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 $2.3 billion and $1.7 billion for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, these amounts were $4.1 billion and $3.2 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 $24 million for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, the amount of this expense was $52 million and $46 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 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, 2014 and 2013, respectively:


	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Three months ended June 30, 2014
Revenues—external customers
Premiums:
Medicare Advantage	$	6,475	$	1,366	$	—	$	—	$	—		$	7,841
Medicare stand-alone PDP		939		2		—		—		—			941

Total Medicare		7,414		1,368		—		—		—			8,782

Fully-insured		912		1,321		—		—		—			2,233
Specialty		66		275		—		—		—			341
Military services		—		—		—		4		—			4
Medicaid and other		206		—		—		18		—			224

Total premiums		8,598		2,964		—		22		—			11,584

Services revenue:
Provider		—		6		307		—		—			313
ASO and other		13		81		—		114		—			208
Pharmacy		—		—		25		—		—			25

Total services revenue		13		87		332		114		—			546

Total revenues—external customers		8,611		3,051		332		136		—			12,130

Intersegment revenues
Services		—		16		3,697		—		(3,713	)		—
Products		—		—		938		—		(938	)		—

Total intersegment revenues		—		16		4,635		—		(4,651	)		—

Investment income		18		11		—		15		48			92

Total revenues		8,629		3,078		4,967		151		(4,603	)		12,222

Operating expenses:
Benefits		7,283		2,472		—		27		(155	)		9,627
Operating costs		982		492		4,726		103		(4,468	)		1,835
Depreciation and amortization		35		25		35		4		(20	)		79

Total operating expenses		8,300		2,989		4,761		134		(4,643	)		11,541

Income from operations		329		89		206		17		40			681
Interest expense		—		—		—		—		35			35

Income before income taxes	$	329	$	89	$	206	$	17	$	5		$	646


	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	$	—	$	—		$	—		$	6,732
Medicare stand-alone PDP		785		2		—		—			—			787

Total Medicare		6,357		1,162		—		—			—			7,519

Fully-insured		285		1,273		—		—			—			1,558
Specialty		52		275		—		—			—			327
Military services		—		—		—		5			—			5
Medicaid and other		72		—		—		220			—			292

Total premiums		6,766		2,710		—		225			—			9,701

Services revenue:
Provider		—		5		312		—			—			317
ASO and other		2		82		—		114			—			198
Pharmacy		—		—		13		—			—			13

Total services revenue		2		87		325		114			—			528

Total revenues—external customers		6,768		2,797		325		339			—			10,229

Intersegment revenues
Services		—		12		2,906		—			(2,918	)		—
Products		—		—		680		—			(680	)		—

Total intersegment revenues		—		12		3,586		—			(3,598	)		—

Investment income		18		10		—		15			49			92

Total revenues		6,786		2,819		3,911		354			(3,549	)		10,321

Operating expenses:
Benefits		5,696		2,235		—		251			(91	)		8,091
Operating costs		640		423		3,751		129			(3,482	)		1,461
Depreciation and amortization		32		27		36		4			(19	)		80

Total operating expenses		6,368		2,685		3,787		384			(3,592	)		9,632

Income (loss) from operations		418		134		124		(30	)		43			689
Interest expense		—		—		—		—			35			35

Income (loss) before income taxes	$	418	$	134	$	124	$	(30	)	$	8		$	654


	Retail		Employer Group		Healthcare Services		Other Businesses		Eliminations/ Corporate			Consolidated
	(in millions)
Six months ended June 30, 2014
Revenues—external customers
Premiums:
Medicare Advantage	$	12,935	$	2,750	$	—	$	—	$	—		$	15,685
Medicare stand-alone PDP		1,802		4		—		—		—			1,806

Total Medicare		14,737		2,754		—		—		—			17,491

Fully-insured		1,437		2,650		—		—		—			4,087
Specialty		125		550		—		—		—			675
Military services		—		—		—		10		—			10
Medicaid and other		375		—		—		29		—			404

Total premiums		16,674		5,954		—		39		—			22,667

Services revenue:
Provider		—		11		597		—		—			608
ASO and other		27		162		—		241		—			430
Pharmacy		—		—		46		—		—			46

Total services revenue		27		173		643		241		—			1,084

Total revenues—external customers		16,701		6,127		643		280		—			23,751

Intersegment revenues
Services		—		35		7,151		—		(7,186	)		—
Products		—		—		1,784		—		(1,784	)		—

Total intersegment revenues		—		35		8,935		—		(8,970	)		—

Investment income		37		21		—		30		95			183

Total revenues		16,738		6,183		9,578		310		(8,875	)		23,934

Operating expenses:
Benefits		14,170		4,828		—		55		(302	)		18,751
Operating costs		1,905		991		9,116		205		(8,597	)		3,620
Depreciation and amortization		72		49		71		8		(39	)		161

Total operating expenses		16,147		5,868		9,187		268		(8,938	)		22,532

Income from operations		591		315		391		42		63			1,402
Interest expense		—		—		—		—		70			70

Income (loss) before income taxes	$	591	$	315	$	391	$	42	$	(7	)	$	1,332


	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	$	—	$	—	$	—		$	13,658
Medicare stand-alone PDP		1,546		4		—		—		—			1,550

Total Medicare		12,854		2,354		—		—		—			15,208

Fully-insured		564		2,541		—		—		—			3,105
Specialty		101		550		—		—		—			651
Military services		—		—		—		16		—			16
Medicaid and other		151		—		—		438		—			589

Total premiums		13,670		5,445		—		454		—			19,569

Services revenue:
Provider		—		9		618		—		—			627
ASO and other		4		166		—		234		—			404
Pharmacy		—		—		22		—		—			22

Total services revenue		4		175		640		234		—			1,053

Total revenues—external customers		13,674		5,620		640		688		—			20,622

Intersegment revenues
Services		—		23		5,707		—		(5,730	)		—
Products		—		—		1,334		—		(1,334	)		—

Total intersegment revenues		—		23		7,041		—		(7,064	)		—

Investment income		36		21		—		30		98			185

Total revenues		13,710		5,664		7,681		718		(6,966	)		20,807

Operating expenses:
Benefits		11,625		4,412		—		438		(189	)		16,286
Operating costs		1,253		856		7,367		244		(6,813	)		2,907
Depreciation and amortization		64		50		72		8		(34	)		160

Total operating expenses		12,942		5,318		7,439		690		(7,036	)		19,353

Income from operations		768		346		242		28		70			1,454
Interest expense		—		—		—		—		70			70

Income before income taxes	$	768	$	346	$	242	$	28	$	—		$	1,384