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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5975
HUMANA INC.
(Exact Name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 61-0647538
<S> <C>
(State of incorporation) (I.R.S. Employer
Identification Number)
</TABLE>
<TABLE>
<CAPTION>
500 West Main Street
<S> <C>
Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 502-580-1000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.16 2/3 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in the Registrant's definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1999 was $2,817,113,416 calculated using the average
price on such date of $17.75. The number of shares outstanding of the
Registrant's Common Stock as of March 1, 1999 was 167,575,889.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part II and Part IV incorporate herein by reference the
Registrant's 1998 Annual Report to Stockholders; Part III incorporates herein
by reference portions of the Registrant's Proxy Statement filed pursuant to
Regulation 14A covering the Annual Meeting of Stockholders scheduled to be held
May 6, 1999.
The Exhibit Index begins on page 20.
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PART I
ITEM 1. BUSINESS
General
Humana Inc. is a Delaware corporation organized in 1961. Its principal
executive offices are located at 500 West Main Street, Louisville, Kentucky
40202 and its telephone number at that address is (502) 580-1000. As used
herein, the terms "the Company" or "Humana" include Humana Inc. and its
subsidiaries. This Annual Report on Form 10-K contains both historical and
forward-looking information. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
There can be no assurance that anticipated future results will be achieved
because actual results may differ materially from those projected in the
forward-looking statements. Readers are cautioned that a number of factors,
which are described herein, could adversely affect the Company's ability to
obtain these results. These include the effects of either federal or state
health care reform or other legislation, changes in the Medicare reimbursement
system, renewal of the Company's Medicare contracts with the federal
government, renewal of the Company's contract with the federal government to
administer the TRICARE program and renewal of the Company's Medicaid contracts
with various state governments. Such factors also include the effects of other
general business conditions, including but not limited to, the Company's
ability to integrate its acquisitions, the Company's ability to appropriately
address the "Year 2000" computer system issue, government regulation,
competition, premium rate and yield changes, retrospective premium adjustments
relating to federal government contracts, medical and pharmacy cost trends,
changes in Commercial and Medicare HMO membership, operating subsidiary capital
requirements, the ability of health care providers (including physician
practice management companies) to comply with current contract terms, the
effect of provider contract rate negotiations, general economic conditions and
the retention of key employees. In addition, past financial performance is not
necessarily a reliable indicator of future performance and investors should not
use historical performance to anticipate results or future period trends.
Since 1983, the Company has been a health services company that facilitates
the delivery of health care services through networks of providers to its
approximately 6.2 million medical members. The Company's products are marketed
primarily through health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs") that encourage or require the use of contracted
providers. HMOs and PPOs control health care costs by various means, including
pre-admission approval for hospital inpatient services, pre-authorization of
outpatient surgical procedures and risk-sharing arrangements with providers.
These providers may share medical cost risk or have other incentives to deliver
quality medical services in a cost-effective manner. During 1998, the Company
began an initiative to increase the amount of medical cost risk assumed by
certain of its provider partners related primarily to its HMO products. As a
result, at December 31, 1998, approximately 50 percent and 70 percent of its
Commercial and Medicare HMO membership, respectively, were under various forms
of risk-sharing arrangements. The Company also offers various specialty
products to employers, including dental, group life and workers' compensation,
and administrative services ("ASO") to those who self-insure their employee
health plans.
The Company markets and distributes its products to three distinct customer
groups and, therefore, reports operations in three business segments. Results
of each segment are measured based on premium revenues and underwriting margin
(premium revenues less medical expenses). The Company does not allocate assets
or administrative costs to the segments and, therefore, does not measure
results based on segment assets or pretax profits. Members from all three
segments generally utilize the same medical provider networks, enabling the
Company to obtain more favorable contract terms with providers. As a result,
the profitability of each segment is somewhat interdependent.
In the Commercial segment, the Company markets and distributes its fully-
insured HMO, PPO, specialty and ASO products to large group employers (over 100
employees) and small group employers. Premium revenue pricing to large group
employers has historically been more competitive than that to small group
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employers, resulting in less favorable underwriting margins for large groups.
At December 31, 1998, the Company had a total of 3,261,500 fully-insured
Commercial members and provided claims processing, utilization review and other
administrative services to 646,200 ASO members.
In the Public Sector segment, the Company markets and distributes its
Medicare and Medicaid products to individuals eligible for these government-
sponsored programs. The products marketed to Medicare-eligible individuals are
either HMO products ("Medicare HMO") or indemnity insurance policies that
supplement Medicare benefits ("Medicare supplement"). At December 31, 1998, the
Company had 502,000 Medicare HMO members and 56,600 Medicare supplement
members. The Company facilitates the delivery of health care services to
Medicaid-eligible individuals under contracts generally renewable annually with
various states except for a two-year contract with the Commonwealth of Puerto
Rico. The Puerto Rico contract, previously scheduled to expire on March 31,
1999, has been extended one month to April 30, 1999. The Company does not
expect to be able to renew the contract in Puerto Rico under favorable terms
and, therefore, has announced its intention to close this market when the
contract expires. At December 31, 1998, the Company had 643,800 Medicaid
members, approximately 442,000 of which were in Puerto Rico.
The Company's third segment is TRICARE. In this segment, the Company
facilitates the delivery of health care services to the dependents of active
military personnel and retired military personnel and their dependents located
in the Southeastern United States. The Company is in the third year of its
contract with the United States Department of Defense, which is renewable
annually for up to two additional years. As encouraged by government
regulation, TRICARE is managed by a separate management team and is more
autonomous than the Company's Commercial and Public Sector segments, which
generally share sales, marketing, customer service, medical management and
claims processing functions of the Company. Three health benefit options are
available to TRICARE beneficiaries. In addition to a traditional indemnity
option, participants may enroll in an HMO-like plan with a point-of-service
option or take advantage of reduced co-payments by using a network of preferred
providers. The Company has subcontracted with third parties to provide certain
administration and specialty services under the contract. At December 31, 1998,
the Company had 1,085,700 TRICARE members.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million in cash. This transaction
added approximately 50,000 medical members to the Company's Chicago, Illinois,
membership.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily
of $7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA served approximately 1.1 million medical members
and provided comprehensive health services through its HMOs in Florida, Texas
and Puerto Rico. In addition, PCA provided workers' compensation third-party
administrative management services. Prior to November 1996, PCA also was a
direct writer of workers' compensation insurance in Florida.
On October 17, 1997, the Company acquired ChoiceCare Corporation
("ChoiceCare") for approximately $250 million in cash. The purchase was funded
with borrowings under the Company's commercial paper program. ChoiceCare
provided health services products to approximately 250,000 medical members in
the Greater Cincinnati, Ohio, area.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. On October 31, 1997, the Company
also sold The Lexington Hospital in Lexington, Kentucky, to Jewish Hospital
Healthcare Services, Inc. These sale transactions did not have a material
impact on the Company's financial position, results of operations or cash
flows.
2
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Commercial Products
HMO
An HMO provides prepaid health care services to its members through a
network of independent primary care physicians, specialty physicians and other
health care providers who contract with the HMO to furnish such services.
Primary care physicians generally include internists, family practitioners and
pediatricians. Generally, access to specialty physicians and other health care
providers must be approved by the member's primary care physician. These other
health care providers include, among others, hospitals, nursing homes, home
health agencies, pharmacies, mental health and substance abuse centers,
diagnostic centers, optometrists, outpatient surgery centers, dentists, urgent
care centers and durable medical equipment suppliers. Because access to these
other health care providers must generally be approved by the primary care
physician, the HMO product is the most restrictive form of managed care.
At December 31, 1998, the Company owned and operated 14 actively licensed
HMOs, which contracted with approximately 78,300 physicians (including
approximately 22,200 primary care physicians) and approximately 1,060
hospitals. In addition, the Company had approximately 8,100 contracts with
other providers to provide services to HMO members.
An HMO member, typically through the member's employer, pays a monthly fee
which generally covers, with minimal co-payments, health care services received
from or approved by the member's primary care physician. For the year ended
December 31, 1998, Commercial HMO premium revenues totaled approximately $2.3
billion or 24 percent of the Company's total premium revenues. Approximately
$182 million of the Company's Commercial HMO premium revenues for the year
ended December 31, 1998 were derived from contracts with the United States
Office of Personnel Management ("OPM"), under which the Company facilitates the
delivery of health care services to approximately 117,000 federal civilian
employees and their dependents. Pursuant to these contracts, payments made by
OPM may be retrospectively adjusted downward by OPM if an audit discloses that
a comparable product was offered by the Company to a similar size subscriber
group at a lower premium rate than that offered to OPM. Management believes
that any retrospective adjustments as a result of OPM audits will not have a
material impact on the Company's financial position, results of operations or
cash flows.
PPO
PPO products include many elements of managed health care. PPOs are also
similar to traditional health insurance because they provide a member with the
freedom to choose a physician or other health care provider. In a PPO, the
member is encouraged, through financial incentives, to use participating health
care providers which have contracted with the PPO to provide services at
favorable rates. In the event a member chooses not to use a participating
health care provider, the member may be required to pay a greater portion of
the provider's fees.
At December 31, 1998, approximately 85,300 physicians and approximately
1,020 hospitals contracted directly with the Company to provide services to PPO
members. The Company also had approximately 6,200 contracts (including certain
contracts which also service the Company's HMOs) with other providers to
provide services to PPO members. In addition, the Company had access to 28
leased provider networks throughout the country.
For the year ended December 31, 1998, Commercial PPO premium revenues
totaled approximately $2.7 billion or 28 percent of the Company's total premium
revenues.
The Company expects that 1999 Commercial HMO and PPO premium rates will
increase approximately 5 to 7 percent from 1998 levels. Over the last four
years, changes in the Company's Commercial HMO and PPO premium rates have
ranged between an approximate 2 percent decrease for the year ended December
31, 1995, to an approximate 4 percent increase for the year ended December 31,
1998, with an average increase of approximately 1 percent.
3
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Medicare Products
Medicare is a federal program that provides persons age 65 and over and some
disabled persons certain hospital and medical insurance benefits, which include
hospitalization benefits for up to 90 days per incident of illness plus a
lifetime reserve aggregating 60 days. Each Medicare-eligible individual is
entitled to receive inpatient hospital care ("Part A") without the payment of
any premium, but is required to pay a premium to the federal government, which
is adjusted annually, to be eligible for physician care and other services
("Part B").
Even though participating in both Part A and Part B of the traditional
Medicare program, beneficiaries are still required to pay certain deductible
and coinsurance amounts. They may, if they choose, supplement their Medicare
coverage by purchasing Medicare supplement policies which pay these deductibles
and coinsurance amounts. Many of these policies also cover other services (such
as prescription drugs) which are not included in Medicare coverage.
Humana contracts with the federal government's Health Care Financing
Administration ("HCFA") to facilitate the delivery of medical benefits in
exchange for a fixed monthly payment per member to Medicare-eligible
individuals residing in the geographic areas in which its HMOs operate.
Individuals who elect to participate in these Medicare programs are relieved of
the obligation to pay some or all of the deductible or coinsurance amounts but
are generally required to use exclusively the services provided by the HMO and
are required to pay a Part B premium to the Medicare program. In 1998, the
enrollee paid the HMO a premium only in cases where the HMO facilitates the
delivery of additional benefits and where competitive market conditions permit.
At December 31, 1998, approximately 73,000 members in 16 markets were paying
premiums which totaled approximately $22 million in 1998.
Medicare HMO
A Medicare HMO product involves a contract between an HMO and HCFA pursuant
to which HCFA makes a fixed monthly payment to the HMO on behalf of each
Medicare-eligible individual who chooses to enroll for coverage in the HMO.
Membership may be terminated by the member at any time during the month. The
fixed monthly payment is determined by formula established by federal law.
As of January 1, 1999, the Company facilitates the delivery of Medicare HMO
services under 10 contracts with HCFA in 11 states. Management believes that
additional Medicare HMO growth opportunities exist because only approximately
15 percent of the country's Medicare-eligible beneficiaries are enrolled in
managed care programs similar to those offered by the Company. The Company
intends to pursue those opportunities in markets which meet the Company's long-
term growth strategies.
At December 31, 1998, HCFA contracts covered approximately 502,000 Medicare
HMO members for which the Company received premium revenues of approximately
$2.9 billion or 30 percent of the Company's total premium revenues for 1998. At
December 31, 1998, one such HCFA contract covered approximately 264,000 members
in Florida and accounted for premium revenues of approximately $1.5 billion,
which represented 52 percent of the Company's HCFA premium revenues or 16
percent of the Company's total premium revenues for 1998. HCFA contracts are
renewed for a one-year term each December 31 unless terminated 90 days prior
thereto. Management believes termination of the HCFA contract covering the
members in Florida would have a material adverse effect on the revenues,
profitability and business prospects of the Company.
As more fully discussed in the "Health Care Reform-National" section, the
Balanced Budget Act of 1997 ("BBA") included provisions that altered the
methodology for payment effective January 1, 1998 in the Medicare program. The
Company's 1999 average rate of statutory increase under the HCFA contracts is
approximately 2 percent. Over the last five years, annual increases have ranged
from as low as the January 1998 and 1999 increases of 2 percent to as high as
10 percent in January 1996, with an average of approximately 5 percent,
including the January 1999 increase. Cost saving initiatives and continuation
of risk-sharing strategies are necessary to mitigate the effect of lower
Medicare reimbursement rates.
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The loss of the Company's HCFA contracts or significant changes in the
Medicare HMO program as a result of legislative action, including reductions in
payments or increases in benefits without corresponding increases in payments,
would have a material adverse effect on the revenues, profitability and
business prospects of the Company.
Medicare Supplement
The Company's Medicare supplement product is an insurance policy which pays
for hospital deductibles, co-payments and coinsurance for which an individual
enrolled in the traditional Medicare program is responsible.
Under the terms of existing Medicare supplement policies, the Company may
not reduce or cancel the benefits contracted for by policyholders. These
policies are renewable annually by the insured at the Company's prevailing
rates, which may increase subject to approval by appropriate state insurance
regulators.
At December 31, 1998, the Company facilitated the delivery of Medicare
supplement benefits for approximately 56,600 members. For the year ended
December 31, 1998, Medicare supplement premium revenues totaled approximately
$68 million or 1 percent of the Company's total premium revenues.
Medicaid Products
Medicaid is a federal program that is state-operated to facilitate the
delivery of health care services to low-income residents. Each state which
chooses to do so develops, through a state specific regulatory agency, a
Medicaid managed care initiative which must be approved by HCFA. HCFA requires
that Medicaid managed care plans meet federal standards and cost no more than
the amount that would have been spent on a comparable fee-for-service basis.
States currently use either a formal proposal process reviewing many bidders or
award individual contracts to qualified bidders which apply for entry to the
program. In either case, the contractual relationship with the state is
generally for a one-year period. Management believes that the risks associated
with participation in a state Medicaid managed care program are similar to the
risks associated with the Medicare HMO product discussed previously. In both
instances, the Company receives a fixed monthly payment from a government
agency for which it is required to facilitate the delivery of managed health
care services to enrolled members. Due to the increased emphasis on state
health care reform and budgetary constraints, more states are utilizing a
managed care product in their Medicaid programs.
The Company also maintains a two-year contract with the Commonwealth of
Puerto Rico to facilitate the delivery of health care services to Medicaid-
eligible individuals. The Puerto Rico contract, previously scheduled to expire
March 31, 1999, has been extended one month to April 30, 1999. The Company does
not expect to be able to renew the contract with the Commonwealth of Puerto
Rico under favorable terms and, therefore, has announced its intention to close
this market when the contract expires. For the year ended December 31, 1998,
premium revenues from the Company's Medicaid products totaled approximately
$554 million or 6 percent of the Company's total premium revenues. It is
anticipated that Medicaid premium revenues will approximate 3 percent of the
Company's total 1999 premium revenues. At December 31, 1998, the Company had
approximately 201,800 and 442,000 Medicaid members in four states and the
Commonwealth of Puerto Rico, respectively.
TRICARE
In 1993, the Company established Humana Military Healthcare Services, Inc.
(a wholly-owned subsidiary of the Company), to enter into contracts to
facilitate the delivery of managed care services to the dependents of active
military personnel and retired military personnel and their dependents. In
November 1995, the United States Department of Defense awarded the Company its
first TRICARE contract covering approximately 1.1 million eligible
beneficiaries in Florida, Georgia, South Carolina, Mississippi, Alabama,
Tennessee and Eastern Louisiana.
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On July 1, 1996, the Company began facilitating the delivery of managed
health care services to these approximate 1.1 million eligible beneficiaries
under a potential five-year contract (a one-year contract renewable annually
for up to two additional years). The government exercised its option to extend
the contract for one additional year effective July 1, 1998. The Company has
subcontracted with third parties to provide certain administration and
specialty services under the contract. Three health benefit options are
available to TRICARE beneficiaries. In addition to a traditional indemnity
option, participants may enroll in an HMO-like plan with a point-of-service
option or take advantage of reduced co-payments by using a network of preferred
providers. TRICARE premium revenues were approximately $800 million or 8
percent of the Company's total premium revenues for the year ended December 31,
1998.
The Company will actively seek opportunities to facilitate the delivery of
managed care services to beneficiaries of federal and state programs, including
other TRICARE contracts.
Other Related Products
The Company offers various specialty products to employers, including
dental, group life and workers' compensation, and administrative services
("ASO") to those who self-insure their employee health plans. Specialty and
administrative services membership at December 31, 1998 totaled approximately
2.6 million members and 646,200 members, respectively. Specialty product
premium revenues were approximately $239 million or 3 percent of the Company's
total premiums for the year ended December 31, 1998.
The following table lists the Company's premium revenue for the year ended
December 31, 1998, by product and segment:
PREMIUM REVENUE
(In millions)
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<CAPTION>
Percent
Public of
Commercial Sector TRICARE Total Total
---------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
HMO.................................. $2,330 -- -- $2,330 24.3%
PPO.................................. 2,688 -- -- 2,688 28.0
Medicare HMO......................... -- $2,918 -- 2,918 30.4
Medicare supplement.................. -- 68 -- 68 0.7
Medicaid............................. -- 554 -- 554 5.8
TRICARE.............................. -- -- $800 800 8.3
Specialty............................ 239 -- -- 239 2.5
------ ------ ---- ------ -----
Total.............................. $5,257 $3,540 $800 $9,597 100.0%
====== ====== ==== ====== =====
Percent of total................... 54.8% 36.9% 8.3% 100.0%
====== ====== ==== ======
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Provider Arrangements
In certain situations the Company's HMOs contract with individual or groups
of primary care physicians, generally for an actuarially determined, fixed,
per-member-per-month fee called a "capitation" payment. Under these
arrangements, physicians are paid a fixed amount to provide services to their
members. These contracts typically obligate primary care physicians to provide
or make referrals to specialty physicians and other providers for the provision
of all covered managed health care services to HMO members. The capitation
payment does not vary with the nature or extent of services to the member and
is generally designed to shift a portion of the HMOs' financial risk to the
primary care physician. The degree to which the Company uses capitation
arrangements varies by provider.
The Company also contracts with medical specialists and other providers to
which a primary care physician may refer a member. The contracts with
specialists may be capitation arrangements or may provide for payment on a fee-
for-service basis based on negotiated fees. Typically, payments by the Company
to these
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specialists and other providers reduce the ultimate payment that otherwise
would be made to primary care physicians. The Company's HMOs also have
arrangements under which physicians can earn bonuses when certain target goals
relating to quality and cost effectiveness in the provision of patient care are
met. The Company's contracts with capitated physicians generally provide for
stop-loss coverage so that a physician's financial risk for any single member
is limited to a certain amount on an annual basis.
The focal point for cost control in the Company's HMOs is the primary care
physician who, under contract, provides services and controls utilization of
appropriate services by directing or approving hospitalization and referrals to
specialists and other providers. Cost control is further achieved by directly
negotiating provider discounts. Cost control in the Company's PPOs is achieved
primarily by establishing a cost-effective network of participating health care
providers and providing incentives for members to use such providers. These
providers are generally paid on a negotiated fee-for-service basis. With
respect to both HMO and PPO products, cost control is further achieved through
the use of a utilization review system designed to allow only necessary
hospital admissions, lengths of stay and necessary or appropriate medical
procedures. The Company's HMOs and PPOs generally contract for hospital
services under per-diem arrangements for inpatient hospital services and
discounted fee-for-service arrangements for outpatient services. During the
year ended December 31, 1998, approximately 35 percent of the Company's total
medical costs were for services provided to its members in hospitals or related
facilities.
The Company has certain other risk-sharing contracts whereby providers also
assume a specified level of risk for covered managed care services to its
members. Under these risk-sharing arrangements called global capitation
contracts, providers are paid a monthly capitation payment per covered member
to assume risk for all managed care services including professional and
institutional (i.e. hospital) costs. The capitation payments are based on a
specified percentage of premiums (typically 78 to 88 percent).
During 1998, the Company began an initiative to increase the amount of HMO
product medical cost risk assumed by certain of its provider partners. As a
result, at December 31, 1998, approximately 50 percent and 70 percent of its
Commercial and Medicare HMO membership, respectively, were under some form of
risk sharing arrangements. Under all of its risk-sharing arrangements, the
Company remains financially responsible for the provision of covered medical
services if its contractors fail to perform their obligations under the
contract.
Prior to 1998, the Company employed physicians providing services to members
in markets where it operated health centers or staff model HMOs. As part of its
ongoing strategy of identifying and assessing non-strategic assets, the Company
reached separate agreements during 1998 whereby certain provider groups or
systems assumed the operations of most of Humana's health centers. The
agreements relate to approximately 440 physicians formerly employed by Humana
and approximately 361,000 members of the Company's health centers.
The Company continually contracts and seeks to renew contracts with
providers at rates designed to ensure adequate profitability. To the extent the
Company is unable to obtain such rates, its financial position, results of
operations and cash flows could be adversely impacted. Currently, the Company
is in negotiations with a major provider and is unable to predict the impact of
these negotiations on future contract rates.
During 1998, the Company continued its Hospital Inpatient Management System
("HIMS") which allows specially trained physicians to manage the entire range
of medical care while an HMO member is in the hospital, and coordinate the
member's discharge and care after discharge. The Company also continues to
implement several disease management programs in various markets. Under these
arrangements, the Company provides financial incentives for contractors to
provide the full range of care to members with respect to a particular high
risk or chronic disease in a quality, cost-effective manner. These programs
include congestive heart failure, prenatal and premature infant care, asthma
related illness, end stage renal disease, diabetes and breast cancer screening.
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Quality Assessment and Customer Service
Access to high quality health care services is an important element of the
Company's business. All of the Company's contracts require that the provider
participate in the Company's quality assurance program. Physician participation
in the Company's HMOs and PPOs is conditioned upon the physician meeting the
Company's requirements concerning the physician's professional qualifications.
When considering whether to contract with a physician for HMO participation,
the Company performs or contracts for on-going credentialing verifications and
peer review that meet both regulatory and accrediting agency standards.
The Company has a program in place to monitor important aspects of HMO plan-
wide service and quality indicators with oversight by a board and senior
management committee. Such indicators as credentialing, quality concerns,
customer service, disenrollment and satisfaction are measured against
standards. Another measure of quality is the reporting of Health Plan Employer
Data Information Sets ("HEDIS"), which the Company has been reporting since
June 1994. HEDIS is useful to purchasers of managed health care services to
measure individual health plan quality and service. Each HMO has in place a
peer review procedure which is implemented by a quality management committee
("QMC"). This committee is headed by the HMO's medical director and is composed
of physicians and physician group representatives. The QMC performs an initial
evaluation of applicants for credentialing and reviews all providers on a
periodic basis to monitor the appropriateness of members' care.
Health Maintenance Organization Accreditation
With the increasing significance of managed care in the health care
industry, several independent organizations have been formed for the purpose of
responding to external demands for accountability over the managed care
industry. The organizations utilized by the Company are the National Committee
for Quality Assurance ("NCQA") and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"). In the states of Kansas and Florida,
accreditation or external review by an accrediting organization is mandatory
and generally required for licensure.
NCQA performs site reviews of standards for quality improvement,
credentialing, utilization management, medical records, preventive health
services and member rights and responsibilities. As of January 31, 1999, eight
of Humana's HMOs have achieved full accreditation from NCQA. Humana Medical
Plan, Inc., in its South Florida and Tampa Bay markets, Humana Health Plan,
Inc., in its Chicago market, Humana Health Plan, Inc. and Humana Kansas City,
Inc., in the Kansas City market, Humana Health Plan of Ohio, Inc. dba
ChoiceCare in the Cincinnati market and Humana Health Plan, Inc., HMPK, Inc.
and HPlan, Inc. in the Louisville market. In addition, Humana Medical Plan,
Inc. in its North Florida (Jacksonville) and Central Florida (includes Daytona
and Orlando areas) are fully accredited by NCQA pending limited merger reviews.
The limited merger reviews will assess the integration of the fully accredited
PCA Health Plans that Humana acquired during 1997. Humana also has an NCQA
accreditation survey scheduled for the Texas market in July 1999. This survey
will include Humana Health Plan of Texas, Inc., Humana HMO Texas, Inc. and PCA
Health Plans of Texas, Inc., located in the San Antonio, Austin, Corpus
Christi, Dallas and Houston markets.
JCAHO reviews rights, responsibilities and ethics, continuum of care,
education and communication, leadership, management of information and human
resources, and network performance. JCAHO also evaluates the mechanisms the
organization has established to ensure continuous quality improvement. Humana
Medical Plan, Inc., in Humana's Ft. Walton market received a three-year
accreditation from JCAHO during 1998.
The Company's Y2K Readiness Disclosure Statement
The Company operates one of the largest managed care data centers in the
nation. The primary computing facility is located in Louisville, Kentucky with
a satellite operation in Green Bay, Wisconsin. In 1998, Humana's Information
Systems organization included 950 associates with an annual operating budget of
$135 million. The Company's application systems are largely developed and
maintained in-house by a staff of 400
8
<PAGE>
application programmers who are versed in the use of state-of-the-art
technology. All application systems are fully integrated and automatically pass
data through various system processes. The information systems support
marketing, sales, underwriting, contract administration, billing, financial,
and other administrative functions as well as customer service, authorization
and referral management, concurrent review, physician capitation and claims
administration, provider management, quality management and utilization review.
The Company internally develops most of its own application systems
software. All application systems must comply with strict standards for data
integrity, file compatibility and architectural requirements. The Company
maintains a central project coordination function and an architectural review
function that ensure consistency across the application portfolio. The Company
has subscribed to automated file processes and integrated data architectures
for over twenty-five years.
The Year 2000 issue is the result of two potential malfunctions that may
have an impact on the Company's systems and equipment. The first potential
malfunction is the result of computers being programmed to use two rather than
four digits to define the applicable year. The second potential malfunction
arises where embedded microchips and micro-controllers have been designed using
two rather than four digits to define the applicable year. As a result, certain
of the Company's date-sensitive computer programs, building infrastructure
components and medical devices, may recognize a date using "00" as the year
1900 rather than the year 2000. If uncorrected, the problem may result in
computer system and program failures or equipment malfunctions that could
result in a disruption of business operations (such as the payment of medical
claims, premium billing and collection, and membership enrollment verification
as well as the use of medical equipment such as heart defibrillators).
Humana's Information Systems organization operates in a centralized manner.
The Company's data center and the majority of its programming and support staff
are located at its corporate offices in Louisville, Kentucky. A Year 2000
project management office is in place to oversee the progress made in the
assessment and correction of the Company's Year 2000 exposures.
In general, the Company's Year 2000 project consists of four phases--
assessment, remediation, validation, and implementation--and is categorized
into the following four components:
Information Technology (IT)--software essential for day-to-day
operations including both internally developed software and third party
software which interfaces therewith.
IT Infrastructure--mainframe, network, telecommunications interfaces and
self-contained operating systems.
Third party business partners and intermediaries--entities on which the
Company relies for transmission and receipt of claims, and encounter,
membership and payment information, including federal and state
governmental agencies such as the Health Care Financing Administration.
Non-IT Infrastructure--telecommunications equipment, elevators, public
safety equipment (i.e., security and fire), medical equipment and HVAC
systems.
The Company commenced the assessment of its Year 2000 exposures in 1996.
Remediation efforts of internally developed software and third party software
applications have also begun. The Company's plan is to have modified all
critical mainframe systems and components in time for such systems and
components to utilize the updated Year 2000 logic during the second quarter of
1999. Modifying all critical systems and components by the second quarter of
1999 will enable the majority of the modified programs to run in a production
environment for a considerable period of time before encountering Year 2000
data. Of the Company's 98 mainframe systems identified in the assessment, 92
have been renovated, validated and are currently operating using the updated
Year 2000 logic. During 1999, the remaining 6 systems will be modified,
upgraded, or replaced and all systems will continue to be monitored and tested
to ensure that they will function properly after December 31, 1999. In
addition, the Company is in the process of contacting vendors, third party
9
<PAGE>
business partners and intermediaries in an effort to obtain the information
necessary to address Year 2000 issues. The Company anticipates completing, in
all material respects, its Year 2000 project by the end of the third quarter
1999. The Company's efforts are currently progressing on plan.
The Year 2000 project is currently estimated to have a minimum total cost of
approximately $25 million. Project to date costs total $19.5 million, including
$18.5 million during the year ended December 31, 1998. Year 2000 expenses
represented less than 15 percent of the Information Systems budget during 1998.
Year 2000 costs are expensed as incurred and funded through operating cash
flow.
The extent and magnitude of the Year 2000 project, as it will affect the
Company both before and for some period after January 1, 2000, are difficult to
predict or quantify. As a result, the Company has recently undertaken the
development of contingency plans in the event that its Year 2000 project is not
completed in an accurate or timely manner. The Company has identified five
major functional areas, covering 20 operational subdivisions, that will require
contingency plans. The five major functional areas are: providers, service
centers, suppliers and vendors, customers and brokers, and banking and finance.
The Company is in the process of developing and refining alternative operating
procedures for each functional area. Additionally, a tracking system is being
developed to monitor the implementation of these procedures.
While the Company presently believes that the timely completion of its Year
2000 project will limit exposure so that the Year 2000 will not pose material
operational problems, the Company does not control third party systems.
Although the Company is contacting third parties, the Company has not received
assurances that all third party interfaces will be converted in a timely
manner. Additionally, if Year 2000 modifications or upgrades are not
accomplished in a timely manner or proper contingency plans are not
implemented, Year 2000 failures which may result could have a material adverse
impact on the Company's results of operations or its financial position.
The costs of the Year 2000 project and the date on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
considering assumptions of future events including the continued availability
of certain resources and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from
plan. Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes, and the
ability of the Company's significant suppliers, customers and others with which
it conducts business, including federal and state governmental agencies, to
identify and resolve their own Year 2000 issues.
Sales and Marketing
Individuals become members of the Company's Commercial HMOs and PPOs through
their employer or other groups which typically offer employees or members a
selection of managed health care products, pay for all or part of the premiums
and make payroll deductions for any premiums payable by the employees. The
Company attempts to become an employer's or group's exclusive source of managed
health care benefits by offering HMO and PPO products that facilitate the
delivery of cost-effective quality care consistent with the needs and
expectations of the employees or members.
The Company uses various methods to market its Commercial and Public Sector
products, including television, radio, telemarketing and mailings. At December
31, 1998, the Company used approximately 47,800 licensed independent brokers
and agents and approximately 500 licensed employees to sell the Company's
Commercial products. Many of the Company's employer group customers are
represented by insurance brokers and consultants who assist these groups in the
design and purchase of health care products. The Company generally pays brokers
a commission based on premiums, with commissions varying by market and premium
volume.
At December 31, 1998, the Company used approximately 6,200 licensed
independent brokers for referrals and approximately 1,100 employed sales
representatives, who are each paid a salary and/or per member
10
<PAGE>
commission, to market the Company's Medicaid and Medicare products. The
Company also used approximately 500 telemarketing representatives who assisted
in the marketing of Medicaid and Medicare products by making appointments for
broker/sales representatives with prospective members.
The following table lists the Company's medical membership at December 31,
1998, by state and product:
MEDICAL MEMBERSHIP
(In thousands)
<TABLE>
<CAPTION>
Commercial Public Sector
-------------------------------- ------------------------------------
Total Percent
Total Medicare Medicare Public of
PPO HMO ASO Commercial HMO Medicaid Supplement Sector TRICARE Total Total
------- ------- ----- ---------- -------- -------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida................ 203.7 307.3 5.9 516.9 264.1 129.3 5.0 398.4 414.6 1,329.9 21.4%
Texas.................. 314.1 318.8 18.4 651.3 79.2 38.4 5.7 123.3 0.0 774.6 12.5%
Illinois............... 255.5 292.2 75.8 623.5 70.4 13.7 0.1 84.2 0.0 707.7 11.4%
Puerto Rico............ 28.8 25.2 0.0 54.0 0.0 441.9 0.0 441.9 0.0 495.9 8.0%
Wisconsin.............. 82.1 109.4 278.7 470.2 2.3 20.5 0.0 22.8 0.0 493.0 8.0%
Kentucky............... 207.4 101.3 18.3 327.0 13.1 0.0 30.1 43.2 0.0 370.2 6.0%
Georgia................ 88.1 7.3 13.4 108.8 0.0 0.0 3.2 3.2 258.8 370.8 6.0%
Ohio................... 100.1 219.0 49.0 368.1 15.2 0.0 0.0 15.2 0.0 383.3 6.2%
Missouri/ Kansas....... 41.1 101.3 14.5 156.9 24.6 0.0 5.7 30.3 0.0 187.2 3.0%
Indiana................ 91.0 0.0 27.5 118.5 0.0 0.0 0.0 0.0 0.0 118.5 1.9%
South Carolina......... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 135.5 135.5 2.2%
Tennessee.............. 68.4 0.0 16.2 84.6 33.1 0.0 0.0 33.1 70.1 187.8 3.0%
Other.................. 294.5 4.9 128.5 427.9 0.0 0.0 6.8 6.8 206.7 641.4 10.4%
------- ------- ----- ------- ----- ----- ---- ------- ------- ------- -----
Total................. 1,774.8 1,486.7 646.2 3,907.7 502.0 643.8 56.6 1,202.4 1,085.7 6,195.8 100.0%
======= ======= ===== ======= ===== ===== ==== ======= ======= ======= =====
</TABLE>
Risk Management
Through the use of internally developed underwriting criteria, the Company
determines the risk it is willing to assume and the amount of premium to
charge for its Commercial products. In most instances, employers and other
groups must meet the Company's underwriting standards in order to qualify to
contract with the Company for coverage. Small group reform laws in some states
have imposed regulations which provide for guaranteed issue of certain health
insurance products and prescribe certain limitations on the variation in rates
charged based upon assessment of health conditions.
Underwriting techniques are not employed in connection with Medicare HMO
products because HCFA regulations require the Company to accept all eligible
Medicare applicants regardless of their health or prior medical history. The
Company also is not permitted to employ underwriting criteria for the Medicaid
product but rather follows HCFA and state requirements. In addition, with
respect to the TRICARE contract, no underwriting techniques are employed
because the Company must accept all eligible beneficiaries who choose to
participate.
Competition
The managed health care industry is highly competitive and contracts for
the sale of Commercial products are generally bid or renewed annually. The
Company's competitors vary by local market and include Blue Cross/Blue Shield
(including HMOs and PPOs owned by Blue Cross/Blue Shield plans), national
insurance companies and other HMOs and PPOs. Many of the Company's competitors
have more membership in local markets or greater financial resources. The
Company's ability to sell its products and to retain customers is or may be
influenced by such factors as benefits, pricing, contract terms, number and
quality of participating physicians and other managed health care providers,
utilization review, claims processing, administrative efficiency,
relationships with agents, quality of customer service and accreditation
results.
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<PAGE>
Government Regulation
Of the Company's 14 actively licensed HMO subsidiaries, nine are qualified
under the Federal Health Maintenance Organization Act of 1973, as amended. To
obtain federal qualification, an HMO must meet certain requirements, including
conformance with benefit, rating and financial reporting standards. In certain
markets, and for certain products, the Company operates HMOs that are not
federally qualified because this provides greater flexibility with respect to
product design and pricing than is possible for federally qualified HMOs.
Six subsidiaries (Humana Medical Plan, Inc., Humana Health Plan of Texas,
Inc., Humana Health Plan, Inc., Humana Kansas City, Inc., Humana Health Plan of
Ohio, Inc. and Humana Wisconsin Health Organization Insurance Corporation) are
qualified under HCFA's Medicare+Choice program to sell Medicare HMO products in
11 states.
HCFA conducts audits of HMOs qualified under its Medicare+Choice program at
least biannually and may perform other reviews more frequently to determine
compliance with federal regulations and contractual obligations. These audits
include review of the HMO's administration and management (including management
information and data collection systems), fiscal stability, utilization
management and physician incentive arrangements, health services delivery,
quality assurance, marketing, enrollment and disenrollment activity, claims
processing and complaint systems.
HCFA requires an independent review of medical records and quality of care
and all denied claims and service complaints which are not resolved in favor of
a member. All advertising and member communication materials require review and
approval by HCFA.
HCFA regulations require quarterly and annual submission of financial
statements. In addition, HCFA requires certain disclosures to HCFA and to
Medicare beneficiaries concerning operations of a health plan qualified under
the Medicare+Choice program. Financial arrangements and incentive plans between
an HMO and physicians in the HMO's networks are an important area within the
HCFA regulations for qualified HMOs. These rules also require certain levels of
stop-loss coverage to protect contracted physicians against major losses
relating to patient care, depending on the amount of financial risk they
assume. The reporting of certain health care data contained in HEDIS is another
important HCFA disclosure requirement.
The Company's Medicaid products are regulated by the applicable state agency
in the state in which the Company sells a Medicaid product and the Commonwealth
of Puerto Rico, in conformance with federal approval of the applicable state
plan, and are subject to periodic reviews by these agencies. The reviews are
similar in nature to those performed by HCFA.
Laws in each of the states and the Commonwealth of Puerto Rico in which the
Company operates its HMOs, PPOs and other health insurance-related services
regulate the Company's operations, including the scope of benefits, rate
formulas, delivery systems, utilization review procedures, quality assurance,
complaint systems, enrollment requirements, claim payments, marketing and
advertising. The HMO, PPO and other health insurance-related products offered
by the Company are sold under licenses issued by the applicable insurance
regulators and are required to be in compliance with certain minimum capital
requirements. These requirements must be satisfied by investing in approved
investments that generally cannot be used for other purposes. Under state laws,
the Company's HMOs and health insurance companies are audited by state
departments of insurance for financial and contractual compliance, and its HMOs
are audited for compliance with health services standards by respective state
departments of health. Most states' laws require such audits to be performed at
least triennially.
The Company and its licensed subsidiaries are subject to regulation under
state insurance holding company and Commonwealth of Puerto Rico regulations.
These regulations require, among other things, prior approval and/or notice of
certain material transactions, including dividend payments, intercompany
agreements and the filing of various financial and operational reports.
12
<PAGE>
The National Association of Insurance Commissioners has recommended that
states adopt a risk-based capital ("RBC") formula for companies established as
HMO entities. The RBC provisions may require new minimum capital and surplus
levels for some of the Company's HMO subsidiaries. The Company does not expect
that the RBC provisions will have a material impact on its financial position,
results of operations or cash flows.
Management works proactively to ensure compliance with all governmental laws
and regulations affecting the Company's business.
Health Care Reform
There continue to be diverse legislative and regulatory initiatives at both
the federal and state levels to address aspects of the nation's health care
system.
National
In 1997, Congress passed the Balanced Budget Act, including the
establishment of the Medicare+Choice program, which revised the structure of
and reimbursement for private health plan options for Medicare enrollees. The
BBA sought to expand the options available to Medicare enrollees by permitting
HCFA to contract with many types of managed care plans, including provider
sponsored organizations ("PSO"), and creating a new private fee-for-service
option. Few PSOs have applied for participation in the Medicare+Choice
programs. Federal reimbursement was also modified so that the premiums paid by
HCFA will be adjusted to take into account, on an increasing basis, a blend of
national and local health care cost factors, rather than only local costs--
starting with a 10% national factor in 1998 and moving to a 50% national factor
by 2003. In addition, starting in January 1999, the Company's Medicare
reimbursement will be reduced through the assessment of .355 percent of premium
(approximately $11 million), designed to fund a national senior education
program. The 1998 assessment was .428 percent.
In addition, the BBA also required that HCFA modify Medicare reimbursement
by developing health-risk premium adjustments to better estimate the actual
cost for individual beneficiaries. In January 1999, HCFA released the
preliminary Year 2000 premium rates and the risk adjusted payment amounts with
a phased-in approach, moving to a 100% health-risk adjusted premium by the year
2004. Congress is evaluating the impact the methodology will have on
Medicare+Choice plans relative to current and future enrollment. Congress also
is evaluating the impact of other BBA provisions in light of the withdrawals of
several health plans, including those operated by Humana, from certain Medicare
markets characterized by high medical costs, inadequate reimbursement rates
and/or unsatisfactory provider contract arrangements. The Company is in the
process of preparing Medicare rate and benefit filings for Year 2000 and is
considering benefit reductions, increased member premiums and out-of-pocket
expenses to mitigate the effect of the lower Medicare reimbursement established
by the BBA.
Other proposals under consideration by Congress include greater government
oversight over private health insurance. In addition, the President and the
President's Advisory Commission on Consumer Protection and Quality in the
Health Care Industry have made recommendations for enhancing certain consumer
health insurance rights. It is expected that both the House and the Senate will
consider specific legislation authorizing certain patient protections in
private health insurance during 1999.
State
A number of states have enacted some form of managed care reform. Issues
relating to managed care consumer protection standards, including increased
plan information disclosure, expedited grievance and
13
<PAGE>
appeals procedures, third party review of certain medical decisions, health
plan liability, access to specialists and confidentiality of medical records
continue to be under discussion. Further, proposals that place restrictions on
the selection and termination of participating health care providers also are
receiving review. A few states are also expected to consider small group
purchasing alliance legislation.
Management believes that managed care and health care in general will
continue to be scrutinized and may lead to additional legislative health care
reform initiatives. Management is unable to predict how existing federal or
state laws and regulations may be changed or interpreted, what additional laws
or regulations affecting the Company's businesses may be enacted or proposed,
when and which of the proposed laws will be adopted or what effect any such new
laws and regulations will have on the revenues, profitability and business
prospects of the Company.
Other
Captive Insurance Company
The Company insures substantially all professional liability risks through a
wholly-owned subsidiary (the"Subsidiary"). The annual premiums paid to the
Subsidiary are determined by independent actuaries. The Subsidiary reinsures
levels of coverage for losses in excess of its retained limits with unrelated
insurance carriers.
Centralized Management Services
Centralized management services are provided to each health plan from the
Company's headquarters and service centers. These services include management
information systems, product administration, financing, personnel, development,
accounting, legal advice, public relations, marketing, insurance, purchasing,
risk management, actuarial, underwriting and claims processing.
Employees
As of December 31, 1998, the Company had approximately 16,300 employees,
including approximately 300 employees covered by collective bargaining
agreements. The Company has not experienced any work stoppages and believes it
has good relations with its employees.
14
<PAGE>
ITEM 2. PROPERTIES
The Company owns its principal executive office, which is the Humana
Building, located at 500 West Main Street, Louisville, Kentucky 40202.
The Company owns or leases medical centers ranging in size from
approximately 1,500 to 80,000 square feet. Most of the medical centers are
leased or subleased to providers within Humana's network. The Company's
administrative market offices are generally leased, with square footage ranging
from approximately 700 to 89,000. The following chart lists the location of
properties used in the operation of the Company at December 31, 1998:
<TABLE>
<CAPTION>
Medical Administrative
Centers Offices
------------ ----------------
Owned Leased Owned Leased Total
----- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Florida..................................... 6 82 3 22 113
Illinois.................................... 8 18 -- 10 36
Puerto Rico................................. -- -- -- 21 21
Texas....................................... 5 4 8 2 19
Kentucky.................................... 8 5 3 2 18
Missouri/Kansas............................. 3 5 2 0 10
Wisconsin................................... -- -- 1 8 9
California.................................. -- -- -- 7 7
Ohio........................................ -- -- -- 6 6
Other....................................... 1 3 1 46 51
--- --- ------- ------- ---
Total....................................... 31 117 18 124 290
=== === ======= ======= ===
</TABLE>
In addition, the Company owns buildings in Louisville, Kentucky, San
Antonio, Texas, Green Bay, Wisconsin and Jacksonville, Florida, and leases
facilities in Madison, Wisconsin, all of which are used for customer service
and claims processing. The Louisville and Green Bay facilities also perform
enrollment processing and other corporate functions.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit styled Mary Forsyth, et al v. Humana Inc., et al,
Case #CV-5-89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United
States District Court for the District of Nevada. On August 18, 1997, the
Company filed a Petition for Writ of Certiorari in the United States Supreme
Court ("Petition") requesting the Supreme Court to reverse the Ninth Circuit's
decision to reinstate the claim under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") on behalf of a class of insureds who paid
coinsurance at Humana hospitals (the "Co-Payer Class"). The petition was
granted by the Supreme Court on June 22, 1998. Oral arguments on the Company's
Petition were heard on November 30, 1998. In a decision issued on January 20,
1999, the Supreme Court upheld the decision of the Ninth Circuit and reinstated
the RICO claim of the Co-Payer Class. The Ninth Circuit also reinstated an
antitrust claim that had been dismissed by the District Court. The Company
requested summary judgment in the District Court on that Claim on October 6,
1997. That request was denied on September 21, 1998. The Company has requested
the District Court to reconsider its decision. The plaintiffs have filed their
Fourth Amended Complaint and a motion for leave to file a Fifth Amended
Complaint reasserting an ERISA claim and adding new RICO and antitrust claims.
The company filed a motion to dismiss the Fourth Amended Complaint and a motion
opposing the plaintiffs' request to file the Fifth Amended Complaint. The
motions are pending before the District Court. The trial on the claims, which
was scheduled to begin on February 23, 1998, has been postponed.
On April 22, 1993, an alleged stockholder of the Company filed a purported
shareholder derivative action in the Court of Chancery of the State of
Delaware, County of New Castle, styled Lewis v. Austen, et al, Civil Action No.
12937. The action was purportedly brought on behalf of the Company and Galen
Health Care, Inc.
15
<PAGE>
("Galen") against all of the directors of both companies at the time Galen was
spun off from the Company alleging, among other things, that the defendants had
improperly amended the Company's existing stock option plans to bifurcate their
existing options to allow employees of each company to receive options in the
stock of the other company. The challenged amendment to the plan was approved
by the Company's stockholders at the 1993 Annual Meeting of Stockholders. The
defendants filed a motion to dismiss the case in October 1995. A hearing on
this motion was held on January 26, 1999. The decision is still pending. The
Company believes that the complaint is without merit.
Between November 19, 1997 and December 11, 1997, three related, purported
class action complaints entitled (i) Medhat Reiser v. PCA, et al, Civil Action
No. 97-3678 (S.D. Fla.) (Middlebrooks, J.), (ii) Janice Wells and Stewart
Colton v. PCA, et al, Civil Action No. 97-3832 (King, J.), and (iii) David
Applestein v. PCA, et al, Civil Action No. 97-4030 (Nesbitt, J.), were filed in
the United States District Court for the Southern District of Florida by
purported former stockholders of Physician Corporation of America ("PCA")
against PCA and certain of its former directors and officers. By order entered
February 13, 1998, the three actions were consolidated into a single action
entitled In re Physician Corporation of America Securities Litigation, Civil
Action No. 97-3678 (S.D. Fla.) (Middlebrooks, J.). The Reiser, Wells and
Applestein complaints contain the same or substantially similar allegations;
namely, that PCA and the individual defendants knowingly or recklessly made
false and misleading statements in press releases and public filings with
respect to the financial and regulatory difficulties of PCA's workers'
compensation business. Count I of all three complaints is premised on alleged
violations of Section 10(b) of the Securities Exchange Act of 1934 (the "1934
Act") and SEC Rule 10b-5, and Count II on alleged violations of Section 20(a)
of the 1934 Act. All three complaints seek certification of a class of
stockholders who purchased shares of PCA common stock from May 1996 through
March 1997, as well as money damages plus prejudgment interest in an
unspecified amount, and costs and expenses including attorneys fees. On
February 19, 1999, the U.S. District Court denied PCA's motion to dismiss. The
Company believes that the allegations in the above complaints are without merit
and intends to pursue the defense of the consolidated action vigorously.
Damages for claims for personal injuries and medical benefit denials are
usual in the Company's business. Personal injury claims are covered by
insurance from the Subsidiary and excess carriers, except punitive damages
generally are not paid where claims are settled and generally are awarded only
where a court determines there has been a willful act or omission to act.
Government regulators conduct reviews from time to time to audit compliance
with government regulations and statutes, and those reviews may result in fines
or other payments. Management does not believe that any pending and threatened
legal actions and audits by agencies that regulate the Company will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are names and ages of all of the current executive officers
of the Company as of March 1, 1999, their positions, date of election to such
position and the date first elected an officer of the Company:
<TABLE>
<CAPTION>
First Elected
Name Age Position Officer
---- --- -------- -------------
<C> <C> <S> <C>
President and Chief Executive
Gregory H. Wolf......... 42 Officer and Director 10/95(1)
Kenneth J. Fasola....... 39 Senior Vice President--Sales, 05/96(2)
Marketing and Business
Development
Senior Vice President--Health
Michael B. McCallister.. 46 System Management 09/89(3)
Senior Vice President and Chief
James E. Murray......... 45 Financial Officer 08/90(4)
David R. Nelson......... 44 Vice President and Chief Actuary 09/96(5)
Senior Vice President--National
Bruce D. Perkins........ 44 Contracting 09/94(6)
Senior Vice President and Chief
Jerry D. Reeves, M.D.... 54 Medical Officer 01/97(7)
Vice President--Customer Service
Gregory K. Rotherham.... 42 and Operations 09/96(8)
Kirk E. Rothrock........ 40 Senior Vice President--Specialty 05/96(9)
Products and Services and
International Businesses
Senior Vice President--Market
George W. Vieth, Jr..... 43 Segment Management 12/95(10)
</TABLE>
- --------
(1) Mr. Wolf currently serves as President, Chief Executive Officer and
Director of the Company having been elected to this position December 1997.
Mr. Wolf previously served as President and Chief Operating Officer from
September 1996 until December 1997 and served as Chief Operating Officer of
the Company since July 1996. Mr. Wolf was initially elected an officer of
the Company at the time of the acquisition of EMPHESYS in 1995. Mr. Wolf
had been President and Chief Operating Officer of EMPHESYS (now a wholly-
owned subsidiary of the Company) since November 1994. Mr. Wolf was named
Executive Vice President for Employers Health Insurance Company ("EHIC") (a
wholly owned subsidiary of EMPHESYS) in 1993 and was named Senior Vice
President for EHIC in 1990 for Marketing, Sales and Business Development.
(2) Mr. Fasola currently serves as Senior Vice President--Sales, Marketing and
Business Development and was elected to this position November 1998. Prior
to that, Mr. Fasola served as Vice President--Sales & Marketing from May
1996 to November 1998. Mr. Fasola served in a similar capacity as Vice
President and National Sales Manager of EHIC since 1989.
(3) Mr. McCallister currently serves as Senior Vice President--Health System
Management and was elected to this position January 1998. Prior to that,
Mr. McCallister served as Division I President from July 1996 to January
1998. Mr. McCallister joined the Company in June 1974 as a Financial
Specialist and served in several positions throughout the Company.
(4) Mr. Murray currently serves as Senior Vice President and Chief Financial
Officer and was elected to this position November 1998. Prior to this, Mr.
Murray served as Chief Financial Officer from January 1997 to November 1998
and Vice President--Finance from August 1990 to January 1997. Mr. Murray
joined the Company as Controller in October 1989.
(5) Mr. Nelson was elected to the above position in September 1996. Prior to
that, Mr. Nelson was Vice President and Chief Actuary of EHIC since 1992.
(6) Mr. Perkins currently serves as Senior Vice President--National Contracting
and was elected to this position January 1998. Prior to that, Mr. Perkins
served as Senior Vice President--Provider Affairs and Reengineering from
August 1996 to January 1998. He served as President of the South/West
Division from May 1996 to August 1996 and Vice President--Region II from
August 1994 to May 1996. Mr. Perkins joined the Company in May 1976.
(7) Dr. Reeves, a pediatric oncologist, joined the Company in January 1997 in
the above position. Prior to that, Dr. Reeves was Senior Vice President--
Health Care Operations and Chief Medical Officer at Sierra Health Services,
Inc. in Las Vegas, Nevada. Dr. Reeves was employed by Sierra for eight
years.
17
<PAGE>
(8) Mr. Rotherham currently serves as Vice President--Customer Service and
Operations and was elected to this position in October 1998. Prior to
that, Mr. Rotherham served as Vice President & General Manager--Medstep
from May 1998 through October 1998 and as Vice President--Marketing from
September 1996 through May 1998. Mr. Rotherham also served in a similar
capacity as Vice President for EHIC since 1994.
(9) Mr. Rothrock currently serves as Senior Vice President--Specialty Products
& Services & International Businesses and was elected to this position
November 1998. Prior to that, Mr. Rothrock served as Vice President--
Specialty Products and Business Development from May 1996 to November
1998. Mr. Rothrock served in a similar capacity as Vice President for EHIC
since 1993 and as an Assistant Vice President since 1991.
(10) Mr. Vieth currently serves as Senior Vice President--Market Segment
Management and was elected to this position November 1998. Prior to that,
Mr. Vieth served as Vice President--Strategy and Systems Development from
January 1998 through November 1998. Mr. Vieth also served as Vice
President--Development and Planning from December 1995 through January
1998. Mr. Vieth joined the Company in November 1992 as Director of
Development and Planning.
Executive officers are elected annually by the Company's Board of Directors
and serve until their successors are elected or until resignation or removal.
There are no family relationships among any of the executive officers of the
Company.
18
<PAGE>
PART II
Information for Items 5 through 8 of this report, which appears in the 1998
Annual Report to Stockholders as indicated on the following table, is
incorporated by reference herein in this report and filed as an exhibit hereto:
<TABLE>
<CAPTION>
Annual
Report to
Stockholders
Page
------------
<C> <S> <C>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 57
ITEM 6. SELECTED FINANCIAL DATA................................ 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 30--38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements...................... 39--52
Report of independent accountants...................... 53
Quarterly financial information (unaudited)............ 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
</TABLE>
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item other than the information set forth
in Part I under the Section entitled "Executive Officers of the Company," is
herein incorporated by reference from the Registrant's Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on May 6, 1999 appearing
under the caption "Election of Directors" of such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 6, 1999, appearing under the caption "Executive
Compensation of the Company" of such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 6, 1999, appearing under the caption "Security
Ownership of Certain Beneficial Owners of Company Common Stock" of such Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 6, 1999 appearing under the caption "Certain
Transactions with Management and Others" of such Proxy Statement.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements, financial statement schedules and exhibits set
forth below are filed as part of this report.
(1) Financial Statements--The response to this portion of Item 14 is
submitted as Item 8 of this report.
(2) Index to Consolidated Financial Statement Schedules:
Consolidated Schedules as of and for the years ended December 31, 1998,
1997 and 1996:
I Parent Company Financial Information
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable.
(3) Exhibits:
<TABLE>
<C> <S>
3(a) Restated Certificate of Incorporation filed with the Secretary of State
of Delaware on November 9, 1989, as restated to incorporate the
amendment of January 9, 1992, and the correction of March 23, 1992.
Exhibit 4(i) to the Company's Post-Effective Amendment to the
Registration Statement on Form S-8 (Reg. No. 33-49305) filed February
2, 1994, is incorporated by reference herein.
(b) By-laws, as amended. Exhibit 3(b) to the Company's Annual Report for
the fiscal year ended December 31, 1997, is incorporated by reference
herein.
4(a) Form of Amended and Restated Rights Agreement dated February 14, 1996,
between Humana Inc. and Mid-America Bank of Louisville and Trust
Company. Exhibit 1.3 to the Registration Statement (File No. 1-5975) on
Form 8-A/A dated February 14, 1996, is incorporated by reference
herein.
(b) Amendment No. 2 to the Rights Agreement. Exhibit 4.3 to the
Registration Statement (File No. 1-5975) on Form 8-A/A dated March 1,
1999, is incorporated by reference herein.
(c) There are no instruments defining the rights of holders with respect to
long-term debt in excess of 10 percent of the total assets of the
Company on a consolidated basis. Other long-term indebtedness of the
Company is described in Note 6 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders. The
Company agrees to furnish copies of all such instruments defining the
rights of the holders of such indebtedness to the Commission upon
request.
10(a)* 1981 Non-Qualified Stock Option Plan, as amended. Exhibit 10(c) to the
Company's Form SE filed on November 25, 1987, is incorporated by
reference herein.
(b)* Amendment No. 2 to the 1981 Non-Qualified Stock Option Plan, as
amended. Annex A to the Company's Proxy Statement covering the Annual
Meeting of Stockholders held on February 18, 1993, is incorporated by
reference herein.
(c)* 1989 Stock Option Plan for Employees. Exhibit A to the Company's Proxy
Statement covering the Annual Meeting of Stockholders held on January
11, 1990, is incorporated by reference herein.
(d)* Amendment No. 1 to the 1989 Stock Option Plan for Employees. Annex B to
the Company's Proxy Statement covering the Annual Meeting of
Stockholders held on February 18, 1993, is incorporated by reference
herein.
(e)* Amendment No. 2 to the 1989 Stock Option Plan for Employees. Exhibit
10(e) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, is incorporated by reference herein.
</TABLE>
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
20
<PAGE>
<TABLE>
<C> <S>
10(f)* 1989 Stock Option Plan for Non-Employee Directors. Exhibit B to the
Company's Proxy Statement covering the Annual Meeting of Stockholders
held on January 11, 1990, is incorporated by reference herein.
(g)* Amendment No. 1 to the 1989 Stock Option Plan for Non-Employee
Directors. Annex C to the Company's Proxy Statement covering the Annual
Meeting of Stockholders held on February 18, 1993, is incorporated by
reference herein.
(h)* Amendment No. 2 to the 1989 Stock Option Plan for Non-Employee
Directors. Exhibit 10(h) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, is incorporated by
reference herein.
(i)* 1989 Stock Option Plan for Non-Employee Directors, as amended and
restated in 1998. Exhibit A to the Company's Proxy Statement covering
the Annual Meeting of Stockholders held on May 14, 1998, is
incorporated by reference herein.
(j)* 1996 Stock Incentive Plan for Employees. Annex A to the Company's Proxy
Statement covering the Annual Meeting of Stockholders held on May 9,
1996, is incorporated by reference herein.
(k)* 1996 Stock Incentive Plan for Employees as amended in 1998. Exhibit C
to the Company's Proxy Statement covering the Annual Meeting of
Stockholders held on May 14, 1998, is incorporated by reference herein.
(l)* Executive Management Incentive Compensation Plan--Group A, Corporate.
Exhibit C to the Company's Proxy Statement covering the Annual Meeting
of Stockholders held on May 26, 1994, is incorporated by reference
herein.
(m)* Humana Inc. 1998 Executive Management Incentive Compensation Plan.
Exhibit B to the Company's Proxy Statement covering the Annual Meeting
of Stockholders held on May 14, 1998, is incorporated by reference
herein.
(n)* Restated agreement providing for termination benefits in the event of a
change of control. Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, is incorporated by
reference herein.
(o)* Humana Inc. 1998 Management Incentive Compensation Plan. Exhibit 10(n)
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, is incorporated by reference herein.
(p)* Employment Agreement--Gregory H. Wolf, dated December 1, 1997. Exhibit
10(o) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated by reference herein.
(q)* Employment Agreement--Gregory H. Wolf, dated December 1, 1998, filed
herewith.
(r)* Humana Officers' Target Retirement Plan, as amended. Exhibit 10(p) to
the Company's Annual Report on From 10-K for the fiscal year ended
December 31, 1997, is incorporated by reference herein.
(s)* Humana Thrift Excess Plan as amended. Exhibit 10(s) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
is incorporated by reference herein.
(t)* Humana Supplemental Executive Retirement Plan as amended. Exhibit 10(t)
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, is incorporated by reference herein.
(u)* Letter agreement with Company officers concerning health insurance
availability. Exhibit 10(mm) to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994, is incorporated by
reference herein.
(v) Indemnity Agreement. Appendix B to the Company's Proxy Statement
covering the Annual Meeting of Stockholders held on January 8, 1987, is
incorporated by reference herein.
</TABLE>
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
21
<PAGE>
<TABLE>
<C> <S>
10(w) Agreement between the Secretary of the Department of Health and Human
Services and Humana Medical Plan, Inc. Exhibit 10(w) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993,
is incorporated by reference herein.
(x) The $1.5 Billion Credit Facility between the Company and Chase Manhattan
Bank. Exhibit 10 to the Company's Current Report on Form 8-K filed on
September 23, 1997, is incorporated by reference herein.
(y) The $1.5 Billion Commercial Paper Private Placement Memorandum between
the Company and Chase Securities, Inc. Exhibit 4a to the Company's
Current Report on Form 8-K filed on September 23, 1997, is incorporated
by reference herein.
(z) The $1.5 Billion Commercial Paper Private Placement Memorandum between
the Company and Merrill Lynch Money Markets, Inc. Exhibit 4b to the
Company's Current Report on Form 8-K filed on September 23, 1997, is
incorporated by reference herein.
(aa) Assumption of Liabilities and Indemnification Agreement between the
Company and Galen Health Care, Inc. ("Galen"). Exhibit 10(g) to the
Company's Current Report on Form 8-K filed on March 5, 1993, is
incorporated by reference herein.
(bb) Agreement between the United States Department of Defense and Humana
Military Healthcare Services, Inc., a wholly owned subsidiary of the
Company. Exhibit 10(dd) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, is incorporated by reference
herein.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges, filed
herewith.
13 1998 Annual Report to Stockholders, filed herewith. The Annual Report
shall not be deemed to be filed with the Commission except to the extent
that information is specifically incorporated by reference herein.
21 List of Subsidiaries, filed herewith.
23 Consent of PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
</TABLE>
- --------
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Humana Inc.
/s/ James E. Murray
By: _________________________________
James E. Murray
Chief Financial Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Murray Chief Financial Officer March 31, 1999
____________________________________ (Principal Accounting
James E. Murray Officer)
/s/ David A. Jones Chairman of the Board March 31, 1999
____________________________________
David A. Jones
/s/ David A. Jones, Jr. Vice Chairman of the Board March 31, 1999
____________________________________
David A. Jones, Jr.
/s/ K. Frank Austen, M.D. Director March 31, 1999
____________________________________
K. Frank Austen, M.D.
/s/ Michael E. Gellert Director March 31, 1999
____________________________________
Michael E. Gellert
/s/ John R. Hall Director March 31, 1999
____________________________________
John R. Hall
/s/ Irwin Lerner Director March 31, 1999
____________________________________
Irwin Lerner
/s/ W. Ann Reynolds, Ph.D. Director March 31, 1999
____________________________________
W. Ann Reynolds, Ph.D.
/s/ Gregory H. Wolf Director, President and March 31, 1999
____________________________________ Chief Executive Officer
Gregory H. Wolf
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Humana Inc.
Our report on our audits of the consolidated financial statements of Humana
Inc. dated February 9, 1999 has been incorporated by reference in this Form 10-
K from page 53 of the 1998 Annual Report to Stockholders of Humana Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index in Item 14(a)(2)
of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 9, 1999
24
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION (a)
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
ASSETS
<S> <C> <C>
Receivables from operating subsidiaries (b).................. $ 168 $ 162
Other current assets......................................... 39 11
Property and equipment, net.................................. 181 167
Investments in subsidiaries.................................. 2,380 2,251
Other........................................................ 35 60
------ ------
TOTAL ASSETS............................................... $2,803 $2,651
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities (c)...................................... $ 513 $ 229
Long-term debt............................................... 573 889
Other........................................................ 29 32
------ ------
Total liabilities.......................................... 1,115 1,150
------ ------
Contingencies (b)
Preferred stock, $1 par; authorized 10,000,000 shares; none
issued...................................................... -- --
Common stock, $.16-2/3 par; authorized 300,000,000 shares;
issued and outstanding 167,515,362 shares--1998, 164,058,225
shares--1997................................................ 28 27
Other stockholders' equity................................... 1,660 1,474
------ ------
Total stockholders' equity................................. 1,688 1,501
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $2,803 $2,651
====== ======
</TABLE>
- --------
(a) Parent company financial information has been derived from the consolidated
financial statements of the Company and excludes the accounts of all
operating subsidiaries. This information should be read in conjunction with
the consolidated financial statements of the Company.
(b) In the normal course of business, the parent company indemnifies certain of
its subsidiaries for health plan obligations its subsidiaries may be unable
to meet.
(c) At December 31, 1998 current liabilities include $250 million of debt
classified as short-term.
25
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION (a)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 (b) 1996
---- -------- ----
<S> <C> <C> <C>
Revenues:
Management fees charged to operating subsidiaries...... $297 $228 $170
Interest income........................................ 1 5 3
---- ---- ----
298 233 173
---- ---- ----
Expenses:
Selling, general and administrative.................... 293 201 189
Depreciation and amortization.......................... 33 26 21
Interest expense....................................... 40 17 9
---- ---- ----
366 244 219
---- ---- ----
Loss before income taxes and equity in income of
subsidiaries............................................ (68) (11) (46)
Income tax benefit..................................... 38 9 18
---- ---- ----
Loss before equity in income of subsidiaries............. (30) (2) (28)
Equity in income of subsidiaries....................... 159 175 40
---- ---- ----
Net income............................................... $129 $173 $ 12
==== ==== ====
</TABLE>
- --------
(a) Parent company financial information has been derived from the consolidated
financial statements of the Company and excludes the accounts of all
operating subsidiaries. This information should be read in conjunction with
the consolidated financial statements of the Company.
(b) Includes the operations of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
26
<PAGE>
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION (a)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities (b)... $ 105 $ 191 $ 57
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment........... (43) (38) (32)
Purchases of marketable securities............ (1) (6) (6)
Maturities and sales of marketable
securities................................... 7 1 5
Parent funding of operating subsidiaries...... (59) (209) (46)
Acquisitions of health plans.................. -- (656) --
Other......................................... (11) 17 (8)
-------- -------- --------
Net cash used in investing activities....... (107) (891) (87)
-------- -------- --------
Cash flows from financing activities:
Issuance of long-term debt.................... 123 300 --
Repayment of long-term debt................... (330) -- (250)
Net commercial paper borrowings............... 141 367 222
Other......................................... 68 33 58
-------- -------- --------
Net cash provided by financing activities... 2 700 30
-------- -------- --------
Change in cash and cash equivalents............. -- -- --
Cash and cash equivalents at beginning of
period......................................... -- -- --
-------- -------- --------
Cash and cash equivalents at end of period...... $ -- $ -- $ --
======== ======== ========
</TABLE>
- --------
(a) Parent company financial information has been derived from the consolidated
financial statements of the Company and excludes the accounts of all
operating subsidiaries. This information should be read in conjunction with
the consolidated financial statements of the Company.
(b) During the years ended December 31, 1998, 1997 and 1996, the Company
received dividends from its operating subsidiaries totaling $93, $146 and
$140, respectively.
27
<PAGE>
HUMANA INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997 and 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Deductions
Beginning Acquired Costs and Other or Balance at
of Period Balances Expenses Accounts (a) Write-offs End of Period
---------- -------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for loss on
premiums receivable:
Year ended December
31, 1998............. $48 -- $11 $14 $(11) $62
Year ended December
31, 1997............. 38 $9 10 3 (12) 48
Year ended December
31, 1996............. 36 -- 11 (1) (8) 38
</TABLE>
- --------
(a) Represents retroactive membership adjustments recorded in premium income.
28
<PAGE>
Exhibit 10(q)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of December 1, 1998 by and between HUMANA INC.
(hereinafter "Company"), a Delaware corporation having its principal place of
business in Louisville, Kentucky, and Gregory H. Wolf (hereinafter "Employee"):
WITNESSETH:
WHEREAS, Employee desires to render faithful and efficient service to the
Company; and
WHEREAS, the Company desires to receive the benefit of Employee's service;
and
WHEREAS, Employee is willing to be employed by the Company; and
WHEREAS, both Company and Employee desire to formalize the conditions of
Employee's employment by written agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties agree as follows:
1. Office. The Company hereby employs Employee and as President and
------
Chief Executive Officer and Employee hereby agrees to serve the
Company in such capacity.
2. Term of Employment. Employee's employment shall be for the "Employment
------------------
Period" with the initial term commencing on December 1, 1998 and
extending through December 31, 2000. The initial term shall be
automatically renewed and extended upon the expiration thereof for
successive periods of one (1) year until such time as the Employment
Period shall terminate pursuant to the terms of this Agreement, or
until the Company on the one hand, or Employee on the other hand, shall
terminate the Employment Period by giving written notice to the other
party on or before sixty (60) days prior to the expiration date of the
initial or any renewal term. The renewal and extension of this
Agreement shall also be referred to as the "Employment Period." The
effective date of Employee's termination of employment for whatever
reason under this Agreement shall be the "Termination Date."
3. Responsibilities. During the Employment Period, Employee shall devote
----------------
his entire business time and attention, except during reasonable
vacation periods, to, and exert his best efforts to promote, the
affairs of the Company, and shall render such services to the Company
as may be required by the Board of Directors of the Company
<PAGE>
("Board") consistent with his employment as Chief Executive Officer.
Nothing herein contained shall preclude service by Employee on a
reasonable number of boards of directors or trustees of other entities
not engaged in any business competitive with the business of the
Company, provided that Employee shall discuss any such board service in
advance with the Company's Board.
4. Incapacity. If, during the Employment Period, Employee should be
----------
prevented from performing his duties or fulfilling his responsibilities
by reason of any incapacity or disability for a continuous period of
six (6) months, then the Company's Board, in its sole and absolute
discretion, may, based on the opinion of a qualified physician,
consider such incapacity or disability to be total and may on ninety
(90) days written notice to Employee terminate the Employment Period.
Benefits and payments shall be made under this Agreement following
incapacity as if it were a termination without Good Cause in accordance
with Section 8(a).
5. Death. The Employment Period shall automatically terminate upon the
-----
death of Employee, and payments will be made to the Employee's estate
as if it was a termination without Good Cause in accordance with
Section 8(a).
6. Compensation. During the Employment Period, Employee shall (i)
------------
receive a base salary (hereinafter "Annual Base Salary") that shall be
an annual amount of not less than Eight Hundred Thousand Dollars
($800,000) payable in accordance with the payroll practices of the
Company, and shall (ii) participate in an incentive plan providing for
a target incentive compensation amount of not less than one hundred
percent (100%) of his Annual Base Salary.
7. Benefit Plans and Programs. During the Employment Period, Employee
--------------------------
shall be eligible for participation in all benefit plans and programs,
including those for executive employees, made available by the Company
to its respective employees.
8. Severance Payments.
------------------
(a) In the event that Employee's employment is terminated by (i) the
Company while this Agreement is in effect without Good Cause as
defined in Sections 8(c)(1), (2) or (3) hereof, (ii) by the
Company for Good Cause as defined in Section 8(c)(4) hereof, (iii)
because the Company terminates the Employment Period pursuant to
Section 2 of this Employment Agreement, (iv) by reason of
incapacity or disability in accordance with Section 4, or (v) by
reason of death in accordance with Section 5:
2
<PAGE>
(1) The Company shall pay to Employee or his estate, no later
than thirty (30) calendar days after such Termination Date,
an amount equal to any unpaid current Annual Base Salary
accrued through the Termination Date, his bonus, calculated
at one hundred percent (100%) of his Annual Base Salary
prorated for the current fiscal year through the Termination
Date, plus one (1) times the sum of his then current Annual
Base Salary and bonus, calculated at one hundred percent
(100%) of his Annual Base Salary. The Company shall
continue to keep in full force and effect all plans or
policies of medical, accident and life insurance benefits
with respect to Employee and his dependents with the same
level of coverage available to employees under the terms of
those employee benefit plans for a period of twelve (12)
months, upon the same terms, costs and otherwise to the same
extent as such plans are in effect for employees of the
Company who were similarly situated to Employee as of the
Termination Date.
(2) All restricted shares previously awarded to Employee but not
yet vested shall become vested and non-forfeitable as of the
Termination Date.
(3) To the extent stock options granted to Employee have not
become fully vested and exercisable as of the Termination
Date, such options shall become fully vested and all vested
stock options shall be exercisable for two (2) years
commencing on the Termination Date.
(b) In the event that Employee's employment is terminated by the
Company for Good Cause as defined in Sections 8(c)(1), (2) or
(3):
(1) The Company shall pay to Employee, no later than thirty (30)
calendar days after the Termination Date, an amount equal to
his then current Annual Base Salary accrued but unpaid
through the Termination Date; and Employee shall have a
period of ninety (90) days after such Termination Date in
which to exercise any exercisable vested stock options,
subject to the provisions of any applicable stock option
agreement.
(2) Any restricted shares or stock options previously granted
but still subject to restriction or unvested at the
Termination Date shall be forfeited.
3
<PAGE>
(c) Good Cause shall mean the Company's Board has determined in good
faith, without being bound by the Company's progressive
discipline policy for employees:
(1) that Employee has engaged in acts or omissions against the
Company or any of its subsidiaries constituting dishonesty,
intentional breach of fiduciary obligation or intentional
wrongdoing or misfeasance; or
(2) that Employee has been arrested or indicted in a possible
criminal violation involving fraud or dishonesty; or
(3) that Employee has intentionally and in bad faith acted in a
manner which results in a material detriment to the assets,
business or prospects of the Company or any of its
subsidiaries; or
(4) that Employee has failed to perform on a prolonged basis,
where such failure is considered to be substantial and where
corporate performance expectations have been previously
agreed upon with the Employee on an annual basis. Further,
the failure to perform must be because of things considered
to be within the reasonable control of the Employee,
generally of an operating or strategic nature, and excluding
performance primarily resulting from things clearly beyond
the reasonable control of Employee, such as the following:
(A) a drop in the Company's stock share price as a result of
an overall market correction,
(B) severe national economic conditions, or
(C) adverse problems intrinsic to the Company's industry.
(d) In the event that Employee's employment is terminated (i) because
the Employee terminates the Employment Period pursuant to Section
2 of this Employment Agreement or (ii) because Employee
voluntarily leaves the employ of the Company during the
Employment Period, then the Company shall pay to Employee, no
later than thirty (30) calendar days after such Termination Date,
an amount equal to any unpaid current Annual Base Salary accrued
through the Termination Date, plus one (1) times his then current
Annual Base Salary. Any bonus finally determined to be payable at
the end of the fiscal year in which the Termination Date is
included shall be prorated for the period up to and including the
Termination Date and shall be promptly paid to Employee at the
same time any other similar bonuses are paid to any
4
<PAGE>
other employee of the Company for such fiscal year. The Company
shall continue to keep in full force and effect all plans or
policies of medical, accident and life insurance benefits with
respect to Employee and his dependents with the same level of
coverage available to employees under the terms of those employee
benefit plans for a period of twelve (12) months, upon the same
terms, costs and otherwise to the same extent as such plans are
in effect for employees of the Company who were similarly
situated to Employee as of the Termination Date.
(e) Following the Employment Period, Employee shall be eligible for
continuation of health and dental insurance coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act (COBRA) for
eighteen (18) months. For the first twelve (12) months,
Employee's cost will be an amount equal to the normal employee
contribution. Thereafter, the cost will be an amount equal to the
COBRA cost of such coverage. During the first eighteen (18)
months, Employee may elect any of the coverages available to
Humana employees. Thereafter, Humana agrees that Employee may
elect coverage under any of the insured products offered by
Humana's health insurance or HMO subsidiaries for Employee, his
spouse as of the date hereof ("Spouse"), and any eligible
dependent until the later of Employee's age sixty-five (65) or
eligibility for Medicare coverage (hereinafter "Extended
Coverage"). At the earlier of Employee attaining Medicare
eligibility or death, Employee's Spouse and any now current
eligible dependent of Employee and Spouse will be eligible for
Extended Coverage until the later of Spouse's age sixty-five (65)
or Medicare coverage eligibility. If at any time during which the
Extended Coverage is in effect Employee or his Spouse obtains
Medicare or becomes eligible for other employee group health
insurance coverage which does not exclude a pre-existing
condition of Employee, Spouse or dependent, Humana's obligation
will cease as to the one who has obtained Medicare or, in the
case of other employee group health coverage, as to that person
and their eligible dependents. Employee's premium for the
Extended Coverage and Spouse's premium, if she retains Extended
Coverage, will be amount equal to the COBRA cost of such
coverage. If Humana hereafter adopts a retiree health insurance
program and Humana still has obligations under this provision,
Employee will be offered the option of participating in that
program in lieu of the Extended Coverage described herein. The
health and dental insurance benefits hereunder shall be
administered in conjunction with any other similar benefits which
the Employee has from the Company but in no case shall be
duplicative.
5
<PAGE>
9. Termination After A Change in Control. In the event of a "Change in
-------------------------------------
Control" of the Company (as defined as of the date hereof in the
Company's 1996 Stock Incentive Plan for Employees), if, within twenty-
four (24) months following the closing of such a Change in Control (or
at any time prior thereto but in contemplation thereof):
(i) There is a material reduction in the Employee's title, authority
or responsibilities, including reporting responsibilities;
(ii) The Employee's Annual Base Salary is reduced;
(iii) The Employee's office at which he is to perform his duties is
relocated to a location more than thirty (30) miles from the
location at which the Employee performed his duties prior to the
Change in Control;
(iv) The Company fails to continue in effect any incentive, bonus or
other compensation plan in which the Employee participates,
unless the Company substitutes a substantially equivalent
benefit;
(v) The Company fails to continue in effect any employee benefit
plan (including any medical, hospitalization, life insurance,
dental or disability benefit plan in which the Employee
participated) or any material fringe benefit or perquisite
enjoyed by the Employee at the time of the Change in Control,
unless the Company substitutes benefits which, in the aggregate,
are substantially equivalent;
(vi) The Company breaches any material provision of this Employment
Agreement; or
(vii) The Company fails to obtain a satisfactory agreement from any
successor or assign of the Company to assume and agree to
perform this Employment Agreement;
Then the Employee shall have the option to voluntarily terminate his
employment and the Company shall:
(a) Pay the Employee his full base salary earned but not yet paid
through the Termination Date at the greater of the rate in effect
at the time of the Change in Control or the Termination Date
("Higher Annual Base Salary"), plus any bonuses or incentive
compensation which, pursuant to the terms of any compensation or
benefit plan, have been earned and are payable as of the
6
<PAGE>
Termination Date. For purposes of this Agreement, bonuses and
incentive compensation shall be considered payable if all
conditions for earning them have been met and any requirement
that Employee be actively employed as of the date of payment
shall be disregarded.
(b) Pay the Employee a lump sum in an amount equal to two and one-
half (2 1/2) times the amount equal to the sum of (1) the
Employee's Higher Annual Base Salary plus (2) the maximum target
bonus or incentive compensation which could have been earned by
the Employee calculated as if all relevant goals had been met
during the then current fiscal year of the Company pursuant to
the terms of the incentive compensation plan in which he
participates. If there is no incentive compensation plan in
effect as of the Termination Date, then for purposes of this
Agreement it shall be assumed that the amount of incentive
compensation to be paid to the Employee shall be the maximum
target amount under any incentive compensation plan in which he
participated at the date of the Change in Control or the most
recent plan participated in, whichever would be greater.
(c) Maintain in full force and effect for the benefit of the Employee
and the Employee's dependents and beneficiaries, at the Company's
expense, all life insurance, health insurance, dental insurance,
accidental death and dismemberment insurance and disability
insurance under plans and programs in which the Employee and/or
the Employee's dependents and beneficiaries participated
immediately prior to the Termination Date, provided that
continued participation is possible under the general terms and
provisions of such plans and programs ("Extended Benefits"). The
Extended Benefits shall be continued until the earlier of (A) the
second (2nd) anniversary of the Termination Date, (B) the
effective date of the Employee's coverage under equivalent
benefits from a new employer (provided that no such equivalent
benefits shall be considered effective unless and until all pre-
existing condition limitations and waiting period restrictions
have been waived or have otherwise lapsed), or (C) the death of
the Employee. If participation in any such plan or program is
barred, the Company shall arrange at its own expense to provide
the Employee with benefits substantially similar to those which
he was entitled to receive under such plans and programs. At the
end of the period of coverage, the Employee shall have the right
to have assigned to him, at no cost and with no apportionment of
prepaid premiums, any assignable insurance policy relating
specifically to him. Employee shall be entitled to continuation
coverage as provided by COBRA at the conclusion of the coverage
provided under this Section.
7
<PAGE>
The amount of any payment or benefit provided for in this Section 9
shall be offset by any lump sum cash payments due the Employee upon
termination under any other provisions of this Employment Agreement.
(d) To the extent that any amounts or payments in the nature of
compensation [within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated
thereunder ("Section 280G")] to or for the benefit of the
Employee under this Employment Agreement or otherwise (or any
part of such amount or other payment) constitutes an "excess
parachute payment" within the meaning of Section 280G and Section
4999 of the Internal Revenue Code, then the Company shall pay to
Employee an additional sum such that, after all taxes applicable
to the receipt of such amount have been subtracted therefrom, the
remaining amount will equal the sum of the amount of tax imposed
with respect to the "excess parachute payment," plus any interest
and penalties thereon (other than those caused solely by
Employee's action or inaction). Therefore, the effect shall be to
maintain the Employee in the same financial position that he
would have been in had no tax under Section 280G been imposed.
10. Restrictive Covenants. Employee shall not during the Employment
---------------------
Period, directly or indirectly, alone or as a member of a partnership
or association, or as an officer, director, advisor, consultant, agent
or employee of any other company, be engaged in or concerned with any
other duties or pursuits requiring his personal services except with
the prior consent of the Company's Board. Nothing herein contained
shall preclude the ownership by Employee of stocks or other investment
securities.
11. Confidential Information and Trade Secrets.
------------------------------------------
(a) Employee recognizes that Employee's position with the Company
requires considerable responsibility and trust, and, in reliance
on Employee's loyalty, the Company may entrust Employee with
highly sensitive confidential, restricted and proprietary
information involving Trade Secrets and Confidential Information.
(b) For purposes of this Agreement, a "Trade Secret" is any
scientific or technical information, design, process, procedure,
formula or improvement that is valuable and not generally known
to competitors of the Company. "Confidential Information" is any
data or information, other than Trade Secrets, that is important,
competitively sensitive, and not generally known by the public,
including, but not limited to, the Company's business plans,
business prospects, training manuals, product development plans,
bidding and
8
<PAGE>
pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information
concerning employees of the Company, supplier data, operational
or administrative plans, policy manuals, and terms and conditions
of contracts and agreements. The terms "Trade Secret" and
"Confidential Information" shall not apply to information which
is (i) already in Employee's possession (unless such information
was used in connection with formulating the Company's business
plans, obtained by Employee from the Company or was obtained by
Employee in the course of Employee's employment by the Company),
or (ii) required to be disclosed by any applicable law.
(c) Except as required to perform Employee's duties hereunder,
Employee will not use or disclose any Trade Secrets or
Confidential Information of the Company during employment, at any
time after termination of employment and prior to such time as
they cease to be Trade Secrets or Confidential Information
through no act of Employee in violation of this Section 11.
(d) Upon the request of Company and, in any event, upon the
termination of employment hereunder, Employee shall surrender to
the Company all memoranda, notes, records, plans, manuals or
other documents pertaining to the Company's business or
Employee's employment (including all copies thereof). Employee
will also leave with the Company all materials involving Trade
Secrets or Confidential Information of the Company. All such
information and materials, whether or not made or developed by
Employee, shall be the sole and exclusive property of the
Company, and Employee hereby assigns to the Company all of
Employee's right, title and interest in and to any and all of
such information and materials.
12. Covenant Not To Compete. Employee hereby covenants and agrees that
-----------------------
for a period commencing on the date hereof and ending twelve (12)
months after ceasing employment with the Company for whatever reason,
he shall not:
(a) Compete in any way with the Company without the Company's prior
written consent.
(b) Interfere with the relationship of the Company and any employee,
agent or representative.
(c) Divert, or attempt to cause the diversion from the Company, any
business with which the Company has been actively engaged in
during any part of the past two (2) year period preceding the
Termination Date, nor interfere with
9
<PAGE>
relationships of the Company with policyholders, dealers,
distributors, marketers, sources of supply or customers.
Employee further specifically acknowledges that the geographic area to
which the covenants contained in this Section 12 apply is the same
geographic area in which the Company transacted its business during
any part of the twelve (12) month period immediately prior to the
Termination Date. The time period during which the prohibitions set
forth in this Section 12 apply shall be tolled and suspended as to
Employee for a period equal to the aggregate quantity of time during
which Employee violates such prohibitions in any respect.
13. Specific Enforcement. Employee specifically acknowledges and agrees
--------------------
that the restrictions set forth in Sections 11 and 12 hereof are
reasonable and necessary to protect the legitimate interest of the
Company and that the Company would not have entered into this
Agreement in the absence of such restrictions. Employee further
acknowledges and agrees that any violation of the provisions of
Sections 11 or 12 hereof will result in irreparable injury to the
Company, that the remedy at law for any violation or threatened
violation of such Sections will be inadequate and that in the event of
any such breach, the Company, in addition to any other remedies or
damages available to it at law or in equity, shall be entitled to
temporary injunctive relief before trial from any court of competent
jurisdiction as a matter of course, and to permanent injunctive relief
without the necessity of proving actual damages.
14. Effect of Termination of the Employment Period. Upon the termination
----------------------------------------------
of the Employment Period, this Agreement shall terminate, and all of
the parties' obligations hereunder shall forthwith terminate, except
that rights and remedies accruing prior to such termination or arising
out of this Agreement shall survive.
15. Notice. Any notice required to be given by the Company hereunder to
------
Employee shall be in proper form and signed by an officer or Director
of the Board of the Company. Until one party shall advise the other
in writing to the contrary, notices shall be deemed delivered:
(a) To the Company if delivered to the Chairman of the Board of the
Company, or if mailed, certified or registered mail postage
prepaid, to Humana Inc., 500 West Main Street, Louisville,
Kentucky 40202; Attention: Chairman of the Board, with a copy to
the Company's General Counsel.
(b) To employee if delivered to Employee, or if mailed to him by
certified or registered mail, postage prepaid, to Gregory H.
Wolf, 211 Waterleaf Way, Louisville, Kentucky 40207.
10
<PAGE>
16. Benefit. This Agreement shall bind and inure to the benefit of the
-------
Company and the Employee, their respective heirs, successors and
assigns.
17. Severability. If a judicial determination is made that any of the
------------
provisions of this Employment Agreement constitutes an unreasonable or
otherwise unenforceable restriction against Employee, such provision
shall be rendered void only to the extent that such judicial
determination finds such provisions to be unreasonable or otherwise
unenforceable. In this regard, the parties hereto hereby agree that
any judicial authority construing this Employment Agreement shall be
empowered to sever any portion of the territory or prohibited business
activity from the coverage of Sections 11 or 12 and to apply the
provisions to the remaining portion of the territory or the remaining
business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this
Employment Agreement are determined not to be specifically
enforceable, the Company shall nevertheless be entitled to recover
monetary damages as a result of the breach of such provision by
Employee.
18. Other. This Employment Agreement shall, as of its effective date,
replace and supercede the Employment Agreement dated December 1, 1997
between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ATTEST: HUMANA INC.
BY:________________________________ BY:________________________________
Corporate Secretary David A. Jones
Chairman of the Board
WITNESS: "EMPLOYEE"
___________________________________ ___________________________________
Gregory H. Wolf
11
<PAGE>
EXHIBIT 12
HUMANA INC.
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED)
(Dollars in millions) YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
Earnings:
Income before income taxes $ 203 $ 270 $ 18
Fixed charges 58 29 19
---- ----- ----
$ 261 $ 299 $ 37
==== ===== ====
Fixed charges:
Interest charged to expense $ 47 $ 20 $ 11
One-third of rent expense (a) 11 9 8
---- ----- ----
$ 58 $ 29 $ 19
==== ===== ====
Ratio of earnings to fixed charges 4.5(a) 10.4 2.0(b)
==== ===== ====
For the purpose of determining earnings in the calculation of the ratio of
earnings to fixed charges (the "Ratio"), earnings have been increased by the
provision for income taxes and fixed charges. Fixed charges consist of interest
expense on borrowings and one-third (the proportion deemed representative of the
interest portion) of rent expense.
(a) Exclusive of charges associated with certain market closures, merger
dissolution and losses on disposals of non-strategic assets of $34 million
pretax, premium deficiencies of $46 million pretax, a one-time incentive for
non-officer employees of $16 million pretax and other cost of $36 million
pretax, the ratio for the year ended December 31, 1998 would have been 6.8.
(b) Exclusive of charges related to closing of the Washington, D.C. market,
severance and facility costs for workforce reductions and market closures
and product discontinuance cost of $96 million pretax, premium deficiencies
of $105 million pretax and litigation and certain other costs of $14 million
pretax, the ratio for the year ended December 31, 1996 would have been 13.3.
<PAGE>
EXHIBIT 13
Financial Section
================================================================================
Humana Inc.
1 Selected Financial Data
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
13 Consolidated Balance Sheets
14 Consolidated Statements of Income
15 Consolidated Statements of Stockholders' Equity
16 Consolidated Statements of Cash Flows
17 Notes to Consolidated Financial Statements
27 Report of Independent Accountants
28 Quarterly Financial Information (Unaudited)
29 Board of Directors and Officers and Vice Presidents
31 Additional Information
<PAGE>
Selected Financial Data
================================================================================
Humana Inc.
Dollars in millions, except per share results
- ---------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1998 (a) (b) 1997 (c) 1996 (d) (e) 1995 (c) 1994 (f)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums by segment:
Commercial $ 5,257 $ 4,387 $ 4,255 $ 2,883 $ 2,054
Public Sector:
Medicare HMO 2,918 2,426 1,907 1,569 1,406
Medicaid and other 622 303 164 153 116
- -------------------------------------------------------------------------------------------------------------------------------
3,540 2,729 2,071 1,722 1,522
TRICARE 800 764 351 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total premiums 9,597 7,880 6,677 4,605 3,576
Interest and other income 184 156 111 97 78
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 9,781 8,036 6,788 4,702 3,654
Income before income taxes 203 270 18 288 257
Net income 129 173 12 190 176
Earnings per common share .77 1.06 .07 1.17 1.10
Earnings per common share -
assuming dilution .77 1.05 .07 1.16 1.07
Net cash provided by operations 76 289 341 150 298
Financial Position
- ------------------------------------------------------------------------------------------------------------------------------
Cash and investments $ 2,812 $ 2,798 $ 1,880 $ 1,696 $ 1,203
Total assets 5,496 5,600 3,306 3,056 1,957
Medical and other expenses payable 1,908 2,075 1,099 866 527
Debt and other long-term obligations 977 1,057 361 399 83
Stockholders' equity 1,688 1,501 1,292 1,287 1,058
Operating Data
- ------------------------------------------------------------------------------------------------------------------------------
Medical expense ratio 83.8 82.8% 84.3% 81.7% 81.6%
Administrative expense ratio 15.2 15.5% 15.5% 13.9% 13.6%
Medical membership by segment:
Commercial:
Fully-insured 3,261,500 3,258,600 2,759,600 2,834,900 1,500,800
Administrative services 646,200 651,200 471,000 495,100 93,500
- ------------------------------------------------------------------------------------------------------------------------------
3,907,700 3,909,800 3,230,600 3,330,000 1,594,300
Public Sector:
Medicare HMO 502,000 480,800 364,500 310,400 287,400
Medicaid and other 700,400 704,000 152,900 164,000 159,200
- ------------------------------------------------------------------------------------------------------------------------------
1,202,400 1,184,800 517,400 474,400 446,600
TRICARE 1,085,700 1,112,200 1,103,000 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total 6,195,800 6,206,800 4,851,000 3,804,400 2,040,900
- ------------------------------------------------------------------------------------------------------------------------------
Specialty membership:
Dental 1,375,500 936,400 844,800 797,000
Other 1,257,800 1,504,200 1,039,400 1,063,000
- -------------------------------------------------------------------------------------------------------------------
Total 2,633,300 2,440,600 1,884,200 1,860,000
===================================================================================================================
</TABLE>
(a) Includes charges associated with certain market closures, merger
dissolution and losses on disposals of non-strategic assets of $34 million
pretax, ($22 million after tax or $.13 per diluted share).
(b) Includes premium deficiencies of $46 million pretax ($29 million after tax
or $.17 per diluted share), a one-time incentive for non-officer employees
of $16 million pretax ($10 million after tax or $.06 per diluted share) and
other costs of $36 million pretax ($23 million after tax or $.14 per
diluted share).
(c) Includes the operations of Health Direct, Inc., Physician Corporation of
America, ChoiceCare Corporation and EMPHESYS Financial Group since their
dates of acquisition, February 28, 1997, September 8, 1997, October 17,
1997 and October 11, 1995, respectively.
(d) Includes charges related to the closing of the Washington, D.C., market,
severance and facility costs for workforce reductions and market closures
and product discontinuance costs of $96 million pretax ($63 million after
tax or $.38 per diluted share).
(e) Includes premium deficiencies of $105 million pretax ($68 million after tax
or $.41 per diluted share), litigation and certain other costs of $14
million pretax ($9 million after tax or $.06 per diluted share).
(f) Includes nonrecurring income of $11 million pretax ($17 million after tax
or $.10 per diluted share) related to the favorable settlement of income
tax disputes with the Internal Revenue Service, partially offset by the
write-down of a nonoperational asset.
1
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Humana Inc.
The consolidated financial statements of Humana Inc. (the "Company") in this
Annual Report present the Company's financial position, results of operations
and cash flows, and should be read in conjunction with the following discussion
and analysis. This discussion and analysis contains both historical and
forward-looking information. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
There can be no assurance that anticipated future results will be achieved
because actual results may differ materially from those projected in the
forward-looking statements. Readers are cautioned that a number of factors,
which are described herein and in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, could adversely affect the Company's ability
to obtain these results. These include the effects of either federal or state
health care reform or other legislation, changes in the Medicare reimbursement
system, renewal of the Company's Medicare contracts with the federal government,
renewal of the Company's contract with the federal government to administer the
TRICARE program and renewal of the Company's Medicaid contracts with various
state governments. Such factors also include the effects of other general
business conditions, including but not limited to, the Company's ability to
integrate its acquisitions, the Company's ability to appropriately address the
"Year 2000" computer system issue, government regulation, competition, premium
rate and yield changes, retrospective premium adjustments relating to federal
government contracts, medical and pharmacy cost trends, changes in Commercial
and Medicare HMO membership, operating subsidiary capital requirements, the
ability of health care providers (including physician practice management
companies) to comply with current contract terms, the effect of provider
contract rate negotiations, general economic conditions and the retention of key
employees. In addition, past financial performance is not necessarily a
reliable indicator of future performance and investors should not use historical
performance to anticipate results or future period trends.
Introduction
The Company is a health services company that facilitates the delivery of health
care services through networks of providers to its approximately 6.2 million
medical members. The Company's products are marketed primarily through health
maintenance organizations ("HMOs") and preferred provider organizations ("PPOs")
that encourage or require the use of contracted providers. HMOs and PPOs
control health care costs by various means, including pre-admission approval for
hospital inpatient services, pre-authorization of outpatient surgical
procedures, and risk-sharing arrangements with providers. These providers may
share medical cost risk or have other incentives to deliver quality medical
services in a cost-effective manner. During 1998, the Company began an
initiative to increase the amount of medical cost risk assumed by certain of its
provider partners related primarily to its HMO products. As a result, at
December 31, 1998, approximately 50 percent and 70 percent of its Commercial and
Medicare HMO membership, respectively, were under various forms of risk-sharing
arrangements. The Company also offers various specialty products to employers,
including dental, group life and workers' compensation, and administrative
services ("ASO") to those who self-insure their employee health plans. In
total, the Company's products are licensed in 47 states, the District of
Columbia and Puerto Rico, with approximately 21 percent of its membership in the
state of Florida.
The Company markets and distributes its products to three distinct customer
groups and, therefore, reports operations in three business segments. Results
of each segment are measured based on premium revenues and underwriting margin
(premium revenues less medical expenses). The Company does not allocate assets
or administrative costs to the segments and, therefore, does not measure results
based on segment assets or pretax profits. Members from all three segments
generally utilize the same medical provider networks, enabling the Company to
obtain more favorable contract terms with providers. As a result, the
profitability of each segment is somewhat interdependent.
In the Commercial segment, the Company markets and distributes its fully-insured
HMO, PPO, specialty and ASO products to large group employers (over 100
employees) and small group employers. Premium revenue pricing to large group
employers has historically been more competitive than that to small group
employers,
2
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
resulting in less favorable underwriting margins for large groups. In the
Public Sector segment, the Company markets and distributes its Medicare and
Medicaid products to individuals eligible for these government-sponsored
programs. The Medicare HMO product provides health care services that include
all Medicare benefits and, in certain circumstances, additional services. The
Company's third segment is TRICARE. In this segment, the Company facilitates
health care services for the dependents of active military personnel and retired
military personnel and their dependents located in the Southeastern United
States. The Company is in the third year of its contract with the United States
Department of Defense, which is renewable annually for up to two additional
years. As encouraged by government regulation, TRICARE is managed by a separate
management team and is more autonomous than the Company's Commercial and Public
Sector segments, which generally share sales, marketing, customer service,
medical management and claims processing functions of the Company.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health Direct")
from Advocate Health Care for $23 million in cash. This transaction, which was
recorded using the purchase method of accounting, added approximately 50,000
medical members to the Company's Chicago, Illinois, membership.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily of
$7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA served approximately 1.1 million medical members
and provided comprehensive health services through its HMOs in Florida, Texas
and Puerto Rico. In addition, PCA provided workers' compensation third-party
administrative management services. Prior to November 1996, PCA also was a
direct writer of workers' compensation insurance in Florida. Long-term medical
and other expenses payable in the accompanying consolidated balance sheets
includes the long-term portion of workers' compensation liabilities related to
this business. This transaction was recorded using the purchase method of
accounting.
On October 17, 1997, the Company acquired ChoiceCare Corporation ("ChoiceCare")
for approximately $250 million in cash. The purchase was funded with borrowings
under the Company's commercial paper program. ChoiceCare provided health
services products to approximately 250,000 medical members in the Greater
Cincinnati, Ohio, area. This transaction was recorded using the purchase method
of accounting.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. On October 31, 1997, the Company
also sold The Lexington Hospital in Lexington, Kentucky, to Jewish Hospital
Healthcare Services, Inc. These sale transactions did not have a material
impact on the Company's financial position, results of operations or cash flows.
Asset Write-Downs and Other Charges
On August 10, 1998, the Company and United HealthCare Corporation ("United")
announced their mutual agreement to terminate the previously announced Agreement
and Plan of Merger, dated May 27, 1998. The merger, among other things, was
expected to improve the operating results of certain of the Company's products
and markets. Following the merger's termination, the Company conducted a
strategic evaluation of each of its markets and product offerings. As a result
of this strategic evaluation, which included assessing the Company's competitive
market positions and profit potential, the Company recognized charges of $34
million during the third quarter of 1998. The charges included severance and
lease termination costs associated with closing five markets (Sarasota and
Treasure Coast, Florida, Springfield and Jefferson City, Missouri and Puerto
Rico) and discontinuing products ($5 million), write-downs of certain
receivables and property and equipment associated with closing markets ($10
million), losses on disposals of non-strategic assets ($12 million) and merger
dissolution costs ($7 million). Charges for estimated employee severance costs
were based on the
3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
===============================================================================
Humana Inc.
Company's employee benefit plan arrangements. Significant market closure
activities are expected to be completed by the end of the second quarter of 1999
as membership lapses or existing contracts expire.
In 1996, the Company recorded asset write-downs and other charges of $96
million. These charges included write-downs of long-lived assets associated
with the Company's Washington, D.C., health plan ($70 million), severance and
lease termination costs for workforce reductions undertaken during 1997 ($15
million) and market closure and product discontinuance costs ($11 million).
Substantially all amounts related to the cash portion of these charges were paid
before the end of 1997.
Premium Deficiencies and Other Costs
In addition to the charges discussed above, as a result of management's regular
assessment of the profitability of its contracts for providing health care
services to its members, the Company recorded provisions for probable future
losses (premium deficiencies) of $46 million and $105 million in 1998 and 1996,
respectively. These premium deficiencies have been included in medical expenses
in the accompanying consolidated statements of income.
After evaluating the recoverability of receivables from certain physician
practice management companies, a write-down of $27 million was recorded in 1998
medical expenses in the accompanying consolidated statements of income. In
addition, as a result of the dissolved merger with United, a one-time incentive
for each non-officer employee ($16 million) and other costs ($9 million) were
recorded during 1998. The one-time non-officer employee incentive and other
costs have been included in selling, general and administrative expenses in the
accompanying consolidated statements of income.
During 1996, the Company recorded provisions for litigation and certain other
costs of $14 million which has been included in selling, general and
administrative expenses in the accompanying consolidated statements of income.
Comparison of Results of Operations
In order to enhance comparability, and to present an estimated baseline against
which historical and prospective periods should be measured, the following
discussions comparing the results for the years ended December 31, 1998, 1997
and 1996 exclude the impact of the asset write-downs and other charges, premium
deficiencies, and other costs described previously.
Years Ended December 31, 1998 and 1997
Income before income taxes totaled $335 million for the year ended December 31,
1998, compared to $270 million for the year ended December 31, 1997. Net income
was $213 million or $1.27 per diluted share in 1998, compared to $173 million or
$1.05 per diluted share in 1997. The earnings increase was a result of the full
year contribution from the 1997 PCA and ChoiceCare acquisitions, increased
Commercial premium yields, provider risk-sharing initiatives, improved claims
payment accuracy across various product lines, and increased interest and other
income. These favorable items were partially offset by increased pharmacy costs
system-wide.
The Company's 1998 premium revenues increased 22 percent to a record $9.6
billion, from $7.9 billion for the year ended December 31, 1997. This increase
was attributable to the current year effect of 1997 acquisitions, Commercial and
Medicare HMO same-plan membership growth and increased premium rates for the
Company's Commercial products. PCA and ChoiceCare premium revenues contributed
approximately $1.6 billion, a $1.1 billion increase over 1997. Same-plan
membership growth contributed $120 million and Commercial premium increases
added approximately $186 million, as same-plan Commercial premium yields
increased 4.8 percent. Changes in Medicare HMO premium yield had little effect
on premium revenues as same-plan yields declined .4 percent in 1998. The
Medicare 2 percent statutory rate increase for 1998 was offset by membership
growth in geographic areas with lower reimbursement rates.
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
===============================================================================
Humana Inc.
During 1998, the Company's medical expense ratio increased to 83.0 percent from
82.8 percent for the year ended December 31, 1997. The year to year increase
was the result of the higher medical expense ratio of acquired plans being
included for a full year during 1998. The same-plan medical expense ratio
improved 20 basis points to 82.2 percent from 82.4 percent in 1997, the result
of the aforementioned premium rate increases, provider risk-sharing initiatives
and improved claim payment accuracy. These improvements were partially offset by
increased year-over-year pharmacy costs of 16 percent and 9 percent for the
Company's Commercial and Medicare HMO products, respectively. As more fully
described above, the medical expense ratio discussion excludes the impact of
premium deficiencies ($46 million) and the write-down of physician practice
management receivables ($27 million). The inclusion of these two items
increases the 1998 medical expense ratio from 83.0 percent to 83.8 percent.
The Company's administrative cost ratio was 14.9 percent and 15.5 percent for
the years ended December 31, 1998 and 1997, respectively. This improvement was
the result of efforts to streamline the organization, as well as synergy savings
from the 1997 acquisitions. Although further synergy savings are expected from
these acquisitions, planned spending during 1999 for information systems and
customer service enhancements will likely offset the beneficial effect of these
savings. This administrative expense ratio discussion excludes the impact of
the one-time non-officer employees incentive ($16 million) and other costs ($9
million) described above. The inclusion of these two items increases the 1998
administrative expense ratio from 14.9 percent to 15.2 percent.
Interest income totaled $150 million for the year ended December 31, 1998,
compared to $131 million for the year ended December 31, 1997. The increase was
attributable to the full year impact of including PCA's and ChoiceCare's
investment portfolios, as well as increased realized investment gains. The tax
equivalent yield on invested assets approximated 7.7 percent and 7.5 percent for
the years ended December 31, 1998 and 1997, respectively. Tax equivalent yield
is the rate earned on invested assets, excluding unrealized gains and losses,
adjusted for the benefit of nontaxable investment income. The weighted average
investment life increased to 2.7 years at December 31, 1998, from 2.6 years at
December 31, 1997.
Business Segment Information for the Years Ended December 31, 1998 and 1997
Commercial premium revenues increased 20 percent in 1998 to $5.3 billion, from
$4.4 billion in 1997. The PCA and ChoiceCare acquisitions contributed $575
million of this increase, while increased premium yields contributed the
remainder. Commercial membership remained stable in 1998, the result of the
Company's commitment to price its Commercial products commensurate with the
underlying risk. For 1999, Commercial premium yield increases are expected to
approximate 5 to 7 percent, while membership is expected to increase
approximately 5 percent. Public Sector premium revenues increased 30 percent to
$3.5 billion in 1998, the result of the 1997 acquisitions and 4.4 percent same-
plan membership growth in the Medicare HMO product. During 1998, the Company
slowed its Medicare HMO membership growth in newer, more costly markets. In
addition, the September 1998 announcement to close two markets by December 31,
1998, resulted in the decrease of 16,000 members. Medicare HMO premium yields
are expected to increase approximately 2 percent in 1999, while membership is
expected to increase approximately 5 percent. Also during 1999, Medicaid
membership is expected to decline approximately 442,000 members, the result of
the expiration of the Puerto Rico Medicaid contract. TRICARE revenues increased
4.7 percent in 1998 on stable membership, due to contract modifications.
The following table depicts segment medical membership balances and activity as
of and for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
In Thousands Commercial Public Sector TRICARE Commercial Public Sector TRICARE
---------- ------------- ------- ---------- ------------- -------
Beginning medical membership 3,910 1,185 1,112 3,231 517 1,103
Sales 822 359 - 703 254 -
Cancellations (824) (342) - (635) (222) -
Acquisitions - - - 735 659 -
Dispositions - - - (124) (23) -
TRICARE change - - (26) - - 9
- -----------------------------------------------------------------------------------------------------------
Ending medical membership 3,908 1,202 1,086 3,910 1,185 1,112
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
===============================================================================
Humana Inc.
The Commercial segment medical expense ratio improved 100 basis points to 82.3
percent in 1998, due to increased premium yields and risk-sharing initiatives
previously mentioned. During 1999, the Company believes its Commercial segment
medical expense ratio will be benefitted by its continued focus on pricing its
Commercial products at rates commensurate with the risk assumed and its control
of claims cost trends, including its contractual relationships with providers.
The Company believes that the industry's 1999 Commercial premium pricing
environment will facilitate its Commercial premium rate increases. The Public
Sector medical expense ratio increased to 84.8 percent in 1998 from 82.3 percent
in 1997, primarily from lower Medicare HMO reimbursement rates, the 1997 growth
of Medicare HMO membership in new, more costly markets outside the Company's
base markets and increasing Medicaid costs in Puerto Rico. Although the
expiration of the Puerto Rico Medicaid contract will improve the Public Sector
medical expense ratio, for the Public Sector medical expense ratio to remain
stable, the Company must continue to control its Medicare HMO medical costs
during 1999 in line with the anticipated 2 percent premium yield increases.
TRICARE's medical expense ratio improved 110 basis points in 1998 to 80.1
percent, the result of continuing utilization management, improved networks and
contract price modifications. As previously described, this medical expense
ratio discussion excludes the impact of premium deficiencies ($46 million) and
the write-down of physician practice management receivables ($27 million). The
inclusion of these two items increases the 1998 Commercial and Public Sector
medical expense ratios to 82.9 percent and 86.0 percent, respectively.
Years Ended December 31, 1997 and 1996
Income before income taxes totaled $270 million for the year ended December 31,
1997, compared to $234 million for the year ended December 31, 1996. Net income
was $173 million or $1.05 per diluted share in 1997, compared to $152 million or
$.92 per diluted share in 1996. The earnings increase was primarily a result of
increasing Commercial premium yields, improved hospital utilization and
providing a full year of health care services under the TRICARE contract, which
commenced during the third quarter of 1996. These favorable items were
partially offset by higher than anticipated medical costs in the Company's new
Medicare HMO markets and increased pharmacy costs system-wide. The acquisitions
of PCA and ChoiceCare did not significantly impact 1997 earnings.
The Company's premium revenues increased 18 percent to $7.9 billion for the year
ended December 31, 1997, from $6.7 billion for the year ended December 31, 1996.
The premium revenue increase was primarily attributable to the full year impact
of the TRICARE contract, the acquisitions of PCA and ChoiceCare and increased
premium yields. TRICARE premium revenues increased $413 million in 1997 and the
PCA and ChoiceCare acquisitions contributed premium revenues of approximately
$512 million since their dates of acquisition. Premium rate changes contributed
the remaining increase, as same-plan Commercial and Medicare HMO premium yields
increased 4.2 percent and 4.3 percent, respectively.
During 1997, the Company's medical expense ratio increased to 82.8 percent from
82.7 percent for the year ended December 31, 1996 as a result of the PCA and
ChoiceCare acquisitions. Excluding the effect of these acquisitions, the
Company's medical expense ratio improved to 82.4 percent, reflecting the
aforementioned premium yield increases, favorable physician cost trends
(compared to premium yield increases) in the Company's Commercial products and
an overall improvement in hospital utilization. These medical cost improvements
were partially offset by higher than anticipated medical costs in the Company's
new Medicare HMO markets (where a larger portion of membership growth was
taking place) and increased pharmacy costs system-wide. As more fully described
previously, the medical expense ratio discussion excludes the impact of the
premium deficiencies recorded in 1996 of $105 million. The inclusion of these
premium deficiencies increases the 1996 medical expense ratio from 82.7 percent
to 84.2 percent.
The Company's administrative cost ratio was 15.5 percent and 15.3 percent for
the years ended December 31, 1997 and 1996, respectively. Although investment
spending in such areas as customer service, information systems and Medicare HMO
product growth initiatives resulted in this year-over-year increase, efforts to
rationalize the Company's staffing levels and streamline the organizational
structure resulted in sequential quarterly improvements in the administrative
cost ratio throughout 1997. The administrative expense ratio discussion
excludes the impact of provisions in 1996 for litigation and certain other costs
($14 million) described previously. The inclusion of these costs increases the
1996 administrative expense ratio from 15.3 percent to 15.6 percent.
6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
===============================================================================
Humana Inc.
Interest income totaled $131 million for the year ended December 31, 1997,
compared to $101 million for the year ended December 31, 1996. The increase is
primarily attributable to a larger investment portfolio resulting from the
addition of TRICARE, PCA and ChoiceCare. The tax equivalent yield on invested
assets approximated 7.5 percent and 8 percent for the years ended December 31,
1997 and 1996, respectively. Tax equivalent yield is the rate earned on
invested assets, excluding unrealized gains and losses, adjusted for the benefit
of nontaxable investment income. The weighted average investment life decreased
to 2.6 years at December 31, 1997, from 3.1 years at December 31, 1996.
Business Segment Information for the Years Ended December 31, 1997 and 1996
Commercial segment premiums increased 3 percent for the year ended December 31,
1997, from $4.3 billion to $4.4 billion. The increase was the result of the 1997
acquisitions and increased premium yields, partially offset by same-plan fully-
insured membership reductions. Same-plan fully-insured membership declined
62,500 members, the result of a premium pricing discipline begun during the
second half of 1996. Commercial same-plan ASO membership increased 130,000 or
28 percent during 1997. Public Sector premiums increased 32 percent for the
year ended December 31, 1997, from $2.1 billion to $2.7 billion. The increase
was the result of the aforementioned acquisitions, same-plan Medicare HMO
membership growth in new markets and same-plan Medicare HMO premium yields of
4.4 percent. Same-plan Public Sector membership increased 31,500 or 6 percent
in 1997, the result of Medicare HMO product growth of 19 percent, largely offset
by a decline in membership for other Public Sector products. TRICARE premium
revenues totaled approximately $764 million for the year ended December 31,
1997, compared to approximately $351 million for the period July 1 through
December 31, 1996.
The following table depicts segment medical membership balances and activity as
of and for the years ended December 31, 1997 and 1996, including the effect of
the PCA and ChoiceCare acquisitions:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
In Thousands Commercial Public Sector TRICARE Commercial Public Sector TRICARE
- ----------------------------------------------------------------------------------------------------------
Beginning medical membership 3,231 517 1,103 3,330 474 -
Sales 703 254 - 587 196 1083
Cancellations (635) (222) - (686) (153) -
Acquisitions 735 659 - - - -
Dispositions (124) (23) - - - -
TRICARE change - - 9 - - 20
- ----------------------------------------------------------------------------------------------------------
Ending medical membership 3,910 1,185 1,112 3,231 517 1,103
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Commercial medical expense ratio improved 50 basis points in 1997 to 83.3
percent. The improvement resulted from same-plan premium yield increases and
favorable physician cost trends (compared to premium yield increases), partially
offset by the higher medical expense ratio of the acquired plans. The Public
Sector medical expense ratio increased from 80.3 percent in 1996 to 82.3 percent
in 1997, resulting from higher than anticipated costs in the Company's new
Medicare HMO markets. The TRICARE medical expense ratio improved from 83.6
percent during 1996 to 81.2 percent in 1997. This medical expense ratio
discussion excludes the impact of premium deficiencies ($105 million). The
inclusion of this item increases the 1996 Commercial medical expense ratio to
86.3 percent.
Liquidity
During 1998, cash provided by the Company's operations was $76 million, compared
to cash provided by operations in 1997 and 1996 of $289 million and $341
million, respectively. Cash flow in 1998 was negatively impacted by the 1997
PCA acquisition, including paydowns of medical claims backlogs, cash advances to
providers and severance payments. Also during 1998, the Company made cash
payments of $134 million related to the closed block of PCA workers'
compensation business. The 1997 decline in net cash provided by operations was
the result of changes in operating assets and liabilities, increased TRICARE
receivables and more timely medical claims processing.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
Cash provided by investing activities totaled $7 million in 1998, compared to
cash used for investing activities of $664 million in 1997. The use of cash for
investing activities during 1997 was primarily the result of the PCA and
ChoiceCare acquisitions. Cash provided by financing activities was $51 million
in 1998 compared to $679 million in 1997. Cash provided in 1998 was the result
of the timing of book overdrafts, while in 1997 cash provided by financing
activities was the result of borrowings to finance acquisitions.
The Company's subsidiaries operate in states which require certain levels of
equity and regulate the payment of dividends to the parent company. As a
result, the Company's ability to use operating subsidiaries' cash flows is
restricted to the extent of the subsidiaries' ability to obtain regulatory
approval to pay dividends.
The Company maintains a revolving credit agreement ("Credit Agreement") which
provides additional liquidity under a line of credit of up to $1.5 billion.
Borrowings under this Credit Agreement were $93 million and $300 million at
December 31, 1998 and 1997, respectively. The Company also maintains a
commercial paper program and issues debt securities thereunder. The commercial
paper program is backed by the Credit Agreement. Commercial paper borrowings
averaged $659 million in 1998 at a weighted average interest rate of 5.9
percent. Commercial paper borrowings outstanding at December 31, 1998 and 1997
was $730 million and $589 million, respectively.
The Company intends to repay approximately $250 million of its outstanding debt
with the proceeds of operating subsidiary dividends expected to be received
during 1999. All borrowings under both the Credit Agreement and commercial
paper program, except the planned 1999 repayments, have been classified as long-
term debt based on management's ability and intent to refinance borrowings on a
long-term basis.
Management believes that existing working capital, future operating cash flows
and funds available under the existing revolving Credit Agreement and commercial
paper program are sufficient to meet future liquidity needs. Management also
believes the aforementioned sources of funds are adequate to allow the Company
to pursue strategic acquisition and expansion opportunities, as well as to fund
capital requirements.
Risk Sensitive Financial Instruments and Positions
The Company's risk of fluctuation in earnings due to changes in interest income
from its fixed income portfolio is partially mitigated by the Company's debt
position, as well as the short duration of the fixed income portfolio.
The Company has evaluated the interest income and debt expense impact resulting
from a hypothetical change in interest rates of 100, 200 and 300 basis points
over the next 12-month period, as reflected in the table below. In the past 10
years, annual changes in commercial paper rates have never exceeded 300 basis
points, changed between 200 and 300 basis points twice, and changed between 100
and 200 basis points twice. The modeling technique used to calculate the pro
forma net change considered the cash flows related to fixed income investments
and debt, including the repayment of $250 million of debt in 1999, which are
subject to interest rate changes during a prospective 12-month period.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in earnings Increase (decrease) in earnings
given an interest rate given an interest rate
Dollars in millions decrease of X basis points increase of X basis points
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
(300) (200) (100) 100 200 300
- -----------------------------------------------------------------------------------------------------------------
1998
Fixed income portfolio $(11.9) $ (7.9) $(4.0) $ 4.0 $ 8.0 $ 12.0
Debt 5.7 3.8 1.9 (1.9) (3.8) (5.7)
- -----------------------------------------------------------------------------------------------------------------
Total $ (6.2) $ (4.1) $(2.1) $ 2.1 $ 4.2 $ 6.3
=================================================================================================================
1997
Fixed income portfolio $(15.1) $(10.0) $(5.0) $ 4.9 $ 9.9 $ 14.8
Debt 12.3 8.2 4.1 (4.1) (8.2) (12.3)
- -----------------------------------------------------------------------------------------------------------------
Total $ (2.8) $ (1.8) $ (.9) $ .8 $ 1.7 $ 2.5
=================================================================================================================
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
The following table presents the hypothetical change in fair market values of
common equity securities held by the Company at December 31, 1998 which are
sensitive to changes in stock market values. These common equity securities are
held for purposes other than trading.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Decrease in Increase in
valuation of security Fair value valuation of security
given an X% decrease in as of given an X% increase in
Dollars in millions each equity security's value December 31, each equity security's value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(30%) (20%) (10%) 10% 20% 30%
- -------------------------------------------------------------------------------------------------------------------------
1998
Common equity securities $(18.6) $(12.4) $(6.2) $62.1 $6.2 $12.4 $18.6
- -------------------------------------------------------------------------------------------------------------------------
1997
Common equity securities $(15.5) $(10.4) $(5.2) $51.8 $5.2 $10.4 $15.5
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in equity valuations (based upon the Standard & Poor's 500 stock index)
over the past 10 years which were in excess of 30 percent occurred five times,
between 20 percent and 30 percent occurred two times, and between 10 percent and
20 percent occurred three times.
Capital Resources
The Company's ongoing capital expenditures relate primarily to administrative
facilities and information systems necessary for activities such as claims
processing, billing and collections, medical utilization review and customer
service. Total capital expenditures, excluding acquisitions, were $104 million,
$73 million and $72 million for the years ended December 31, 1998, 1997 and
1996, respectively. Capital expenditures during 1998 included the $32 million
purchase and renovation of a regional customer service center in Jacksonville,
Florida.
Excluding acquisitions, planned capital spending in 1999 will approximate $80 to
$90 million for the expansion and improvement of administrative facilities and
information systems.
Effects of Inflation and Changing Prices
The Company's operations are regulated by various state and federal government
agencies. Actuarially determined premium rate increases for Commercial products
are generally approved by the respective state insurance commissioners, while
increases in premiums for Medicaid and Medicare HMO products are established by
various state governments and the Health Care Financing Administration. Premium
rates under the TRICARE contract with the United States Department of Defense
may be adjusted on a year by year basis to reflect inflation, changes in the
workload volumes of military medical facilities and contract modifications.
The Company's 1999 average rate of statutory increase under the Medicare
contracts is approximately 2 percent. Over the last five years, annual
increases have ranged from as low as the January 1998 increase of 2 percent to
as high as 9 percent in January 1996, with an average of approximately 5
percent. The Company's Medicare contracts with the federal government are
renewed for a one-year term each December 31 unless terminated 90 days prior
thereto.
Legislative proposals are being considered which may revise the Medicare
program's current support of the use of managed health care for Medicare
beneficiaries and the future reimbursement rates thereunder. Management is
unable to predict the outcome of these proposals or the impact they may have on
the Company's financial position, results of operations or cash flows. The
Company's Medicaid contracts are generally annual contracts with various states
except for the two-year contract with the Commonwealth of Puerto Rico. The
Puerto Rico contract, previously scheduled to expire March 31, 1999, has been
extended one month to April 30, 1999. The Company does not expect to be able to
renew the contract in Puerto Rico under favorable terms and, therefore, has
announced its intention to close this market when the contract expires.
Additionally, the Company's TRICARE contract is a one-year contract renewable
annually for up to two additional years. The loss of these contracts (other
than the contract in Puerto Rico) or significant changes in these programs as a
result of legislative action, including reductions in payments or increases in
benefits without corresponding increases in payments, would have a material
adverse effect on the revenues, profitability and business prospects of the
Company.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
In addition, the Company continually contracts and seeks to renew contracts with
providers at rates designed to ensure adequate profitability. To the extent the
Company is unable to obtain such rates, its financial position, results of
operations and cash flows could be adversely impacted. Currently, the Company
is in renegotiations with a major provider and is unable to predict the impact
of these negotiations on future rates.
The Company's Y2K Readiness Disclosure Statement
The Company operates one of the largest managed care data centers in the nation.
The primary computing facility is located in Louisville, Kentucky with a
satellite operation in Green Bay, Wisconsin. In 1998, Humana's Information
Systems organization included 950 associates with an annual operating budget of
$135 million. The Company's application systems are largely developed and
maintained in-house by a staff of 400 application programmers who are versed in
the use of state-of-the-art technology. All application systems are fully
integrated and automatically pass data through various system processes. The
information systems support marketing, sales, underwriting, contract
administration, billing, financial, and other administrative functions as well
as customer service, authorization and referral management, concurrent review,
physician capitation and claims administration, provider management, quality
management and utilization review.
The Company internally develops most of its own application systems software.
All application systems must comply with strict standards for data integrity,
file compatibility and architectural requirements. The Company maintains a
central project coordination function and an architectural review function that
ensure consistency across the application portfolio. The Company has subscribed
to automated file processes and integrated data architectures for over twenty-
five years.
The Year 2000 issue is the result of two potential malfunctions that may have an
impact on the Company's systems and equipment. The first potential malfunction
is the result of computers being programmed to use two rather than four digits
to define the applicable year. The second potential malfunction arises where
embedded microchips and micro-controllers have been designed using two rather
than four digits to define the applicable year. As a result, certain of the
Company's date-sensitive computer programs, building infrastructure components
and medical devices, may recognize a date using "00" as the year 1900 rather
than the year 2000. If uncorrected, the problem may result in computer system
and program failures or equipment malfunctions that could result in a disruption
of business operations (such as the payment of medical claims, premium billing
and collection, and membership enrollment verification as well as the use of
medical equipment such as heart defibrillators).
Humana's Information Systems organization operates in a centralized manner. The
Company's data center and the majority of its programming and support staff are
located at its corporate offices in Louisville, Kentucky. A Year 2000 project
management office is in place to oversee the progress made in the assessment and
correction of the Company's Year 2000 exposures.
In general, the Company's Year 2000 project consists of four phases --
assessment, remediation, validation, and implementation -- and is categorized
into the following four components:
Information Technology (IT) - software essential for day-to-day operations
----------------------------
including both internally developed software and third party software which
interfaces therewith.
IT Infrastructure - mainframe, network, telecommunications interfaces and
-----------------
self-contained operating systems.
Third party business partners and intermediaries - entities on which the
------------------------------------------------
Company relies for transmission and receipt of claims, and encounter,
membership and payment information, including federal and state
governmental agencies such as the Health Care Financing Administration.
Non-IT Infrastructure - telecommunications equipment, elevators, public
---------------------
safety equipment (i.e., security and fire), medical equipment and HVAC
systems.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
The Company commenced the assessment of its Year 2000 exposures in 1996.
Remediation efforts of internally developed software and third party software
applications have also begun. The Company's plan is to have modified all
critical mainframe systems and components in time for such systems and
components to utilize the updated Year 2000 logic during the second quarter of
1999. Modifying all critical systems and components by the second quarter of
1999 will enable the majority of the modified programs to run in a production
environment for a considerable period of time before encountering Year 2000
data. Of the Company's 98 mainframe systems identified in the assessment, 92
have been renovated, validated and are currently operating using the updated
Year 2000 logic. During 1999, the remaining 6 systems will be modified,
upgraded, or replaced and all systems will continue to be monitored and tested
to ensure that they will function properly after December 31, 1999. In
addition, the Company is in the process of contacting vendors, third party
business partners and intermediaries in an effort to obtain the information
necessary to address Year 2000 issues. The Company anticipates completing, in
all material respects, its Year 2000 project by the end of the third quarter
1999. The Company's efforts are currently progressing on plan.
The Year 2000 project is currently estimated to have a minimum total cost of
approximately $25 million. Project to date costs total $19.5 million, including
$18.5 million during the year ended December 31, 1998. Year 2000 expenses
represented less than 15 percent of the Information Systems budget during 1998.
Year 2000 costs are expensed as incurred and funded through operating cash flow.
The extent and magnitude of the Year 2000 project, as it will affect the Company
both before and for some period after January 1, 2000, are difficult to predict
or quantify. As a result, the Company has recently undertaken the development
of contingency plans in the event that its Year 2000 project is not completed in
an accurate or timely manner. The Company has identified five major functional
areas, covering 20 operational subdivisions, that will require contingency
plans. The five major functional areas are: providers, service centers,
suppliers and vendors, customers and brokers, and banking and finance. The
Company is in the process of developing and refining alternative operating
procedures for each functional area. Additionally, a tracking system is being
developed to monitor the implementation of these procedures.
While the Company presently believes that the timely completion of its Year 2000
project will limit exposure so that the Year 2000 will not pose material
operational problems, the Company does not control third party systems.
Although the Company is contacting third parties, the Company has not received
assurances that all third party interfaces will be converted in a timely manner.
Additionally, if Year 2000 modifications or upgrades are not accomplished in a
timely manner or proper contingency plans are not implemented, Year 2000
failures which may result could have a material adverse impact on the Company's
results of operations or its financial position.
The costs of the Year 2000 project and the date on which the Company plans to
complete Year 2000 modifications are based on management's best estimates,
considering assumptions of future events including the continued availability of
certain resources and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from plan.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and the ability of
the Company's significant suppliers, customers and others with which it conducts
business, including federal and state governmental agencies, to identify and
resolve their own Year 2000 issues.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In general, SFAS 133 requires
that all derivatives be recognized as either assets or liabilities in the
balance sheet at their face value, and sets forth the manner in which gains or
losses thereon are to be recorded. The treatment of such gains and losses is
dependent upon the type of exposure, if any, for which the derivative is
designated as a hedge. This statement is effective for periods beginning after
June 15, 1999. Management of the Company anticipates that, due to its limited
use of derivative instruments, the adoption of SFAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Humana Inc.
Other Information
During the ordinary course of business, the Company is subject to pending and
threatened legal actions and audits by the agencies that regulate the Company.
Management of the Company does not believe that any of these actions will have a
material adverse effect on the Company's financial positions, results of
operations or cash flows.
12
<PAGE>
Consolidated Balance Sheets
================================================================================
Humana Inc.
<TABLE>
<CAPTION>
Dollars in millions, except per share amounts
- -----------------------------------------------------------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 913 $ 779
Marketable securities 1,594 1,507
Premiums receivable, less allowance for doubtful
accounts of $62 in 1998 and $48 in 1997 276 351
Deferred income taxes 129 164
Other 207 231
- -----------------------------------------------------------------------------------------
Total current assets 3,119 3,032
- -----------------------------------------------------------------------------------------
Property and equipment, net 433 420
Other assets:
Long-term marketable securities 305 512
Cost in excess of net assets acquired 1,188 1,224
Deferred income taxes 64 60
Other 387 352
- -----------------------------------------------------------------------------------------
Total other assets 1,944 2,148
- -----------------------------------------------------------------------------------------
Total Assets $5,496 $5,600
- -----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable $1,470 $1,478
Trade accounts payable and accrued expenses 395 511
Book overdraft 234 152
Unearned premium revenues 294 304
Short-term debt 250 -
- -----------------------------------------------------------------------------------------
Total current liabilities 2,643 2,445
- -----------------------------------------------------------------------------------------
Long-term medical and other expenses payable 438 597
Long-term debt 573 889
Professional liability and other obligations 154 168
- -----------------------------------------------------------------------------------------
Total liabilities 3,808 4,099
- -----------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; authorized 10,000,000 shares; none issued - -
Common stock, $.16 2/3 par; authorized 300,000,000
shares; issued and outstanding 167,515,362 shares - 1998
and 164,058,225 shares - 1997 28 27
Capital in excess of par value 894 841
Retained earnings 753 624
Accumulated other comprehensive income 13 9
- -----------------------------------------------------------------------------------------
Total stockholders' equity 1,688 1,501
- -----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 5,496 $5,600
- -----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
Consolidated Statements of Income
================================================================================
Humana Inc.
<TABLE>
<CAPTION>
Dollars in millions, except per share results
- --------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums $9,597 $7,880 $6,677
Interest and other income 184 156 111
- --------------------------------------------------------------------------------
Total revenues 9,781 8,036 6,788
Operating expenses:
Medical 8,041 6,522 5,625
Selling, general and administrative 1,328 1,116 940
Depreciation and amortization 128 108 98
Asset write-downs and other charges 34 - 96
- --------------------------------------------------------------------------------
Total operating expenses 9,531 7,746 6,759
- --------------------------------------------------------------------------------
Income from operations 250 290 29
Interest expense 47 20 11
- --------------------------------------------------------------------------------
Income before income taxes 203 270 18
Provision for income taxes 74 97 6
- --------------------------------------------------------------------------------
Net income $ 129 $ 173 $ 12
- --------------------------------------------------------------------------------
Earnings per common share $ .77 $ 1.06 $.07
- --------------------------------------------------------------------------------
Earnings per common share - assuming dilution $ .77 $ 1.05 $.07
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
Consolidated Statements of Stockholders' Equity
================================================================================
Humana Inc.
<TABLE>
<CAPTION>
In millions
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Capital In Other Total
-------------- Excess of Retained Comprehensive Stockholders'
Shares Amount Par Value Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 162 $27 $815 $439 $ 6 $1,287
Comprehensive loss:
Net income - - 12 - 12
Other comprehensive loss:
Net unrealized investment
loss, net of $(8) tax - - - (14) (14)
--------
Comprehensive loss (2)
Other 1 - 7 - - 7
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 163 27 822 451 (8) 1,292
Comprehensive income:
Net income - - 173 - 173
Other comprehensive income:
Net unrealized investment
gain, net of $10 tax - - - 17 17
--------
Comprehensive income 190
- ------------------------------------------------------------------------------------------------------------------------
Other 1 - 19 - - 19
Balances, December 31, 1997 164 27 841 624 9 1,501
Comprehensive income:
Net income - - 129 - 129
--------
Other comprehensive income:
Net unrealized investment
gain, net of $2 tax - - - 4 4
--------
Comprehensive income 133
Other 4 1 53 - - 54
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 168 $28 $894 $753 $13 $1,688
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
Consolidated Statements of Cash Flows
================================================================================
Humana Inc.
<TABLE>
<CAPTION>
Dollars in millions
- ----------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 129 $ 173 $ 12
Adjustments to reconcile net income
to net cash provided by operating activities:
Asset write-downs and losses on sales of assets 17 - 70
Depreciation and amortization 128 108 98
Deferred income taxes 26 40 (25)
Changes in operating assets and liabilities:
Premiums receivable 45 (102) (81)
Other assets 32 (47) (31)
Medical and other expenses payable (22) (118) 215
Workers' compensation liabilities (134) (31) -
Other liabilities (135) 57 84
Unearned premium revenues (10) 203 (3)
Other - 6 2
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 76 289 341
- ----------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisitions of health plan assets, net of cash acquired - (669) (6)
Purchases of property and equipment (104) (73) (72)
Dispositions of property and equipment 12 15 5
Purchases of marketable securities (1,037) (608) (440)
Maturities and sales of marketable securities 1,174 648 356
Other (38) 23 (17)
- ----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 7 (664) (174)
- ----------------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of long-term debt 123 300 -
Repayment of long-term debt (330) - (250)
Net commercial paper borrowings 141 367 222
Change in book overdraft 82 (1) (25)
Other 35 13 1
- ----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 51 679 (52)
- ----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 134 304 115
Cash and cash equivalents at beginning of period 779 475 360
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $913 $779 $475
- ----------------------------------------------------------------------------------------
Supplemental cash flow disclosure:
Interest payments $ 49 $ 15 $ 11
Income tax payments 69 8 39
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
Notes to Consolidated Financial Statements
================================================================================
Humana Inc.
1. Reporting Entity
Nature of Operations
Humana Inc. ("the Company") is a health services company that facilitates the
delivery of health care services through networks of providers. The Company's
products are marketed primarily through health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs") that encourage or require
the use of contracted providers. HMOs and PPOs control health care costs by
various means, including pre-admission approval for hospital inpatient services,
pre-authorization of outpatient surgical procedures, and risk-sharing
arrangements with providers. These providers may share medical cost risk or
have other incentives to deliver quality medical services in a cost-effective
manner. The Company also offers various specialty products to employers,
including dental, group life and workers' compensation, and administrative
services ("ASO") to those who self-insure their employee health plans. In
total, the Company's products are licensed in 47 states, the District of
Columbia and Puerto Rico, with approximately 21 percent of its membership in the
state of Florida.
The Company markets and distributes its products to three distinct customer
groups and, therefore, reports operations in three business segments. Results
of each segment are measured based on premium revenues and underwriting margin
(premium revenues less medical expenses). The Company does not allocate assets
or administrative costs to the segments and, therefore, does not measure results
based on segment assets or pretax profits. Members from all three segments
generally utilize the same medical provider networks, enabling the Company to
obtain more favorable contract terms with providers. As a result, the
profitability of each segment is somewhat interdependent.
Basis of Presentation
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (a) the reported amounts of assets and
liabilities, (b) disclosure of contingent assets and liabilities at the date of
the financial statements and (c) reported amounts of revenues and expenditures
during the reporting period. Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include all subsidiaries of the Company.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, money market funds,
commercial paper and certain U.S. Government securities with an original
maturity of three months or less. Carrying value approximates fair value due to
the short-term maturities of the investments.
Marketable Securities
At December 31, 1998 and 1997, marketable debt and equity securities have been
categorized as available for sale and, as a result, are stated at fair value
based generally on quoted market prices. Commercial mortgage loans are carried
at cost. Marketable debt and equity securities available for current operations
are classified as current assets. Marketable securities available for the
Company's capital spending, professional liability, long-term insurance product
requirements and payment of long-term workers' compensation claims are
classified as long-term assets. Unrealized holding gains and losses, net of
applicable deferred taxes, are included as a component of stockholders' equity
until realized.
For the purpose of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
17
<PAGE>
Notes to Consolidated Financial Statements (continued)
================================================================================
Humana Inc.
Long-Lived Assets
Property and equipment is carried at cost and comprises the following at
December 31, 1998 and 1997:
- -----------------------------------------------------------------------
Dollars in millions 1998 1997
- -----------------------------------------------------------------------
Land $ 33 $ 33
Buildings 355 302
Equipment 400 393
- -----------------------------------------------------------------------
788 728
Accumulated depreciation (355) (308)
- -----------------------------------------------------------------------
$ 433 $ 420
- -----------------------------------------------------------------------
Depreciation is computed using the straight-line method over estimated useful
lives ranging from three to 10 years for equipment and 20 years for buildings.
Depreciation expense was $75 million, $66 million and $59 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
Cost in excess of net assets acquired represents the unamortized excess of cost
over the fair value of tangible and identifiable intangible assets acquired and
is being amortized on a straight-line basis over varying periods not exceeding
40 years. Accumulated amortization totaled $69 million and $37 million at
December 31, 1998 and 1997, respectively.
The carrying values of all long-lived assets are periodically reviewed by
management for impairment, based upon undiscounted future cash flows, and
appropriate losses are recognized whenever the carrying value of an asset may
not be recoverable.
Revenue and Medical Cost Recognition
Premium revenues are recognized as income in the period members are entitled to
receive services. Premiums received prior to such period are recorded as
unearned premium revenues.
Medical costs include claim payments, capitation payments, physician salaries,
allocations of certain centralized expenses and various other costs incurred to
provide medical care to members, as well as estimates of future payments to
hospitals and others for medical care provided prior to the balance sheet date.
Capitation payments represent monthly prepaid fees disbursed to participating
primary care physicians and other providers who are responsible for providing
medical care to members. The estimates of future medical claim and other
expense payments are developed using actuarial methods and assumptions based
upon payment patterns, medical inflation, historical development and other
relevant factors. Estimates of future payments relating to services incurred in
the current and prior periods are continually reviewed by management and
adjusted as necessary.
The Company assesses the profitability of its contracts for providing health
care services to its members when current operating results or forecasts
indicate probable future losses. The Company records a premium deficiency in
current operations to the extent that the sum of expected health care costs,
claim adjustment expenses and maintenance costs exceeds related future premiums.
Anticipated investment income is not considered for purposes of computing the
premium deficiency. During the years ended December 31, 1998 and 1996, the
Company recorded premium deficiencies approximating $46 million and $105
million, respectively.
Management believes the Company's medical and other expenses payable are
adequate to cover future claims payments required, however, such estimates are
subject to changes in assumptions, and, therefore, the actual liability could
differ from amounts provided.
Book Overdraft
Under the Company's cash management system, checks issued but not presented to
banks frequently result in overdraft balances for accounting purposes and are
classified as a current liability in the consolidated balance sheets.
Stock Options
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") and continues to apply Accounting Principles Board.
18
<PAGE>
Notes to Consolidated Financial Statements (continued)
================================================================================
Humana Inc.
Opinion No. 25 and related interpretations in the accounting for its stock
option plans. No compensation expense has been recognized in connection with
the granting of stock options. See Note 8 for discussion of stock options and
the disclosures required by SFAS 123.
Earnings Per Common Share
Detail supporting the computation of earnings per common share and earnings per
common share-assuming dilution follows:
<TABLE>
<CAPTION>
Dollars in millions, except per share results
- ---------------------------------------------------------------------------------
Per Share
Year Ended December 31, 1998 Net Income Shares Results
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings per common share $ 129 166,471,824 $ .77
Effect of dilutive stock options 1,792,756
Earnings per common share - assuming dilution $ 129 168,264,580 $ .77
- ---------------------------------------------------------------------------------
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------
Earnings per common share $ 173 163,406,460 $1.06
Effect of dilutive stock options 2,436,019
Earnings per common share - assuming dilution $ 173 165,842,479 $1.05
- ---------------------------------------------------------------------------------
Year Ended December 31, 1996
- ---------------------------------------------------------------------------------
Earnings per common share $ 12 162,531,524 $ .07
Effect of dilutive stock options 2,747,294
Earnings per common share - assuming dilution $ 12 165,278,818 $ .07
- ---------------------------------------------------------------------------------
</TABLE>
Options to purchase 1,562,949, 2,414,148 and 1,580,891 shares for the years
ended December 31, 1998, 1997 and 1996, respectively, were not included in the
computation of earnings per common share-assuming dilution because the options'
exercise prices were greater than the average market price of the common shares
during the periods.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
Adoption of Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of changes in equity from non-owner sources
in the financial statements. Non-owner changes in stockholders' equity consists
of unrealized investment gains or losses on marketable securities and, as
permitted under the provisions of SFAS 130, are presented in the Consolidated
Statements of Stockholders' Equity. The adoption of SFAS 130 did not affect
results of operations or financial position but did affect disclosure of
comprehensive income.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes new requirements for the reporting of
segment information under a new framework referred to as the management
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect disclosure
of segment information.
In 1998, the Company also adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-
1"), issued by the AICPA's Accounting Standards Executive Committee in March
1998. SOP 98-1 specifies the costs to be capitalized in connection with
obtaining or developing computer software to be used solely to meet the
Company's internal needs. Computer software costs capitalized in 1998
were approximately $9 million.
19
<PAGE>
Notes to Consolidated Financial Statements (continued)
================================================================================
Humana Inc.
3. Asset Write-Downs and Other Charges
In 1998, the Company recorded asset write-downs and other charges of $34
million. The charges included severance and lease termination costs associated
with closing five markets (Sarasota and Treasure Coast, Florida, Springfield and
Jefferson City, Missouri and Puerto Rico) and discontinuing products ($5
million), write-downs of receivables and certain property and equipment
associated with closing markets ($10 million), losses on disposals of non-
strategic assets ($12 million) and merger dissolution costs ($7 million).
Charges for estimated employee severance costs were based on the Company's
employee benefit plan arrangements. Significant market closure activities are
expected to be completed by the end of the second quarter of 1999 as membership
lapses or existing contracts expire. Total premium revenues and underwriting
profits associated with market closures and discontinued products approximated
$665 million and $50 million, respectively, for the year ended December 31,
1998.
Activity related to these charges for the year ended December 31, 1998 follows
(in millions):
Provision for asset write-downs and other charges $ 34
Usage (non-cash) (17)
Usage (cash) (10)
----
Balance remaining at December 31, 1998 $ 7
====
In 1996, the Company recorded asset write-downs and other charges of $96
million. These charges included write-downs of long-lived assets associated
with the Company's Washington, D.C., health plan which was sold in 1997 ($70
million), severance and lease termination costs for workforce reductions
undertaken during 1997 ($15 million) and market closure and product
discontinuance costs ($11 million). Substantially all amounts related to the
cash portion of these charges were paid before the end of 1997.
4. Marketable Securities
Marketable securities classified as current assets at December 31, 1998 and 1997
included the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $ 165 $ 4 $ - $ 169 $ 178 $ 1 $ - $ 179
Tax exempt municipal bonds 845 6 - 851 723 5 (2) 726
Corporate bonds 250 8 - 258 282 6 - 288
Redeemable preferred stocks 124 1 - 125 113 1 (2) 112
Marketable equity securities 129 2 (2) 129 114 5 (1) 118
Other 59 3 - 62 80 4 - 84
- ----------------------------------------------------------------------------------------------------------------------------------
$1,572 $24 $(2) $1,594 $1,490 $22 $ (5) $1,507
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Marketable securities classified as long-term assets at December 31, 1998 and
1997 included the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Dollars in millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government obligations $ 5 $ - $ - $ 5 $ 146 $ - $ - $ 146
Tax exempt municipal bonds 234 4 (1) 237 284 3 (2) 285
Redeemable preferred stocks 31 - - 31 16 - - 16
Marketable equity securities 2 - - 2 19 1 - 20
Other 30 - - 30 45 - - 45
- ----------------------------------------------------------------------------------------------------------------------------------
$ 302 $ 4 $(1) $ 305 $ 510 $ 4 $ (2) $ 512
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Notes to Consolidated Financial Statements (continued)
================================================================================
Humana Inc.
The contractual maturities of debt securities available for sale at December 31,
1998, regardless of their balance sheet classification, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
- -------------------------------------------------------------------------------
Amortized Fair
Dollars in millions Cost Value
- -------------------------------------------------------------------------------
Due within one year $ 178 $ 180
Due after one year through five years 579 590
Due after five years through ten years 410 420
Due after ten years 220 224
Not due at a single maturity date 356 354
- -------------------------------------------------------------------------------
$1,743 $1,768
- -------------------------------------------------------------------------------
Realized gains and losses for the years ended December 31, 1998, 1997 and 1996
were approximately $21 million, $10 million and $2 million, respectively.
5. Income Taxes
The provision for income taxes consisted of the following:
Years Ended December 31,
- -------------------------------------------------------------------------------
Dollars in millions 1998 1997 1996
- -------------------------------------------------------------------------------
Current provision:
Federal $ 39 $ 51 $ 30
State 9 6 1
- -------------------------------------------------------------------------------
48 57 31
- -------------------------------------------------------------------------------
Deferred provision (benefit):
Federal 24 36 (23)
State 2 4 (2)
- -------------------------------------------------------------------------------
26 40 (25)
- -------------------------------------------------------------------------------
$ 74 $ 97 $ 6
- -------------------------------------------------------------------------------
The provision for income taxes was different from the amount computed using the
federal statutory rate due to the following:
Years Ended December 31,
- -------------------------------------------------------------------------------
Dollars in millions 1998 1997 1996
- -------------------------------------------------------------------------------
Income tax provision at federal statutory rate $ 71 $ 95 $ 6
State income taxes, net of federal benefit 8 10 1
Tax exempt investment income (18) (13) (12)
Amortization 17 10 12
Other items, net (4) (5) (1)
- -------------------------------------------------------------------------------
$ 74 $ 97 $ 6
- -------------------------------------------------------------------------------
Cumulative temporary differences which gave rise to deferred tax assets and
liabilities at December 31, 1998 and 1997 were as follows:
Assets (Liabilities)
- -------------------------------------------------------------------------------
Dollars in millions 1998 1997
- -------------------------------------------------------------------------------
Marketable securities $ (8) $ (6)
Long-term assets (46) (42)
Medical and other expenses payable 95 126
Liabilities for charges 16 14
Professional liability risks 7 11
Net operating loss carryforwards 58 77
Other 71 44
- -------------------------------------------------------------------------------
$ 193 $ 224
- -------------------------------------------------------------------------------
At December 31, 1998, the Company has available tax net operating loss
carryforwards of approximately $150 million related to prior acquisitions.
These loss carryforwards, if unused to offset future taxable income of the
acquired subsidiaries, will expire in 2002 through 2012.
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
================================================================================
Humana Inc.
Based on the Company's historical taxable income record and estimates of future
profitability, management has concluded that operating income will more likely
than not be sufficient to give rise to tax expense to cover all deferred tax
assets.
6. Long-Term Debt
The Company maintains a revolving credit agreement ("Credit Agreement") which
provides a line of credit of up to $1.5 billion. Principal amounts outstanding
under the Credit Agreement bear interest at either a fixed rate or a floating
rate, ranging from LIBOR plus 12 basis points to LIBOR plus 30 basis points,
depending on the ratio of debt to debt plus net worth. The Credit Agreement
contains customary covenants and events of default and expires in August 2002.
The Company also maintains and issues debt securities under a commercial paper
program, which is backed by the Credit Agreement.
The Company intends to repay approximately $250 million of its outstanding debt
with the proceeds from operating subsidiary dividends expected to be received
during 1999. All borrowings under both the Credit Agreement and commercial
paper program, except $250 million, have been classified as long-term debt based
on management's ability and intent to refinance borrowings on a long-term basis.
Borrowings and the weighted average interest rate on those borrowings as of
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Weighted Weighted
Average Average
Interest Interest
Dollars in millions Amount Rate Amount Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit Agreement $ 93 5.9% $ 300 6.2%
Commercial paper program 730 5.9% 589 5.9%
- -------------------------------------------------------------------------------
Total debt 823 889
Less: short-term debt 250 -
- -------------------------------------------------------------------------------
Total long-term debt $ 573 $ 889
- -------------------------------------------------------------------------------
</TABLE>
7. Professional Liability and Other Obligations
The Company insures substantially all professional liability risks through a
wholly-owned subsidiary (the "Subsidiary"). Provisions for such risks, including
expenses incident to claim settlements, were $27 million, $32 million and $31
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
Subsidiary reinsures levels of coverage for losses in excess of its retained
limits with unrelated insurance carriers. Allowance for professional liability
risks and the equivalent amounts of marketable securities and reinsurance
recoverables related to the funding thereof included in the accompanying
consolidated balance sheets were $123 million and $111 million at December 31,
1998 and 1997, respectively.
In addition to the long-term portion of the allowance for professional liability
risks, professional liability and other obligations in the accompanying
consolidated balance sheets consist primarily of liabilities for disability and
other long-term insurance products, leases and the Company's employee retirement
and benefit plans. These liabilities totaled $53 million and $77 million at
December 31, 1998 and 1997, respectively.
8. Stockholders' Equity
The Company has adopted a stockholders' rights plan designed to deter takeover
initiatives not considered to be in the best interests of the Company's
stockholders. The rights are redeemable by action of the Company's Board of
Directors at a price of $.01 per right at any time prior to their becoming
exercisable. Pursuant to the plan, under certain conditions, each share of stock
has a right to acquire 1/100th of a share of Series A Participating Preferred
Stock at a price of $145 per share. The plan expires in 2006.
22
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Humana Inc.
The Company has plans under which restricted stock awards and options to
purchase common stock have been granted to officers, directors and key
employees. In 1998, the Company awarded 400,000 shares at $14.38 of
performance-based restricted stock to officers and key employees. The shares
vest in equal one-third installments beginning January 1, 2000, provided the
Company meets certain earnings goals. Unearned compensation under the
restricted stock awards plan is amortized over the vesting period. Compensation
expense recognized related to the restricted stock award plans was $3 million in
1998.
Options are granted at the market price on the date of grant. Exercise
provisions vary, but most options vest in whole or in part one to five years
after grant and expire 10 years after grant. At December 31, 1998, there were
15,883,609 shares reserved for employee and director stock option plans. At
December 31, 1998, there were 4,043,385 shares of common stock available for
future grants. In January 1999, a total of 1,861,500 options were granted and
6,000 shares were awarded to directors in lieu of director fees.
On September 17, 1998, the Company repriced 5,503,491 of its stock options with
original exercise prices ranging from $18.31 to $26.31 to the market price of
the Company's common stock on that date of $15.59. Outstanding stock options
with an exercise price in excess of $18.13 per share could be exchanged in
return for a reduced number of options, with a deferred vesting date of one year
after the exchange date. The repricing resulted in the cancellation of
5,503,491 options and the granting of 4,559,438 options.
The Company's option plan activity for the years ended December 31, 1998, 1997
and 1996 is summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Weighted
Shares Exercise Price Average
Under Option Per Share Exercise Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1996 9,835,855 $ 4.32 to $ 23.06 $ 12.37
Granted 1,888,500 15.63 to 27.56 19.74
Exercised (454,044) 4.32 to 23.06 8.11
Canceled or lapsed (348,424) 6.56 to 27.56 15.87
- --------------------------------------------------------------------------------------------
Balance, December 31, 1996 10,921,887 4.32 to 26.94 13.71
Granted 2,819,000 18.31 to 23.69 19.79
Exercised (1,247,793) 4.32 to 23.06 8.67
Canceled or lapsed (270,830) 6.56 to 23.06 17.32
- --------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,222,264 5.80 to 26.94 15.54
Granted 6,403,788 15.59 to 26.22 17.04
Exercised (3,067,202) 5.80 to 26.31 11.72
Canceled or lapsed (6,753,198) 6.56 to 26.31 20.03
- --------------------------------------------------------------------------------------------
Balance, December 31, 1998 8,805,652 $ 6.56 to $ 26.94 $ 14.52
- --------------------------------------------------------------------------------------------
</TABLE>
A summary of stock options outstanding and exercisable at December 31, 1998
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
---------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.56 to $ 9.64 2,032,160 4.0 years $ 6.97 2,032,160 $ 6.97
10.54 to 14.44 104,700 2.7 years 11.38 104,700 11.38
15.59 to 19.31 6,036,658 7.8 years 16.29 1,112,551 18.40
20.16 to 22.97 304,800 7.8 years 21.16 81,402 22.20
23.06 to 26.94 327,334 4.9 years 23.50 305,668 23.46
---------------------------------------------------------------------------------------------
$ 6.56 to $ 26.94 8,805,652 6.7 years $ 14.52 3,636,481 $ 12.32
---------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997 and 1996, there were 6,215,776 and 4,786,969 options
exercisable, respectively. The weighted average exercise price of options
exercisable during 1997 and 1996 was $13.32 and $11.05, respectively.
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Humana Inc.
If the Company had adopted the expense recognition provisions of SFAS 123 for
purposes of determining compensation expense related to stock options granted
during the years ended December 31, 1998, 1997 and 1996, net income and earnings
per common share would have been changed to the pro forma amounts shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------
Dollars in millions, except per share results 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 129 $ 173 $ 12
Pro forma 116 159 4
- -----------------------------------------------------------------------------------
Earnings per common share As reported $ .77 $1.06 $.07
Pro forma .69 .97 .02
Earnings per common share - As reported $ .77 $1.05 $.07
assuming dilution Pro forma .69 .96 .02
- -----------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted during 1998, 1997 and 1996 was estimated
on the date of grant using the Black-Scholes pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 40.9% 38.5% 40.2%
Risk-free interest rate 4.9% 6.1% 7.0%
Expected option life (years) 6.8 5.4 5.8
Weighted average fair value at grant date $8.59 $8.88 $8.92
- -----------------------------------------------------------------------------------
</TABLE>
The effects of applying SFAS 123 in the pro forma disclosures are not likely to
be representative of the effects on pro forma net income for future years
because variables such as option grants, exercises and stock price volatility
included in the disclosures may not be indicative of future activity.
9. Commitments and Contingencies
The Company's Medicare contracts with the federal government are renewed for a
one-year term each December 31 unless terminated 90 days prior thereto.
Legislative proposals are being considered which may revise the Medicare
program's current support of the use of managed health care for Medicare
beneficiaries and the future reimbursement rates thereunder. Management is
unable to predict the outcome of these proposals or the impact they may have on
the Company's financial position, results of operations or cash flows. The
Company's Medicaid contracts are generally annual contracts with various states
except for the two-year contract with the Commonwealth of Puerto Rico. The
Puerto Rico contract, previously scheduled to expire March 31, 1999, has been
extended one month to April 30, 1999. The Company does not expect to be able to
renew the contract in Puerto Rico under favorable terms and, therefore, has
announced its intention to close this market when the contract expires.
Additionally, the Company's TRICARE contract is a one-year contract renewable
annually for up to two additional years. The loss of these contracts (other
than the contract in Puerto Rico) or significant changes in these programs as a
result of legislative action, including reductions in payments or increases in
benefits without corresponding increases in payments, would have a material
adverse effect on the revenues, profitability and business prospects of the
Company. In addition, the Company continually contracts and seeks to renew
contracts with providers at rates designed to ensure adequate profitability. To
the extent the Company is unable to obtain such rates, its financial position,
results of operations and cash flows could be adversely impacted. Currently,
the Company is in renegotiations with a major provider and is unable to predict
the impact of these negotiations on future contract rates.
During the ordinary course of business, the Company is subject to pending and
threatened legal actions and audits by the agencies that regulate the Company.
Management of the Company does not believe that any of these actions will have a
material adverse effect on the Company's financial positions, results of
operations or cash flows.
10. Acquisitions
On October 17, 1997, the Company acquired ChoiceCare Corporation ("ChoiceCare")
for approximately $250 million in cash. The purchase was funded with borrowings
under the Company's commercial paper program. ChoiceCare
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Humana Inc.
provided health services products to members in the Greater Cincinnati, Ohio,
area.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily of
$7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA provided comprehensive health services through its
HMOs in Florida, Texas and Puerto Rico. In addition, PCA provided workers'
compensation third-party administrative management services. Prior to November
1996, PCA also was a direct writer of workers' compensation insurance in
Florida. Long-term medical and other expenses payable in the accompanying
consolidated balance sheets includes the long-term portion of workers'
compensation liabilities related to this business.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health Direct")
from Advocate Health Care for $23 million in cash.
The above acquisitions were accounted for under the purchase method of
accounting. In connection with these acquisitions, the Company allocated the
acquisition costs to tangible and identifiable intangible assets based upon
their fair values. Identifiable intangible assets, which are included in other
long-term assets in the accompanying consolidated balance sheets, primarily
relate to subscriber and provider contracts. Any remaining value not assigned
to tangible or identifiable intangible assets was then allocated to cost in
excess of net assets acquired. Cost in excess of net tangible and identifiable
intangible assets acquired, recorded in connection with the acquisitions, was
$754 million in 1997. Subscriber and provider contracts are amortized over their
estimated useful lives (seven to 14 years), while cost in excess of net assets
acquired is amortized over periods not exceeding 40 years.
The results of operations for the previously mentioned acquisitions have been
included in the accompanying consolidated statements of income since the date of
acquisition. The following unaudited pro forma consolidated results of
operations give effect to those acquisitions as if they had occurred at the
beginning of the year preceding the year of acquisition:
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
Dollars in millions, except per share results 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $9,272 $8,581
Net income (loss) 64 (271)
- --------------------------------------------------------------------------------
Earnings (loss) per common share $ .39 $(1.67)
Earnings (loss) per common share - assuming dilution .39 (1.67)
- --------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma information may not necessarily reflect future results
of operations or what the results of operations would have been had the
acquisitions actually been consummated at the beginning of the year preceding
the year of acquisition.
11. Segment Information
The Company markets and distributes its products to three distinct customer
groups and, therefore, reports operations in three business segments. Results
of each segment are measured based on premium revenues and underwriting margin
(premium revenues less medical expenses). The Company does not allocate assets
or administrative costs to the segments and, therefore, does not measure results
based on segment assets or pretax profits. Members from all three segments
generally utilize the same medical provider networks, enabling the Company to
obtain more favorable contract terms with providers. As a result, the
profitability of each segment is somewhat interdependent. The accounting
policies of each segment are similar and are described in Note 2 to the
consolidated financial statements.
Commercial Segment
------------------
Facilitates delivery of health care services to the employees of Commercial
enterprises with which the Company has negotiated actuarially determined
premium rates.
Public Sector Segment
---------------------
Facilitates delivery of health care services to Medicaid- and Medicare-
eligible individuals at premium rates generally established by the various
state governments and the Health Care Financing Administration.
25
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Humana Inc.
TRICARE Segment
---------------
Facilitates delivery of health care services for the dependents of active
military personnel and retired military personnel and their dependents
located in the Southeastern United States, under a managed care support
contract awarded through a competitive bid process conducted by the United
States Department of Defense.
The segment results are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Dollars in millions 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premium revenues:
Commercial $ 5,257 $ 4,387 $4,255
Public Sector 3,540 2,729 2,071
TRICARE 800 764 351
- -------------------------------------------------------------------------------------
Total for reportable segments 9,597 7,880 6,677
Non-allocated revenues - interest and other income 184 156 111
- -------------------------------------------------------------------------------------
Total consolidated revenues $ 9,781 $ 8,036 $6,788
- -------------------------------------------------------------------------------------
Underwriting margin:
Commercial $ 900 $ 732 $ 585
Public Sector 497 482 409
TRICARE 159 144 58
- -------------------------------------------------------------------------------------
Total for reportable segments 1,556 1,358 1,052
Other, non-allocated revenue and expense:
Interest and other income 184 156 111
Selling, general and administrative expenses (1,328) (1,116) (940)
Depreciation and amortization (128) (108) (98)
Asset write-downs and other charges (34) - (96)
Interest expense (47) (20) (11)
- -------------------------------------------------------------------------------------
Total consolidated income before income tax $ 203 $ 270 $ 18
- -------------------------------------------------------------------------------------
</TABLE>
The Company's product offerings include managed health care products and
specialty products. Managed health care products facilitate the delivery of
health care services through networks of providers and consist primarily of HMO,
PPO and Medicare HMO products. Managed health care product premiums were
approximately $9,358 million, $7,650 million and $6,483 million for the years
ended December 31, 1998, 1997 and 1996, respectively. The Company markets
various specialty products to its Commercial segment including dental, group
life, workers' compensation and ASO. Specialty product premiums were
approximately $239 million, $230 million, and $194 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Premium revenues derived from contracts with the federal government in 1998,
1997 and 1996 represent approximately 41 percent, 43 percent and 38 percent,
respectively, of total premium revenues.
26
<PAGE>
Report of Independent Accountants
To the Board of Directors
Humana Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the consolidated financial position of Humana
Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 9, 1999
27
<PAGE>
Quarterly Financial Information (Unaudited)
- --------------------------------------------------------------------------------
Humana Inc.
A summary of the Company's quarterly results of operations follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Dollars in millions, except per share results 1998
- --------------------------------------------------------------------------------------
First Second Third (a) (b) Fourth
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $2,402 $2,446 $2,464 $2,469
Income (loss) before income taxes 79 82 (47) 89
Net income (loss) 50 52 (30) 57
Earnings (loss) per common share .30 .31 (.18) .34
Earnings (loss) per common share -
assuming dilution .30 .31 (.18) .34
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Dollars in millions, except per share results 1997 (c)
- ---------------------------------------------------------------------------------------
First Second Third Fourth
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,832 $1,836 $1,968 $2,400
Income before income taxes 60 65 69 76
Net income 39 42 44 48
Earnings per common share .24 .26 .27 .29
Earnings per common share -
assuming dilution .24 .25 .27 .29
</TABLE>
(a) Includes charges associated with certain market closures, merger dissolution
and losses on disposals of non-strategic assets of $34 million pretax ($22
million after tax or $.13 per diluted share).
(b) Includes premium deficiencies of $46 million pretax ($29 million after tax
or $.17 per diluted share), a one-time incentive for non-officer employees
of $16 million pretax ($10 million after tax or $.06 per diluted share) and
other costs of $36 million pretax ($23 million after tax or $.14 per diluted
share).
(c) Includes the operations of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
28
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
K. Frank Austen, M.D. Michael E. Gellert John R. Hall
Theodore B. Bayles Professor of Medicine, General Partner, Windcrest Partners, Retired Chairman of the Board
Harvard Medical School and the private investment partnership and Chief Executive Officer,
Brigham and Women's Hospital Ashland Inc.
David A. Jones David A. Jones, Jr. Irwin Lerner
Chairman of the Board, Humana Inc. Vice Chairman, Humana Inc. Retired Chairman of the Board
Chairman and Managing Director, and Executive Committee,
Chrysalis Ventures, L.L.C. Hoffmann-La Roche Inc.
venture capital firm
W. Ann Reynolds, Ph.D. Gregory H. Wolf
President, University of Alabama at President and Chief Executive
Birmingham Officer, Humana Inc.
<CAPTION>
Board Committees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Executive Committee Audit Committee Investment Committee
David A. Jones, Chairman Michael E. Gellert, Chairman W. Ann Reynolds, Ph.D., Chairwoman
Michael E. Gellert K. Frank Austen, M.D. K. Frank Austen, M.D.
David A. Jones, Jr. John R. Hall Michael E. Gellert
Gregory H. Wolf David A. Jones, Jr. David A. Jones, Jr.
Irwin Lerner
Medical Affairs Committee Nominating and Corporate Organization and Compensation
K. Frank Austen, M.D., Chairman Governance Committee Committee
Irwin Lerner John R. Hall, Chairman Irwin Lerner, Chairman
W. Ann Reynolds, Ph.D. David A. Jones, Jr. K. Frank Austen, M.D.
W. Ann Reynolds, Ph.D. Michael E. Gellert
John R. Hall
<CAPTION>
Officers and Vice Presidents
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gregory H. Wolf
President and Chief Executive
Officer
Barry W. Averill George G. Bauernfeind R. Joseph Berding
Regional Vice President Vice President - Tax Regional Vice President
Jeffrey B. Bringardner Douglas R. Carlisle Gerald R. Cowan
Vice President - National Regional Vice President Vice President - Commercial
and Major Accounts Large Group Segment
James W. Doucette Kenneth J. Fasola Gerald L. Ganoni
Vice President - Investment Senior Vice President - Sales, Vice President - Dental
Management and Treasurer Marketing and Business Development
Lois E. Gargotto David K. George David M. Krebs
Vice President - Systems Vice President - Medicare Vice President - Finance and
Development Sales Controller
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Officers and Vice Presidents (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mitzi R. Krockover, M.D. Joan O. Lenahan Thomas J. Liston
Vice President - Women's Health Corporate Secretary Vice President - Corporate
Development
Heidi S. Margulis Carol J. McCall Michael B. McCallister
Vice President - Government Affairs Vice President - Pharmacy Senior Vice President - Health
Operations System Management
Sheri E. Mitchell James E. Murray Walter E. Neely
Vice President - Accreditation and Senior Vice President and Vice President and Associate General
Compliance Chief Financial Officer Counsel
David R. Nelson Thomas T. Noland, Jr. Theresa R. Ostert
Vice President and Chief Actuary Vice President - Corporate Vice President - Underwriting
Communications
Mark W. Owen John R. Pegues Kathleen Pellegrino
Vice President - Public Sector Programs Vice President - Strategy and Vice President and Associate
Corporate Development General Counsel
Bruce D. Perkins Jerry D. Reeves, M.D. Thomas C. Rekart
Senior Vice President - National Senior Vice President and Chief Vice President - Operations
Contracting Medical Officer Services
Gregory K. Rotherham Kirk E. Rothrock Michael A. Seltzer
Vice President - Customer Service Senior Vice President - Specialty Regional Vice President
Operations Products and Services and
International Businesses
L. Bryan Shaul R. Eugene Shields John T. Terry
Vice President - Mergers and President - Humana Military Vice President - Telemarketing Sales
Acquisitions Healthcare Services
Diana L. Tortelli Richard P. Vance, M.D. George W. Vieth, Jr.
Vice President - Commercial Sales Vice President and Medical Director, Senior Vice President - Market
Population Health Improvement Segment Management
Melissa L. Weaver, M.D. David W. Wille Tod J. Zacharias
Vice President - Health Resource Vice President - Actuarial Services Vice President - Commercial
Effectiveness and Corporate Small Group Segment
Medical Director
Thomas G. Zielinski
Vice President - Wisconsin Service
Center Operations
</TABLE>
<PAGE>
Additional Information
- --------------------------------------------------------------------------------
Transfer Agent
National City Bank
Stock Transfer Department
Post Office Box 92301
Cleveland, Ohio 44193-0900
(800) 622-6757
Form 10-K
Copies of the Company's Form 10-K filed with the Securities and Exchange
Commission may be obtained, without charge, by writing:
Investor Relations
Humana Inc.
Post Office Box 1438
Louisville, Kentucky 40201-1438
Copies of the Company's Form 10-K and other Company information can also be
obtained through the Internet at the following address:
http://www.humana.com
Stock Listing
The Company's common stock trades on the New York Stock Exchange under the
symbol HUM. The following table shows the range of high and low closing sales
prices as reported on the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First Quarter 26-3/8 19-1/2
Second Quarter 31-11/16 24-15/16
Third Quarter 31-7/8 12-7/8
Fourth Quarter 21-9/16 14-3/8
1997 High Low
First Quarter 23 17-3/4
Second Quarter 24-1/4 20-1/8
Third Quarter 24-15/16 22-13/16
Fourth Quarter 24-5/8 18-7/8
</TABLE>
Corporate Headquarters
Humana Inc.
The Humana Building
500 West Main Street
Louisville, Kentucky 40202
(502) 580-1000
(800) 486-2620
Annual Meeting
The Company's Annual Meeting of Stockholders will be held
on Thursday, May 6, 1999, at 10:00 a.m. in the Auditorium
on the 25th floor of the Humana Building.
<PAGE>
HUMANA INC. EXHIBIT 21
SUBSIDIARY LIST
ALABAMA
- -------
1. Humana Health Plan of Alabama, Inc.
2. QuestCare, Inc.
CALIFORNIA
- ----------
1. Centerstone Insurance and Financial Services (Marketpoint is a Division of
CFS) - Doing Business As:
a. Centerstone Insurance Agency and Financial Services, Inc.
b. West Coast Multiple Servs, Inc.
DELAWARE
- --------
1. Centerstone Holding Corporation
2. EMPHESYS Financial Group, Inc.
3. Health Value Management, Inc.
4. Humana Compensation Management Source, Inc.
5. Humana HealthChicago, Inc
6. Humana Inc. - Doing Business As:
a. H.A.C. Inc.
b. Humana of Delaware, Inc.
7. Humana Military Healthcare Services, Inc. - Doing Business As:
a. Humana Military Health Services, Inc.
8. Humrealty, Inc.
9. Medstep, Inc.
10. Physician Corporation of America
FLORIDA
- -------
1. Delray Beach Health Management Associates, Inc. - Doing Business As:
a. Humana Health Care Plans-Delray
2. Family Health Plan Administrators, Inc.
3. Health Inclusive Plan of Florida, Inc. - Doing Business As:
a. Humana Health Care Plans-Century Village Palm Beach
4. Humana Health Care Plans - Davie, Inc. f/k/a Coastal Physician Group of
South Davie, Inc.
5. Humana Health Care Plans - Palm Springs, Inc. f/k/a Coastal Managed Care of
Lake Worth, Inc.
6. Humana Health Care Plans - Rolling Hills, Inc. f/k/a Coastal Physician Group
of North Davie, Inc.
7. Humana Health Care Plans - South Pembroke Pines, Inc. f/k/a Coastal
Physician Group of Pembroke Pines, Inc.
8. Humana Health Care Plans - West Palm Beach, Inc. f/k/a Coastal Managed Care
of West Palm Beach, Inc.
9. Humana Internal Medicine Associates, Inc. f/k/a Coastal Internal Medicine
Associates of Dade, Inc. - Doing Business As:
a. Humana Health Care Plans-Hialeah f/k/a Coastal Internal Medicine
Associates of Hialeah
b. Humana Health Care Plans-South Miami f/k/a Coastal Internal Medicine
Associates of Larkin
c. Humana Health Care Plans-Miami f/k/a Coastal Internal Medicine
Associates of Miami
d. Humana Health Care Plans-Miami Beach f/k/a Coastal Internal Medicine
Associates of Miami Beach
e. Humana Health Care Plans-Royal Oaks f/k/a Coastal Internal Medicine
Associates of Miami Lakes
f. Humana Health Care Plans-Miami Springs f/k/a Coastal Internal Medicine
Associates of Miami Springs
g. Humana Health Care Plans-Midway f/k/a Coastal Internal Medicine
Associates of Midway
h. Humana Health Care Plans-Boca Raton
i. Humana Health Care Plans-Delray Harbor
j. Humana Health Care Plans-Lantana
k. Humana Health Care Plans-Palm Beach Gardens
l. Humana Health Care Plans-Tamarac
m. Humana Health Care Plans-West Boca
(FL-Cont. Next Page)
<PAGE>
FLORIDA Cont.
- -------------
10. Humana Internal Medicine Associates of the Palm Beaches, Inc. f/k/a Coastal
Internal Medicine Associates of the Palm Beaches, Inc.
Doing Business As:
a. Humana Health Care Plans-Lake Worth f/k/a Coastal Internal Medicine
Associates of JFK Circle
b. Humana Health Care Plans-Flagler f/k/a Coastal Internal Medicine
Associates of North Dixie Highway
c. Humana Health Care Plans-Riverbridge f/k/a Coastal Internal Medicine
Associates at Riverbridge
d. Humana Health Care Plans-Palm Beach f/k/a Coastal Internal Medicine
Associates of South Dixie Highway
e. Humana Health Care Plans-Boynton Beach
11. Humana Health Insurance Company of Florida, Inc.
12. Humana Medical Plan, Inc. - Doing Business As:
a. Coastal Pediatrics-Daytona
b. Coastal Pediatrics-Port Orange
c. Coastal Pediatric-Ormond
d. Daytona Gastroenterology
e. Flagler Family Practice
f. Florida Dermatology Center
g. Humana Medical Plan-West Palm Beach
h. Internal Medicine of Daytona
i. Orange Park Family Health Care
j. St. Augustine Family Health Center
k. Suncoast Medical Associates
13. Humana Workers' Compensation Services, Inc. - Doing Business As:
a. Humana Workers' Compensation Insurance Services
14. Lakeside Medical Center Management, Inc. - Doing Business As:
a. University Medical Center
15. PCA Options, Inc.
16. PCA Property & Casualty Insurance Co.
GEORGIA
- -------
1. Humana Employers Health Plan of Georgia, Inc. f/k/a Emphesys Healthcare of
Georgia, Inc.
ILLINOIS
- --------
1. Humana Health Direct, Inc. - Doing Business As:
a. Behavioral Health Direct (IL)
2. Humana HealthChicago Insurance Company - Doing Business As:
a. Goldcare 65
3. The Dental Concern, Ltd. - Doing Business As:
a. TDC (MO)
KENTUCKY
- --------
1. HMPK, INC.
2. HPLAN, INC.
3. Humana Health Plan, Inc. - Doing Business As:
a. Central Kentucky Family Practice
b. Franklin Medical Center
c. Humana Health Care Plans of Indiana
d. Madison Family and Industrial Medicine (KY)
e. Humana Health Care Plans-Somerset (KY)
4. Humco, Inc. (shell corporation-keep active until 12/31/99 per Escrow Agmt.)
5. The Dental Concern, Inc. (f/k/a Randmark, Inc.) - Doing Business As:
a. The Dental Concern/KY, Inc. (IN)
b. The Dental Concern/KY, Inc. (MO)
6. The Dental Concern Insurance Company
<PAGE>
LOUISIANA
- ---------
1. Humana Workers' Compensation Services of Louisiana, Inc.
MISSOURI
- --------
1. Humana Kansas City, Inc. - Doing Business As:
a. Humana Prime Health Plan
2. Humana Insurance Company - Doing Business As:
a. Dental Care Affiliates (GA)
NEVADA
- ------
1. Humana Health Insurance of Nevada, Inc.
OHIO
- ----
1. Humana Health Plan of Ohio, Inc. f/k/a ChoiceCare Health Plans, Inc. - Doing
Business As:
a. ChoiceCare/Humana (IL, IN, KY, OH)
OKLAHOMA
- --------
1. Commonwealth Management, Inc.
PUERTO RICO
- -----------
1. Humana Health Plans of Puerto Rico, Inc.
2. Humana Insurance of Puerto Rico, Inc.
TEXAS
- -----
1. Humana HMO Texas, Inc.
2. Humana Health Plan of Texas, Inc. - Doing Business As:
a. Humana Health Plan of San Antonio
b. Humana Regional Service Center
c. Leon Valley Health Center
d. Lincoln Heights Medical Center
e. MedCentre Plaza Health Center
f. Perrin Oaks Health Center
g. Val Verde Health Center
h. West Lakes Health Center
i. Wurzbach Family Medical Center
3. Humana Workers' Compensation Services of Texas, Inc. f/k/a Lomas General
Insurance Services, Inc.
4. PCA Health Plans of Texas, Inc.
5. PCA Life Insurance Company of Texas, Inc.
6. PCA Provider Organization, Inc.
VERMONT
- -------
1. Managed Care Indemnity, Inc. - Doing Business As:
a. Witherspoon Parking Garage (KY)
VIRGINIA
- --------
1. Humana Group Health Plan, Inc. (Note: Assets sold to Kaiser Permanente
1/31/97)
<PAGE>
WISCONSIN
- ---------
1. CareNetwork, Inc. - Doing Business As:
a. CARENETWORK
2. EMPHESYS Wisconsin Insurance Company
3. Employers Health Insurance Company
4. Humana Wisconsin Health Organization Insurance Corporation - Doing Business
As:
a. WHOIC
b. WHO
5. Independent Care, Inc.
6. Network EPO, Inc.
7. Wisconsin Employers Group, Inc.
FOREIGN
- -------
BERMUDA
- -------
1. Hallmark RE Ltd.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Humana Inc. on Form S-8 (Registration No. 2-39061, No. 2-79239, No. 2-96154, No.
33-33072, No. 33-49305, No. 33-52593, No. 33-54455, No. 33-04435 and No. 333-
57095) of our report dated February 9, 1999, on our audits of the consolidated
financial statements of Humana Inc. as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, which report is
incorporated by reference in this Annual Report on Form 10-K. We further
consent to the incorporation by reference of our report on our audits of the
financial statement schedules of Humana Inc. as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998, which
report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HUMANA
INC.'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED
IN ITS REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 913
<SECURITIES> 1,594
<RECEIVABLES> 338
<ALLOWANCES> 62
<INVENTORY> 5
<CURRENT-ASSETS> 3,119
<PP&E> 788
<DEPRECIATION> 355
<TOTAL-ASSETS> 5,496
<CURRENT-LIABILITIES> 2,643
<BONDS> 573
0
0
<COMMON> 28
<OTHER-SE> 1,660
<TOTAL-LIABILITY-AND-EQUITY> 5,496
<SALES> 9,497
<TOTAL-REVENUES> 9,781
<CGS> 8,041
<TOTAL-COSTS> 9,531
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> 203
<INCOME-TAX> 74
<INCOME-CONTINUING> 129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
