12. 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 $1.9 billion and $1.5 billion for the three months ended March 31, 2014 and 2013, 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 $25 million and $22 million for the three months ended March 31, 2014 and 2013, 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 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 included with intersegment eliminations in the tables presenting segment results below.

Our segment results were as follows for the three months ended March 31, 2014 and 2013, respectively:


	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended March 31, 2014
Revenues - external customers
Premiums:
Medicare Advantage	$	6,460	$	1,384	$	0	$	0	$	0		$	7,844
Medicare stand-alone PDP		863		2		0		0		0			865

Total Medicare		7,323		1,386		0		0		0			8,709

Fully-insured		525		1,329		0		0		0			1,854
Specialty		59		275		0		0		0			334
Military services		0		0		0		6		0			6
Medicaid and other		169		0		0		11		0			180

Total premiums		8,076		2,990		0		17		0			11,083

Services revenue:
Provider		0		5		290		0		0			295
ASO and other		14		81		0		127		0			222
Pharmacy		0		0		21		0		0			21

Total services revenue		14		86		311		127		0			538

Total revenues - external customers		8,090		3,076		311		144		0			11,621

Intersegment revenues
Services		0		19		3,454		0		(3,473	)		0
Products		0		0		846		0		(846	)		0

Total intersegment revenues		0		19		4,300		0		(4,319	)		0

Investment income		19		10		0		15		47			91

Total revenues		8,109		3,105		4,611		159		(4,272	)		11,712

Operating expenses:
Benefits		6,887		2,356		0		28		(147	)		9,124
Operating costs		923		499		4,390		102		(4,129	)		1,785
Depreciation and amortization		37		24		36		4		(19	)		82

Total operating expenses		7,847		2,879		4,426		134		(4,295	)		10,991

Income from operations		262		226		185		25		23			721
Interest expense		0		0		0		0		35			35

Income (loss) before income taxes	$	262	$	226	$	185	$	25	$	(12	)	$	686


	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended March 31, 2013
Revenues - external customers
Premiums:
Medicare Advantage	$	5,736	$	1,190	$	0	$	0	$	0		$	6,926
Medicare stand-alone PDP		761		2		0		0		0			763

Total Medicare		6,497		1,192		0		0		0			7,689

Fully-insured		279		1,268		0		0		0			1,547
Specialty		49		275		0		0		0			324
Military services		0		0		0		11		0			11
Medicaid and other		79		0		0		218		0			297

Total premiums		6,904		2,735		0		229		0			9,868

Services revenue:
Provider		0		4		306		0		0			310
ASO and other		2		84		0		120		0			206
Pharmacy		0		0		9		0		0			9

Total services revenue		2		88		315		120		0			525

Total revenues - external customers		6,906		2,823		315		349		0			10,393

Intersegment revenues
Services		0		11		2,801		0		(2,812	)		0
Products		0		0		654		0		(654	)		0

Total intersegment revenues		0		11		3,455		0		(3,466	)		0

Investment income		18		11		0		15		49			93

Total revenues		6,924		2,845		3,770		364		(3,417	)		10,486

Operating expenses:
Benefits		5,929		2,177		0		187		(98	)		8,195
Operating costs		613		433		3,616		115		(3,331	)		1,446
Depreciation and amortization		32		23		36		4		(15	)		80

Total operating expenses		6,574		2,633		3,652		306		(3,444	)		9,721

Income from operations		350		212		118		58		27			765
Interest expense		0		0		0		0		35			35

Income (loss) before income taxes	$	350	$	212	$	118	$	58	$	(8	)	$	730