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Humana.com
2011
Annual Report

Table of contents

  • Page 1
    2011 Annual Report Humana.com

  • Page 2
    ... share results) 2011 Operating Results Revenues Net income Diluted earnings per common share $36,832 $1,419 $8.46 2010 $33,596 $1,099 $6.47 2009 $30,743 $1,040 $6.15 2008 $28,753 $647 $3.83 2007 $25,153 $834 $4.91 Financial Position Total assets Total liabilities Total shareholder equity $17...

  • Page 3
    ...not to be among them. Having completed 2011, our 50th year, with record revenues, earnings, and healthplan membership, we look forward eagerly to continuing our transformation from a product-focused health benefits company to a customer-focused health care company. In parallel with this evolution is...

  • Page 4
    ... of Defense (DoD) South Region TRICARE® contract to Humana Military Healthcare Services was upheld by reviewing authorities. Health care delivery under the new contract is scheduled to begin on April 1, 2012. As is customary, the contract provides for five one-year options exercisable by the DoD...

  • Page 5
    ... do to improve our health. 2 Enhance our innovative, Humana's Strategy PCP/PC P Mana gement Near-term Medicare Advantage growth expected to produce long-term prosperity: • Diversification • Cross selling me Ca re Be f ne its Health and Well-Being Services • Customer retention Ho Retail...

  • Page 6
    ... are customized to the individual member's needs and desires. Incentive programs are provided using a reward-based system to encourage members to meet their goals. Online tools allow users to track progress. The program offers a wide range of health and well-being tools. 5 - 2011 Annual Report

  • Page 7
    ...of Humana's health benefits value proposition, our pharmacy capabilities have expanded in the past five years to the point where they now represent a significant, differentiating growth center for the company. By number of prescriptions, Humana's pharmacy group is the fifth largest pharmacy provider...

  • Page 8
    ... tools and resources to iPhone and AndroidTM users, including an urgent-care locator, spending-account balances in real time, drug price information, and doctor and hospital searches. 2,000 1,500 1,000 500 Employer Group Retail Dec. 2010 Dec. 2011 Jan. 2012 0 7 - 2011 Annual Report

  • Page 9
    ..., pharmaceuticals, assisted living/senior housing, home care, physician practice management, surgical centers and dental networks. Throughout his career, Bruce has shown an ability to grow businesses profitably and maintain strong relationships with customers and providers. As the company announced...

  • Page 10
    ...Roy Dunbar, William J. McDonald, James J. O'Brien Board of Directors Michael B. McCallister Chairman of the Board and Chief Executive Officer Humana Inc. William J. McDonald Executive Vice President Brand Management Capital One Financial Corporation Kurt J. Hilzinger Partner Court Square Capital...

  • Page 11
    ...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's telephone number, including area code: (502) 580-1000 Securities registered...

  • Page 12
    .... Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services...

  • Page 13
    ...our Medicare Advantage CMS contracts in Florida, we provide health insurance coverage to approximately 381,300 members as of December 31, 2011. 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
    ... home care services. The Other Businesses category consists of our Military services, primarily our TRICARE South Region contract, Medicaid, and closed-block long-term care businesses as well as our contract with CMS to administer the Limited Income Newly Eligible Transition program, or the LI-NET...

  • Page 15
    ...and some disabled persons under the age of 65 certain hospital and medical insurance benefits. CMS, an agency of the United States Department of Health and Human Services, administers the Medicare program. Hospitalization benefits are provided under Part A, without the payment of any premium, for up...

  • Page 16
    ... of original Medicare, typically including reduced cost sharing, enhanced prescription drug benefits, care coordination, data analysis techniques to help identify member needs, complex case management, tools to guide members in their health care decisions, disease management programs, wellness and...

  • Page 17
    ... basic coverage with benefits mandated by Congress, as well as plans providing enhanced coverage with varying degrees of out-of-pocket costs for premiums, deductibles, and co-insurance. In October 2010, we announced the lowest premium national standalone Medicare Part D prescription drug plan co...

  • Page 18
    ... the processing of claims, offering access to our provider networks and clinical programs, and responding to customer service inquiries from members of self-funded employers. These products may include all of the same benefit and product design characteristics of our fully-insured HMO, PPO, or POS...

  • Page 19
    ... of medical centers and worksite medical facilities. In addition to Concentra, our primary care services also include our CAC Medical Centers, or CAC, in South Florida. CAC operates full-service, multi-specialty medical centers staffed by primary care physicians and medical specialists practicing...

  • Page 20
    ... may enroll in a HMO-like plan with a point-of-service option or take advantage of reduced copayments by using a network of preferred providers, similar to a PPO. We have participated in the TRICARE program since 1996 under contracts with the Department of Defense. Our current TRICARE South Region...

  • Page 21
    ... monthly payment from a government agency for which we are required to provide health insurance coverage to enrolled members. Due to the increased emphasis on state health care reform and budgetary constraints, more states are utilizing a managed care product in their Medicaid programs. Our Medicaid...

  • Page 22
    ...members, product and benefit designs, hospital inpatient management systems and enrolling members into various disease management programs. The focal point for health care services in many of our HMO networks is the primary care physician who, under contract with us, provides services to our members...

  • Page 23
    ... our medical membership, including 3.3% of our total Medicare Advantage membership, at December 31, 2011, we contract with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, we prepay these providers a monthly fixed-fee per member, known...

  • Page 24
    ...health care services to our members in the event our providers fail to provide such services. Medical membership under these various arrangements was as follows at December 31, 2011 and 2010: Medical Membership December 31, 2011 December 31, 2010 Capitated HMO hospital system based ...Capitated HMO...

  • Page 25
    ..., and make payroll deductions for any premiums payable by the employees. We attempt to become an employer's or group's exclusive source of health insurance benefits by offering a variety of HMO, PPO, and specialty products that provide cost-effective quality health care coverage consistent with the...

  • Page 26
    ... management information systems, product development and administration, finance, human resources, accounting, law, public relations, marketing, insurance, purchasing, risk management, internal audit, actuarial, underwriting, claims processing, and customer service. Employees As of December 31, 2011...

  • Page 27
    ... 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 anticipated benefits to be incurred in future years. These future policy benefit reserves are recognized on a net level premium method...

  • Page 28
    ... benefits payable include $938 million at December 31, 2011 associated with a closed block of long-term care policies acquired in connection with the November 30, 2007 KMG America Corporation acquisition. Long-term care policies provide for long-duration coverage and, therefore, our actual claims...

  • Page 29
    ...our information systems and data integrity, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, have regulatory or other legal problems, have increases in...

  • Page 30
    ... 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, for...

  • Page 31
    ... design, management, and offering of products and services. These include and could include in the future claims relating to the methodologies for calculating premiums; claims relating to the denial of health care benefit payments; claims relating to the denial or rescission of insurance coverage...

  • Page 32
    ... Rico Health Insurance Administration, or PRHIA, we provided health insurance coverage to approximately 529,300 Medicaid members in Puerto Rico. These contracts accounted for approximately 2% of our total premiums and services revenue for the year ended December 31, 2011. Effective October 1, 2010...

  • Page 33
    ... collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses this diagnosis data to calculate the risk-adjusted premium payment to Medicare Advantage plans. We...

  • Page 34
    ... D program for which we assume no risk. Reinsurance subsidies represent payments for CMS's portion of claims costs which exceed the member's out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent payments from CMS for all or a portion of the deductible, the...

  • Page 35
    ... of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, and the Defense Contract Audit Agency. All of these activities could result in the loss of licensure or the right to participate in various programs, including a limitation on...

  • Page 36
    ... costs for insured products (and particularly how the ratio may apply to Medicare Advantage and possibly prescription drug plans), additional mandated benefits and guarantee issuance associated with commercial medical insurance, requirements that limit the ability of health plans to vary premiums...

  • Page 37
    ... additional limits on the use and disclosure of protected health information, or PHI. Among other things, ARRA requires us and other covered entities to report any unauthorized release or use of or access to PHI to any impacted individuals and to the U.S. Department of Health and Human Services in...

  • Page 38
    ... and managing physicians and other licensed healthcare providers, developing operating policies and procedures, implementing professional standards and controls, and maintaining malpractice insurance. We believe that our health services operations, including arrangements with Concentra's affiliated...

  • Page 39
    ..., rate increases, 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 issued by the applicable insurance...

  • Page 40
    ...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 to deliver quality medical services in...

  • Page 41
    ... care physicians for an actuarially determined, fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members. This type of contract is referred to as a "capitation" contract. The inability of providers to properly manage costs...

  • Page 42
    ... or 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...

  • Page 43
    ...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 attempt to mitigate or cover our exposure from such increased costs through, among other...

  • Page 44
    ... stock and the stocks of other companies in the insurance industry may be increasingly subject to stock price and trading volume volatility. Over the past three years, the stock markets have experienced significant price and trading volume volatility. Company-specific issues and market developments...

  • Page 45
    ...executive office is located in the Humana Building, 500 West Main Street, Louisville, Kentucky 40202. In addition to this property, our other principal operating facilities are located in Louisville, Kentucky; Green Bay, Wisconsin; Tampa Bay, Florida; Cincinnati, Ohio; and San Juan, Puerto Rico, all...

  • Page 46
    ... lawsuits, 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, general contractual matters, intellectual...

  • Page 47
    ... ISSUER 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...

  • Page 48
    ... 12/31/07 HUM ...S&P 500 ...Peer Group ...f) Issuer Purchases of Equity Securities $100 $100 $100 $136 $104 $116 $67 $64 $53 $79 $79 $81 $99 $89 $93 $158 $ 89 $125 In April 2011, the Board of Directors replaced its previously approved share repurchase authorization of up to $250 million with...

  • Page 49
    ... DATA 2011 (a) 2010 (b) 2009 2008 (c) 2007 (d) (dollars in millions, except per common share results) Summary of Operating Results: Revenues: Premiums ...$ Services ...Investment income ...Total revenues ...Operating expenses: Benefits ...Operating costs ...Depreciation and amortization ...Total...

  • Page 50
    ... write-down of deferred acquisition costs associated with our individual commercial medical policies and an expense of $139 million ($88 million after tax, or $0.52 per diluted common share) associated with reserve strengthening for our closed block of long-term care policies acquired in connection...

  • Page 51
    ...our Military services, primarily our TRICARE South Region contract, Medicaid, and closed-block long-term care businesses as well as our contract with CMS to administer the LI-NET program. The results of each segment are measured by income before income taxes. Transactions between reportable segments...

  • Page 52
    ... 2010. Any discussion of favorable prior-period medical claims reserve development in our results of operation discussion that follows refers to amounts that were not in the ordinary course of business. In April 2011, our Board of Directors approved the initiation of a quarterly cash dividend policy...

  • Page 53
    ... acquisition provides scalable analytics solutions that produce clinical insights which we believe will enhance our ability to improve the quality and lower the cost of health care for our members and customers. Effective December 30, 2011, we acquired the California-based Medicare Advantage HMO...

  • Page 54
    ... 5-year South Region contract, which expires March 31, 2017, is subject to annual renewals on April 1 of each year during its term at the government's option. • Health Insurance Reform In March 2010, the President signed into law The Patient Protection and Affordable Care Act and The Health Care...

  • Page 55
    ... classify rebate amounts as additions to incurred claims as opposed to adjustments to premiums for GAAP reporting. • Medicare Advantage payment benchmarks for 2011 were frozen at 2010 levels and beginning in 2012, additional cuts to Medicare Advantage plan payments will begin to take effect (plans...

  • Page 56
    ... on various aspects of the minimum benefit ratio requirement's applicability to Medicare, including aggregation, credibility thresholds, and its possible application to prescription drug plans. The response of other companies to the Health Insurance Reform Legislation and adjustments to their...

  • Page 57
    ...82.9% 13.2% 37.2% (a) Represents total benefit expenses as a percentage of premiums revenue. (b) Represents total operating costs as a percentage of total revenues less investment income. nm - not meaningful Summary Net income was $1.4 billion, or $8.46 per diluted common share, in 2011 compared to...

  • Page 58
    ...Retail segment as a result of increased expenses associated with servicing higher average Medicare Advantage membership. Operating costs for 2010 include $147 million for the write-down of deferred acquisition costs associated with our individual commercial medical policies in our Retail Segment. 48

  • Page 59
    .... Retail Segment 2011 2010 Change Members Percentage Membership: Medical membership: Individual Medicare Advantage ...Individual Medicare stand-alone PDP ...Total individual Medicare ...Individual commercial ...Total individual medical members ...Individual specialty membership (a) ... 1,640,300...

  • Page 60
    ... PDP membership increased 870,100 members, or 52.1%, from December 31, 2010 to December 31, 2011 primarily from higher gross sales year-over-year, particularly due to our low-price-point Humana Walmart-Preferred Rx Plan that we began offering for the 2011 plan year, supplemented by dual eligible and...

  • Page 61
    ... including care coordination and disease management, as well as a significant increase in our individual Medicare stand-alone PDP membership in 2011 that carries a lower benefit ratio, partially offset by lower favorable prior-period medical claims reserve development in 2011 than in 2010. Favorable...

  • Page 62
    ... Health Insurance Reform Legislation which became effective in 2011, partially offset by an increase in group Medicare Advantage membership. Rebates result in the recognition of lower premiums revenue, as amounts are set aside for payments to commercial customers during the following year. Benefit...

  • Page 63
    ... prior-period medical claims reserve development in 2011 versus 2010 and lower utilization of benefits in our commercial group products in 2011. Fully-insured group Medicare Advantage members represented 10.4% of total Employer Group segment medical membership at December 31, 2011 compared to...

  • Page 64
    ... block of long-term care policies. Excluding this charge, the year-over-year decline primarily reflects a decrease in pretax income associated with our contract with CMS to administer the LI-NET program. Comparison of Results of Operations for 2010 and 2009 Certain financial data on a consolidated...

  • Page 65
    ... account in 2010 partially offset by a decline in commercial ASO membership, as well as an increase in primary care services revenue in our Health and Well-Being Services segment primarily as a result of the acquisition of Concentra on December 21, 2010. Investment Income Investment income totaled...

  • Page 66
    policies in 2010, increased Medicare investment spending for our 2011 offerings, and operating costs associated with servicing higher average Medicare Advantage membership, partially offset by a decrease in the number of our employees as a result of our administrative cost reduction strategies, ...

  • Page 67
    ... prior-period medical claims reserve development in 2010. Enrollment • • Individual Medicare Advantage membership increased 54,100 members, or 3.8%, from December 31, 2009 to December 31, 2010, with sales of our PPO products driving the majority of the increase. Individual Medicare stand-alone...

  • Page 68
    ... to enroll in multiple products. 2010 2009 (in millions) Dollars Change Percentage Premiums and Services Revenue: Premiums: Fully-insured commercial group ...Group Medicare Advantage ...Group Medicare stand-alone PDP ...Total group Medicare ...Group specialty ...Total premiums ...Services ...Total...

  • Page 69
    ... year. The favorable development decreased the Employer Group segment benefit ratio by approximately 40 basis points in 2010. Fully-insured group Medicare Advantage members represented 9.1% of total Employer Group segment medical membership at December 31, 2010 compared to 3.3% at December 31, 2009...

  • Page 70
    ... 97.8% Health and Well-Being Services segment pretax income increased $36 million, or 19.7%, from 2009 to $219 million in 2010 primarily due to growth in both our mail order pharmacy business and our CAC medical centers. The opening of our new facility for processing specialty prescription drugs in...

  • Page 71
    ...of long-term care policies in 2010, partially offset by pretax income in 2010 associated with our new contract with CMS to administer the LI-NET program, under which we began providing services in the first quarter of 2010. Liquidity Our primary sources of cash include receipts of premiums, services...

  • Page 72
    ...length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in a lower IBNR). (2) Military services benefits payable primarily results from the timing of the cost of providing health care services to beneficiaries and the payment to...

  • Page 73
    ...the Puerto Rico Health Insurance Administration for our Medicaid business primarily resulted in the increase in commercial and other receivables for 2010 as compared to 2009 followed by a decrease from 2010 to 2011. In addition to the timing of receipts for premiums and services fees and payments of...

  • Page 74
    ... up to $1 billion of our common shares exclusive of shares repurchased in connection with employee stock plans. The new authorization will expire June 30, 2013. Under the new share repurchase authorization, shares could be purchased from time to time at prevailing prices in the open market, by block...

  • Page 75
    ... GAAP guidance issued by the FASB in July 2011, which indicates the insurance industry premium-based assessment should be accrued beginning in 2014, the year in which it is payable. Regulatory Requirements Certain of our subsidiaries operate in states that regulate the payment of dividends, loans...

  • Page 76
    ... to make payments for years subsequent to December 31, 2011 as follows: Payments Due by Period Less than 1 Year 1-3 Years 3-5 Years (in millions) More than 5 Years Total Debt ...Interest (1) ...Operating leases (2) ...Purchase obligations (3) ...Future policy benefits payable and other long-term...

  • Page 77
    ... collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses this diagnosis data to calculate the risk-adjusted premium payment to Medicare Advantage plans. We...

  • Page 78
    ... accounted for approximately 3% of our total premiums and services revenue for the year ended December 31, 2011, consists of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Effective October 1, 2010, as amended in May 2011, the Puerto Rico Health Insurance Administration...

  • Page 79
    ... results of operations and overall financial position. Accordingly, it represents a critical accounting estimate. Most benefit claims are paid within a few months of the member receiving service from a physician or other health care provider. As a result, these liabilities generally are described as...

  • Page 80
    ... of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, changes in medical management processes, product mix, and weekday seasonality. The completion factor method is used for the months of incurred claims prior to...

  • Page 81
    ... 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. 2011 2010 (in millions) 2009 Balances at...

  • Page 82
    ... increase in claim overpayment recoveries during 2011 for claims with 2010 and 2009 dates of service and during 2010 for claims with 2009 and 2008 dates of service, primarily as a result of increased audits of provider billings, as well as system enhancements that improved the claim recovery...

  • Page 83
    ... long-term care, life insurance, annuities, and certain health and other supplemental policies sold to individuals for which some of the premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves are recognized on a net level premium...

  • Page 84
    ... D Provisions We 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...

  • Page 85
    ... 31, 2011 was $363 million to other current assets and $139 million to trade accounts payable and accrued expenses. In order to allow plans offering enhanced benefits the maximum flexibility in designing alternative prescription drug coverage, CMS provided a demonstration payment option in lieu...

  • Page 86
    ... to claim processing, customer service, enrollment, and other services. We recognize the insurance 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...

  • Page 87
    ...defaults 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 $634 million and $597 million at December 31, 2011 and 2010, respectively, of tax-exempt securities guaranteed by monoline...

  • Page 88
    ...For debt securities, we take into account expectations of relevant market and economic data. For example, with respect to mortgage and asset-backed securities, such data includes underlying loan level data and structural features such as seniority and other forms of credit enhancements. A decline in...

  • Page 89
    ... 2009. Goodwill and Long-lived Assets At December 31, 2011, goodwill and other long-lived assets represented 23% of total assets and 51% of total stockholders' equity, compared to 23% and 55%, respectively, at December 31, 2010. We are required to test at least annually for impairment at a level of...

  • Page 90
    ... primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AA- at December 31, 2011. Our net unrealized position improved $328 million from a net unrealized gain position of $197 million at December 31, 2010 to a net unrealized gain position of...

  • Page 91
    ... indebtedness at December 31, 2011 and 2010. Our investment portfolio consists of cash, cash equivalents and investment securities. The modeling technique used to calculate the pro forma net change in pretax earnings considered the cash flows related to fixed income investments and debt, which...

  • Page 92
    ...in 2011 and $52 in 2010: ...Other current assets ...Total current assets ...Property and equipment, net ...Long-term investment securities ...Goodwill ...Other long-term assets ...Total assets ...LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Benefits payable ...Trade accounts payable and...

  • Page 93
    Humana Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31, 2011 2010 2009 (in millions, except per share results) Revenues: Premiums ...Services ...Investment income ...Total revenues ...Operating expenses: Benefits ...Operating costs ...Depreciation and ...

  • Page 94
    ...) Stock option exercises ...566 Stock option and restricted stock tax benefit ...Balances, December 31, 2010 ...190,245 Net income ...Net unrealized investment gains, net of tax expense of $109 million ...Reclassification adjustment for net realized gains included in net income, net of tax expense...

  • Page 95
    ...Change in securities lending payable ...Change in book overdraft ...Common stock repurchases ...Dividends paid ...Excess tax benefit from stock-based compensation ...Proceeds from stock option exercises and other, net ...Net cash (used in) provided by financing activities ...(Decrease) increase in...

  • Page 96
    ...the Department of Defense we primarily provide health insurance coverage to TRICARE members, accounting for approximately 10% of our consolidated premiums and services revenue in 2011. Health Insurance Reform In March 2010, the President signed into law The Patient Protection and Affordable Care Act...

  • Page 97
    ... revenues and costs in our consolidated statements of comprehensive income. Beginning January 1, 2011, costs of certain health and well-being services were reclassified as benefits expense including costs incurred by our wholly-owned mail order pharmacy from transactions with our members that were...

  • Page 98
    ...interest rate at the date of purchase. We participated in a securities lending program to optimize investment income. The program was terminated in the fourth quarter of 2011. We loaned certain investment securities for short periods of time in exchange for collateral initially equal to at least 102...

  • Page 99
    ...revenues. Medicare Part D We 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...

  • Page 100
    ... or trade accounts payable and accrued expenses depending on the contract balance at the end of the reporting period. For plans where we provide enhanced benefits and selected the alternative demonstration payment option in lieu of the reinsurance subsidy, we receive a monthly per member capitation...

  • Page 101
    ..., self-funded employers retain the risk of financing substantially all of the cost of health benefits. However, many ASO customers purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs. Accordingly, we have recorded premiums revenue and benefit...

  • Page 102
    ... our long-lived asset policy. Benefits Payable and Benefit Expense Recognition 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...

  • Page 103
    .... Capitation payments represent monthly contractual fees disbursed to primary care physicians and other providers who are responsible for providing medical care to members. Pharmacy costs represent payments for members' prescription drug benefits, net of rebates from drug manufacturers. Receivables...

  • Page 104
    ... employee's eligible retirement date. We estimate expected forfeitures and recognize compensation expense only for those awards which are expected to vest. We estimate the grant-date fair value of stock options using the Black-Scholes option-pricing model. In addition, we report certain tax effects...

  • Page 105
    ...publicly-traded companies in similar lines of business, and reviewing the underlying financial performance including estimating discounted cash flows. Auction rate securities are debt instruments with interest rates that reset through periodic short-term auctions. From time to time, liquidity issues...

  • Page 106
    ... 6, 2011, we acquired Anvita, Inc., or Anvita, a San Diego-based health care analytics company. The Anvita acquisition provides scalable analytics solutions that produce clinical insights which we expect to enhance our ability to improve the quality and lower the cost of health care for our members...

  • Page 107
    ... centers and worksite medical facilities. The Concentra acquisition provides us entry into the primary care space on a national scale, offering additional means for achieving health and wellness solutions and providing an expandable platform for growth with a management team experienced in physician...

  • Page 108
    ... Investment securities classified as current and long-term were as follows at December 31, 2011 and 2010, respectively: Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (in millions) Fair Value December 31, 2011 U.S. Treasury and other U.S. government corporations and agencies...

  • Page 109
    ...Our investment policy limits investments in a single issuer and requires diversification among various asset types. In addition, 22% of our tax-exempt securities were insured by bond insurers and had an equivalent weighted average S&P credit rating of AA exclusive of the bond insurers' guarantee. 99

  • Page 110
    ... in their economic and fiscal situations. We have no direct exposure to sovereign issuances of these five countries. All issuers of securities we own that were trading at an unrealized loss at December 31, 2011 remain current on all contractual payments. After taking into account these and other...

  • Page 111
    ...U.S. Treasury and agency obligations ...Mortgage-backed securities ...Tax-exempt municipal securities ...Mortgage-backed securities: Residential ...Commercial ...Asset-backed securities ...Corporate debt securities ...Redeemable preferred stock ...Total debt securities ...Securities lending invested...

  • Page 112
    ... are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities. 6. MEDICARE PART D As discussed in Note 2, we cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The consolidated balance...

  • Page 113
    ...our new reportable segments for the years ended December 31, 2011 and 2010 (retrospectively adjusted) were as follows: Employer Group Health & Well-Being Other Services Businesses (in millions) Retail Total Balance at December 31, 2009 ...Acquisitions ...Subsequent payments/adjustments ...Balance...

  • Page 114
    ...49 43 Activity in benefits payable, excluding military services, was as follows for the years ended December 31, 2011, 2010 and 2009: 2011 2010 (in millions) 2009 Balances at January 1 ...Acquisitions ...Incurred related to: Current year ...Prior years ...Total incurred ...Paid related to: Current...

  • Page 115
    ...increase in benefit expenses associated with future policy benefits payable during 2010 relates to reserve strengthening for our closed block of long-term care policies acquired in connection with the 2007 KMG America Corporation, or KMG, acquisition more fully described in Note 17. 10. INCOME TAXES...

  • Page 116
    ...for the years ended December 31, 2011, 2010 and 2009 due to the following: 2011 2010 2009 (in millions) Income tax provision at federal statutory rate ...States, net of federal benefit and Puerto Rico ...Tax exempt investment income ...Nondeductible executive compensation ...Contingent tax benefits...

  • Page 117
    ... Assets (Liabilities) 2011 2010 (in millions) Net operating loss carryforward ...Future policy benefits payable ...Benefits payable ...Compensation and other accrued expenses ...Deferred acquisition costs ...Capital loss carryforward ...Unearned premiums ...Other ...Total deferred income tax assets...

  • Page 118
    ... 8.15% due June 15, 2038 ...Total senior notes ...Other long-term borrowings ...Total long-term debt ... $ 530 507 319 267 1,623 36 $1,659 $ 535 508 322 267 1,632 37 $1,669 Senior Notes Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount...

  • Page 119
    ... retirement savings plans. Stock-Based Compensation We have plans under which options to purchase our common stock and restricted stock awards, including restricted stock units, have been granted to executive officers, directors and key employees. The terms and vesting schedules for stock...

  • Page 120
    ...book purposes. The actual tax benefit realized in our tax return is based on the intrinsic value, or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock awards vested during the period. The actual tax benefit realized for the deductions...

  • Page 121
    ... term of 2.5 years. The total intrinsic value of stock options exercised during 2011 was $88 million, compared with $11 million during 2010 and $24 million during 2009. Cash received from stock option exercises totaled $134 million in 2011, $17 million in 2010, and $18 million in 2009. Total...

  • Page 122
    ...5,675 In April 2011, our Board of Directors approved the initiation of a quarterly cash dividend policy. Declaration and payment of future quarterly dividends is at the discretion of the Board and may be adjusted as business needs or market conditions change. The following table provides details of...

  • Page 123
    ...Rent with scheduled escalation terms are accounted for on a straight-line basis over the lease term. Rent expense and sublease rental income, which are recorded net as an operating cost, for all operating leases were as follows for the years ended December 31, 2011, 2010 and 2009: 2011 2010 2009 (in...

  • Page 124
    ... generally are guaranteed by Humana Inc., 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 until discharged; and (3) payment to providers for services rendered prior...

  • Page 125
    ... collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses this diagnosis data to calculate the risk-adjusted premium payment to Medicare Advantage plans. We...

  • Page 126
    ... accounted for approximately 3% of our total premiums and services revenue for the year ended December 31, 2011, consists of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Effective October 1, 2010, as amended in May 2011, the Puerto Rico Health Insurance Administration...

  • Page 127
    ... was filed on November 30, 2010. We are currently involved in discovery on this matter, with trial currently scheduled for October 2012. On March 2, 2009, in a case styled Southeast Georgia Regional Medical Center, et al. v. Humana Military Healthcare Services, Inc., the named plaintiffs filed an...

  • Page 128
    ... business practices of health insurance and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, provider contracting, competitive practices, commission payments, privacy issues, utilization management practices, and sales practices, among...

  • Page 129
    ...our Military services, primarily our TRICARE South Region contract, Medicaid, and closed-block long-term care businesses as well as our contract with CMS to administer the LI-NET program. Our Health and Well-Being Services intersegment revenues primarily relate to managing prescription drug coverage...

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    ... responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, selecting and establishing prices charged by retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in...

  • Page 131
    ... Corporate Retail Consolidated 2011 Revenues-external customers Premiums: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Fully-insured ...Specialty ...Military services ...Medicaid and other ...Total premiums ...Services revenue: Provider ...ASO and other ...Pharmacy ...Total...

  • Page 132
    ...Retail 2010 Revenues-external customers Premiums: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Fully-insured ...Specialty ...Military services ...Medicaid and other ...Total premiums ...Services revenue: Provider ...ASO and other ...Pharmacy ...Total services revenue ...Total...

  • Page 133
    ...Retail 2009 Revenues-external customers Premiums: Medicare Advantage ...Medicare stand-alone PDP ...Total Medicare ...Fully-insured ...Specialty ...Military services ...Medicaid and other ...Total premiums ...Services revenue: Provider ...ASO and other ...Pharmacy ...Total services revenue ...Total...

  • Page 134
    ... benefits payable associated with our long-duration insurance products for the years ended December 31, 2011 and 2010. 2011 Deferred acquisition costs Future policy Deferred benefits acquisition payable costs (in millions) 2010 Future policy benefits payable Other long-term assets ...Trade accounts...

  • Page 135
    ... other long-term assets. Deferred acquisition costs included $54 million and $36 million associated with our individual commercial medical policies at December 31, 2011 and December 31, 2010, respectively. Future policy benefits payable associated with our individual commercial medical policies were...

  • Page 136
    ... presented below: Reinsurer Total Recoverable (in millions) A.M. Best Rating at December 31, 2011 Protective Life Insurance Company ...All others ... $198 238 $436 A+ (superior) A++ to B++ (superior to good) The all other category represents approximately 20 reinsurers with individual balances...

  • Page 137
    ... generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition...

  • Page 138
    ...individual commercial medical policies as more fully described in Note 17 to the consolidated financial statements. (2) Includes an expense of $139 million ($88 million after tax, or $0.52 per diluted common share) associated with reserve strengthening for our closed block of long-term care policies...

  • Page 139
    ... that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as specified in Securities and Exchange Commission rules and forms. Management's Report on Internal Control...

  • Page 140
    ... Company's internal control over financial reporting. Michael B. McCallister Chairman and Chief Executive Officer James H. Bloem Senior Vice President, Chief Financial Officer and Treasurer Steven E. McCulley Vice President and Controller, Principal Accounting Officer ITEM 9B. OTHER INFORMATION None...

  • Page 141
    ... December 2011. Prior to joining the Company, Mr. Broussard was Chief Executive Officer of McKesson Specialty/US Oncology, Inc. US Oncology was purchased by McKesson in December 2010. At US Oncology, Mr. Broussard served in a number of senior executive roles, including Chief Financial Officer, Chief...

  • Page 142
    ... of which should be reported to the Audit Committee. The code may be viewed through the Investor Relations section of our web site at www.humana.com. Any amendment to or waiver of the application of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers will be promptly...

  • Page 143
    ... 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 the Chief Executive Officer and Senior Financial Officers and...

  • Page 144
    ... with Management and Others" and "Corporate Governance - Independent Directors" of such Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled...

  • Page 145
    ... 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). (g) 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 Humana...

  • Page 146
    ...26, 2004). Form of Company's Stock Option Agreement under the 1996 Stock Incentive Plan for Employees (Incentive Stock Options) (incorporated herein by reference to Exhibit 10(b) to Humana Inc.'s Current Report on Form 8-K filed on August 26, 2004). Form of Company's Stock Option Agreement under the...

  • Page 147
    ... 10K filed on February 17, 2011). Letter agreement with Humana Inc. officers concerning health insurance availability (incorporated herein by reference to Exhibit 10(mm) to Humana Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1994). Executive Long-Term Disability Program...

  • Page 148
    ...kk) to Humana Inc.'s Annual Report on Form 10-K filed on February 19, 2010). Amendment of Solicitation/Modification of Contract, dated as of January 6, 2011, by and between Humana Military Healthcare Services, Inc. and the United States Department of Defense TRICARE Management Activity (incorporated...

  • Page 149
    ... compensatory plans or management contracts. Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. Submitted...

  • Page 150
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31, 2011 2010 (in millions, except share amounts) ASSETS Current assets: Cash and cash equivalents ...Investment securities ...Receivable from operating subsidiaries ...Other current assets ...Total ...

  • Page 151
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31, 2011 2010 2009 (in millions) Revenues: Management fees charged to operating subsidiaries ...Investment and other income, net ...Expenses: Operating costs ......

  • Page 152
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF CASH FLOWS For the year ended December 31, 2011 2010 2009 (in millions) Net cash provided by operating activities ...Cash flows from investing activities: Acquisitions ...Purchases of investment securities ......

  • Page 153
    ...in 2011, $747 million in 2010, and $774 million in 2009. Guarantee Through indemnity 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...

  • Page 154
    ...dividends that were able to be paid in 2011 without prior regulatory approval of approximately $740 million. 4. ACQUISITIONS Refer to Note 3 of the notes to consolidated financial statements in this Annual Report on Form 10-K for a description of acquisitions. 5. INCOME TAXES Refer to Note 10 of the...

  • Page 155
    Humana Inc. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2011, 2010, and 2009 (in millions) Additions Charged (Credited) to Charged to Costs and Other Expenses Accounts (1) Balance at Beginning of Period Acquired Balances Deductions or Write-offs Balance at End ...

  • Page 156
    ... 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. HUMANA INC. By: /S/ JAMES H. BLOEM James H. Bloem Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial...

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    Corporate Headquarters The Humana Building | 500 West Main Street | Louisville, KY 40202 | 502.580.1000 | Humana.com 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 ...

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    Humana.com