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2014 Annual Report
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Table of contents

  • Page 1
    2014 Annual Report G J7KTEN 0215 GCH

  • Page 2
    ... common share results) 2014 Operating Results Revenues Net income Diluted earnings per common share $48,500 $1,147 $7.36 2013 $41,313 $1,231 $7.73 2012 $39,126 $1,222 $7.47 2011 $36,832 $1,419 $8.46 2010 $33,596 $1,099 $6.47 Financial Position Total assets Total liabilities Total shareholder...

  • Page 3
    Top awards and recognition in 2014 Easiest health care company for providers to do business with #1 overall perf form mance e #1 speed of pa aying g health care e pro ovi ide ers Athenahealth Pay yerVie ew rankin ngs s 2013 and 2014 Awards for hiring and supporting veterans Secretary of Defense ...

  • Page 4
    ... Company to Work for Diversity, inclusion, military-friendly, health coaching, financial policies and more 2013 Finalist, GBCHealth Award For TeamUp4Health, a program that showed how small groups of committed individuals can impact the health of their community Global Healthcare Magazine, 2014

  • Page 5
    ... customer experience, 2) engaging our members in clinical programs based on these trusting relationships, and 3) offering assistance to providers in transitioning from fee-for-service to value-based reimbursement. This was accomplished by putting our nearly 14 million medical members at the center...

  • Page 6
    ... million members Total Medicare stand-alone Prescription Drug Plan membership This transformative work is consistent with Humana's own ongoing transformation. From a traditional health insurer with an episodic, claims-based relationship with our customers, we're becoming a health company dedicated...

  • Page 7
    ...care insurance policies reserve strengthening. **Includes $0.15 per share of expense related to early retirement of debt. Humana Chronic Care Program (HCCP) engagement rate $5.00 $2.50 days 496k more at home for our newly managed HCCP members $0.00 4 2012 2013 2014 2014 Annual Report 4 2014...

  • Page 8
    Board of Directors Kurt J. Hilzinger Chairman of the Board Humana Inc. Partner Court Square Capital Partners, LP Bruce D. Broussard President and Chief Executive Officer Humana Inc. Frank A. D'Amelio Executive Vice President, Business Operations and Chief Financial Officer Pfizer Inc. W. Roy ...

  • Page 9
    ... file number 1-5975 to (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 10
    ... 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 Part IV Item 15. Exhibits, Financial Statement Schedules...

  • Page 11
    ...Medicare Advantage contracts in Florida with the Centers for Medicare and Medicaid Services, or CMS, under which we provide health insurance coverage to approximately 542,400 members as of December 31, 2014. Humana Inc. was organized as a Delaware corporation in 1964. Our principal executive offices...

  • Page 12
    ... our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer to assess performance and allocate resources. Our Products Our medical and specialty insurance products allow members to access health care services...

  • Page 13
    ... 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 to 90 days per incident of illness plus a lifetime...

  • Page 14
    ...information to CMS within prescribed deadlines. At December 31, 2014, we provided health insurance coverage under CMS contracts to approximately 2,446,200 individual Medicare Advantage members, including approximately 542,400 members in Florida. These Florida contracts accounted for premiums revenue...

  • Page 15
    ...LI-NET prescription drug plan program, and subsequently transitions each member into a Medicare Part D plan that may or may not be a Humana Medicare plan. Medicare and Medicaid Dual Eligible and Long-Term Care Support Services Medicare beneficiaries who also qualify for Medicaid due to low income or...

  • Page 16
    ....6% n/a Our commercial products sold to employer groups include a broad spectrum of major medical benefits with multiple in-network coinsurance levels and annual deductible choices that employers of all sizes can offer to their employees on either a fully-insured, through HMO, PPO, or POS plans, or...

  • Page 17
    ... insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs. As with individual commercial policies, employers can customize their offerings with optional benefits such as dental, vision, life, and a portfolio of voluntary benefit products. Group Medicare Advantage...

  • Page 18
    ... involved in the care management of our customers with the greatest needs. Home based services include the operations of Humana At Home, Inc., or Humana At Home® (formerly known as SeniorBridge Family Companies, Inc.), acquired in 2012. As a chronic-care provider of in-home care for seniors, we...

  • Page 19
    ...-term care insurance policies are intended to protect the insured from the cost of long-term care services including those provided by nursing homes, assisted living facilities, and adult day care as well as home health care services. No new policies have been written since 2005 under this closed...

  • Page 20
    ... Group Group Medicare Advantage and standalone PDP Individual Commercial ASO Other Businesses Total Percent of Total Florida Texas Kentucky Georgia Ohio Illinois California Wisconsin Missouri/Kansas Tennessee Louisiana North Carolina Virginia Indiana Michigan Colorado Arizona Military services...

  • Page 21
    ... Advantage members, or 29.0% of our total individual Medicare Advantage membership. Physicians under capitation arrangements typically have stop loss coverage so that a physician's financial risk for any single member is limited to a maximum amount on an annual basis. We typically process all claims...

  • Page 22
    ... provides an opportunity to enroll Medicare eligible individuals in person. In addition, we market our individual Medicare and individual commercial health insurance and specialty products through licensed independent brokers and agents. For our Medicare products, commissions paid to employed sales...

  • Page 23
    ... 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 needs and...

  • Page 24
    ... Services We provide centralized management services to each of our health plans and to 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...

  • Page 25
    ... to cover services), and various other costs incurred to provide 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...

  • Page 26
    ... Medicare programs, state-based contracts, participation in health insurance exchanges, and expansion of clinical capabilities as part of our integrated care delivery model), investments in health and well-being product offerings, acquisitions, new taxes and assessments (including the non-deductible...

  • Page 27
    ... the successful implementation of our integrated care delivery model, our strategy with respect to state-based contracts, including those covering members dually eligible for the Medicare and Medicaid programs, and our participation in health insurance exchanges. We have made substantial investments...

  • Page 28
    ... effectively 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...

  • Page 29
    ... premiums; claims relating to the denial of health care benefit payments; claims relating to the denial or rescission of insurance coverage; challenges to the use of some software products used in administering claims; claims relating to our administration of our Medicare Part D offerings; medical...

  • Page 30
    ... December 31, 2014, under our contracts with CMS we provided health insurance coverage to approximately 542,400 individual Medicare Advantage members in Florida. These contracts accounted for approximately 15% of our total premiums and services revenue for the year ended December 31, 2014. The loss...

  • Page 31
    ... provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans. In 2012, CMS released a "Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits...

  • Page 32
    ... model principles are in accordance with the requirements of the Social Security Act, which if not implemented correctly, could have material adverse effect on our results of operations, financial position, or cash flows. • Our CMS contracts which cover members' prescription drugs under Medicare...

  • Page 33
    ... our medical and operating costs by, among other things, requiring a minimum benefit ratio on insured products, lowering our Medicare payment rates and increasing our expenses associated with a non-deductible health insurance industry fee and other assessments); our financial position (including...

  • Page 34
    ... small employers to purchase health insurance that became effective January 1, 2014, with an annual open enrollment period. Insurers participating on the health insurance exchanges must offer a minimum level of benefits and are subject to guidelines on setting premium rates and coverage limitations...

  • Page 35
    ... offer, payment, solicitation, or receipt of any form of remuneration to induce, or in return for, the referral of Medicare or other governmental health program patients or patient care opportunities, or in return for the purchase, lease, or order of items or services that are covered by Medicare or...

  • Page 36
    ... generally require, among other things, prior approval and/or notice of new products, rates, benefit changes, and certain material transactions, including dividend payments, purchases or sales of assets, intercompany agreements, and the filing of various financial and operational reports. Any...

  • Page 37
    ...health benefits businesses. Our pharmacy mail order business competes with locally owned drugstores, retail drugstore chains, supermarkets, discount retailers, membership clubs, Internet companies and other mail-order and long-term care pharmacies. Our pharmacy business also subjects us to extensive...

  • Page 38
    ... measure for determining payment by Medicare or Medicaid programs for the drugs sold in our mail-order pharmacy business may reduce the revenues and gross margins of this business which may result in a material adverse effect on our results of operations, financial position, and cash flows. If we do...

  • Page 39
    ...provided before paying a dividend even if approval is not required. Actual dividends paid may vary due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix. Dividends from our non-insurance companies...

  • Page 40
    ..., as well as the possibility that customers or lenders could develop a negative perception of our long or short-term financial prospects. Similarly, our access to funds could be limited if regulatory authorities or rating agencies were to take negative actions against us. If a combination of these...

  • Page 41
    ... table lists, by state, the number of medical centers and administrative offices we owned or leased at December 31, 2014: Medical Centers Owned Leased Administrative Offices Owned Leased Total Florida Texas California Georgia Kentucky Arizona Illinois Colorado Michigan Ohio Pennsylvania Tennessee...

  • Page 42
    ...as class-action lawsuits. Among other matters, this litigation may include employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate disputes, failure to disclose network discounts...

  • Page 43
    ... common stock. Dividends The following table provides details of dividend payments, excluding dividend equivalent rights, in 2013 and 2014: Record Date Payment Date Amount per Share Total Amount (in millions) 2013 payments 12/31/2012 3/28/2013 6/28/2013 9/30/2013 2014 payments 12/31/2013 3/31/2014...

  • Page 44
    ... of Contents Stock Total Return Performance The following graph compares our total return to stockholders with the returns of the Standard & Poor's Composite 500 Index ("S&P 500") and the Dow Jones US Select Health Care Providers Index ("Peer Group") for the five years ended December 31, 2014. The...

  • Page 45
    ... following table provides information about purchases by us during the three months ended December 31, 2014 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act: Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) Dollar Value...

  • Page 46
    ... share) for reserve strengthening associated with our non-strategic closed block of long-term care insurance policies. Includes the acquired operations of Arcadian Management Services, Inc. from March 31, 2012, SeniorBridge Family Companies, Inc. from July 6, 2012, and Metropolitan Health Networks...

  • Page 47
    ... prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, collectively our state-based contracts. The Employer Group segment consists of Medicare and commercial fully-insured medical and specialty health insurance...

  • Page 48
    ... in our Medicare Advantage, Medicare stand-alone PDP, and individual commercial medical offerings as well as increased membership in our clinical programs. In September 2014, we paid the federal government $562 million for the annual health insurance industry fee. This fee is not deductible for tax...

  • Page 49
    ... Medicare Advantage membership increased 377,500 members, or 18.2%, from December 31, 2013 to December 31, 2014 reflecting net membership additions, particularly for our HMO offerings, for the 2014 plan year as well as dual eligible members from state-based contracts in Virginia and Illinois...

  • Page 50
    ... cost ratio in 2014 on a revenue base that reflects growth from our pharmacy solutions and home based services businesses as they serve our growing Medicare membership. Programs to enhance the quality of care for members are key elements of our integrated care delivery model. We have accelerated...

  • Page 51
    ... Data, during 2013, we recorded net benefits expense of $243 million ($154 million after-tax, or $0.99 per diluted common share) for reserve strengthening related to our non-strategic closed-block of long-term care insurance policies acquired in connection with the 2007 acquisition of KMG. Health...

  • Page 52
    ... further lowering our Medicare payment rates and increasing our expenses associated with the non-deductible health insurance industry fee and other assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows (including the receipt of amounts...

  • Page 53
    ... 2013 (dollars in millions, except per common share results) Dollars Percentage Revenues: Premiums: Retail Employer Group Other Businesses Total premiums Services: Retail Employer Group Healthcare Services Other Businesses Total services Investment income Total revenues Operating expenses: Benefits...

  • Page 54
    ... from 2013 to $46.0 billion for 2014 primarily due to increases in both Retail and Employer Group segment premiums mainly driven by higher average individual and group Medicare Advantage membership as well as higher individual commercial medical membership. In addition, year-overyear comparisons to...

  • Page 55
    ... increased $1,284 million, or 20.2%, in 2014 compared to 2013 primarily due to costs mandated by the Health Care Reform Law, including the non-deductible health insurance industry fee, and investments in health care exchanges and state-based contracts, partially offset by operating cost efficiencies...

  • Page 56
    ... members have the ability to enroll in multiple products. Change 2014 2013 (in millions) Dollars Percentage Premiums and Services Revenue: Premiums: Individual Medicare Advantage Medicare stand-alone PDP Total Retail Medicare Individual commercial State-based Medicaid Individual specialty Total...

  • Page 57
    ... contracts, partially offset by increased membership in our clinical programs and the inclusion of the health insurance industry fee in the pricing of our products. The Retail segment's benefits expense for 2014 included the beneficial effect of $385 million in favorable prior-year medical claims...

  • Page 58
    ... members have the ability to enroll in multiple products. Change 2014 2013 (in millions) Dollars Percentage Premiums and Services Revenue: Premiums: Group Medicare Advantage Group Medicare stand-alone PDP Total group Medicare Fully-insured commercial group Group specialty Total premiums Services...

  • Page 59
    ... product distribution partnerships. • Premiums revenue • Employer Group segment premiums increased $1.0 billion, or 9.2%, from 2013 to 2014 primarily due to higher average group Medicare Advantage membership as well as an increase in fully-insured commercial group medical premiums per member...

  • Page 60
    ... cost ratio in 2014 on a revenue base that reflects growth from our pharmacy solutions and home based services businesses as they serve our growing Medicare membership. Script Volume • Humana Pharmacy Solutions® script volumes for the Retail and Employer Group segment membership increased to...

  • Page 61
    ... Financial Statements and Supplementary Data. In addition, from time to time, we evaluate alternatives for our businesses that do not meet our strategic, growth or profitability objectives. Among the businesses that we are currently evaluating is our closed block of long-term care insurance policies...

  • Page 62
    ... 2012 (dollars in millions, except per common share results) Dollars Percentage Revenues: Premiums: Retail Employer Group Other Businesses Total premiums Services: Retail Employer Group Healthcare Services Other Businesses Total services Investment income Total revenues Operating expenses: Benefits...

  • Page 63
    ... share in 2013 for reserve strengthening associated with our closed-block of long-term care insurance policies included with Other Businesses as discussed in Note 18 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. Year-over-year comparisons...

  • Page 64
    ... rate to the effective tax rate. Retail Segment Change 2013 2012 Members Percentage Membership: Medical membership: Individual Medicare Advantage Medicare stand-alone PDP Total Retail Medicare Individual commercial State-based Medicaid Total Retail medical members Individual specialty membership...

  • Page 65
    ...and Florida LongTerm Support Services contracts, including American Eldercare. Individual specialty membership increased 93,800 members, or 9.9%, from December 31, 2012 to December 31, 2013 primarily driven by increased membership in dental and vision offerings. • • • • Premiums revenue...

  • Page 66
    ... Health Care Reform Law and new state-based contracts as well as increased Medicare marketing spending. Employer Group Segment Change 2013 2012 Members Percentage Membership: Medical membership: Fully-insured commercial group ASO Group Medicare Advantage Medicare Advantage ASO Total group Medicare...

  • Page 67
    ... 2012 (in millions) Dollars 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 premiums and services revenue Income before income taxes Benefit...

  • Page 68
    ... in pretax income associated with our home based services business reflects the increase in home health services provided to our Medicare Advantage members. Script Volume • Humana Pharmacy Solutions® script volumes for the Retail and Employer Group segment membership increased to approximately...

  • Page 69
    ... strengthening for our closed-block of long-term care insurance policies further discussed in Note 18 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data. In addition, 2013 reflects the loss of our Medicaid contracts in Puerto Rico effective...

  • Page 70
    ..., and the timing of working capital items as discussed below. Cash flows were positively impacted by annual Medicare enrollment gains because premiums generally are collected in advance of claim payments by a period of up to several months. In addition, 2014 operating cash flows were impacted by...

  • Page 71
    ... Supplementary Data. Many provisions of the Health Care Reform Law became effective in 2014, including the commercial risk adjustment, risk corridor, and reinsurance provisions as well as the non-deductible health insurance industry fee. As discussed previously, the timing of payments and receipts...

  • Page 72
    ...premiums and services revenues, payments of benefits expense, and amounts due under the risk limiting and health insurance industry fee provisions of the Health Care Reform Law, other working capital items impacting operating cash flows primarily resulted from the timing of payments for the Medicare...

  • Page 73
    ...Uses of Liquidity Dividends The following table provides details of dividend payments, excluding dividend equivalent rights, in 2012, 2013, and 2014 under our Board approved quarterly cash dividend policy: Payment Date 2012 2013 2014 Amount per Share $1.02 $1.06 $1.10 $ $ $ Total Amount (in millions...

  • Page 74
    ... December 31, 2014. Liquidity Requirements We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund...

  • Page 75
    ...of ordinary dividends that may be paid to our parent company in 2015 is approximately $800 million in the aggregate. In September 2014, we paid the federal government $562 million for the annual health insurance industry fee attributed to calendar year 2014, in accordance with the Health Care Reform...

  • Page 76
    ... consolidated financial statements and accompanying notes. We continuously evaluate our estimates and those critical accounting policies related primarily to benefits expense and revenue recognition as well as accounting for impairments related to our investment securities, goodwill, and long-lived...

  • Page 77
    ... 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 the...

  • Page 78
    ... in completion factors for incurred months prior to the most recent three months. (b) Reflects estimated potential changes in benefits payable at December 31, 2014 caused by changes in annualized claims trend used for the estimation of per member per month incurred claims for the most recent three...

  • Page 79
    ... 2012. The table below details our favorable medical claims reserve development related to prior fiscal years by segment for 2014, 2013, and 2012. Favorable Medical Claims Reserve Development 2014 2013 2012 (in millions) Change 2014 2013 Retail Segment Employer Group Segment Other Businesses Total...

  • Page 80
    ... be adequate to provide for future expected policy benefits and maintenance costs. Future policy benefits payable include $1.5 billion at December 31, 2014 and $1.4 billion at December 31, 2013 associated with a non-strategic closed block of long-term care insurance policies acquired in connection...

  • Page 81
    liability at December 31, 2013. Amounts charged to accumulated other comprehensive income are net of applicable deferred taxes. Long-term care insurance policies provide nursing home and home health coverage for which premiums are collected many years in advance of benefits paid, if any. Therefore, ...

  • Page 82
    ... 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 services contracts with the federal government and our contracts with various state Medicaid programs...

  • Page 83
    ...2014 Percentage of Total December 31, 2013 Percentage of Total (dollars in millions) U.S. Treasury and other U.S. government corporations and agencies: U.S. Treasury and agency obligations Mortgage-backed securities Tax-exempt municipal securities Mortgage-backed securities: Residential Commercial...

  • Page 84
    ...of the security; changes in credit rating of the security by the rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, we take into account expectations of relevant market and economic data. For example...

  • Page 85
    ... the long-term inflation rate. Key assumptions in our cash flow projections, including changes in membership, premium yields, medical and operating cost trends, and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process...

  • Page 86
    ... 31, 2014 and 2013. 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 are subject to interest rate...

  • Page 87
    ... earnings does not reflect the full 3% point reduction. (b) The interest rate under our senior notes is fixed. There were no borrowings outstanding under the credit agreement at December 31, 2014 or December 31, 2013 or under our commercial paper program (commenced in October 2014) at December 31...

  • Page 88
    ... share amounts) 2013 ASSETS Current assets: Cash and cash equivalents Investment securities Receivables, less allowance for doubtful accounts of $137 in 2014 and $118 in 2013 Other current assets Total current assets Property and equipment, net Long-term investment securities Goodwill Other long...

  • Page 89
    Humana Inc. CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 2014 2013 (in millions, except per share results) 2012 Revenues: Premiums Services Investment income Total revenues Operating expenses: Benefits Operating costs Depreciation and amortization Total operating expenses ...

  • Page 90
    Humana Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31, 2014 2013 (in millions) 2012 Net income Other comprehensive income (loss): Change in gross unrealized investment gains/losses Effect of income taxes Total change in unrealized investment gains/losses, net of...

  • Page 91
    ... tax benefit Balances, December 31, 2012 Net income Other comprehensive loss Common stock repurchases Dividends and dividend equivalents Stock-based compensation Restricted stock unit vesting Stock option exercises Stock option and restricted stock tax benefit Balances, December 31, 2013 Net income...

  • Page 92
    ... sales of investment securities Net cash used in investing activities Cash flows from financing activities Receipts (withdrawals) from contract deposits, net Proceeds from issuance of senior notes, net Repayment of long-term debt Common stock repurchases Dividends paid Excess tax benefit from stock...

  • Page 93
    ... contracts with the Centers for Medicare and Medicaid Services, or CMS, to provide health insurance coverage for individual Medicare Advantage members in Florida. CMS is the federal government's agency responsible for administering the Medicare program. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...

  • Page 94
    ...annual premium-based fee on health insurers for each calendar year beginning on or after January 1, 2014 which is not deductible for tax purposes. We are required to estimate a liability for the health insurer fee and record it in full once qualifying insurance coverage is provided in the applicable...

  • Page 95
    ... for calendar years 2014 through 2016 to a state or HHS established reinsurance entity based on a national contribution rate per covered member as determined by HHS. While all commercial medical plans, including self-funded plans, are required to fund the reinsurance entity, only fully-insured non...

  • Page 96
    ... 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 services contracts with the federal government and our contracts with various state Medicaid programs...

  • Page 97
    ... 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 premiums revenue...

  • Page 98
    ... claim processing, customer service, enrollment, and other services. We recognized the insurance premium as revenue ratably over the period coverage was provided. Health care services reimbursements were recognized as revenue in the period health services were provided. Administrative services fees...

  • Page 99
    ... employer-group prepaid health services policies typically have a 1-year term and may be cancelled upon 30 days notice by the employer group. Life insurance, annuities, and certain health and other supplemental policies sold to individuals are accounted for as long-duration insurance products...

  • Page 100
    ... our long-lived asset policy. Benefits Payable and Benefits Expense Recognition Benefits expense includes 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...

  • Page 101
    ... income taxes. Derivative Financial Instruments On October 29, 2012, we acquired a noncontrolling equity interest in MCCI Holdings, LLC, or MCCI, a privately held Medical Services Organization, or MSO, headquartered in Miami, Florida that coordinates medical care for Medicare Advantage and Medicaid...

  • Page 102
    ... securities of 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...

  • Page 103
    ...American Eldercare complements our core capabilities and strength in serving seniors and disabled individuals with a unique focus on individualized and integrated care, and has contracts to provide Medicaid long-term support services across the entire state of Florida. The enrollment effective dates...

  • Page 104
    ... as deductible expenses for tax purposes. The other intangible assets, which primarily consist of customer contracts and provider contracts, have a weighted average useful life of 9.7 years. The results of operations and financial condition of American Eldercare, Metropolitan, Humana At Home, and...

  • Page 105
    Humana Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 4. INVESTMENT SECURITIES Investment securities classified as current and long-term were as follows at December 31, 2014 and 2013, respectively: Gross Unrealized Gains Gross Unrealized Losses Amortized Cost Fair Value (in millions)...

  • Page 106
    ... FINANCIAL STATEMENTS-(Continued) Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at December 31, 2014 and 2013, respectively: Less than 12 months Fair...

  • Page 107
    ... of realized gains (losses) related to investment securities and included within investment income was as follows for the years ended December 31, 2014, 2013, and 2012: 2014 2013 (in millions) 2012 Gross realized gains Gross realized losses Net realized capital gains $ $ 29 $ (9) 20 $ 33 $ (11...

  • Page 108
    ...2013, respectively, for financial assets measured at fair value on a recurring basis: Fair Value Measurements Using Quoted Prices Other in Active Observable Markets Inputs (Level 1) (Level 2) (in millions) Unobservable Inputs (Level 3) Fair Value December 31, 2014 Cash equivalents Debt securities...

  • Page 109
    ...completed our acquisitions of American Eldercare, Metropolitan, SeniorBridge, Arcadian, and other companies during 2014, 2013, and 2012. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of...

  • Page 110
    ... 2, 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, 2014 and 2013: 2014 Risk Corridor Settlement CMS Subsidies/ Discounts Risk...

  • Page 111
    ... of goodwill for our reportable segments for the years ended December 31, 2014 and 2013 were as follows: Retail Employer Group Healthcare Services (in millions) Other Businesses Total Balance at December 31, 2012 Acquisitions Dispositions Subsequent payments/adjustments Balance at December...

  • Page 112
    ...improvements during 2014 and 2013 resulted from increased membership and favorable medical claims reserve development due to better than originally expected utilization across most of our major business lines and increased financial recoveries. The increase in financial recoveries primarily resulted...

  • Page 113
    ...rate for the years ended December 31, 2014, 2013 and 2012 due to the following: 2014 2013 (in millions) 2012 Income tax provision at federal statutory rate States, net of federal benefit, and Puerto Rico Tax exempt investment income Health insurer fee Nondeductible executive compensation Other, net...

  • Page 114
    ... 31, 2014. We file income tax returns in the United States and certain foreign jurisdictions. The U.S. Internal Revenue Service, or IRS, has completed its examinations of our consolidated income tax returns for 2012 and prior years. Our 2013 tax return is in the post-filing review period under...

  • Page 115
    Humana Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) subject to state, local and foreign tax examinations for years before 2011. As of December 31, 2014, we are not aware of any material adjustments that may be proposed. 12. DEBT The carrying value of long-term debt outstanding was as ...

  • Page 116
    ... the extent it was deductible for federal income tax purposes. The Company's cash match is invested pursuant to the participant's contribution direction. Based on the closing price of our common stock of $143.63 on December 31, 2014, approximately 13% of the retirement and savings plan's assets were...

  • Page 117
    ... retirement-eligible. Upon exercise, stock-based compensation awards are settled with authorized but unissued company stock or treasury stock. The compensation expense that has been charged against income for these plans was as follows for the years ended December 31, 2014, 2013, and 2012: 2014 2013...

  • Page 118
    ... was estimated on the date of grant using the Black-Scholes pricing model with the weighted-average assumptions indicated below: 2014 2013 2012 Weighted-average fair value at grant date Expected option life (years) Expected volatility Risk-free interest rate at grant date Dividend yield $ 22.45...

  • Page 119
    ... was as follows for the years ended December 31, 2014, 2013 and 2012: 2014 2013 (dollars in millions, except per common share results, number of shares/options in thousands) 2012 Net income available for common stockholders $ Weighted-average outstanding shares of common stock used to compute basic...

  • Page 120
    ... STATEMENTS-(Continued) 15. STOCKHOLDERS' EQUITY Dividends The following table provides details of dividend payments, excluding dividend equivalent rights, in 2012, 2013, and 2014 under our Board approved quarterly cash dividend policy: Payment Date Amount per Share Total Amount (in millions) 2012...

  • Page 121
    ... million in 2013, and 0.7 million common shares for $58 million in 2012. Regulatory Requirements Certain of our insurance subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as...

  • Page 122
    .... Government Contracts Our Medicare products, which accounted for approximately 72% of our total premiums and services revenue for the year ended December 31, 2014, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the...

  • Page 123
    ... provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans. In 2012, CMS released a "Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits...

  • Page 124
    ..., financial position, and cash flows. Our state-based Medicaid business accounted for approximately 2% of our total premiums and services revenue for the year ended December 31, 2014. In addition to our state-based Medicaid contracts in Florida and Kentucky, we have contracts in Illinois and...

  • Page 125
    ... Medicare Part D prescription drug program and other litigation. A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extracontractual damages, care delivery malpractice, and claims arising from medical benefit denials are covered...

  • Page 126
    ... prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, collectively our state-based contracts. The Employer Group segment consists of Medicare and commercial fully-insured medical and specialty health insurance...

  • Page 127
    ... retail pharmacies at the point of service. In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based managed care agreements with our health plans. Under these agreements, the provider receives a monthly capitated fee that...

  • Page 128
    ...31, 2014, 2013, and 2012: Retail 2014 Employer Group Healthcare Services Other Businesses Eliminations/ Corporate Consolidated (in millions) Revenues-external customers Premiums: Medicare Advantage Medicare stand-alone PDP Total Medicare Fully-insured Specialty Military services Medicaid and...

  • Page 129
    ... 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 revenues-external customers Intersegment revenues Services Products Total...

  • Page 130
    ... FINANCIAL STATEMENTS-(Continued) Retail 2012 Employer Group Healthcare Services Other Businesses Eliminations/ Corporate Consolidated (in millions) Revenues-external customers Premiums: Medicare Advantage Medicare stand-alone PDP Total Medicare Fully-insured Specialty Military services Medicaid...

  • Page 131
    ... liability at December 31, 2013. Amounts charged to accumulated other comprehensive income are net of applicable deferred taxes. Long-term care insurance policies provide nursing home and home health coverage for which premiums are collected many years in advance of benefits paid, if any. Therefore...

  • Page 132
    ...Future policy benefits payable associated with our individual commercial medical policies were $297 million at December 31, 2014 and $327 million at December 31, 2013. 19. REINSURANCE Certain blocks of insurance assumed in acquisitions, primarily life, long-term care, and annuities in run-off status...

  • Page 133
    ... by the strong financial ratings at December 31, 2014 presented below: Reinsurer Total Recoverable (in millions) A.M. Best Rating at December 31, 2014 Protective Life Insurance Company Munich American Reassurance Company Employers Reassurance Corporation General Re Life Corporation All others...

  • Page 134
    ..., on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • Page 135
    Humana Inc. QUARTERLY FINANCIAL INFORMATION (Unaudited) A summary of our quarterly unaudited results of operations for the years ended December 31, 2014 and 2013 follows: 2014 First Second Third Fourth (in millions, except per share results) Total revenues Income before income taxes Net income ...

  • Page 136
    ...members of senior management and the Board of Directors. Based on our evaluation as of December 31, 2014, we as the principal executive officer and the principal financial officer and the principal accounting officer of the Company have concluded that the Company's disclosure controls and procedures...

  • Page 137
    ... control over financial reporting as of December 31, 2014 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 report which...

  • Page 138
    ... currently serves as Director, President and Chief Executive Officer (Principal Executive Officer), having held these positions since January 1, 2013. Mr. Broussard was elected President upon joining the Company in December 2011 and served in that capacity through December 2012. Prior to joining the...

  • Page 139
    ... Chief Human Resources Officer, having been elected to this position in December 2012. Prior to joining the Company, Mr. Huval spent 10 years at Bank of America in multiple senior-level roles, including Human Resources executive and Chief Information Officer for Global Wealth & Investment Management...

  • Page 140
    ... 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, currently known as the Humana Inc. Ethics Every Day. All employees and directors are required to annually affirm in writing their acceptance of the code...

  • Page 141
    ... thereto; and the Code of Conduct for the Chief Executive Officer and Senior Financial Officers and any waivers thereto. Additional information about these items can be found in, and is incorporated by reference to, our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on...

  • Page 142
    ... to 2.29 stock options in the 2011 Plan). The information under the captions "Security Ownership of Certain Beneficial Owners of Company Common Stock" and "Security Ownership of Directors and Executive Officers" in our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held...

  • Page 143
    ... Financial Statement Schedules are included herein: Schedule I Schedule II Parent Company Financial Information Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable. (3) 3(a) Exhibits: Restated Certificate of Incorporation of Humana Inc. filed...

  • Page 144
    ... Report on Form 10-K filed on February 19, 2010). Humana Inc. Amended and Restated 2003 Stock Incentive Plan (incorporated herein by reference to Appendix A to Humana Inc.'s Proxy Statement with respect to the Annual Meeting of Stockholders held on April 27, 2006). Humana Inc. Executive Management...

  • Page 145
    ... 2013. Form of Company's Restricted Stock Unit Agreement with Non-Compete/Non-Solicit under the Amended and Restated 2003 Stock Incentive Plan (incorporated herein by reference to Exhibit 10(y) to Humana Inc.'s Annual Report on Form 10-K filed on February 24, 2012). Five-Year Credit Agreement, dated...

  • Page 146
    ... 2014). Agreement between the United States Department of Defense and Humana Military Healthcare Services, Inc., a wholly owned subsidiary of Humana Inc., dated as March 3, 2011 (incorporated herein by reference to Exhibit 10(mm) to Humana Inc.'s Annual Report on Form 10-K filed on February 24, 2012...

  • Page 147
    ... including 10(ff) and 10(hh) are 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...

  • Page 148
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31, 2014 2013 (in millions, except share amounts) ASSETS Current assets: Cash and cash equivalents Investment securities Receivable from operating subsidiaries Other current assets Total current assets ...

  • Page 149
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF INCOME For the year ended December 31, 2014 2013 (in millions) 2012 Revenues: Management fees charged to operating subsidiaries Investment and other income, net Expenses: Operating costs Depreciation Interest $ ...

  • Page 150
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31, 2014 2013 (in millions) 2012 Net income Other comprehensive income (loss): Change in gross unrealized investment gains/losses Effect of income taxes Total change ...

  • Page 151
    Humana Inc. SCHEDULE I-PARENT COMPANY FINANCIAL INFORMATION CONDENSED STATEMENTS OF CASH FLOWS For the year ended December 31, 2014 2013 (in millions) 2012 Net cash provided by operating activities Cash flows from investing activities: Acquisitions Capital contributions to operating subsidiaries ...

  • Page 152
    ... required, by state regulatory authorities, Humana Inc., our parent company, charges a management fee for reimbursement of certain centralized services provided to its subsidiaries including information systems, disbursement, investment and cash administration, marketing, legal, finance, and medical...

  • Page 153
    ... financial statements in this Annual Report on Form 10-K for a description of acquisitions. During 2014 and 2013, we funded certain non-regulated subsidiary acquisitions, including the acquisition of American Eldercare Inc., with contributions from Humana Inc., our parent company, included...

  • Page 154
    Humana Inc. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2014, 2013, and 2012 (in millions) Additions Charged (Credited) to Costs and Expenses Balance at Beginning of Period Acquired Balances Charged to Other Accounts (1) Deductions or Write-offs Balance at End...

  • Page 155
    ... requirements of Sections 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/ BRIAN A. KANE Brian A. Kane Senior Vice President and Chief Financial Officer (Principal...

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  • Page 157
    ... 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 Company's Internet site...

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    Humana.com Humana.com GCHJ7KTEN 0215