SEGMENT INFORMATION

9 Months Ended

Sep. 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 $1.1 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.

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.

	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.

	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.

	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.