10-Q 1 d390018d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 1-5975

 

 

HUMANA INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   61-0647538
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

500 West Main Street

Louisville, Kentucky 40202

(Address of principal executive offices, including zip code)

(502) 580-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class of Common Stock

$0.16 2/3 par value

  

Outstanding at

September 30, 2012

158,223,755 shares

 

 

 


Table of Contents

Humana Inc.

FORM 10-Q

SEPTEMBER 30, 2012

INDEX

 

          Page  
   Part I: Financial Information   
Item 1.    Financial Statements   
   Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011      3   
   Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011      4   
  

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011

     5   
   Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011      6   
   Notes to Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      46   
Item 4.    Controls and Procedures      47   
   Part II: Other Information   
Item 1.    Legal Proceedings      48   
Item 1A.    Risk Factors      48   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      50   
Item 3.    Defaults Upon Senior Securities      51   
Item 4.    Mine Safety Disclosures      51   
Item 5.    Other Information      51   
Item 6.    Exhibits      51   
   Signatures      52   
   Certifications   

 


Table of Contents

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,
2012
    December 31,
2011
 
     (in millions, except share amounts)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,363      $ 1,377   

Investment securities

     8,058        7,743   

Receivables, less allowance for doubtful accounts of $94 in 2012 and $85 in 2011:

     642        1,034   

Other current assets

     1,615        1,027   
  

 

 

   

 

 

 

Total current assets

     11,678        11,181   
  

 

 

   

 

 

 

Property and equipment, net

     1,034        912   

Long-term investment securities

     1,837        1,710   

Goodwill

     2,962        2,740   

Other long-term assets

     1,286        1,165   
  

 

 

   

 

 

 

Total assets

   $ 18,797      $ 17,708   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Benefits payable

   $ 3,958      $ 3,754   

Trade accounts payable and accrued expenses

     1,962        1,783   

Book overdraft

     277        306   

Unearned revenues

     172        213   
  

 

 

   

 

 

 

Total current liabilities

     6,369        6,056   

Long-term debt

     1,616        1,659   

Future policy benefits payable

     1,851        1,663   

Other long-term liabilities

     270        267   
  

 

 

   

 

 

 

Total liabilities

     10,106        9,645   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $1 par; 10,000,000 shares authorized; none issued

     0        0   

Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 194,285,994 shares issued at September 30, 2012 and 193,230,310 shares issued at December 31, 2011

     32        32   

Capital in excess of par value

     2,079        1,938   

Retained earnings

     7,731        6,825   

Accumulated other comprehensive income

     397        303   

Treasury stock, at cost, 36,062,239 shares at September 30, 2012 and 29,225,996 shares at December 31, 2011

     (1,548     (1,035
  

 

 

   

 

 

 

Total stockholders’ equity

     8,691        8,063   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 18,797      $ 17,708   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  
     (in millions, except per share results)  

Revenues:

           

Premiums

   $ 9,088       $ 8,852       $ 28,029       $ 26,468   

Services

     467         356         1,251         1,035   

Investment income

     96         93         289         273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     9,651         9,301         29,569         27,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Benefits

     7,467         7,147         23,469         21,761   

Operating costs

     1,408         1,361         4,175         3,810   

Depreciation and amortization

     75         67         218         201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,950         8,575         27,862         25,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     701         726         1,707         2,004   

Interest expense

     26         27         78         82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     675         699         1,629         1,922   

Provision for income taxes

     249         254         599         702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 426       $ 445       $ 1,030       $ 1,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 2.65       $ 2.71       $ 6.34       $ 7.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 2.62       $ 2.67       $ 6.27       $ 7.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per common share

   $ 0.26       $ 0.25       $ 0.77       $ 0.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  
     (in millions)  

Net income

   $ 426      $ 445      $ 1,030      $ 1,220   

Other comprehensive income:

        

Gross unrealized investment gain

     116        145        168        258   

Effect of income taxes

     (42     (53     (61     (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized investment gain, net of tax

     74        92        107        164   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification adjustment for net realized

gains included in net income

     (6     (2     (20     (7

Effect of income taxes

     2        1        7        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassification adjustment, net of tax

     (4     (1     (13     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     70        91        94        160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 496      $ 536      $ 1,124      $ 1,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the nine months ended
September 30,
 
     2012     2011  
     (in millions)  

Cash flows from operating activities

    

Net income

   $ 1,030      $ 1,220   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net realized capital gains

     (20     (7

Stock-based compensation

     68        53   

Depreciation and amortization

     238        225   

(Benefit) provision for deferred income taxes

     (6     12   

Changes in operating assets and liabilities, net of effect of businesses acquired:

    

Receivables

     436        (77

Other assets

     (236     (205

Benefits payable

     131        399   

Other liabilities

     121        392   

Unearned revenues

     (95     1,820   

Other, net

     51        44   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,718        3,876   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Acquisitions, net of cash acquired

     (288     (14

Purchases of property and equipment

     (304     (216

Purchases of investment securities

     (2,166     (2,667

Maturities of investment securities

     1,111        1,129   

Proceeds from sales of investment securities

     894        625   
  

 

 

   

 

 

 

Net cash used in investing activities

     (753     (1,143
  

 

 

   

 

 

 

Cash flows from financing activities

    

Receipts (withdrawals) from contract deposits, net

     (347     225   

Repayment of long-term debt

     (36     0   

Change in book overdraft

     (29     (110

Common stock repurchases

     (513     (541

Dividends paid

     (124     (41

Excess tax benefit from stock-based compensation

     21        12   

Proceeds from stock option exercises and other

     49        68   
  

 

 

   

 

 

 

Net cash used in financing activities

     (979     (387
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (14     2,346   

Cash and cash equivalents at beginning of period

     1,377        1,673   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,363      $ 4,019   
  

 

 

   

 

 

 

Supplemental cash flow disclosures:

    

Interest payments

   $ 65      $ 68   

Income tax payments, net

   $ 514      $ 718   

See accompanying notes to condensed consolidated financial statements.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2011, that was filed with the Securities and Exchange Commission, or the SEC, on February 24, 2012. We refer to the Form 10-K as the “2011 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.

The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates. Refer to Note 2 to the consolidated financial statements included in our 2011 Form 10-K for information on accounting policies that the Company considers in preparing its consolidated financial statements.

The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.

Military Services

On April 1, 2012, we began delivering services under a new TRICARE South Region contract with the Department of Defense, or DoD. Under the new contract, we provide administrative services, including offering access to our provider networks and clinical programs, claim processing, customer service, enrollment, and other services, while the federal government retains all of the risk of the cost of health benefits. Under the terms of the new TRICARE South Region contract, we do not record premiums revenue or benefit expenses in our condensed consolidated statements of income related to these health care costs and related reimbursements. Instead, we account for revenues under the new contract net of estimated health care costs similar to an administrative services fee only agreement. The new contract includes fixed administrative services fees and incentive fees and penalties. Administrative services fees are recognized as services are performed.

Our TRICARE members are served by both in-network and out-of-network providers in accordance with the new TRICARE South Region contract. We pay health care costs related to these services to the providers and are subsequently reimbursed by the DoD for such payments. We account for the payments associated with these health care costs and the related reimbursements under deposit accounting in our consolidated balance sheets and as a financing activity under receipts (withdrawals) from contract deposits in our consolidated statements of cash flows. For the first six months of the new TRICARE South Region contract, April 1, 2012 to September 30, 2012, health care cost payments were $1.3 billion, exceeding reimbursements of $1.2 billion by $65 million.

As described in Note 2 to the consolidated financial statements included in our 2011 Form 10-K, our previous TRICARE South Region contract that expired on March 31, 2012 provided a financial interest in the underlying health care cost; therefore, we reported revenues on a gross basis. We shared the risk with the federal government for the cost of health benefits in our previous contract, earning more revenue or incurring additional cost based on the variance of actual health care costs versus an annually negotiated target health care cost.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There are no recently issued accounting standards that apply to us or that will have a material impact on our results of operations, financial condition, or cash flows.

3. ACQUISITIONS

On November 5, 2012, we announced that we had entered into a definitive agreement to acquire Metropolitan Health Networks, Inc., or Metropolitan, a Management Services Organization, or MSO, that coordinates medical care for Medicare Advantage and Medicaid beneficiaries primarily in Florida. Under the terms of the agreement, we will pay $11.25 per share in cash to acquire all of the outstanding shares of Metropolitan and repay all outstanding debt for an estimated transaction value of approximately $850 million plus transaction expenses. The closing of the transaction is subject to Metropolitan shareholder approval as well as federal and state regulatory approval and is expected to close by the end of the first quarter of 2013. We expect to finance this transaction with a combination of cash and debt.

In October 2012, we acquired a noncontrolling equity interest in MCCI Holdings, LLC, or MCCI, an MSO headquartered in Miami, Florida that coordinates medical care for Medicare Advantage and Medicaid beneficiaries primarily in Florida and Texas.

The Metropolitan and MCCI transactions are expected to provide us with proven integrated care delivery models that have demonstrated scalability to new markets. A substantial portion of the revenues for both Metropolitan and MCCI are derived from services provided to defined sets of Humana Medicare Advantage members under capitation contracts with our health plans. Under these capitation agreements with Humana, Metropolitan and MCCI assume financial risk associated with these Medicare Advantage members.

On July 6, 2012, we acquired SeniorBridge Family Companies, Inc., or SeniorBridge, a chronic-care provider of in-home care for seniors, expanding our existing clinical and home health capabilities and strengthening our offerings for members with complex chronic-care needs. The preliminary allocation of the purchase price resulted in goodwill of $99 million and other intangible assets of $14 million. The goodwill was assigned to the Health and Well-Being Services segment and is not deductible for tax purposes. The other intangible assets, which primarily consist of customer contracts, trade name, and technology, have a weighted average useful life of 5.2 years.

Effective March 31, 2012, we acquired Arcadian Management Services, Inc., or Arcadian, a Medicare Advantage health maintenance organization (HMO) serving members in 15 U.S. states, increasing Medicare membership and expanding our Medicare footprint and future growth opportunities in these areas. The preliminary allocation of the purchase price resulted in goodwill of $48 million and other intangible assets of $38 million. The goodwill was assigned to the Retail segment and is not deductible 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.

On December 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 and customers. The preliminary allocation of the purchase price resulted in goodwill of $118 million and other intangible assets of $60 million. The goodwill was assigned to the Retail segment and is not deductible for tax purposes. The other intangible assets, which primarily consist of technology and customer contracts, have a weighted average useful life of 6.5 years.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

The purchase price allocations of SeniorBridge, Arcadian, and Anvita are preliminary, subject to completion of valuation analyses, including, for example, refining assumptions used to calculate the fair value of other intangible assets. The results of operations and financial condition of SeniorBridge, Arcadian, and Anvita have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the acquisition dates. Acquisition-related costs recognized in connection with these acquisitions were not material. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition was not material to our results of operations.

In addition, during 2012, we have completed or entered into definitive agreements to acquire other health and wellness and technology related businesses which individually or in the aggregate have not had, or are not expected to have, a material impact on our results of operations, financial condition, or cash flows.

4. INVESTMENT SECURITIES

Investment securities classified as current and long-term were as follows at September 30, 2012 and December 31, 2011, respectively:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (in millions)  

September 30, 2012

          

U.S. Treasury and other U.S. government corporations and agencies:

          

U.S. Treasury and agency obligations

   $ 545       $ 18       $ 0      $ 563   

Mortgage-backed securities

     1,836         107         (1     1,942   

Tax-exempt municipal securities

     2,688         192         (2     2,878   

Mortgage-backed securities:

          

Residential

     36         1         (1     36   

Commercial

     613         45         0        658   

Asset-backed securities

     36         1         0        37   

Corporate debt securities

     3,377         406         (2     3,781   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

   $ 9,131       $ 770       $ (6   $ 9,895   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

U.S. Treasury and other U.S. government corporations and agencies:

          

U.S. Treasury and agency obligations

   $ 705       $ 20       $ 0      $ 725   

Mortgage-backed securities

     1,701         85         (2     1,784   

Tax-exempt municipal securities

     2,709         149         (2     2,856   

Mortgage-backed securities:

          

Residential

     46         0         (2     44   

Commercial

     356         25         0        381   

Asset-backed securities

     82         1         0        83   

Corporate debt securities

     3,329         262         (11     3,580   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

   $ 8,928       $ 542       $ (17   $ 9,453   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

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 September 30, 2012 and December 31, 2011, respectively:

 

     Less than 12 months     12 months or more     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (in millions)  

September 30, 2012

               

U.S. Treasury and other U.S. government corporations and agencies:

               

U.S. Treasury and agency obligations

   $ 49       $ 0      $ 1       $ 0      $ 50       $ 0   

Mortgage-backed securities

     54         (1     15         0        69         (1

Tax-exempt municipal securities

     51         (1     25         (1     76         (2

Mortgage-backed securities:

               

Residential

     0         0        4         (1     4         (1

Commercial

     10         0        0         0        10         0   

Asset-backed securities

     0         0        7         0        7         0   

Corporate debt securities

     62         (2     6         0        68         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

   $ 226       $ (4   $ 58       $ (2   $ 284       $ (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2011

               

U.S. Treasury and other U.S. government corporations and agencies:

               

U.S. Treasury and agency obligations

   $ 117       $ 0      $ 0       $ 0      $ 117       $ 0   

Mortgage-backed securities

     67         (1     18         (1     85         (2

Tax-exempt municipal securities

     53         0        48         (2     101         (2

Mortgage-backed securities:

               

Residential

     3         0        24         (2     27         (2

Commercial

     14         0        0         0        14         0   

Asset-backed securities

     16         0        4         0        20         0   

Corporate debt securities

     355         (10     41         (1     396         (11
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

   $ 625       $ (11   $ 135       $ (6   $ 760       $ (17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Approximately 94% of our debt securities were investment-grade quality, with a weighted average credit rating of AA- by S&P at September 30, 2012. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. At September 30, 2012, 10% of our tax-exempt municipal securities were pre-refunded, generally with U.S. government and agency securities. Tax-exempt municipal securities that were not pre-refunded were diversified among general obligation bonds of U.S. states and local municipalities as well as special revenue bonds. General obligation bonds, which are backed by the taxing power and full faith of the issuer, accounted for 43% of the tax-exempt municipals that were not pre-refunded in the portfolio. Special revenue bonds, issued by a municipality to finance a specific public works project such as utilities, water and sewer, transportation, or education, and supported by the revenues of that project, accounted for the remaining 57% of these municipals. Our general obligation bonds are diversified across the U.S. with no individual state exceeding 11%. In addition, 21% 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. Our investment policy limits investments in a single issuer and requires diversification among various asset types.

 

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Unaudited

 

The recoverability of our non-agency residential and commercial mortgage-backed securities is supported by factors such as seniority, underlying collateral characteristics and credit enhancements. These residential and commercial mortgage-backed securities at September 30, 2012 primarily were composed of senior tranches having high credit support, with over 99% of the collateral consisting of prime loans. The weighted average credit rating of all commercial mortgage-backed securities was AA at September 30, 2012.

The percentage of corporate securities associated with the financial services industry was 22.6% at September 30, 2012 and 19.3% at December 31, 2011.

Several European countries, including Spain, Italy, Ireland, Portugal, and Greece, have been subject to credit deterioration due to weakness 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 September 30, 2012 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates and tighter liquidity conditions in the current markets than when the securities were purchased. At September 30, 2012, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at September 30, 2012.

The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and nine months ended September 30, 2012 and 2011:

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2012     2011     2012     2011  
     (in millions)  

Gross realized gains

   $ 10      $ 5      $ 26      $ 16   

Gross realized losses

     (4     (3     (6     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized capital gains

   $ 6      $ 2      $ 20      $ 7   
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no material other-than-temporary impairments for the three and nine months ended September 30, 2012 or 2011.

The contractual maturities of debt securities available for sale at September 30, 2012, regardless of their balance sheet classification, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized
Cost
     Fair
Value
 
     (in millions)  

Due within one year

   $ 393       $ 396   

Due after one year through five years

     1,853         1,939   

Due after five years through ten years

     2,690         2,963   

Due after ten years

     1,674         1,924   

Mortgage and asset-backed securities

     2,521         2,673   
  

 

 

    

 

 

 

Total debt securities

   $ 9,131       $ 9,895   
  

 

 

    

 

 

 

 

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Unaudited

 

5. FAIR VALUE

Financial Assets

The following table summarizes our fair value measurements at September 30, 2012 and December 31, 2011, respectively, for financial assets measured at fair value on a recurring basis:

 

            Fair Value Measurements Using  
     Fair
Value
     Quoted Prices in
Active Markets

(Level 1)
     Other
Observable
Inputs

(Level 2)
     Unobservable
Inputs

(Level 3)
 
     (in millions)  

September 30, 2012

           

Cash equivalents

   $ 897       $ 897       $ 0       $ 0   

Debt securities:

           

U.S. Treasury and other U.S. government corporations and agencies:

           

U.S. Treasury and agency obligations

     563         0         563         0   

Mortgage-backed securities

     1,942         0         1,942         0   

Tax-exempt municipal securities

     2,878         0         2,865         13   

Mortgage-backed securities:

           

Residential

     36         0         36         0   

Commercial

     658         0         658         0   

Asset-backed securities

     37         0         36         1   

Corporate debt securities

     3,781         0         3,757         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     9,895         0         9,857         38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 10,792       $ 897       $ 9,857       $ 38   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Cash equivalents

   $ 1,205       $ 1,205       $ 0       $ 0   

Debt securities:

           

U.S. Treasury and other U.S. government corporations and agencies:

           

U.S. Treasury and agency obligations

     725         0         725         0   

Mortgage-backed securities

     1,784         0         1,784         0   

Tax-exempt municipal securities

     2,856         0         2,840         16   

Mortgage-backed securities:

           

Residential

     44         0         44         0   

Commercial

     381         0         381         0   

Asset-backed securities

     83         0         82         1   

Corporate debt securities

     3,580         0         3,556         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     9,453         0         9,412         41   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total invested assets

   $ 10,658       $ 1,205       $ 9,412       $ 41   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no material transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2012 or September 30, 2011.

 

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Our Level 3 assets had a fair value of $38 million at September 30, 2012, or less than 0.5% of our total invested assets. During the three and nine months ended September 30, 2012 and 2011, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:

 

     For the three months ended September 30,  
     2012     2011  
     Private
Placements/
Venture
Capital
     Auction
Rate
Securities
    Total     Private
Placements/
Venture
Capital
     Auction
Rate
Securities
    Total  
     (in millions)  

Beginning balance at July 1

   $ 25       $ 15      $ 40      $ 31       $ 21      $ 52   

Total gains or losses:

              

Realized in earnings

     0         0        0        0         0        0   

Unrealized in other comprehensive income

     0         0        0        0         0        0   

Purchases

     0         0        0        0         0        0   

Sales

     0         (2     (2     0         0        0   

Settlements

     0         0        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30

   $ 25       $ 13      $ 38      $ 31       $ 21      $ 52   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     For the nine months ended September 30,  
     2012     2011  
     Private
Placements/
Venture
Capital
     Auction
Rate
Securities
    Total     Private
Placements/
Venture
Capital
     Auction
Rate
Securities
    Total  
     (in millions)  

Beginning balance at January 1

   $ 25       $ 16      $ 41      $ 14       $ 52      $ 66   

Total gains or losses:

              

Realized in earnings

     0         0        0        0         0        0   

Unrealized in other comprehensive income

     0         0        0        0         2        2   

Purchases

     0         0        0        17         0        17   

Sales

     0         (3     (3     0         (33     (33

Settlements

     0         0        0        0         0        0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30

   $ 25       $ 13      $ 38      $ 31       $ 21      $ 52   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Financial Liabilities

Our long-term debt, recorded at carrying value in our consolidated balance sheets, was $1,616 million at September 30, 2012 and $1,659 million at December 31, 2011. The fair value of our long-term debt was $1,872 million at September 30, 2012 and $1,834 million at December 31, 2011. The fair value of our long-term debt is determined based on Level 2 inputs including quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.

 

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Unaudited

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As disclosed in Note 3, we completed our acquisitions of SeniorBridge, Arcadian, Anvita, and other companies during 2012 and 2011. The preliminary 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 the related tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The preliminary fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets can be expected to generate in the future. We developed internal estimates for the expected cash flows and discount rates in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no assets or liabilities measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2012 or 2011.

6. MEDICARE PART D

We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS. The condensed consolidated balance sheets include the following amounts associated with Medicare Part D as of September 30, 2012 and December 31, 2011. Amounts included below relating to the 2011 contract year for the net risk corridor payable of $289 million and the CMS subsidies receivable of $376 million at September 30, 2012 are expected to be settled in the fourth quarter of 2012.

 

     September 30, 2012     December 31, 2011  
     Risk
Corridor
Settlement
    CMS
Subsidies/

Discounts
    Risk
Corridor
Settlement
    CMS
Subsidies/

Discounts
 
     (in millions)  

Other current assets

   $ 38      $ 654      $ 2      $ 363   

Trade accounts payable and accrued expenses

     (428     (155     (331     (139
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current (liability) asset

   $ (390   $ 499      $ (329   $ 224   
  

 

 

   

 

 

   

 

 

   

 

 

 

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2012 were as follows:

 

     Retail      Employer
Group
     Health  &
Well-Being
Services
     Other
Businesses
     Total  
     (in millions)  

Balance at January 1, 2012

   $ 754       $ 62       $ 1,867       $ 57       $ 2,740   

Acquisitions

     46         0         136         40         222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

   $ 800       $ 62       $ 2,003       $ 97       $ 2,962   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 2012 and December 31, 2011:

 

     Weighted
Average
Life
     September 30, 2012      December 31, 2011  
        Cost      Accumulated
Amortization
     Net      Cost      Accumulated
Amortization
     Net  
     (in millions)  

Other intangible assets:

                    

Customer contracts/relationships

     10.3 yrs       $ 484       $ 215       $ 269       $ 429       $ 182       $ 247   

Trade names and technology

     14.4 yrs         147         16         131         135         6         129   

Provider contracts

     15.1 yrs         51         18         33         44         15         29   

Noncompetes and other

     6.9 yrs         49         17         32         40         10         30   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other intangible assets

     11.2 yrs       $ 731       $ 266       $ 465       $ 648       $ 213       $ 435   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense for other intangible assets was approximately $53 million for the nine months ended September 30, 2012 and $40 million for the nine months ended September 30, 2011. The following table presents our estimate of amortization expense for 2012 and each of the five next succeeding years:

 

     (in millions)  

For the years ending December 31,:

  

2012

   $ 72   

2013

     72   

2014

     67   

2015

     59   

2016

     53   

2017

     44   

8. EARNINGS PER COMMON SHARE COMPUTATION

Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and nine months ended September 30, 2012 and 2011:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  
    

(dollars in millions except per common share results,

number of shares in thousands)

 

Net income available for common stockholders

   $ 426       $ 445       $ 1,030       $ 1,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average outstanding shares of common stock used to compute basic earnings per common share

     160,639         164,121         162,391         166,138   

Dilutive effect of:

           

Employee stock options

     431         895         629         962   

Restricted stock

     1,348         1,564         1,362         1,458   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used to compute diluted earnings per common share

     162,418         166,580         164,382         168,558   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 2.65       $ 2.71       $ 6.34       $ 7.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 2.62       $ 2.67       $ 6.27       $ 7.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Number of antidilutive stock options and restricted stock excluded from computation

     758         168         799         1,017   

 

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9. STOCKHOLDERS’ EQUITY

Dividends

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 our dividend payments in 2012:

 

Record
Date
    Payment
Date
    Amount
per Share
    Total
Amount
 
                  (in millions)  
  12/30/2011        1/31/2012      $ 0.25      $ 41   
  3/30/2012        4/27/2012      $ 0.25      $ 41   
  6/29/2012        7/27/2012      $ 0.26      $ 42   
  9/28/2012        10/26/2012      $ 0.26      $ 41   

In October 2012, the Board of Directors declared a cash dividend of $0.26 per share payable on January 25, 2013 to stockholders of record as of the close of business on December 31, 2012.

Stock Repurchases

In April 2012, the Board of Directors replaced its previously approved share repurchase authorization of up to $1 billion with a new authorization for repurchases of up to $1 billion of our common shares exclusive of shares repurchased in connection with employee stock plans, expiring on June 30, 2014. Under this share repurchase authorization, shares could be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions, subject to certain regulatory restrictions on volume, pricing, and timing. During the nine months ended September 30, 2011, we repurchased 6.76 million shares in open market transactions for $492 million at an average price of $72.75 under previously approved share repurchase authorizations. During the nine months ended September 30, 2012, we repurchased 1.15 million shares in open market transactions for $100 million at an average price of $86.95 under a previously approved share repurchase authorization and we repurchased 5.10 million shares in open market transactions for $360 million at an average price of $70.66 under the new authorization. As of October 31, 2012, the remaining authorized amount under the new authorization totaled $640 million.

In connection with employee stock plans, we acquired 0.6 million common shares for $53 million and 0.8 million common shares for $49 million during the nine months ended September 30, 2012 and 2011, respectively.

10. INCOME TAXES

The effective income tax rate was 36.9% for the three months ended September 30, 2012, compared to 36.3% for the three months ended September 30, 2011. For the nine months ended September 30, 2012 the effective tax rate was 36.8%, compared to 36.5% for the nine months ended September 30, 2011.

11. GUARANTEES AND CONTINGENCIES

Government Contracts

Our Medicare products, which accounted for approximately 71% of our total premiums and services revenue for the nine months ended September 30, 2012, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by August 1 of the calendar

 

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year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for 2013, and all of our product offerings filed with CMS for 2013 have been approved.

CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage plans according to health severity. The risk-adjustment model pays more for enrollees with predictably higher costs. Under this model, rates paid to Medicare Advantage plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on a comparison of our beneficiaries’ risk scores, derived from medical diagnoses, to those enrolled in the government’s original Medicare program. Under the risk-adjustment methodology, all Medicare Advantage plans must 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 the diagnosis data to calculate the risk-adjusted premium payment to Medicare Advantage plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims.

CMS is continuing to perform audits of various companies’ selected Medicare Advantage contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical record documentation in an attempt to validate provider coding practices and the presence of risk adjustment conditions which influence the calculation of premium payments to Medicare Advantage plans.

On February 24, 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provides that, in calculating the economic impact of audit results for a Medicare Advantage contract, if any, the results of the audit sample will be extrapolated to the entire Medicare Advantage contract based upon a comparison to “benchmark” audit data in the government fee-for-service program. This comparison to the government program benchmark audit is necessary to determine the economic impact, if any, of audit results because the government program data set provides the basis for Medicare Advantage plans risk adjustment to payment rates. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between Medicare Advantage plans and the government fee-for-service program data (such as for frequency of coding for certain diagnoses in Medicare Advantage plan data versus the government program data set).

The final methodology, including the first application of extrapolated audit results to determine audit settlements, will be applied to the next round of RADV contract level audits to be conducted on 2011 premium payments. Medicare Advantage contracts will be selected for audit after the close of the final reconciliation for the payment year being audited. The final reconciliation occurs in August of the calendar year following the payment year.

Estimated audit settlements, if any, are recorded as a reduction of premium revenue in our condensed consolidated statements of income, based upon available information. However, we are awaiting additional guidance from CMS regarding the benchmark audit data in the government fee-for-service program and the identification of our specific Medicare Advantage contracts that will be selected for audit. Accordingly, we cannot determine whether such audits will have a material adverse effect on our results of operations, financial position, or cash flows.

At September 30, 2012, our Military services business, which accounted for approximately 4% of our total premiums and services revenue for the nine months ended September 30, 2012, primarily consisted of the TRICARE South Region contract. On April 1, 2012, we began delivering services under the new TRICARE South

 

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Region contract that the Department of Defense TRICARE Management Activity, or TMA, awarded to us on February 25, 2011. The new 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.

Our Medicaid business, which accounted for approximately 3% of our total premiums and services revenue for the nine months ended September 30, 2012, primarily 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, or PRHIA, awarded us contracts for the East, Southeast, and Southwest regions for a three-year term through June 30, 2013.

The loss of any of the contracts above or significant changes in these programs as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.

Legal Proceedings and Certain Regulatory Matters

Florida Matters

As previously disclosed, with the assistance of outside counsel, we are conducting an ongoing internal investigation related to certain aspects of our Florida subsidiary operations. We have voluntarily self-reported the existence of this investigation to CMS, the U.S. Department of Justice, and the Florida Agency for Health Care Administration. Matters under review include, without limitation, the relationships between certain of our Florida-based employees and providers in our Medicaid and/or Medicare networks, practices related to the financial support of non-profit or provider access centers for Medicaid enrollment and related enrollment processes, and loans to or other financial support of physician practices. We have reported to these regulatory authorities on the progress of our investigation to date, and intend to continue to discuss with these authorities our factual findings as well as any remedial actions we have taken or may take. We also may face litigation or further government inquiry regarding certain aspects of the Medicare and Medicaid operations of certain of our Florida subsidiaries.

On December 16, 2010, an individual filed a qui tam suit captioned United States of America ex rel. Marc Osheroff v. Humana et al. in the Southern District of Florida, against us, several of our health plan subsidiaries, and certain other companies that operate medical centers in Miami-Dade County, Florida. After the U.S. government declined to intervene, the Court ordered the complaint unsealed, and the individual plaintiff amended his complaint and served the Company on December 8, 2011. The amended complaint alleges certain civil violations by our CAC Medical Centers in Florida, including offering various amenities such as transportation and meals, to Medicare and dual eligible individuals in our community center settings. The amended complaint also alleges civil violations by our Medicare Advantage health plans in Florida, arising from the alleged activities of our CAC Medical Centers and the codefendants in the complaint. The amended complaint seeks damages and penalties on behalf of the United States under the Anti-Inducement and Anti-Kickback Statutes and the False Claims Act. On September 28, 2012, the Court dismissed, with prejudice, all causes of action that were asserted in the suit, and the individual plaintiff has asked the Court to reconsider its decision.

On January 6, 2012, the Civil Division of the United States Attorney’s Office for the Southern District of Florida advised our legal counsel that it is seeking documents and information from us and several of our affiliates relating to several matters including the coding of medical claims by one or more South Florida medical providers, and loans to physician practices.

Other Lawsuits and Regulatory Matters

Our current and past business practices are subject to review or other investigations by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the 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

 

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Unaudited

 

payments, privacy issues, utilization management practices, and sales practices, among others. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.

We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business operations, certain of which may be styled 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, failure to disclose network discounts and various other provider arrangements, general contractual matters, intellectual property matters, and challenges to subrogation practices. Under state guaranty assessment laws, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do. As a government contractor, we may also be subject to qui tam litigation brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government including, among other allegations, resulting from coding and review practices under the Medicare risk-adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the lawsuit is unsealed, and the individual may continue to prosecute the action on his or her own. We also are subject to allegations of non-performance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.

Personal injury claims and claims for extracontractual damages arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.

We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.

12. SEGMENT INFORMATION

We manage our business with three reportable segments: Retail, Employer Group, and Health and Well-Being Services. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles. These segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for 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.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

The Retail segment consists of Medicare and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products, marketed directly to individuals. The Employer Group segment consists of Medicare and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products, as well as administrative services only products marketed to employer groups. The Health and Well-Being Services segment includes services offered to our health plan members as well as to third parties that promote health and wellness, including primary care, pharmacy, integrated wellness, and 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 program.

Our Health and Well-Being Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions®, or HPS, and includes the operations of RightSourceRx®, our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are 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 the arrangement on behalf of members in our other segments. As principal, our Health and Well-Being Services segment reports revenues on a gross basis, including co-share amounts from members collected by third party retail pharmacies at the point of service.

We present our consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of $1.2 billion and $1.1 billion for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, these amounts were $3.5 billion and $3.1 billion, respectively. In addition, depreciation and amortization expense associated with certain businesses in our Health and Well-Being Services segment delivering benefits to our members, primarily associated with our pharmacy operations, are included with benefits expense. The amount of this expense was $3 million and $7 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, the amount of this expense was $20 million and $24 million, respectively.

Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our 2011 Form 10-K. Transactions between reportable segments consist of sales of services rendered by our Health and Well-Being Services segment, primarily pharmacy and behavioral health services, to our Retail and Employer Group customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often utilize the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and included with intersegment eliminations in the tables presenting segment results below.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

Our segment results were as follows for the three and nine months ended September 30, 2012 and 2011:

 

     Retail      Employer
Group
     Health and
Well-Being
Services
     Other
Businesses
     Eliminations/
Corporate
    Consolidated  
                   (in millions)               

Three months ended September 30, 2012

                

Revenues—external customers

                

Premiums:

                

Medicare Advantage

   $ 5,203       $ 1,023       $ 0       $ 0       $ 0      $ 6,226   

Medicare stand-alone PDP

     635         2         0         64         0        701   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Medicare

     5,838         1,025         0         64         0        6,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fully-insured

     255         1,256         0         0         0        1,511   

Specialty

     45         271         0         0         0        316   

Military services

     0         0         0         69         0        69   

Medicaid and other

     0         0         0         265         0        265   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premiums

     6,138         2,552         0         398         0        9,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Services revenue:

                

Provider

     0         0         271         0         0        271   

ASO and other

     6         88         0         99         0        193   

Pharmacy

     0         0         3         0         0        3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total services revenue

     6         88         274         99         0        467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues—external customers

     6,144         2,640         274         497         0        9,555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Intersegment revenues

                

Services

     1         3         2,324         0         (2,328     0   

Products

     0         0         602         0         (602     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total intersegment revenues

     1         3         2,926         0         (2,930     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Investment income

     19         11         0         14         52        96   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     6,164         2,654         3,200         511         (2,878     9,651   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses:

                

Benefits

     5,049         2,178         0         332         (92     7,467   

Operating costs

     658         413         3,028         125         (2,816     1,408   

Depreciation and amortization

     33         20         24         4         (6     75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     5,740         2,611         3,052         461         (2,914     8,950   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     424         43         148         50         36        701   

Interest expense

     0         0         0         0         26        26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 424       $ 43       $ 148       $ 50       $ 10      $ 675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefit expenses for the three months ended September 30, 2012 included favorable prior-year medical claims reserve development not in the ordinary course of business of an estimated $38 million in our Retail segment, $14 million in our Employer Group segment, and $2 million for our Other Businesses.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

     Retail      Employer
Group
     Health and
Well-Being
Services
     Other
Businesses
     Eliminations/
Corporate
    Consolidated  
                   (in millions)               

Three months ended September 30, 2011

                

Revenues—external customers

                

Premiums:

                

Medicare Advantage

   $ 4,566       $ 803       $ 0       $ 0       $ 0      $ 5,369   

Medicare stand-alone PDP

     579         2         0         43         0        624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Medicare

     5,145         805         0         43         0        5,993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fully-insured

     221         1,185         0         0         0        1,406   

Specialty

     33         235         0         0         0        268   

Military services

     0         0         0         944         0        944   

Medicaid and other

     0         0         0         241         0        241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premiums

     5,399         2,225         0         1,228         0        8,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Services revenue:

                

Provider

     0         0         233         0         0        233   

ASO and other

     5         89         0         26         0        120   

Pharmacy

     0         0         3         0         0        3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total services revenue

     5         89         236         26         0        356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues—external customers

     5,404         2,314         236         1,254         0        9,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Intersegment revenues

                

Services

     0         4         2,130         0         (2,134     0   

Products

     0         0         461         0         (461     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total intersegment revenues

     0         4         2,591         0         (2,595     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Investment income

     19         12         0         15         47        93   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     5,423         2,330         2,827         1,269         (2,548     9,301   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses:

                

Benefits

     4,249         1,857         0         1,117         (76     7,147   

Operating costs

     603         406         2,723         121         (2,492     1,361   

Depreciation and amortization

     30         21         21         2         (7     67   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     4,882         2,284         2,744         1,240         (2,575     8,575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     541         46         83         29         27        726   

Interest expense

     0         0         0         0         27        27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 541       $ 46       $ 83       $ 29       $ 0      $ 699   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefit expenses for the three months ended September 30, 2011 included favorable prior-year medical claims reserve development not in the ordinary course of business of an estimated $32 million in our Retail segment and $9 million in our Employer Group segment, partially offset by unfavorable prior-year medical claims reserve development of an estimated $7 million for our Other Businesses.

 

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Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

     Retail      Employer
Group
     Health and
Well-Being
Services
     Other
Businesses
     Eliminations/
Corporate
    Consolidated  
                   (in millions)               

Nine months ended September 30, 2012

                

Revenues—external customers

                

Premiums:

                

Medicare Advantage

   $ 15,604       $ 3,059       $ 0       $ 0       $ 0      $ 18,663   

Medicare stand-alone PDP

     1,967         6         0         203         0        2,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Medicare

     17,571         3,065         0         203         0        20,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fully-insured

     749         3,745         0         0         0        4,494   

Specialty

     125         793         0         0         0        918   

Military services

     0         0         0         1,006         0        1,006   

Medicaid and other

     0         0         0         772         0        772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premiums

     18,445         7,603         0         1,981         0        28,029   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Services revenue:

                

Provider

     0         0         749         0         0        749   

ASO and other

     17         266         0         208         0        491   

Pharmacy

     0         0         11         0         0        11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total services revenue

     17         266         760         208         0        1,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues—external customers

     18,462         7,869         760         2,189         0        29,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Intersegment revenues

                

Services

     2         11         7,187         0         (7,200     0   

Products

     0         0         1,777         0         (1,777     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total intersegment revenues

     2         11         8,964         0         (8,977     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Investment income

     58         31         0         43         157        289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     18,522         7,911         9,724         2,232         (8,820     29,569   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses:

                

Benefits

     15,609         6,316         0         1,844         (300     23,469   

Operating costs

     1,911         1,257         9,246         364         (8,603     4,175   

Depreciation and amortization

     96         60         67         12         (17     218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     17,616         7,633         9,313         2,220         (8,920     27,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     906         278         411         12         100        1,707   

Interest expense

     0         0         0         0         78        78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 906       $ 278       $ 411       $ 12       $ 22      $ 1,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefit expenses for the nine months ended September 30, 2012 included favorable prior-year medical claims reserve development not in the ordinary course of business of an estimated $95 million in our Retail segment and $11 million for our Other Businesses, partially offset by unfavorable prior-year medical claims reserve development of an estimated $4 million in our Employer Group segment. In addition, benefit expenses for our Other Businesses for the nine months ended September 30, 2012 included expense of approximately $46 million for a litigation settlement associated with our Military services business.

 

23


Table of Contents

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

 

     Retail      Employer
Group
     Health and
Well-Being
Services
     Other
Businesses
     Eliminations/
Corporate
    Consolidated  
                   (in millions)               

Nine months ended September 30, 2011

                

Revenues—external customers

                

Premiums:

                

Medicare Advantage

   $ 13,646       $ 2,363       $ 0       $ 0       $ 0      $ 16,009   

Medicare stand-alone PDP

     1,737         6         0         196         0        1,939   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Medicare

     15,383         2,369         0         196         0        17,948   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fully-insured

     628         3,601         0         0         0        4,229   

Specialty

     89         698         0         0         0        787   

Military services

     0         0         0         2,802         0        2,802   

Medicaid and other

     0         0         0         702         0        702   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premiums

     16,100         6,668         0         3,700         0        26,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Services revenue:

                

Provider

     0         0         670         0         0        670   

ASO and other

     12         269         0         76         0        357   

Pharmacy

     0         0         8         0         0        8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total services revenue

     12         269         678         76         0        1,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues—external customers

     16,112         6,937         678         3,776         0        27,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Intersegment revenues

                

Services

     0         10         6,325         0         (6,335     0   

Products

     0         0         1,330         0         (1,330     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total intersegment revenues

     0         10         7,655         0         (7,665     0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Investment income

     57         36         0         40         140        273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     16,169         6,983         8,333         3,816         (7,525     27,776   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses:

                

Benefits

     13,193         5,409         0         3,375         (216     21,761   

Operating costs

     1,626         1,217         8,004         351         (7,388     3,810   

Depreciation and amortization

     89         64         61         7         (20     201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     14,908         6,690         8,065         3,733         (7,624     25,772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     1,261         293         268         83         99        2,004   

Interest expense

     0         0         0         0         82        82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

   $ 1,261       $ 293       $ 268       $ 83       $ 17      $ 1,922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefit expenses for the nine months ended September 30, 2011 included favorable prior-year medical claims reserve development not in the ordinary course of business of an estimated $104 million in our Retail segment, $42 million in our Employer Group segment, and $5 million for our Other Businesses.

 

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Humana Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the SEC, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A. – Risk Factors in our 2011 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent to February 24, 2012, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.

Executive Overview

General

Headquartered in Louisville, Kentucky, Humana is a leading health care company that offers a wide range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being. By leveraging the strengths of our core businesses, we believe that we can better explore opportunities for existing and emerging adjacencies in health care that can further enhance wellness opportunities for the millions of people across the nation with whom we have relationships.

Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking total benefit expenses as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.

Business Segments

We manage our business with three reportable segments: Retail, Employer Group, and Health and Well-Being Services. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles. These segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for 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.

The Retail segment consists of Medicare and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products, marketed directly to individuals. The Employer Group segment consists of Medicare and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products, as well as administrative services only products marketed to employer groups. The Health and Well-Being Services segment includes services offered to our health plan members as well as to third parties that promote health and wellness, including primary care, pharmacy, integrated wellness, and 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 program.

 

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The results of each segment are measured by income before income taxes. Transactions between reportable segments consist of sales of services rendered by our Health and Well-Being Services segment, primarily pharmacy and behavioral health services, to our Retail and Employer Group customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often utilize the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at the corporate level. These corporate amounts are reported separately from our reportable segments and included with intersegment eliminations.

Seasonality

One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. These plans provide varying degrees of coverage. Our quarterly Retail segment earnings and operating cash flows are impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s plan period which begins annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases as the year progresses. In addition, the number of low-income senior members as well as year-over-year changes in the mix of membership in our stand-alone PDP products affects the quarterly benefit ratio pattern.

Our Employer Group segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of the Retail segment, with the Employer Group’s benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.

2012 Highlights

Consolidated

 

   

Our results for the three and nine months ended September 30, 2012, were significantly impacted by a higher benefit ratio. The consolidated benefit ratio increased 150 basis points to 82.2% for the three months ended September 30, 2012 and increased 150 basis points to 83.7% for the nine months ended September 30, 2012 compared to the same periods in 2011. The increases primarily were due to increases in the Retail segment benefit ratios primarily associated with our individual Medicare Advantage products discussed in our Retail segment highlights that follow.

 

   

Comparisons to 2011 are impacted by benefit expenses incurred related to the settlement of litigation associated with our Military services business during the nine months ended September 30, 2012 and favorable prior-year medical claims reserve development not in the ordinary course of business that was higher in the three months ended September 30, 2012 than in the three months ended September 30, 2011 and lower in the nine months ended September 30, 2012 than in the nine months end September 30, 2011.

 

   

As announced in March 2012, we entered into a strategic alliance with CareSource to more effectively serve Medicare and Medicaid beneficiaries – particularly people who qualify for both the federal Medicare program and state-based Medicaid programs. In August 2012, the Ohio Department of Job and Family Services announced that the alliance would be serving people who qualify for both Medicaid and Medicare in three Ohio regions as part of the state’s new Integrated Care Delivery System. On October 4, 2012, we announced that we had been selected by the Kentucky Cabinet of Health and Family Services to participate in its comprehensive managed Medicaid program for Medicaid recipients residing in a 16-county region including Louisville, Kentucky, the state’s largest city.

 

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Retail

 

   

As discussed in the detailed Retail segment results of operations discussion that follows, we experienced a significant increase in the benefit ratio in the Retail segment, with the segment’s benefit ratio increasing 360 basis points to 82.3% for the three months ended September 30, 2012 and increasing 270 basis points to 84.6% for the nine months ended September 30, 2012. These increases primarily were due to a planned increase in the target benefit ratio associated with positioning for Health Insurance Reform Legislation funding changes and minimum benefit ratio requirements and a higher individual Medicare Advantage benefit ratio experienced on new membership than the assumptions used in our 2012 Medicare bids.

 

   

Individual Medicare Advantage membership of 1,911,800 at September 30, 2012 increased 271,500 members, or 16.6%, from 1,640,300 at December 31, 2011 and increased 298,400 members, or 18.5%, from 1,613,400 at September 30, 2011 primarily due to the annual enrollment period associated with the 2012 plan year. We acquired approximately 62,600 members with Arcadian Management Services, Inc., or Arcadian, effective March 31, 2012, discussed below, and 12,100 members with another acquisition effective December 30, 2011.

 

   

Individual Medicare stand-alone PDP membership of 2,947,200 at September 30, 2012 increased 406,800 members, or 16.0%, from 2,540,400 at December 31, 2011 and increased 469,100, or 18.9%, from 2,478,100 at September 30, 2011, primarily due to growth in our national stand-alone Medicare Part D prescription drug plan co-branded with Wal-Mart Stores, Inc., the Humana Walmart-Preferred Rx Plan.

 

   

Effective March 31, 2012, we acquired Arcadian, a Medicare Advantage HMO serving members in 15 U.S. states, increasing our Medicare membership by approximately 62,600 members and expanding our Medicare footprint and future growth opportunities. To obtain antitrust approval in connection with the Arcadian acquisition, we entered into a consent agreement with the United States Department of Justice that will require divestiture of overlapping Medicare Advantage health plan business in eight areas within Arizona, Arkansas, Louisiana, Oklahoma, and Texas. We expect that the divestitures, anticipated to include approximately 12,600 members, would be effective January 1, 2013.

 

   

On April 2, 2012, CMS announced that it is estimating an annual payment benchmark growth rate for Medicare of 3.07% for 2013. Together with other technical components of the rate change from CMS, we estimate that our average 2013 premium rate change from CMS will be relatively flat. We believe we can effectively design Medicare Advantage products based upon this level of rate increase while continuing to remain competitive compared to both the combination of original Medicare with a supplement policy as well as Medicare Advantage products offered by our competitors. In addition, we will continue to pursue our cost-reduction and outcome-enhancing strategies, including care coordination and disease management, which we believe will mitigate the adverse effects of the rates on our Medicare Advantage members. Nonetheless, there can be no assurance that we will be able to successfully execute operational and strategic initiatives with respect to changes in the Medicare Advantage program. Failure to execute these strategies may result in a material adverse effect on our results of operations, financial position, and cash flows.

Employer Group Segment

 

   

Fully-insured group Medicare Advantage membership of 367,900 at September 30, 2012 increased 77,300 members, or 26.6%, from 290,600 at December 31, 2011 and increased 80,000 members, or 27.8%, from 287,900 at September 30, 2011 primarily due to the January 2012 addition of a new large group account.

Health and Well-Being Services Segment

 

   

On November 5, 2012, we announced that we had entered into a definitive agreement to acquire Metropolitan Health Networks, Inc., or Metropolitan, a Management Services Organization, or MSO, that coordinates medical care for Medicare Advantage and Medicaid beneficiaries primarily in Florida. Under the terms of the agreement, we will pay $11.25 per share in cash to acquire all of the outstanding shares of Metropolitan and repay all outstanding debt for an estimated transaction value of approximately $850 million plus transaction expenses. The closing of the transaction is subject to Metropolitan shareholder approval as well as federal and state regulatory approval and is expected to close by the end of the first quarter of 2013. We expect to finance this transaction with a combination of cash and debt.

In October 2012, we acquired a noncontrolling equity interest in MCCI Holdings, LLC, or MCCI, an MSO headquartered in Miami, Florida that coordinates medical care for Medicare Advantage and Medicaid beneficiaries primarily in Florida and Texas.

 

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  The Metropolitan and MCCI transactions are expected to provide us with proven integrated care delivery models that have demonstrated scalability to new markets. A substantial portion of the revenues for both Metropolitan and MCCI are derived from services provided to defined sets of Humana Medicare Advantage members under capitation contracts with our health plans. Under these capitation agreements with Humana, Metropolitan and MCCI assume financial risk associated with these Medicare Advantage members.

 

   

On July 6, 2012, we acquired SeniorBridge Family Companies, Inc., or SeniorBridge, a chronic-care provider of in-home care for seniors, expanding our existing clinical and home health capabilities and strengthening our offerings for members with complex chronic-care needs.

Other Businesses

 

   

On April 1, 2012, we began delivering services under the new TRICARE South Region contract that the Department of Defense TRICARE Management Activity, or TMA, awarded to us on February 25, 2011. The new 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. We account for revenues under the new contract net of estimated health care costs similar to an administrative services fee only agreement.

Health Insurance Reform

The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Insurance Reform Legislation) enacted significant reforms to various aspects of the U.S. health insurance industry. While regulations and interpretive guidance on some provisions of the Health Insurance Reform Legislation have been issued to date by the Department of Health and Human Services (HHS), the Department of Labor, the Treasury Department, and the National Association of Insurance Commissioners, there are many significant provisions of the legislation that will require additional guidance and clarification in the form of regulations and interpretations in order to fully understand the impacts of the legislation on our overall business, which we expect to occur over the next several years.

Implementation dates of the Health Insurance Reform Legislation vary from September 23, 2010 to as late as 2018. The following outlines certain provisions of the Health Insurance Reform Legislation:

 

   

Many changes are already effective and have been implemented by the Company, including: elimination of pre-existing condition limits for enrollees under age 19, elimination of certain annual and lifetime caps on the dollar value of benefits, expansion of dependent coverage to include adult children until age 26, a requirement to provide coverage for preventive services without cost to members, new claim appeal requirements, and the establishment of an interim high risk program for those unable to obtain coverage due to a pre-existing condition or health status.

 

   

Effective January 1, 2011, minimum benefit ratios were mandated for all commercial fully-insured medical plans in the large group (85%), small group (80%), and individual (80%) markets, with annual rebates to policyholders if the actual benefit ratios, calculated in a manner prescribed by HHS, do not meet these minimums. Certain states were approved to apply an individual threshold lower than the 80% requirement temporarily to avoid market disruption. We began accruing for rebates in 2011, based on the manner prescribed by HHS, with initial rebate payments made in July 2012. Our benefit ratios reported herein, calculated from financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, differ from the benefit ratios calculated as prescribed by HHS under the Health Insurance Reform Legislation. The more noteworthy differences include the fact that the benefit ratio calculations prescribed by HHS are calculated separately by state and legal entity; reflect actuarial adjustments where the membership levels are not large enough to create credible size; exclude some of our health insurance products; include taxes and fees as reductions of premium; treat changes in reserves differently than GAAP; and 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 in 2012, additional cuts to Medicare Advantage plan payments took effect (plans receive a range of 95% in high-cost areas to 115% in low-cost areas of Medicare fee-for-service rates), with changes being phased-in over two to six years, depending on the level of payment reduction in a county. In addition, in 2011 the gap in coverage for Medicare Part D prescription drug coverage began to incrementally close.

 

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Beginning in 2014, the Health Insurance Reform Legislation requires: all individual and group health plans to guarantee issuance and renew coverage without pre-existing condition exclusions or health-status rating adjustments; the elimination of annual limits on coverage on certain plans; the establishment of state-based exchanges for individuals and small employers (with up to 100 employees) coupled with programs designed to spread risk among insurers; the introduction of standardized plan designs based on set actuarial values; the establishment of a minimum benefit ratio of 85% for Medicare plans; and insurance industry assessments, including an annual premium-based assessment and a three-year $25 billion commercial reinsurance fee. The annual premium-based assessment levied on the insurance industry is $8 billion in 2014 with increasing annual amounts thereafter, growing to $14 billion by 2017, and is not deductible for income tax purposes, which will significantly increase our effective income tax rate in 2014.

The Health Insurance Reform Legislation also specifies required benefit designs, limits rating and pricing practices, encourages additional competition (including potential incentives for new market entrants) and expands eligibility for Medicaid programs. In addition, the law will significantly increase federal oversight of health plan premium rates and could adversely affect our ability to appropriately adjust health plan premiums on a timely basis. Financing for these reforms will come, in part, from material additional fees and taxes on us and other health insurers, health plans and individuals beginning in 2014, as well as reductions in certain levels of payments to us and other health plans under Medicare as described herein.

In addition, certain provisions in the Health Insurance Reform Legislation tie Medicare Advantage premiums to the achievement of certain quality performance measures (Star Ratings). Beginning in 2012, Medicare Advantage plans with an overall Star Rating of three or more stars (out of five) are eligible for a quality bonus in their basic premium rates. Initially quality bonuses were limited to the few plans that achieved four or more stars as an overall rating, but CMS has expanded the quality bonus to three Star plans for a three year period through 2014. Recent Star Ratings issued by CMS indicated that 99% of our Medicare Advantage members are now in plans that will qualify for quality bonus payments in 2014, up from 98% in 2013, with 40% of our Medicare Advantage members in plans with an overall Star Rating of four or more stars, including one five star plan, exclusive of those recently acquired, including Arcadian. Plans that earn an overall Star Rating of five are immediately eligible to enroll members year round. Beginning in 2015, plans must have a Star Rating of four or higher to qualify for bonus money. Notwithstanding successful historical efforts to improve our Star Ratings and other quality measures for 2012 and 2013 and the continuation of such efforts, there can be no assurances that we will be successful in maintaining or improving our Star Ratings in future years. Accordingly, our plans may not be eligible for full level quality bonuses, which could adversely affect the benefits such plans can offer, reduce membership, and/or reduce profit margins.

As discussed above, implementing regulations and related interpretive guidance continue to be issued on several significant provisions of the Health Insurance Reform Legislation. Congress may also withhold the funding necessary to implement the Health Insurance Reform Legislation, or may attempt to replace the legislation with amended provisions or repeal it altogether. Given the breadth of possible changes and the uncertainties of interpretation, implementation, and timing of these changes, which we expect to occur over the next several years, the Health Insurance Reform Legislation could change the way we do business, potentially impacting our pricing, benefit design, product mix, geographic mix, and distribution channels. In particular, implementing regulations and related guidance are forthcoming 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 offerings, if any, could cause meaningful disruption in the local health care markets. Further, various health insurance reform proposals are also emerging at the state level. It is reasonably possible that the Health Insurance Reform Legislation and related regulations, as well as future legislative changes, in the aggregate may have a material adverse effect on our results of operations, including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, lowering our Medicare payment rates and increasing our expenses associated with the non-deductible federal premium tax and other assessments; our financial position, including our ability to maintain the value of our goodwill; and our cash flows. If the new non-deductible federal premium tax and other assessments, including a three-year commercial reinsurance fee, were imposed as enacted, and if we are unable to adjust our business model to address these new taxes and assessments, such as through the reduction of our operating costs or adjustments to premium pricing or benefit design, there can be no assurance that the non-deductible federal premium tax and other assessments would not have a material adverse effect on our results of operations, financial position, and cash flows.

 

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We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Health and Well-Being Services segment, primarily pharmacy and behavioral health services, to our Retail and Employer Group customers and are described in Note 12 to the condensed consolidated financial statements.

 

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Comparison of Results of Operations for 2012 and 2011

The following discussion primarily deals with our results of operations for the three months ended September 30, 2012, or the 2012 quarter, the three months ended September 30, 2011, or the 2011 quarter, the nine months ended September 30, 2012, or the 2012 period, and the nine months ended September 30, 2011, or the 2011 period.

Consolidated

 

     For the three months ended
September 30,
    Change  
     2012     2011     Dollars     Percentage  
     (dollars in millions, except per common share results)        

Revenues:

        

Premiums:

        

Retail

   $ 6,138      $ 5,399      $ 739        13.7

Employer Group

     2,552        2,225        327        14.7

Other Businesses

     398        1,228        (830     (67.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums

     9,088        8,852        236        2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Services:

        

Retail

     6        5        1        20.0

Employer Group

     88        89        (1     (1.1 )% 

Health and Well-Being Services

     274        236        38        16.1

Other Businesses

     99        26        73        280.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     467        356        111        31.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     96        93        3        3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,651        9,301        350        3.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Benefits

     7,467        7,147        320        4.5

Operating costs

     1,408        1,361        47        3.5

Depreciation and amortization

     75        67        8        11.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,950        8,575        375        4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     701        726        (25     (3.4 )% 

Interest expense

     26        27        (1     (3.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     675        699        (24     (3.4 )% 

Provision for income taxes

     249        254        (5     (2.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 426      $ 445      $ (19     (4.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 2.62      $ 2.67      $ (0.05     (1.9 )% 

Benefit ratio(a)

     82.2     80.7       1.5

Operating cost ratio(b)

     14.7     14.8       (0.1 )% 

Effective tax rate

     36.9     36.3       0.6

 

(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.

 

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     For the nine months  ended
September 30,
    Change  
     2012     2011     Dollars     Percentage  
     (dollars in millions, except per common share results)        

Revenues:

        

Premiums:

        

Retail

   $ 18,445      $ 16,100      $ 2,345        14.6

Employer Group

     7,603        6,668        935        14.0

Other Businesses

     1,981        3,700        (1,719     (46.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums

     28,029        26,468        1,561        5.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Services:

        

Retail

     17        12        5        41.7

Employer Group

     266        269        (3     (1.1 )% 

Health and Well-Being Services

     760        678        82        12.1

Other Businesses

     208        76        132        173.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total services

     1,251        1,035        216        20.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     289        273        16        5.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     29,569        27,776        1,793        6.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Benefits

     23,469        21,761        1,708        7.8

Operating costs

     4,175        3,810        365        9.6

Depreciation and amortization

     218        201        17        8.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     27,862        25,772        2,090        8.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,707        2,004        (297     (14.8 )% 

Interest expense

     78        82        (4     (4.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,629        1,922        (293     (15.2 )% 

Provision for income taxes

     599        702        (103     (14.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,030      $ 1,220      $ (190     (15.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 6.27      $ 7.24      $ (0.97     (13.4 )% 

Benefit ratio(a)

     83.7     82.2       1.5

Operating cost ratio(b)

     14.3     13.9       0.4

Effective tax rate

     36.8     36.5       0.3

 

(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.

Summary

Net income was $426 million, or $2.62 per diluted common share, in the 2012 quarter compared to $445 million, or $2.67 per diluted common share, in the 2011 quarter. Net income was $1.0 billion, or $6.27 per diluted common share, in the 2012 period compared to $1.2 billion, or $7.24 per diluted common share, in the 2011 period. The decreases primarily were due to lower operating results in the Retail segment, partially offset by improved operating results in the Health and Well-Being Services segment. During the 2012 quarter and period, we experienced a significant increase in the Retail segment benefit ratio primarily associated with our individual Medicare Advantage products primarily due to a planned increase in the target benefit ratio associated with positioning for Health Insurance Reform Legislation funding changes and minimum benefit ratio requirements and a higher benefit ratio experienced on new membership than the assumptions used in our 2012 Medicare bids. Our diluted earnings per common share for the 2012 period included $0.18 per diluted common share for benefit expenses related to the settlement of a litigation matter associated with our Military services business. In addition,

 

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our diluted earnings per common share included the beneficial impact of favorable prior-year medical claims reserve development of approximately $0.21 per diluted common share for the 2012 quarter compared to $0.13 per diluted common share for the 2011 quarter. For the 2012 period, our diluted earnings per common share included the beneficial impact of favorable prior-year medical claims reserve development of approximately $0.39 per diluted common share compared to $0.57 per diluted common share for the 2011 period.

Premiums

Consolidated premiums increased $236 million, or 2.7%, from the 2011 quarter to $9.1 billion for the 2012 quarter, and increased $1.6 billion, or 5.9%, from the 2011 period to $28.0 billion for the 2012 period. These increases primarily were due to increases in both Retail and Employer Group segment premiums primarily driven by higher average individual and group Medicare Advantage membership, partially offset by lower premiums for our Other Businesses due to the transition to the new TRICARE South Region contract. As discussed previously, on April 1, 2012, we began delivering services under the new TRICARE South Region contract that the TMA awarded to us on February 25, 2011. We account for revenues under the new contract net of estimated healthcare costs similar to an administrative services fee only agreement, and as such there are no premiums recognized under the new contract. Average membership is calculated by summing the ending membership for each month in a period and dividing the result by the number of months in a period. Premiums revenue reflects changes in membership and increases in average per member premiums. Items impacting average per member premiums include changes in premium rates as well as changes in the geographic mix of membership, the mix of product offerings, and the mix of benefit plans selected by our membership.

Services Revenue

Consolidated services revenue increased $111 million, or 31.2%, from the 2011 quarter to $467 million for the 2012 quarter, and increased $216 million, or 20.9%, from the 2011 period to $1.3 billion for the 2012 period. These increases primarily were due to increased services revenue for our Other Businesses due to the transition to the new TRICARE South Region contract on April 1, 2012 discussed above, and an increase in services revenue in our Health and Well-Being Services segment from growth in our Concentra operations and the acquisition of SeniorBridge on July 6, 2012.

Investment Income

Investment income totaled $96 million for the 2012 quarter, an increase of $3 million from the 2011 quarter. For the 2012 period, investment income totaled $289 million, an increase of $16 million, or 5.9%, from the 2011 period. These increases primarily reflect capital gains realized in the 2012 quarter and period.

Benefit Expenses

Consolidated benefit expenses were $7.5 billion for the 2012 quarter, an increase of $320 million, or 4.5%, from the 2011 quarter. For the 2012 period, consolidated benefit expenses were $23.5 billion, an increase of $1.7 billion, or 7.8%, from the 2011 period. These increases primarily were due to an $800 million, or 18.8%, increase in Retail segment benefit expenses from the 2011 quarter to the 2012 quarter, and a $2.4 billion, or 18.3%, increase in Retail segment benefit expenses from the 2011 period to the 2012 period, primarily driven by an increase in the average number of individual Medicare members. These increases were partially offset by a decrease in benefit expenses for Other Businesses primarily due to the transition to the new administrative services only TRICARE South Region contract on April 1, 2012. We do not record benefit expenses under the new contract.

The consolidated benefit ratio for the 2012 quarter was 82.2%, a 150 basis point increase from the 2011 quarter. The consolidated benefit ratio for the 2012 period was 83.7%, a 150 basis point increase from the 2011 period. These increases primarily were due to increases in both the Retail and Employer Group segments benefit ratios as described further in our segment results discussion that follows. Year-over-year quarterly comparisons of the consolidated benefit ratio were favorably impacted by 20 basis points and year-over-year period comparisons were favorably impacted by 30 basis points due to the continued growth of our Health & Well-Being Services segment and the related savings realized on a consolidated basis from providing these services directly to our members at fair market value rather than through a third party.

 

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Operating Costs

Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.

Consolidated operating costs increased $47 million, or 3.5%, during the 2012 quarter compared to the 2011 quarter, and increased $365 million, or 9.6%, during the 2012 period compared to the 2011 period. The increases primarily were due to an increase in operating costs in our Retail Segment as a result of Medicare Advantage growth.

The consolidated operating cost ratio for the 2012 quarter was 14.7%, improving 10 basis points from the 2011 quarter primarily reflecting substantially improved operating leverage nearly offset by the impact of the new TRICARE South Region contract being accounted for as an administrative services fee only arrangement. For the 2012 period the consolidated operating cost ratio was 14.3%, increasing 40 basis points from the 2011 period as the negative impact of the new TRICARE South Region contract being accounted for as an administrative services fee only arrangement was partially offset by improved operating leverage.

Depreciation and Amortization

Depreciation and amortization for the 2012 quarter totaled $75 million, an increase of $8 million, or 11.9%, from the 2011 quarter. For the 2012 period, depreciation and amortization of $218 million increased $17 million, or 8.5%, from the 2011 period. These increases primarily were due to increased amortization expense in the 2012 quarter and period as a result of the acquisitions of Anvita in the fourth quarter of 2011, Arcadian in the first quarter of 2012, and other health and wellness businesses during 2012.

Interest Expense

Interest expense was $26 million for the 2012 quarter compared to $27 million for the 2011 quarter. Interest expense was $78 million for the 2012 period compared to $82 million for the 2011 period. In March 2012, we repaid $36 million of junior subordinated debt that carried a higher interest rate than our senior notes.

Income Taxes

Our effective tax rate during the 2012 quarter was 36.9%, comparable to the effective tax rate of 36.3% in the 2011 quarter. For the 2012 period, our effective tax rate was 36.8%, comparable to the effective tax rate of 36.5% in the 2011 period.

 

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Retail Segment

 

     September 30,      Change  
     2012      2011      Members      Percentage  

Membership:

           

Medical membership:

           

Individual Medicare Advantage

     1,911,800         1,613,400         298,400         18.5

Individual Medicare stand-alone PDP

     2,947,200         2,478,100         469,100         18.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total individual Medicare

     4,859,000         4,091,500         767,500         18.8

Individual commercial

     518,600         480,700         37,900         7.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total individual medical members

     5,377,600         4,572,200         805,400         17.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Individual specialty membership (a)

     940,800         755,600         185,200         24.5
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Specialty products include dental, vision, and other supplemental health and financial protection products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.

 

     For the three months
ended

September 30,
    Change  
     2012     2011     Dollars     Percentage  
           (in millions)              

Premiums and Services Revenue:

        

Premiums:

        

Individual Medicare Advantage

   $ 5,203      $ 4,566      $ 637        14.0

Individual Medicare stand-alone PDP

     635        579        56        9.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total individual Medicare

     5,838        5,145        693        13.5

Individual commercial

     255        221        34        15.4

Individual specialty

     45        33        12        36.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums

     6,138        5,399        739        13.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Services

     6        5        1        20.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and services revenue

   $ 6,144      $ 5,404      $ 740        13.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 424      $ 541      $ (117     (21.6 )% 

Benefit ratio

     82.3