How much of Humana's business comes from government contracts?

During 2004, 43% of premiums and administrative services fees came from contracts with the federal government, including 17% from TRICARE and 15% from one CMS contract in Florida covering approximately 231,700 members.

Why did the medical expense ratio increase in 2004?

The consolidated medical expense ratio rose to 84.1% from 83.5%, primarily due to the Commercial segment's ratio increasing 100 basis points to 83.9%. This was driven by underwriting losses on a large customer account serving about 89,000 members, which lapsed on January 1, 2005, and a very competitive pricing environment in the 2 to 300 life customer segment.

What is the status of the managed care class action litigation?

The case, styled In re Managed Care Litigation, is in the Southern District of Florida. The Eleventh Circuit upheld the RICO class certification but reversed as to state law claims, and the Supreme Court denied certiorari on January 10, 2005. Trial is scheduled for September 6, 2005, with liability tried first. Aetna and Cigna have settled, and the company says it intends to defend the action vigorously.

What does Humana expect for 2005 Medicare Advantage growth and pricing?

The company anticipates organic Medicare Advantage enrollment growth of 10% to 15% in 2005, and per-member premium increases in the 9% to 11% range, excluding the CarePlus acquisition. Including CarePlus, it expects approximately 470,000 to 485,000 Medicare Advantage members at December 31, 2005.

HUM 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 2, 2005. Cited figures are marked; the original filing is the authoritative source.

Humana Inc. (NYSE: HUM), headquartered in Louisville, Kentucky, reported 2004 total revenues of $13.1 billion^a, net income of $280.0 million, and diluted earnings per share of $1.72, up from $1.41 in 2003.

The company operates two segments, Commercial and Government. Premium revenues rose 7.3% to $12.7 billion^b, driven largely by the April 2004 Ochsner Health Plan acquisition ($157.1 million in cash) and higher Medicare Advantage premium rates. Government segment pretax earnings were $273.8 million, up 22.4%, while Commercial segment pretax earnings were $142.0 million, up 17.4%.

Margins were mixed. The consolidated medical expense ratio rose to 84.1%^c from 83.5%, mainly because of the Commercial segment, where a large customer account serving about 89,000 members generated underwriting losses and the account lapsed on January 1, 2005. The consolidated SG&A expense ratio fell to 14.5% from 15.4%.

Cash flow from operations declined to $347.8 million^d from $413.1 million, primarily because of the timing of Medicare Advantage premium remittances. Stockholders' equity reached $2.09 billion, and the company repurchased 3.8 million shares for $67.0 million during 2004. Looking ahead, the company acquired CarePlus Health Plans of Florida on February 16, 2005 for approximately $450 million in cash, adding about 50,000 Medicare Advantage members.

It expects Medicare Advantage enrollment of 470,000 to 485,000 at December 31, 2005, and an effective tax rate of approximately 30% for 2005. Key risks disclosed include a pending Medicare Advantage risk-adjustment phase-in, a TRICARE South Region contract that is subject to annual renewal, uncertainty over the Puerto Rico Medicaid contract expiring June 30, 2005, and a RICO-based managed care class action set for trial on September 6, 2005.

02—Key points

Key Highlights

Revenues of $13.1 billion in 2004, up from $12.2 billion in 2003; net income of $280.0 million, or $1.72 diluted EPS, versus $1.41 in 2003
Government segment pretax income rose 22.4% to $273.8 million; Commercial segment pretax income rose 17.4% to $142.0 million
Consolidated medical expense ratio increased to 84.1% from 83.5%, largely due to Commercial segment underwriting losses on a large account
Consolidated SG&A expense ratio improved to 14.5% from 15.4%
Operating cash flow fell to $347.8 million from $413.1 million, mainly due to timing of Medicare Advantage premium receipts
Acquired CarePlus Health Plans of Florida on February 16, 2005 for approximately $450 million in cash, adding about 50,000 Medicare Advantage members
Expects 2005 Medicare Advantage enrollment of 470,000 to 485,000 at year-end and an effective tax rate of about 30%

03—Questions

Frequently Asked Questions

How much of Humana's business comes from government contracts?
During 2004, 43% of premiums and administrative services fees came from contracts with the federal government, including 17% from TRICARE and 15% from one CMS contract in Florida covering approximately 231,700 members.
Why did the medical expense ratio increase in 2004?
The consolidated medical expense ratio rose to 84.1% from 83.5%, primarily due to the Commercial segment's ratio increasing 100 basis points to 83.9%. This was driven by underwriting losses on a large customer account serving about 89,000 members, which lapsed on January 1, 2005, and a very competitive pricing environment in the 2 to 300 life customer segment.
What is the status of the managed care class action litigation?
The case, styled In re Managed Care Litigation, is in the Southern District of Florida. The Eleventh Circuit upheld the RICO class certification but reversed as to state law claims, and the Supreme Court denied certiorari on January 10, 2005. Trial is scheduled for September 6, 2005, with liability tried first. Aetna and Cigna have settled, and the company says it intends to defend the action vigorously.
What does Humana expect for 2005 Medicare Advantage growth and pricing?
The company anticipates organic Medicare Advantage enrollment growth of 10% to 15% in 2005, and per-member premium increases in the 9% to 11% range, excluding the CarePlus acquisition. Including CarePlus, it expects approximately 470,000 to 485,000 Medicare Advantage members at December 31, 2005.

04—Continue

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