SEGMENT INFORMATION

We manage our business with three reportable segments: Retail, Employer Group, and Healthcare 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, and includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, collectively our state-based contracts. The Employer Group segment consists of Medicare and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and voluntary benefit products, as well as administrative services only, or ASO, products and our health and wellness products primarily marketed to employer groups. The Healthcare Services segment includes services offered to our health plan members as well as to third parties including pharmacy, provider services, home based services, integrated behavioral health services and predictive modeling and informatics services. The Other Businesses category consists of our military services, primarily our TRICARE South Region contract, closed-block of long-term care insurance policies, and our Puerto Rico Medicaid contracts under which coverage was terminated effective September 30, 2013.

Our Healthcare 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, contracting with 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 Healthcare 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.

In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based managed care agreements with our health plans. Under these agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services and related administrative costs. Accordingly, our Healthcare Services segment reports provider services related revenues on a gross basis. Capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services.

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 $2.6 billion and $2.0 billion for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, these amounts were $6.8 billion and $5.2 billion respectively. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our provider services and pharmacy operations, are included with benefits expense. The amount of this expense was $27 million and $23 million for the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the amount of this expense was $79 million and $69 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 2013 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, 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 use 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 are included with intersegment eliminations in the tables presenting segment results below.

Our segment results were as follows for the three and nine months ended September 30, 2014 and 2013, respectively:



	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended September 30, 2014
Revenues - external customers
Premiums:
Medicare Advantage	$	6,508	$	1,381	$	—	$	—	$	—		$	7,889
Medicare stand-alone PDP	804		2		—		—		—			806
Total Medicare	7,312		1,383		—		—		—			8,695
Fully-insured	926		1,335		—		—		—			2,261
Specialty	67		274		—		—		—			341
Military services	—		—		—		5		—			5
Medicaid and other	292		—		—		13		—			305
Total premiums	8,597		2,992		—		18		—			11,607
Services revenue:
Provider	—		6		302		—		—			308
ASO and other	10		84		—		108		—			202
Pharmacy	—		—		26		—		—			26
Total services revenue	10		90		328		108		—			536
Total revenues - external customers	8,607		3,082		328		126		—			12,143
Intersegment revenues
Services	—		22		3,851		—		(3,873		)	—
Products	—		—		968		—		(968		)	—
Total intersegment revenues	—		22		4,819		—		(4,841		)	—
Investment income	19		11		—		15		50			95
Total revenues	8,626		3,115		5,147		141		(4,791		)	12,238
Operating expenses:
Benefits	7,201		2,589		—		27		(151		)	9,666
Operating costs	1,063		487		4,908		96		(4,656		)	1,898
Depreciation and amortization	40		26		37		4		(22		)	85
Total operating expenses	8,304		3,102		4,945		127		(4,829		)	11,649
Income from operations	322		13		202		14		38			589
Interest expense	—		—		—		—		38			38
Income before income taxes	$	322	$	13	$	202	$	14	$	—		$	551



	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended September 30, 2013
Revenues - external customers
Premiums:
Medicare Advantage	$	5,552	$	1,193	$	—	$	—	$	—		$	6,745
Medicare stand-alone PDP	740		2		—		—		—			742
Total Medicare	6,292		1,195		—		—		—			7,487
Fully-insured	292		1,278		—		—		—			1,570
Specialty	54		273		—		—		—			327
Military services	—		—		—		6		—			6
Medicaid and other	76		—		—		232		—			308
Total premiums	6,714		2,746		—		238		—			9,698
Services revenue:
Provider	—		6		310		—		—			316
ASO and other	3		84		—		108		—			195
Pharmacy	—		—		17		—		—			17
Total services revenue	3		90		327		108		—			528
Total revenues - external customers	6,717		2,836		327		346		—			10,226
Intersegment revenues
Services	—		14		2,999		—		(3,013		)	—
Products	—		—		716		—		(716		)	—
Total intersegment revenues	—		14		3,715		—		(3,729		)	—
Investment income	19		10		—		15		49			93
Total revenues	6,736		2,860		4,042		361		(3,680		)	10,319
Operating expenses:
Benefits	5,647		2,316		—		230		(118		)	8,075
Operating costs	718		443		3,856		103		(3,580		)	1,540
Depreciation and amortization	33		25		37		5		(17		)	83
Total operating expenses	6,398		2,784		3,893		338		(3,715		)	9,698
Income from operations	338		76		149		23		35			621
Interest expense	—		—		—		—		35			35
Income before income taxes	$	338	$	76	$	149	$	23	$	—		$	586



	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Nine months ended September 30, 2014
Revenues - external customers
Premiums:
Medicare Advantage	$	19,443	$	4,131	$	—	$	—	$	—		$	23,574
Medicare stand-alone PDP	2,606		6		—		—		—			2,612
Total Medicare	22,049		4,137		—		—		—			26,186
Fully-insured	2,363		3,985		—		—		—			6,348
Specialty	192		824		—		—		—			1,016
Military services	—		—		—		15		—			15
Medicaid and other	667		—		—		42		—			709
Total premiums	25,271		8,946		—		57		—			34,274
Services revenue:
Provider	—		17		899		—		—			916
ASO and other	37		246		—		349		—			632
Pharmacy	—		—		72		—		—			72
Total services revenue	37		263		971		349		—			1,620
Total revenues - external customers	25,308		9,209		971		406		—			35,894
Intersegment revenues
Services	—		57		11,002		—		(11,059		)	—
Products	—		—		2,752		—		(2,752		)	—
Total intersegment revenues	—		57		13,754		—		(13,811		)	—
Investment income	56		32		—		45		145			278
Total revenues	25,364		9,298		14,725		451		(13,666		)	36,172
Operating expenses:
Benefits	21,371		7,417		—		82		(453		)	28,417
Operating costs	2,968		1,478		14,024		301		(13,253		)	5,518
Depreciation and amortization	112		75		108		12		(61		)	246
Total operating expenses	24,451		8,970		14,132		395		(13,767		)	34,181
Income from operations	913		328		593		56		101			1,991
Interest expense	—		—		—		—		108			108
Income (loss) before income taxes	$	913	$	328	$	593	$	56	$	(7	)	$	1,883



	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Nine months ended September 30, 2013
Revenues - external customers
Premiums:
Medicare Advantage	$	16,860	$	3,543	$	—	$	—	$	—		$	20,403
Medicare stand-alone PDP	2,286		6		—		—		—			2,292
Total Medicare	19,146		3,549		—		—		—			22,695
Fully-insured	856		3,819		—		—		—			4,675
Specialty	155		823		—		—		—			978
Military services	—		—		—		22		—			22
Medicaid and other	227		—		—		670		—			897
Total premiums	20,384		8,191		—		692		—			29,267
Services revenue:
Provider	—		15		928		—		—			943
ASO and other	7		250		—		342		—			599
Pharmacy	—		—		39		—		—			39
Total services revenue	7		265		967		342		—			1,581
Total revenues - external customers	20,391		8,456		967		1,034		—			30,848
Intersegment revenues
Services	—		37		8,706		—		(8,743		)	—
Products	—		—		2,050		—		(2,050		)	—
Total intersegment revenues	—		37		10,756		—		(10,793		)	—
Investment income	55		31		—		45		147			278
Total revenues	20,446		8,524		11,723		1,079		(10,646		)	31,126
Operating expenses:
Benefits	17,272		6,728		—		668		(307		)	24,361
Operating costs	1,971		1,299		11,223		347		(10,393		)	4,447
Depreciation and amortization	97		75		109		13		(51		)	243
Total operating expenses	19,340		8,102		11,332		1,028		(10,751		)	29,051
Income from operations	1,106		422		391		51		105			2,075
Interest expense	—		—		—		—		105			105
Income before income taxes	$	1,106	$	422	$	391	$	51	$	—		$	1,970