD, we provide health insurance coverage...

  • Page 19
    ... TRICARE South Region contract represents approximately 96% of total military services premiums and ASO fees. Our Commercial Segment Products We offer medical and specialty benefits, including primary and workplace care through our medical centers and worksite medical facilities, to employer groups...

  • Page 20
    ...funded employers retain the risk of financing substantially all of the cost of health benefits. However, most ASO customers purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs. For the year ended December 31, 2010, commercial ASO fees totaled...

  • Page 21
    ... our total medical membership at December 31, 2010, by market and product: Government Medicare standMedicare Medicare alone Advantage ASO PDP Medicaid Commercial Percent of Total Military services (in thousands) PPO HMO ASO Total Kentucky ...Florida ...Texas ...Puerto Rico ...Ohio ...Illinois...

  • Page 22
    ... taking total benefit expenses as a percentage of premium revenues. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers participating in physician-based capitated HMO...

  • Page 23
    ...2010 and 2009: Government Segment Medicare Advantage and Medicare Military Medicare stand-alone Military Services Total ASO PDP services ASO Medicaid Segment Medical Membership: December 31, 2010 Capitated HMO hospital system based ...13,900 Capitated HMO physician group based ...44,800 Risk-sharing...

  • Page 24
    ...structure approved by CMS. Individuals become members of our commercial HMOs and PPOs through their employers or other groups which typically offer employees or members a selection of health insurance products, pay for all or part of the premiums, and make payroll deductions for any premiums payable...

  • Page 25
    ... their health or prior medical history. Competition The health benefits industry is highly competitive. Our competitors vary by local market and include other managed care companies, national insurance companies, and other HMOs and PPOs, including HMOs and PPOs owned by Blue Cross/Blue Shield plans...

  • Page 26
    ... our health plans and both of our business segments from our headquarters and service centers. These services include management information systems, product development and administration, finance, human resources, accounting, law, public relations, marketing, insurance, purchasing, risk management...

  • Page 27
    ... health insurance coverage to our members. These costs also include estimates of future payments to hospitals and others for medical care provided to our members. Generally, premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in excess of our benefit cost...

  • Page 28
    ... in moving between competitors. Contracts for the sale of commercial products are generally bid upon or renewed annually. While health plans compete on the basis of many factors, including service and the quality and depth of provider networks, we expect that price will continue to be a significant...

  • Page 29
    ... participate in these programs. Over the last few years we have increased the size of our Medicare geographic reach through expanded Medicare product offerings. We are offering both the stand-alone Medicare prescription drug coverage and Medicare Advantage health plan with prescription drug coverage...

  • Page 30
    ... e-business organization by enhancing interactions with customers, brokers, agents, providers and other stakeholders through web-enabled technology. Our strategy includes sales and distribution of health benefit products through the Internet, and implementation of advanced self-service capabilities...

  • Page 31
    ... our total premiums and ASO fees for the year ended December 31, 2010. These programs involve various risks, as described further below. • At December 31, 2010, under our contracts with CMS we provided health insurance coverage to approximately 378,700 Medicare Advantage members in Florida. These...

  • Page 32
    ... of the contract award. For the year ended December 31, 2010, premiums and ASO fees associated with the TRICARE South Region contract were $3.4 billion, or 10.3% of our total premiums and ASO fees. We are continuing to evaluate issues associated with our military services businesses such as...

  • Page 33
    ...audits. RADV audits review medical record documentation in an attempt to validate provider coding practices and the presence of risk adjustment conditions which influence the calculation of premium payments to Medicare Advantage plans. To date, six Humana contracts have been selected by CMS for RADV...

  • Page 34
    ...voluntarily self-reported the existence of this investigation to CMS, the U.S. Department of Justice and the Florida Agency for Health Care Administration. Matters under review include, without limitation, the relationships between certain of our Florida-based employees and providers in our Medicaid...

  • Page 35
    ... on health insurers, limiting Medicare Advantage payment rates, stipulating a prescribed minimum ratio for the amount of premium revenues to be expended on medical costs, additional mandated benefits and guarantee issuance associated with Commercial medical insurance, requirements that limit the...

  • Page 36
    ... revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and administrative costs, lowering our Medicare payment rates and increasing our expenses associated with the non-deductible federal premium...

  • Page 37
    ...workers to receive benefits and to appeal benefit denials, prohibit charging medical co-payments or deductibles to employees, may restrict employers' rights to select healthcare providers or direct an injured employee to a specific provider to receive non-emergency workers' compensation medical care...

  • Page 38
    ... or re-entry into a state or market, rate formulas, delivery systems, utilization review procedures, quality assurance, complaint systems, enrollment requirements, claim payments, marketing, and advertising. The HMO, PPO, and other health insurance-related products we offer are sold under licenses...

  • Page 39
    ... business may be adversely affected. We contract with physicians, hospitals and other providers to deliver health care to our members. Our products encourage or require our customers to use these contracted providers. These providers may share medical cost risk with us or have financial incentives...

  • Page 40
    ... payments, or take other actions that could result in higher health care costs for us, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician specialty groups, physician...

  • Page 41
    ...wholesalers that provide us with purchase discounts and volume rebates on certain prescription drugs dispensed through our mail-order and specialty pharmacies. These discounts and volume rebates are generally passed on to clients in the form of steeper price discounts. Changes in existing federal or...

  • Page 42
    ... the federal government. This could result in attempts to reduce payments in our federal and state government health care coverage programs, including the Medicare, military services, and Medicaid programs, and could result in an increase in taxes and assessments on our activities. Although we could...

  • Page 43
    ... in our markets; regulatory changes and adverse outcomes from litigation and government or regulatory investigations; sales of stock by insiders; changes in our credit ratings; limitations on premium levels or the ability to raise premiums on existing policies; increases in minimum capital, reserves...

  • Page 44
    ... operating facilities, at December 31, 2010: Medical Centers Owned Leased Administrative Offices Owned Leased Total Florida ...Texas ...Georgia ...California ...Michigan ...Ohio ...Illinois ...Colorado ...Tennessee ...Arizona ...Kentucky ...Pennsylvania ...Louisiana ...South Carolina ...Missouri...

  • Page 45
    ... of legal actions in the ordinary course of business, including employment litigation, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, failure to disclose network discounts and various other provider arrangements...

  • Page 46
    ... PURCHASES OF EQUITY SECURITIES a) Market Information Our common stock trades on the New York Stock Exchange under the symbol HUM. The following table shows the range of high and low closing sales prices as reported on the New York Stock Exchange Composite Price for each quarter in the years ended...

  • Page 47
    ... 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market...

  • Page 48
    ... services insured ...Military services ASO ...Total military services ...Medicaid insured ...Medicaid ASO ...Total Medicaid ...Total Government ...Commercial: Fully-insured ...ASO ...Total Commercial ...Total medical membership ...Specialty Membership: Dental ...Vision ...Other supplemental benefits...

  • Page 49
    ... includes the benefit of $68.9 million ($43.0 million after tax, or $0.25 per diluted share) related to our 2006 Medicare Part D reconciliation with CMS and the settlement of some TRICARE contractual provisions related to prior years. (d) Includes the acquired operations of CHA Service Company from...

  • Page 50
    ... premium, ASO fee, and plan benefit levels that are commensurate with our benefit and administrative costs. Benefit costs are subject to a high rate of inflation due to many forces, including new higher priced technologies and medical procedures, new prescription drugs and therapies, an aging...

  • Page 51
    ... risk program for those unable to obtain coverage due to a pre-existing condition or health status. Effective January 1, 2011, minimum benefit ratios were mandated for all commercial fully-insured health plans in the large group (85%), small group (80%), and individual (80%) markets, with rebates to...

  • Page 52
    ... to sales of group Medicare Advantage products and preferred provider organization, or PPO, products. Average fully-insured Medicare Advantage membership increased 15.7% for the year ended December 31, 2010 compared to the year ended December 31, 2009. Likewise, Medicare Advantage premium revenues...

  • Page 53
    ...-over-year changes in the mix of membership in our stand-alone PDP products affect the quarterly benefit ratio pattern. CMS is conducting certain procedural Risk-Adjustment Data Validation Audits, or RADV audits, of us and various companies' selected Medicare Advantage contracts to review medical...

  • Page 54
    ... occupational medicine, urgent care, physical therapy, and wellness services to workers and the general public through its operation of medical centers and worksite medical facilities. The Concentra acquisition provides entry into the primary care space on a national scale, offering additional means...

  • Page 55
    .... The acquisition expanded our Medicare HMO membership in central Florida, adding approximately 7,300 members. On May 22, 2008, we acquired OSF Health Plans, Inc., or OSF, a managed care company serving both Medicare and commercial members in central Illinois, for cash consideration of approximately...

  • Page 56
    ... and 2009: 2010 Change 2009 Dollars Percentage (dollars in thousands) Premium revenues: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Military services ...Medicaid ...Total Government ...Fully-insured ...Specialty ...Total Commercial ...Total ...Administrative services fees...

  • Page 57
    ...-down of deferred acquisition costs associated with our individual major medical policies and a net charge of $138.9 million ($0.52 per diluted common share) for reserve strengthening associated with our closed block of long-term care policies in our Commercial Segment in 2010 as discussed in Note...

  • Page 58
    ... 31, 2009, approximately 109,600 members were associated with a new group Medicare Advantage contract added during the first quarter of 2010, with sales of our PPO products driving the majority of the increase in individual Medicare Advantage membership. Total fully-insured group Medicare Advantage...

  • Page 59
    ... costs associated with our individual major medical policies in 2010, increased Medicare investment spending for our 2011 offerings, and administrative costs associated with servicing higher average Medicare Advantage membership, partially offset by a decrease in the number of our employees...

  • Page 60
    ... deferred acquisition costs associated with our individual major medical policies which increased the SG&A expense ratio 190 basis points in 2010. In addition, the increases in 2010 primarily reflect administrative costs associated with increased specialty and mail-order pharmacy business, partially...

  • Page 61
    ...: 2009 2008 (dollars in thousands) Change Dollars Percentage Premium revenues: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Military services ...Medicaid ...Total Government ...Fully-insured ...Specialty ...Total Commercial ...Total ...Administrative services fees: Government...

  • Page 62
    ... share, in 2008. The year-over-year increase primarily reflects higher operating earnings in our Government segment as a result of significantly lower prescription drug claims expenses associated with our Medicare stand-alone PDP products. Premium Revenues and Medical Membership Premium revenues...

  • Page 63
    .... Sales of our PPO products drove the majority of the 72,600 increase in Medicare Advantage members since December 31, 2008. Medicare Advantage per member premiums increased 6.8% during 2009 compared to 2008 reflecting the effect of introducing member premiums for most of our Medicare Advantage...

  • Page 64
    ... an increase in per member premiums. We experienced higher utilization of benefits in our fully-insured group accounts as in-group attrition, primarily as a result of reductions of less experienced workers, has led to a shift in the mix of members to an older workforce having more health care needs...

  • Page 65
    ...Medicare enrollment gains in 2010 because premiums generally are collected in advance of claim payments by a period of up to several months. Conversely, during 2009, cash flows were negatively impacted by the payment of run-off claims associated with enrollment losses in our stand-alone PDP business...

  • Page 66
    ... pharmacy claims, which fluctuate due to month-end cutoff, and an increase in amounts owed to providers under capitated and risk sharing arrangements from Medicare Advantage membership growth. The detail of total net receivables was as follows at December 31, 2010, 2009 and 2008: Change 2010 2009...

  • Page 67
    ... the Puerto Rico Health Insurance Administration for our Medicaid business resulted in the increase in commercial and other receivables for 2010 as compared to 2009. In addition to the timing of receipts for premiums and payments of benefit expenses, other working capital items impacting operating...

  • Page 68
    ... 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market...

  • Page 69
    ..., investment securities, operating cash flows, and funds available under our credit agreement or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, future expansion opportunities, and capital expenditures...

  • Page 70
    ... Data. (3) Purchase obligations include agreements to purchase services, primarily information technology related services, or to make improvements to real estate, in each case that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum levels...

  • Page 71
    ...in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2011. CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage plans according to health severity. The risk...

  • Page 72
    .... Our military services business, which accounted for approximately 11% of our total premiums and ASO fees for the year ended December 31, 2010, primarily consists of the TRICARE South Region contract. The original 5-year South Region contract expired on March 31, 2009 and was extended through March...

  • Page 73
    ...the request for proposal requesting from offerors final proposal revisions to address, among other things, health care cost savings resulting from provider network discounts in the South Region. We submitted our final proposal revisions on November 9, 2010. At this time, we are not able to determine...

  • Page 74
    ... upon per member per month claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, changes in medical...

  • Page 75
    ... volatile than other segments of the economy. The drivers of medical cost trends include increases in the utilization of hospital facilities, physician services, new higher priced technologies and medical procedures, and new prescription drugs and therapies, as well as the inflationary effect on the...

  • Page 76
    ... regarding the accrual and payment of our benefits payable, excluding military services. Components of the total incurred claims for each year include amounts accrued for current year estimated benefit expenses as well as adjustments to prior year estimated accruals. 2010 2009 (in thousands) 2008...

  • Page 77
    ... 31, 2010 and 2009, respectively, represent liabilities for long-duration insurance policies including long-term care, health, and life insurance policies and annuities sold to individuals for which some of the premium received in the earlier years is intended to pay anticipated benefits to be...

  • Page 78
    ... cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The payments we receive monthly from CMS and members, which are determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We recognize premium revenues...

  • Page 79
    ... per member to provide prescription drug coverage in the catastrophic layer. We chose the demonstration payment option for some of our plans that offered enhanced coverage over the last three years. This capitation amount, derived from our annual bid submissions, was recorded as premium revenue. The...

  • Page 80
    ... premium as revenue ratably over the period coverage is provided. Health care services reimbursements are recognized as revenue in the period health services are provided. Administrative services fees are recognized as revenue in the period services are performed. The TRICARE South Region contract...

  • Page 81
    ... and generally provide credit enhancement for bond issues related to our tax-exempt municipal securities. We have no direct exposure to these monoline insurers. We owned $597.2 million and $587.2 million at December 31, 2010 and 2009, respectively, of tax-exempt securities guaranteed by monoline...

  • Page 82
    ...501) $170,536 $(17,506) In April 2009, the Financial Accounting Standards Board, or the FASB, issued new guidance to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording...

  • Page 83
    ... Assets At December 31, 2010, goodwill and other long-lived assets represented 23% of total assets and 55% of total stockholders' equity, compared to 21% and 50%, respectively, at December 31, 2009. We are required to test at least annually for impairment at a level of reporting referred to as the...

  • Page 84
    ..., premium yields, medical and administrative cost trends, and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. If these assumptions differ from actual, including the impact of the ultimate outcome of health care...

  • Page 85
    ... for these assets. There were no material impairment losses in the last three years. Long-lived assets associated with our military services business are not material. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings and financial position are exposed to financial...

  • Page 86
    ..., including shifts between taxable and tax-exempt securities, and spread changes specific to various investment categories. In the past ten years, changes in 3 month LIBOR rates during the year have exceeded 300 basis points twice, have not changed between 200 and 300 basis points, have changed...

  • Page 87
    ... policy benefits payable ...Other long-term liabilities ...Total liabilities ...Commitments and contingencies Stockholders' equity: Preferred stock, $1 par; 10,000,000 shares authorized; none issued ...Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 190,244,741 shares issued in 2010...

  • Page 88
    Humana Inc. CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 2010 2009 2008 (in thousands, except per share results) Revenues: Premiums ...Administrative services fees ...Investment income ...Other revenue ...Total revenues ...Operating expenses: Benefits ...Selling, general and ...

  • Page 89
    Humana Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Common Stock Capital In Other Total Issued Excess of Retained Comprehensive Treasury Stockholders' Shares Amount Par Value Earnings Income (Loss) Stock Equity (in thousands) Balances, January 1, 2008 ...186,739 $31,123 $1,497,...

  • Page 90
    ...credit agreement ...Proceeds from issuance of senior notes ...Debt issue costs ...Proceeds from swap termination ...Change in securities lending payable ...Change in book overdraft ...Common stock repurchases ...Excess tax benefit from stock-based compensation ...Proceeds from stock option exercises...

  • Page 91
    ... provide health insurance coverage for Medicare Advantage members in Florida, accounting for approximately 17% of our total premiums and administrative services fees in 2010. CMS is the federal government's agency responsible for administering the Medicare program. Under federal government contracts...

  • Page 92
    ... realized from a sale or otherthan-temporary impairment. In April 2009, the Financial Accounting Standards Board, or the FASB, issued new guidance to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed...

  • Page 93
    ... payable are recorded as investment income. Receivables and Revenue Recognition We generally establish one-year commercial membership contracts with employer groups, subject to cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military...

  • Page 94
    ... cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The payments we receive monthly from CMS and members, which are determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We recognize premium revenues...

  • Page 95
    ... months after the close of each calendar year. We continue to revise our estimates with respect to the risk corridor provisions based on subsequent period pharmacy claims data. Military services Military services revenue primarily is derived from our TRICARE South Region contract with the Department...

  • Page 96
    ... prescriptions. Patient services include workers' compensation injury care and related services as well as other healthcare services related to employer needs or statutory requirements. Patient services revenues are recognized in the period services are provided to the customer when the sales price...

  • Page 97
    ... Benefit expenses include claim payments, capitation payments, pharmacy costs net of rebates, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well as estimates of future payments to hospitals and others for medical care...

  • Page 98
    ...provided. Future policy benefits payable Future policy benefits payable include liabilities for long-duration insurance policies including life insurance, annuities, health, and long-term care policies sold to individuals for which some of the premium received in the earlier years is intended to pay...

  • Page 99
    ... by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments as well as debt securities and derivative contracts whose value...

  • Page 100
    ...types of costs that can be capitalized in the acquisition of insurance contracts. We defer policy acquisition costs, primarily commissions, associated with our health, life insurance, annuities, and other supplemental policies sold to individuals and accounted for as long-duration insurance products...

  • Page 101
    ... occupational medicine, urgent care, physical therapy, and wellness services to workers and the general public through its operation of medical centers and worksite medical facilities. The Concentra acquisition provides entry into the primary care space on a national scale, offering additional means...

  • Page 102
    ... central Florida. On May 22, 2008, we acquired OSF Health Plans, Inc., or OSF, a managed care company serving both Medicare and commercial members in central Illinois, for cash consideration of approximately $87.3 million, including the payment of $3.3 million during 2009 to settle a purchase price...

  • Page 103
    ... Investment securities classified as current and long-term were as follows at December 31, 2010 and 2009, respectively: Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (in thousands) Fair Value December 31, 2010 U.S. Treasury and other U.S. government corporations and agencies...

  • Page 104
    ... securities ...Tax-exempt municipal securities ...Mortgage-backed securities: ...Residential ...Commercial ...Asset-backed securities ...Corporate debt securities ...Total debt securities ...December 31, 2009 U.S. Treasury and other U.S. government corporations and agencies: U.S. Treasury and agency...

  • Page 105
    ...credit rating of AA exclusive of the bond insurers' guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types. The recoverability of our residential and commercial mortgage-backed securities is supported by factors such as seniority...

  • Page 106
    ... Quoted Prices in Active Markets Significant Other Significant for Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) (in thousands) Fair Value December 31, 2010 Cash equivalents ...Debt securities: U.S. Treasury and other U.S. government corporations and agencies...

  • Page 107
    ... unobservable inputs (Level 3) were comprised of the following: For the year ended December 31, 2010 Privates and Venture Capital 2009 Privates and Venture Capital Auction Rate Securities Auction Rate Total Securities (in thousands) Total Beginning balance at January 1 ...Total gains or losses...

  • Page 108
    ...we cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The consolidated balance sheets include the following amounts associated with Medicare Part D as of December 31, 2010 and 2009: 2010 2009 Risk Risk Corridor CMS Corridor CMS Settlement Subsidies...

  • Page 109
    ...-term assets in the accompanying consolidated balance sheets at December 31, 2010 and 2009: Weighted Average Life 2010 Accumulated Amortization 2009 Accumulated Amortization Cost Net (in thousands) Cost Net Other intangible assets: Customer contracts/ relationships ...Trade names ...Provider...

  • Page 110
    ... to the development of system enhancements to our Commercial claims processing platform. Military services benefits payable of $255.2 million and $279.2 million at December 31, 2010 and 2009, respectively, primarily consisted of our estimate of incurred healthcare services provided to beneficiaries...

  • Page 111
    ...the years ended December 31, 2010, 2009 and 2008: 2010 2009 (in thousands) 2008 Military services ...Future policy benefits ...Total ... $3,059,492 305,875 $3,365,367 $3,019,655 73,130 $3,092,785 $2,819,787 64,338 $2,884,125 The increase in benefit expenses associated with future policy benefits...

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    ...: Assets (Liabilities) 2010 2009 (in thousands) Future policy benefits payable ...Net operating loss carryforward ...Compensation and other accrued expenses ...Benefits payable ...Deferred acquisition costs ...Capital loss carryforward ...Unearned premiums ...Other ...Total deferred income tax...

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    ... by the Internal Revenue Service (IRS). Beginning with the 2009 tax year, as well as 2010, we are participating in the Compliance Assurance Process (CAP) with the IRS. Under CAP, the IRS does advance reviews during the tax year and as the return is being prepared for filing, thereby reducing the...

  • Page 114
    ... loss associated with the termination of a swap with a subsidiary of Lehman, which subsequently filed for bankruptcy protection. 13. EMPLOYEE BENEFIT PLANS Employee Savings Plan We have defined contribution retirement and savings plans covering eligible employees. Our contribution to these plans is...

  • Page 115
    ... contribution retirement and savings plans. Stock-Based Compensation We have plans under which options to purchase our common stock and restricted stock awards have been granted to executive officers, directors and key employees. The terms and vesting schedules for stock-based awards vary by type of...

  • Page 116
    ...average calculation methodology based on daily price intervals as measured over the expected term of the option. Activity for our option plans was as follows for the year ended December 31, 2010: Shares Under Option Weighted-Average Exercise Price Options outstanding at December 31, 2009 ...Granted...

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    ... the market price of our common stock on the date of grant. Compensation expense is recorded straight-line over the vesting period, generally three years from the date of grant. For restricted stock awards granted on or after January 1, 2010 to retirement eligible employees, the compensation expense...

  • Page 118
    ... 2009, the Board of Directors authorized the repurchase of up to $250 million of our common shares exclusive of shares repurchased in connection with employee stock plans. Under this share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market...

  • Page 119
    ... acquisition of Concentra on December 21, 2010 as described further in Note 3, including leases for medical and operating facilities, certain corporate office space as well as office and medical equipment. Purchase Obligations We have agreements to purchase services, primarily information technology...

  • Page 120
    ...in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2011. CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage plans according to health severity. The risk...

  • Page 121
    .... Our military services business, which accounted for approximately 11% of our total premiums and ASO fees for the year ended December 31, 2010, primarily consists of the TRICARE South Region contract. The original 5-year South Region contract expired on March 31, 2009 and was extended through March...

  • Page 122
    ..., that contracted for reimbursement of outpatient services provided to beneficiaries of the DoD's TRICARE health benefits program ("TRICARE"). The Complaint alleged that Humana Military breached its network agreements when it failed to reimburse the hospitals based on negotiated discounts for non...

  • Page 123
    ...voluntarily self-reported the existence of this investigation to CMS, the U.S. Department of Justice and the Florida Agency for Health Care Administration. Matters under review include, without limitation, the relationships between certain of our Florida-based employees and providers in our Medicaid...

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    ... 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. When identifying our...

  • Page 125
    ... for the years ended December 31, 2010, 2009, and 2008: 2010 Government Segment 2009 (in thousands) 2008 Revenues: Premiums: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Military services ...Medicaid ...Total premiums ...Administrative services fees ...Investment income...

  • Page 126
    ...of our total premiums and ASO fees for the year ended December 31, 2010. We use long-duration accounting for products such as long-term care, life insurance, annuities, and certain health and other supplemental policies sold to individuals because they are expected to remain in force for an extended...

  • Page 127
    ...costs and future policy benefits payable associated with our long-duration insurance products for the years ended December 31, 2010 and 2009. 2010 2009 Future policy Deferred Future policy benefits acquisition benefits payable costs payable (in thousands) Deferred acquisition costs Other long-term...

  • Page 128
    ... major medical policies were $179.8 million at December 31, 2010 and $128.3 million at December 31, 2009. In light of the Health Insurance Reform Legislation, including mandating that 80% of premium revenues be expended on medical costs for individual major medical policies beginning in 2011...

  • Page 129
    ...to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures...

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    Concentra is a wholly-owned subsidiary whose total assets and total revenues represent 6% and 0.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2010. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky February 17, 2011 120

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    Humana Inc. QUARTERLY FINANCIAL INFORMATION (Unaudited) A summary of our quarterly unaudited results of operations for the years ended December 31, 2010 and 2009 follows: First 2010 Second(1) Third Fourth(2) (in thousands, except per share results) Total revenues ...Income before income taxes ......

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    ... by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations. The Audit Committee of the Board of Directors, which is composed solely of independent outside directors, meets periodically with members of management, the internal...

  • Page 133
    ... of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, who also audited the Company's consolidated financial statements included in our Annual Report on Form 10-K, as stated in their...

  • Page 134
    ...-Chief Service and Information Officer Senior Vice President-Chief Human Resources Officer Senior Vice President-Chief Strategy & Corporate Development Officer Senior Vice President-Senior Products Senior Vice President-Chief Innovation and Marketing Officer Senior Vice President-Public Affairs...

  • Page 135
    ...Financial Officers will be promptly disclosed through the Investor Relations section of our web site at www.humana.com. Code of Business Conduct and Ethics Since 1995, we have operated under an omnibus Code of Ethics and Business Conduct, known as the Humana Inc. Principles of Business Ethics, which...

  • Page 136
    ...our Corporate Governance Guidelines; our Policy Regarding Transactions in Company Securities, Inside Information and Confidentiality; stock ownership guidelines for directors and for executive officers; the Humana Inc. Principles of Business Ethics and any waivers thereto; and the Code of Ethics for...

  • Page 137
    ...from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 21, 2011 appearing under the captions "Stock Ownership Information-Security Ownership of Certain Beneficial Owners of Company Common Stock" and "Equity Compensation Plan Information" of such Proxy Statement...

  • Page 138
    ... York Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.2 to Humana Inc.'s Registration Statement on Form S-3 filed on March 31, 2006). There are no instruments defining the rights of holders with respect to long-term debt in excess of 10 percent of the total assets of...

  • Page 139
    ... on Form 8-K filed on May 21, 2008). Trust under Humana Inc. Deferred Compensation Plans (incorporated herein by reference to Exhibit 10(p) to Humana Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999). The Humana Inc. Deferred Compensation Plan for Non-Employee Directors...

  • Page 140
    ...to Humana Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2004). Amendment of Solicitation/Modification of Contract, dated as of January 16, 2009, by and between Humana Military Healthcare Services, Inc. and the United States Department of Defense TRICARE Management Activity...

  • Page 141
    ...Explanatory Note regarding Medicare Prescription Drug Plan Contracts between Humana and CMS (incorporated herein by reference to Exhibit 10(nn) to Humana Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). Form of Company's Restricted Stock Unit Agreement with Non-Solicit...

  • Page 142
    ... Flows for the years ended December 31, 2008, 2009 and 2010; and (iv) Notes to Consolidated Financial Statements. Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits...

  • Page 143
    ...,000 shares authorized; 190,244,741 shares issued in 2010 and 189,801,119 shares issued in 2009 ...Capital in excess of par value ...Retained earnings ...Accumulated other comprehensive income ...Treasury stock, at cost, 21,795,051 shares in 2010 and 19,621,069 shares in 2009 ...Total stockholders...

  • Page 144
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF OPERATIONS For the year ended December 31, 2010 2009 2008 (in thousands) Revenues: Management fees charged to operating subsidiaries ...Investment and other income, net ...Expenses: Selling, general and ...

  • Page 145
    ... under credit agreement ...Proceeds from issuance of senior notes ...Debt issue costs ...Proceeds from swap termination ...Change in book overdraft ...Change in securities lending payable ...Common stock repurchases ...Tax benefit from stock-based compensation ...Proceeds from stock option exercises...

  • Page 146
    ... agreements approved by state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by our parent company in the event of insolvency for; (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized...

  • Page 147
    ...statements in this Annual Report on Form 10-K for a description of acquisitions. During 2008, we funded a subsidiary's 2008 acquisition of UnitedHealth Group's Las Vegas, Nevada individual SecureHorizons Medicare Advantage HMO business with contributions from Humana Inc., our parent company, of $225...

  • Page 148
    Humana Inc. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2010, 2009, and 2008 (in thousands) Additions Charged Balance at (Credited) to Charged to Beginning Acquired Costs and Other of Period Balances Expenses Accounts (1) Deductions or Write-offs Balance at End ...

  • Page 149
    ... Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: February 17, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on...

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  • Page 151
    ... • 500 West Main Street • Louisville, KY 40202 • (502) 580-1000 More Information About Humana Inc. Copies of the Company's filings with the Securities and Exchange Commission may be obtained without charge via the Investor Relations page of the Company's Internet site at Humana.com or by...

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