Segment Information

6 Months Ended

Jun. 30, 2013

Segment Information

13. SEGMENT INFORMATION

On January 1, 2013, we reclassified certain of our businesses to correspond with internal management reporting changes and renamed our Health and Well-Being Services segment as Healthcare Services. Our Employer Group segment now includes our health and wellness businesses, including HumanaVitality and Lifesynch’s employee assistance programs, which had historically been reported in our Healthcare Services segment. The Retail segment now includes our contract with CMS to administer the LI-NET program as well as our state-based Medicaid businesses, which had historically been reported in our Other Businesses category. Prior period segment financial information has been recast to conform to the 2013 presentation.

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 integrated care delivery 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 LI-NET program and state-based Medicaid businesses. 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, 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 provider services, pharmacy, integrated behavioral health services, and home care services. The Other Businesses category consists of our military services, primarily our TRICARE South Region contract, Puerto Rico Medicaid, and closed-block long-term care businesses.

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, 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 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 $1.2 billion for the three months ended June 30, 2013 and 2012. For the six months ended June 30, 2013 and 2012, these amounts were $2.5 billion and $2.4 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 $24 million and $9 million for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012, the amount of this expense was $46 and $17 million, respectively. These increases primarily were due to amortization expense associated with the December 21, 2012 acquisition of Metropolitan Health Networks, Inc.

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 2012 Form 10-K. Transactions between reportable segments 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 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, 2013 and 2012, respectively:

	Retail		Employer Group		Healthcare Services		Other Businesses			Eliminations/ Corporate			Consolidated
					(in millions)
Three months ended June 30, 2013
Revenues—external customers
Premiums:
Medicare Advantage	$	5,572	$	1,160	$	0	$	0		$	0		$	6,732
Medicare stand-alone PDP		785		2		0		0			0			787
Total Medicare		6,357		1,162		0		0			0			7,519
Fully-insured		285		1,273		0		0			0			1,558
Specialty		52		275		0		0			0			327
Military services		0		0		0		5			0			5
Medicaid and other		72		0		0		220			0			292
Total premiums		6,766		2,710		0		225			0			9,701
Services revenue:
Provider		0		4		313		0			0			317
ASO and other		2		82		0		114			0			198
Pharmacy		0		0		13		0			0			13
Total services revenue		2		86		326		114			0			528
Total revenues—external customers		6,768		2,796		326		339			0			10,229
Intersegment revenues
Services		0		12		2,858		0			(2,870	)		0
Products		0		0		680		0			(680	)		0
Total intersegment revenues		0		12		3,538		0			(3,550	)		0
Investment income		18		10		0		15			49			92
Total revenues		6,786		2,818		3,864		354			(3,501	)		10,321
Operating expenses:
Benefits		5,696		2,235		0		251			(91	)		8,091
Operating costs		640		429		3,697		129			(3,434	)		1,461
Depreciation and amortization		32		27		36		4			(19	)		80
Total operating expenses		6,368		2,691		3,733		384			(3,544	)		9,632
Income (loss) from operations		418		127		131		(30	)		43			689
Interest expense		0		0		0		0			35			35
Income (loss) before income taxes	$	418	$	127	$	131	$	(30	)	$	8		$	654

	Retail		Employer Group		Healthcare 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		745		2		0		0			0			747
Total Medicare		6,053		1,013		0		0			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		45		0		0		210			0			255
Total premiums		6,390		2,522		0		254			0			9,166
Services revenue:
Provider		0		2		243		0			0			245
ASO and other		5		89		0		91			0			185
Pharmacy		0		0		4		0			0			4
Total services revenue		5		91		247		91			0			434
Total revenues—external customers		6,395		2,613		247		345			0			9,600
Intersegment revenues
Services		1		7		2,359		0			(2,367	)		0
Products		0		0		591		0			(591	)		0
Total intersegment revenues		1		7		2,950		0			(2,958	)		0
Investment income		20		10		0		15			54			99
Total revenues		6,416		2,630		3,197		360			(2,904	)		9,699
Operating expenses:
Benefits		5,378		2,063		0		301			(90	)		7,652
Operating costs		638		428		3,049		111			(2,842	)		1,384
Depreciation and amortization		33		22		20		4			(6	)		73
Total operating expenses		6,049		2,513		3,069		416			(2,938	)		9,109
Income (loss) from operations		367		117		128		(56	)		34			590
Interest expense		0		0		0		0			26			26
Income (loss) before income taxes	$	367	$	117	$	128	$	(56	)	$	8		$	564

	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
					(in millions)
Six months ended June 30, 2013
Revenues—external customers
Premiums:
Medicare Advantage	$	11,308	$	2,350	$	0	$	0	$	0		$	13,658
Medicare stand-alone PDP		1,546		4		0		0		0			1,550
Total Medicare		12,854		2,354		0		0		0			15,208
Fully-insured		564		2,541		0		0		0			3,105
Specialty		101		550		0		0		0			651
Military services		0		0		0		16		0			16
Medicaid and other		151		0		0		438		0			589
Total premiums		13,670		5,445		0		454		0			19,569
Services revenue:
Provider		0		8		619		0		0			627
ASO and other		4		166		0		234		0			404
Pharmacy		0		0		22		0		0			22
Total services revenue		4		174		641		234		0			1,053
Total revenues—external customers		13,674		5,619		641		688		0			20,622
Intersegment revenues
Services		0		23		5,607		0		(5,630	)		0
Products		0		0		1,334		0		(1,334	)		0
Total intersegment revenues		0		23		6,941		0		(6,964	)		0
Investment income		36		21		0		30		98			185
Total revenues		13,710		5,663		7,582		718		(6,866	)		20,807
Operating expenses:
Benefits		11,625		4,412		0		438		(189	)		16,286
Operating costs		1,253		869		7,254		244		(6,713	)		2,907
Depreciation and amortization		64		50		72		8		(34	)		160
Total operating expenses		12,942		5,331		7,326		690		(6,936	)		19,353
Income from operations		768		332		256		28		70			1,454
Interest expense		0		0		0		0		70			70
Income before income taxes	$	768	$	332	$	256	$	28	$	0		$	1,384

	Retail		Employer Group		Healthcare 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		1,471		4		0		0			0			1,475
Total Medicare		11,872		2,040		0		0			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		91		0		0		416			0			507
Total premiums		12,537		5,051		0		1,353			0			18,941
Services revenue:
Provider		0		4		474		0			0			478
ASO and other		11		178		0		109			0			298
Pharmacy		0		0		8		0			0			8
Total services revenue		11		182		482		109			0			784
Total revenues—external customers		12,548		5,233		482		1,462			0			19,725
Intersegment revenues
Services		1		17		4,824		0			(4,842	)		0
Products		0		0		1,175		0			(1,175	)		0
Total intersegment revenues		1		17		5,999		0			(6,017	)		0
Investment income		39		20		0		29			105			193
Total revenues		12,588		5,270		6,481		1,491			(5,912	)		19,918
Operating expenses:
Benefits		10,755		4,116		0		1,317			(186	)		16,002
Operating costs		1,275		864		6,189		217			(5,778	)		2,767
Depreciation and amortization		63		44		39		8			(11	)		143
Total operating expenses		12,093		5,024		6,228		1,542			(5,975	)		18,912
Income (loss) from operations		495		246		253		(51	)		63			1,006
Interest expense		0		0		0		0			52			52
Income (loss) before income taxes	$	495	$	246	$	253	$	(51	)	$	11		$	954