SEGMENT INFORMATION

6 Months Ended

Jun. 30, 2012

SEGMENT INFORMATION

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.

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 $1.0 billion for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, these amounts were $2.4 billion and $2.0 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 $9 million and $7 million for the three months ended June 30, 2012 and 2011, respectively. For each of the six months ended June 30, 2012 and 2011, the amount of this expense was $17 million.

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.

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

	Retail		Employer Group		Health and Well-Being Services		Other Businesses			Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended June 30, 2012
Revenues—external customers
Premiums:
Medicare Advantage	$	5,308	$	1,011	$	0	$	0		$	0		$	6,319
Medicare stand-alone PDP		672		2		0		73			0			747
Total Medicare		5,980		1,013		0		73			0			7,066
Fully-insured		250		1,247		0		0			0			1,497
Specialty		42		262		0		0			0			304
Military services		0		0		0		44			0			44
Medicaid and other		0		0		0		255			0			255
Total premiums		6,272		2,522		0		372			0			9,166
Services revenue:
Provider		0		0		245		0			0			245
ASO and other		5		89		0		91			0			185
Pharmacy		0		0		4		0			0			4
Total services revenue		5		89		249		91			0			434
Total revenues—external customers		6,277		2,611		249		463			0			9,600
Intersegment revenues
Services		1		4		2,377		0			(2,382	)		0
Products		0		0		591		0			(591	)		0
Total intersegment revenues		1		4		2,968		0			(2,973	)		0
Investment income		20		10		0		15			54			99
Total revenues		6,298		2,625		3,217		478			(2,919	)		9,699
Operating expenses:
Benefits		5,273		2,074		0		406			(101	)		7,652
Operating costs		625		417		3,064		123			(2,845	)		1,384
Depreciation and amortization		33		20		22		4			(6	)		73
Total operating expenses		5,931		2,511		3,086		533			(2,952	)		9,109
Income (loss) from operations		367		114		131		(55	)		33			590
Interest expense		0		0		0		0			26			26
Income (loss) before income taxes	$	367	$	114	$	131	$	(55	)	$	7		$	564

Benefit expenses for the three months ended June 30, 2012 included favorable prior-year medical claims reserve development not in the ordinary course of business of an estimated $24 million in our Retail segment, $12 million in our Employer Group segment, and $4 million for our Other Businesses. In addition, benefit expenses for our Other Businesses for the three months ended June 30, 2012 included expense of approximately $46 million for a litigation settlement associated with our Military services business.

	Retail		Employer Group		Health and Well-Being Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended June 30, 2011
Revenues—external customers
Premiums:
Medicare Advantage	$	4,555	$	764	$	0	$	0	$	0		$	5,319
Medicare stand-alone PDP		601		2		0		77		0			680
Total Medicare		5,156		766		0		77		0			5,999
Fully-insured		206		1,217		0		0		0			1,423
Specialty		30		233		0		0		0			263
Military services		0		0		0		935		0			935
Medicaid and other		0		0		0		229		0			229
Total premiums		5,392		2,216		0		1,241		0			8,849
Services revenue:
Provider		0		0		222		0		0			222
ASO and other		4		87		0		28		0			119
Pharmacy		0		0		3		0		0			3
Total services revenue		4		87		225		28		0			344
Total revenues—external customers		5,396		2,303		225		1,269		0			9,193
Intersegment revenues
Services		0		3		2,074		0		(2,077	)		0
Products		0		0		434		0		(434	)		0
Total intersegment revenues		0		3		2,508		0		(2,511	)		0
Investment income		19		12		0		13		47			91
Total revenues		5,415		2,318		2,733		1,282		(2,464	)		9,284
Operating expenses:
Benefits		4,390		1,800		0		1,149		(70	)		7,269
Operating costs		490		387		2,625		111		(2,420	)		1,193
Depreciation and amortization		32		23		20		3		(10	)		68
Total operating expenses		4,912		2,210		2,645		1,263		(2,500	)		8,530
Income from operations		503		108		88		19		36			754
Interest expense		0		0		0		0		28			28
Income before income taxes	$	503	$	108	$	88	$	19	$	8		$	726

Benefit expenses for the three months ended June 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 for our Other Businesses, partially offset by unfavorable prior-year medical claims reserve development of approximately $8 million in our Employer Group segment.

	Retail		Employer Group		Health and Well-Being Services		Other Businesses			Eliminations/ Corporate			Consolidated
	(in millions)
Six months ended June 30, 2012
Revenues—external customers
Premiums:
Medicare Advantage	$	10,401	$	2,036	$	0	$	0		$	0		$	12,437
Medicare stand-alone PDP		1,332		4		0		139			0			1,475
Total Medicare		11,733		2,040		0		139			0			13,912
Fully-insured		494		2,489		0		0			0			2,983
Specialty		80		522		0		0			0			602
Military services		0		0		0		937			0			937
Medicaid and other		0		0		0		507			0			507
Total premiums		12,307		5,051		0		1,583			0			18,941
Services revenue:
Provider		0		0		478		0			0			478
ASO and other		11		178		0		109			0			298
Pharmacy		0		0		8		0			0			8
Total services revenue		11		178		486		109			0			784
Total revenues—external customers		12,318		5,229		486		1,692			0			19,725
Intersegment revenues
Services		1		8		4,863		0			(4,872	)		0
Products		0		0		1,175		0			(1,175	)		0
Total intersegment revenues		1		8		6,038		0			(6,047	)		0
Investment income		39		20		0		29			105			193
Total revenues		12,358		5,257		6,524		1,721			(5,942	)		19,918
Operating expenses:
Benefits		10,560		4,138		0		1,512			(208	)		16,002
Operating costs		1,253		844		6,218		239			(5,787	)		2,767
Depreciation and amortization		63		40		43		8			(11	)		143
Total operating expenses		11,876		5,022		6,261		1,759			(6,006	)		18,912
Income (loss) from operations		482		235		263		(38	)		64			1,006
Interest expense		0		0		0		0			52			52
Income (loss) before income taxes	$	482	$	235	$	263	$	(38	)	$	12		$	954

Benefit expenses for the six months ended June 30, 2012 included favorable prior-year medical claims reserve development not in the ordinary course of business of approximately $57 million in our Retail segment and $9 million for our Other Businesses, partially offset by unfavorable prior-year medical claims reserve development of approximately $18 million in our Employer Group segment. In addition, benefit expenses for our Other Businesses for the six months ended June 30, 2012 included expense of approximately $46 million for a litigation settlement associated with our Military services business.

	Retail		Employer Group		Health and Well-Being Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Six months ended June 30, 2011
Revenues—external customers
Premiums:
Medicare Advantage	$	9,080	$	1,560	$	0	$	0	$	0		$	10,640
Medicare stand-alone PDP		1,158		4		0		153		0			1,315
Total Medicare		10,238		1,564		0		153		0			11,955
Fully-insured		407		2,416		0		0		0			2,823
Specialty		56		463		0		0		0			519
Military services		0		0		0		1,858		0			1,858
Medicaid and other		0		0		0		461		0			461
Total premiums		10,701		4,443		0		2,472		0			17,616
Services revenue:
Provider		0		0		437		0		0			437
ASO and other		7		180		0		50		0			237
Pharmacy		0		0		5		0		0			5
Total services revenue		7		180		442		50		0			679
Total revenues—external customers		10,708		4,623		442		2,522		0			18,295
Intersegment revenues
Services		0		6		4,195		0		(4,201	)		0
Products		0		0		869		0		(869	)		0
Total intersegment revenues		0		6		5,064		0		(5,070	)		0
Investment income		38		24		0		25		93			180
Total revenues		10,746		4,653		5,506		2,547		(4,977	)		18,475
Operating expenses:
Benefits		8,944		3,552		0		2,258		(140	)		14,614
Operating costs		1,023		811		5,281		230		(4,896	)		2,449
Depreciation and amortization		59		43		40		5		(13	)		134
Total operating expenses		10,026		4,406		5,321		2,493		(5,049	)		17,197
Income from operations		720		247		185		54		72			1,278
Interest expense		0		0		0		0		55			55
Income before income taxes	$	720	$	247	$	185	$	54	$	17		$	1,223

Benefit expenses for the six months ended June 30, 2011 included favorable prior-year medical claims reserve development not in the ordinary course of business of approximately $72 million in our Retail segment, $33 million in our Employer Group segment, and $12 million for our Other Businesses.