Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the fiscal year ended December 31, 2007
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)

Delaware	 	61-0647538	
(State of incorporation)	 	(I.R.S. Employer Identification Number)	
 	 	
500 West Main Street	 	 	
Louisville, Kentucky	 	40202	
(Address of principal executive offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (502) 580-1000
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	 	Name of exchange on which registered	
Common stock, $0.16 2/3 par value	 	New York Stock Exchange	
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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   þ     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No þ
The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2007 was $10,250,115,899 calculated using the average price on such date of $61.41.
The number of shares outstanding of the Registrant’s Common Stock as of January 31, 2008 was 170,173,405.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and III incorporate herein by reference portions of the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A covering the Annual Meeting of Stockholders scheduled to be held April 24, 2008.

 

Table of Contents
HUMANA INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2007

  	  	  	  	Page	
 	  	Part I	  	 	
Item 1.	  	Business	  	3	
Item 1A.	  	Risk Factors	  	16	
Item 1B.	  	Unresolved Staff Comments	  	26	
Item 2.	  	Properties	  	27	
Item 3.	  	Legal Proceedings	  	27	
Item 4.	  	Submission of Matters to a Vote of Security Holders	  	27	
 	 	 	
 	  	Part II	  	 	
Item 5.	  	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	  	28	
Item 6.	  	Selected Financial Data	  	30	
Item 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	31	
Item 7A.	  	Quantitative and Qualitative Disclosures about Market Risk	  	61	
Item 8.	  	Financial Statements and Supplementary Data	  	62	
Item 9.	  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	97	
Item 9A.	  	Controls and Procedures	  	97	
Item 9B.	  	Other Information	  	98	
 	 	 	
 	  	Part III	  	 	
Item 10.	  	Directors, Executive Officers and Corporate Governance	  	99	
Item 11.	  	Executive Compensation	  	101	
Item 12.	  	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	  	101	
Item 13.	  	Certain Relationships and Related Transactions, and Director Independence	  	102	
Item 14.	  	Principal Accounting Fees and Services	  	102	
 	 	 	
 	  	Part IV	  	 	
Item 15.	  	Exhibits, Financial Statement Schedules	  	103	
 	  	Signatures and Certifications	  	113	

Table of Contents
PART I
 
ITEM 1.	BUSINESS	
General
Headquartered in Louisville, Kentucky, Humana Inc., referred to throughout this document as “we,” “us,” “our,” the “Company” or “Humana,” is one of the nation’s largest publicly traded health and supplemental benefits companies, based on our 2007 revenues of $25.3 billion. We are a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government benefit programs, and individuals. As of December 31, 2007, we had approximately 11.5 million members in our medical benefit plans, as well as approximately 6.8 million members in our specialty products. During 2007, 71% of our premiums and administrative services fees were derived from contracts with the federal government, including 17% related to our contracts in Florida with the Centers for Medicare and Medicaid Services, or CMS, and 12% related to our military services contracts. Under our CMS contracts in Florida, we provide health insurance coverage to approximately 507,700 members as of December 31, 2007.
We were organized as a Delaware corporation in 1964. Our principal executive offices are located at 500 West Main Street, Louisville, Kentucky 40202, the telephone number at that address is (502) 580-1000, and our website address is www.humana.com.
This Annual Report on Form 10-K contains both historical and forward-looking information. See Item 1A.—Risk Factors for a description of a number of factors that could adversely affect our results or business.
Business Segments
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards (SFAS) No. 131,  Disclosures About Segments of an Enterprise and Related Information , or SFAS 131 , which aggregates products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
 
3

Table of Contents
Our Products
As more fully described in the products discussion that follows, we provide health insurance benefits under health maintenance organization, or HMO, Private Fee-For-Service, or PFFS, and preferred provider organization, or PPO, plans. In addition, we provide other benefits with our specialty products including dental, vision, and other supplementary benefits. The following table presents our segment membership at December 31, 2007, and premiums and administrative services only, or ASO, fees by product for the year ended December 31, 2007:

 	 	Medical
Membership	 	Specialty
Membership	 	Premiums	 	ASO Fees	 	Total
Premiums and
ASO Fees	 	Percent of
Total
Premiums
and ASO
Fees	 	
 	 	(dollars in thousands)	 	
Government:	 	 	 	
Medicare Advantage:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
HMO	 	453,100	 	—  	 	$	5,378,804	 	$	—  	 	$	5,378,804	 	21.7	%	
PFFS	 	615,800	 	—  	 	 	5,146,955	 	 	—  	 	 	5,146,955	 	20.7	%	
PPO	 	74,100	 	—  	 	 	647,658	 	 	—  	 	 	647,658	 	2.6	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare Advantage	 	1,143,000	 	—  	 	 	11,173,417	 	 	—  	 	 	11,173,417	 	45.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare stand-alone PDP	 	3,442,000	 	—  	 	 	3,668,425	 	 	—  	 	 	3,668,425	 	14.8	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare	 	4,585,000	 	—  	 	 	14,841,842	 	 	—  	 	 	14,841,842	 	59.8	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicaid insured	 	384,400	 	—  	 	 	555,594	 	 	—  	 	 	555,594	 	2.3	%	
Medicaid ASO	 	180,600	 	—  	 	 	—  	 	 	8,556	 	 	8,556	 	—  	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicaid	 	565,000	 	—  	 	 	555,594	 	 	8,556	 	 	564,150	 	2.3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Military services insured	 	1,719,100	 	—  	 	 	2,839,790	 	 	—  	 	 	2,839,790	 	11.4	%	
Military services ASO	 	1,146,800	 	—  	 	 	—  	 	 	65,103	 	 	65,103	 	0.3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total military services	 	2,865,900	 	—  	 	 	2,839,790	 	 	65,103	 	 	2,904,893	 	11.7	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Government	 	8,015,900	 	—  	 	 	18,237,226	 	 	73,659	 	 	18,310,885	 	73.8	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fully-insured:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
PPO	 	1,215,800	 	—  	 	 	3,664,019	 	 	—  	 	 	3,664,019	 	14.7	%	
HMO	 	592,800	 	—  	 	 	1,998,981	 	 	—  	 	 	1,998,981	 	8.1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fully-insured	 	1,808,600	 	—  	 	 	5,663,000	 	 	—  	 	 	5,663,000	 	22.8	%	
ASO	 	1,643,000	 	—  	 	 	—  	 	 	307,823	 	 	307,823	 	1.2	%	
Specialty	 	—  	 	6,783,800	 	 	534,121	 	 	10,033	 	 	544,154	 	2.2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Commercial	 	3,451,600	 	6,783,800	 	 	6,197,121	 	 	317,856	 	 	6,514,977	 	26.2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	11,467,500	 	6,783,800	 	$	24,434,347	 	$	391,515	 	$	24,825,862	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Our Products Marketed to Government Segment Members and Beneficiaries
Medicare
We have participated in the Medicare program for private health plans for over 20 years. Since recent significant changes were made to the Medicare program for health plans like those offered by us, we have expanded from a regional to a national presence, now offering at least one type of Medicare plan in all 50 states. The resulting growing membership base provides us with greater leverage to expand our network of PPO and HMO providers. We employ strategies including health assessments and programs such as Personal Nurse ® , a case management and disease management program, and a fitness program for seniors to guide Medicare beneficiaries in making cost-effective decisions with respect to their health care, including cost savings that occur from making positive behavior changes that result in living healthier.
 
4

Table of Contents
Medicare is a federal program that provides persons age 65 and over and some disabled persons under the age of 65 certain hospital and medical insurance benefits. Hospitalization benefits are provided under Part A, without the payment of any premium, for up to 90 days per incident of illness plus a lifetime reserve aggregating 60 days. Eligible beneficiaries are required to pay an annually adjusted premium to the federal government to be eligible for physician care and other services under Part B. Beneficiaries eligible for Part A and Part B coverage under traditional Medicare are still required to pay out-of-pocket deductibles and coinsurance. Prescription drug benefits are provided under Part D. CMS, an agency of the United States Department of Health and Human Services, administers the Medicare program.
Medicare Advantage Products
We contract with CMS under the Medicare Advantage program to provide a comprehensive array of health insurance benefits including wellness programs to Medicare eligible persons under HMO, PPO, and PFFS plans in exchange for contractual payments received from CMS, usually a fixed payment per member per month. We refer to beneficiaries enrolled in these plans collectively as Medicare Advantage, or MA-PD, members. With each of these products, the beneficiary receives benefits in excess of traditional Medicare, typically including reduced cost sharing, enhanced prescription drug benefits, care coordination, data mining techniques to help identify member needs, complex case management, tools to guide members in their health care decisions, disease management programs, wellness and prevention programs, and a reduced monthly Part B premium. Since 2006, Medicare beneficiaries have had more health plan options, including a prescription drug benefit option and greater access to a PPO offering with the roll-out of Regional PPO plans. Prior to 2006, PPO plans were offered on a local basis only. Most Medicare Advantage plans must offer the prescription drug benefit under Part D as part of the basic plan, subject to cost sharing and other limitations. Accordingly, all of the provisions of the Medicare Part D program described in connection with our stand-alone prescription drug plans in the following section also are applicable to our Medicare Advantage plans. Medicare Advantage plans may charge beneficiaries monthly premiums and other copayments for Medicare-covered services or for certain extra benefits.
Our Medicare HMO and PPO plans, which cover Medicare-eligible individuals residing in certain counties, may eliminate or reduce coinsurance or the level of deductibles on many other medical services while seeking care from participating in-network providers or in emergency situations. Except in emergency situations, HMO plans provide no out-of-network benefits. PPO plans carry an out-of network benefit that is subject to higher member cost-sharing. In many cases, these beneficiaries also may be required to pay a monthly premium to the HMO or PPO plan in addition to the monthly Part B premium they are required to pay the Medicare program.
Our Medicare PFFS plans have no preferred network. Individuals in these plans pay us a monthly premium to receive typical Medicare Advantage benefits along with the freedom to choose any health care provider that accepts individuals at reimbursement rates equivalent to traditional Medicare payment rates.
CMS uses monthly rates per person for each county to determine the fixed monthly payments per member to pay to health benefit plans. These rates are adjusted under CMS’s risk adjustment model which uses health status indicators, or risk scores, to improve the accuracy of payment. The risk adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits and Improvement Protection Act of 2000 (BIPA), uses principal hospital inpatient diagnoses as well as diagnosis data from ambulatory treatment settings (hospital outpatient department and physician visits). CMS transitioned to this risk-based reimbursement model while the old reimbursement model based on demographic data including gender, age, and disability status was phased out. In 2006, the portion of risk adjusted payment was increased to 75% from 50% in 2005. The phase-in of risk adjusted payment increased to 100% in 2007. Under the risk adjustment methodology, all health benefit organizations must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines.
Commensurate with phase-in of the risk-adjustment methodology, payments to Medicare Advantage plans were increased by a “budget neutrality” factor. The budget neutrality factor was implemented to prevent overall
 
5

Table of Contents
health plan payments from being reduced during the transition from the previous reimbursement model, based upon average original Medicare fee-for-service spending, to the risk-adjustment payment model. The payment adjustments for budget neutrality were first developed in 2002 and first used with the 2003 payments.
The budget neutrality adjustment began phasing out in 2007 and will be fully eliminated by 2011. This does not mean, however, that the aggregate per-member payments to Medicare plans will be reduced. As plans enroll less healthy beneficiaries, the need for the budget neutrality adjustment declines as the underlying risk adjusted Medicare rates paid to plans increase to account for their enrollees’ greater healthcare needs. As a result of changes in the CMS payment processes, including the phasing in of the risk adjustment methodology and the phasing out of the budget neutrality adjustment described previously, our CMS payments per member may change materially, either favorably or unfavorably.
At December 31, 2007, we provided health insurance coverage under CMS contracts to approximately 1,143,000 MA-PD members for which we received premium revenues of approximately $11.2 billion, or 45.0% of our total premiums and ASO fees for the year ended December 31, 2007. Under our Medicare Advantage contracts with CMS in Florida, we provided health insurance coverage to approximately 325,000 members. These contracts accounted for premium revenues of approximately $4.2 billion, which represented approximately 37.5% of our Medicare Advantage premium revenues, or 16.8% of our total premiums and ASO fees for the year ended December 31, 2007.
Our HMO, PFFS, and PPO products covered under Medicare Advantage contracts with CMS are renewed generally for a one-year term each December 31 unless CMS notifies Humana of its decision not to renew by August 1 of the year in which the contract would end, or Humana notifies CMS of its decision not to renew by the first Monday in June of the year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare Advantage business have been renewed for 2008.
Medicare Stand-Alone Prescription Drug Products
On January 1, 2006, we began offering stand-alone prescription drug plans, or PDPs, under Medicare Part D. Generally, Medicare-eligible individuals enroll in one of our three plan choices between November 15 and December 31 for coverage that begins January 1. The enrollment period was extended to May 31 during 2006 because it was the first year of the program. Our stand-alone PDP offerings consist of plans offering basic coverage with benefits mandated by Congress, as well as plans providing enhanced coverage with varying degrees of out-of-pocket costs for premiums, deductibles and co-insurance. Our revenues from CMS and the beneficiary are determined from our bids submitted annually to CMS. These revenues also reflect the health status of the beneficiary and risk sharing provisions as more fully described beginning on page 56. Our stand-alone PDP contracts with CMS are renewed generally for a one-year term each December 31 unless CMS notifies Humana of its decision not to renew by August 1 of the year in which the contract would end, or Humana notifies CMS of its decision not to renew by the first Monday in June of the year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare stand-alone PDP business have been renewed for 2008.
Medicaid Product
Medicaid is a federal program that is state-operated to facilitate the delivery of health care services primarily to low-income residents. Each electing state develops, through a state specific regulatory agency, a Medicaid managed care initiative that must be approved by CMS. CMS 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 either use a formal proposal process in which they review many bidders before selecting one or award individual contracts to qualified bidders who apply for entry to the program. In either case, the contractual relationship with a state generally is for a one-year period. Under these contracts, we receive a fixed monthly payment from a government agency for which we are required to provide health
 
6

Table of Contents
insurance coverage 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.
Our Medicaid business, which accounted for approximately 2.3% of our total premiums and ASO fees for the year ended December 31, 2007, consisted of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico.
Military Services
Under our TRICARE South Region contract with the Department of Defense, we provide health insurance coverage to the dependents of active duty military personnel and to retired military personnel and their dependents. Currently, three health benefit options are available to TRICARE beneficiaries. In addition to a traditional indemnity option, participants may enroll in a HMO-like plan with a point-of-service option or take advantage of reduced copayments by using a network of preferred providers, similar to a PPO.
We have participated in the TRICARE program since 1996 under contracts with the United States Department of Defense. Our current TRICARE South Region contract, which we were awarded in 2003, covers approximately 2.9 million eligible beneficiaries as of December 31, 2007 in Florida, Georgia, South Carolina, Mississippi, Alabama, Tennessee, Louisiana, Arkansas, Texas and Oklahoma. The South Region is one of the three regions in the United States as defined by the Department of Defense. Of these eligible beneficiaries, 1.1 million were TRICARE ASO members representing active duty beneficiaries, seniors over the age of 65 and beneficiaries in Puerto Rico for which the Department of Defense retains all of the risk of financing the cost of their health benefit. We have subcontracted with third parties to provide selected administration and specialty services under the contract. The TRICARE South Region contract is for a five-year period subject to annual renewals at the federal government’s option, with the fifth option period scheduled to begin April 1, 2008 and run through March 31, 2009. The Department of Defense has the option to extend the current contract for up to six months under existing terms. Congressional authority has also been granted to extend the contract in one year increments for a maximum of two additional years. In the second quarter of 2007, a draft solicitation related to the new TRICARE contracts, currently scheduled to begin April 1, 2009, was issued for industry comment. Currently, we are anticipating a formal request for proposal, or RFP, for the TRICARE contracts.
The TRICARE South Region contract contains provisions that require us to negotiate a target health care cost amount annually with the federal government. Any variance from the target health care cost is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated target health care cost amount could have a material adverse effect on our business. These changes may include, for example, an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease U.S. military deployments.
For the year ended December 31, 2007, TRICARE premium revenues were approximately $2.8 billion, or 11.4% of our total premiums and ASO fees, and TRICARE ASO fees totaled $65.1 million, or 0.3% of our total premiums and ASO fees.
In October 2007, we were awarded the Department of Veterans Affairs first specialty network demonstration project, known as Project HERO (Healthcare Effectiveness through Resource Optimization), to support healthcare delivery to veterans. The contract is comprised of one base period and four one-year option periods subject to annual renewals at the federal government’s option, with services beginning January 1, 2008.
International and Green Ribbon Health Operations
We established our subsidiary Humana Europe in the United Kingdom to provide commissioning support to Primary Care Trusts, or PCTs, in England. Under the contracts we are awarded, we will work in partnership with local PCTs, health care providers, and patients to strengthen health-service delivery and to implement strategies at a local level to help the National Health Service enhance patient experience, improve clinical outcomes, and reduce costs. We are in the start-up phase in anticipation of rendering services under contracts.
 
7

Table of Contents
We participate in a Medicare Health Support pilot program through Green Ribbon Health, or GRH, a joint-venture company with Pfizer Health Solutions Inc. GRH is designed to support Medicare beneficiaries living with diabetes and/or congestive heart failure in Central Florida. GRH uses disease management initiatives including evidence-based clinical guidelines, personal self-directed change strategies, and personal nurses to help participants navigate the health system. Revenues under the contract with CMS, which expires October 31, 2008 unless terminated earlier, are subject to refund unless a savings target is met. To date, all revenues have been deferred until reliable estimates are determinable.
Our Products Marketed to Commercial Segment Employers and Members
Smart Plans and Other Consumer Products
Over the last several years, we have developed and offered various commercial products designed to provide options and choices to employers that are annually facing substantial premium increases driven by double-digit medical cost inflation. These Smart plans, discussed more fully below, and other consumer offerings, which can be offered on either a fully-insured or ASO basis, provided coverage to approximately 564,700 members at December 31, 2007, representing approximately 16.4% of our total commercial medical membership as detailed below.

 	  	Smart Plans and
Other Consumer
Membership	  	Other Commercial
Membership	  	Commercial
Medical
Membership	
Fully-insured	  	327,900	  	1,480,700	  	1,808,600	
ASO	  	236,800	  	1,406,200	  	1,643,000	
 	  	 	  	 	  	 	
Total Commercial medical	  	564,700	  	2,886,900	  	3,451,600	
 	  	 	  	 	  	 	
These products are often offered to employer groups as “bundles”, where the subscribers are offered various HMO and PPO options, with various employer contribution strategies as determined by the employer.
Paramount to our product strategy, we have developed a group of innovative consumer products, styled as “Smart” products, that we believe will be a long-term solution for employers. We believe this new generation of products provides more (1) choices for the individual consumer, (2) transparency of provider costs, and (3) benefit designs that engage consumers in the costs and effectiveness of health care choices. Innovative tools and technology are available to assist consumers with these decisions, including the trade-offs between higher premiums and point-of-service costs at the time consumers choose their plans, and to suggest ways in which the consumers can maximize their individual benefits at the point they use their plans. We believe that when consumers can make informed choices about the cost and effectiveness of their health care, a sustainable long term solution for employers can be realized. Smart products, which accounted for approximately 55% of enrollment in all of our consumer-choice plans as of December 31, 2007, are only sold to employers who use Humana as their sole health insurance carrier.
Some employers have selected other types of consumer-choice products, such as, (1) a product with a high deductible, (2) a catastrophic coverage plan, or (3) ones that offer a spending account option in conjunction with more traditional medical coverage or as a stand alone plan. Unlike our Smart products, these products, while valuable in helping employers deal with near-term cost increases by shifting costs to employees, are not considered by us to be long-term comprehensive solutions to the employers’ cost dilemma, although we view them as an important interim step.
HMO
Our commercial HMO products provide prepaid health insurance coverage to our members through a network of independent primary care physicians, specialty physicians, and other health care providers who
 
8

Table of Contents
contract with the HMO to furnish such services. Primary care physicians generally include internists, family practitioners, and pediatricians. Generally, the member’s primary care physician must approve access to certain specialty physicians and other health care providers. 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 the primary care physician generally must approve access to many of these other health care providers, the HMO product is considered the most restrictive form of a health benefit plan.
An HMO member, typically through the member’s employer, pays a monthly fee, which generally covers, together with some copayments, health care services received from, or approved by, the member’s primary care physician. We participate in the Federal Employee Health Benefits Program, or FEHBP, primarily with our HMO offering in certain markets. FEHBP is the government’s health insurance program for Federal employees, retirees, former employees, family members, and spouses. For the year ended December 31, 2007, commercial HMO premium revenues totaled approximately $2.0 billion, or 8.1% of our total premiums and ASO fees.
PPO
Our commercial PPO products, which are marketed primarily to employer groups and individuals, include some types of wellness and utilization management programs. However, they typically include more cost-sharing with the member, through copayments and annual deductibles. PPOs also are similar to traditional health insurance because they provide a member with more 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.
As part of our PPO products, we offer HumanaOne, a major medical product marketed directly to individuals. We offer this product in select markets where we can generally underwrite risk and utilize our existing networks and distribution channels. This individual product includes provisions mandated by law to guarantee renewal of coverage for as long as the individual chooses.
For the year ended December 31, 2007, employer and individual commercial PPO premium revenues totaled approximately $3.7 billion, or 14.7% of our total premiums and ASO fees.
ASO
In addition to fully-insured Smart plans and other consumer offerings, HMO and PPO products, we also offer ASO products to employers who self-insure their employee health plans. We receive fees to provide administrative services which generally include the processing of claims, offering access to our provider networks and clinical programs, and responding to customer service inquiries from members of self-funded employers. These products may include all of the same benefit and product design characteristics of our fully-insured PPO, HMO or Smart plans and other consumer products described previously. Under ASO contracts, self-funded employers retain the risk of financing substantially all of the cost of health benefits. However, most ASO customers purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs. For the year ended December 31, 2007, commercial ASO fees totaled $307.8 million, or 1.2% of our total premiums and ASO fees.
Specialty
We also offer various specialty products including dental, vision, and other supplemental products. During 2007, we made investments which significantly expanded our specialty product offerings with the acquisitions of CompBenefits Corporation and KMG America Corporation. These acquisitions significantly increased our dental
 
9

Table of Contents
membership and added new product offerings including vision and other supplemental health and life benefit plans primarily sold on a voluntary basis. The supplemental health plans cover, for example, some of the costs associated with cancer and critical illness. At December 31, 2007, we had approximately 6.8 million specialty members, including 3.6 million dental members and 2.3 million vision members. For the year ended December 31, 2007, specialty product premiums and ASO fees were approximately $544.2 million, or 2.2% of our total premiums and ASO fees.
Membership
The following table summarizes our total medical membership at December 31, 2007, by market and product:

 	 	Government	 	Commercial	 	 	 	 	 	
 	 	Medicare
Advantage	 	Medicare
Stand-alone
PDP	 	Medicaid	 	Military
services	 	PPO	 	HMO	 	ASO	 	Total	 	Percent
of Total	 	
 	 	(in thousands)	 	
Florida	 	325.0	 	182.7	 	39.6	 	—  	 	125.2	 	162.6	 	89.5	 	924.6	 	8.1	%	
Texas	 	64.7	 	257.0	 	—  	 	—  	 	253.3	 	106.8	 	174.5	 	856.3	 	7.5	%	
Kentucky	 	42.3	 	71.6	 	—  	 	—  	 	157.7	 	34.6	 	494.7	 	800.9	 	7.0	%	
Illinois	 	47.7	 	93.4	 	—  	 	—  	 	123.5	 	58.4	 	129.2	 	452.2	 	3.9	%	
Puerto Rico	 	19.0	 	0.2	 	344.8	 	—  	 	40.1	 	17.9	 	22.5	 	444.5	 	3.9	%	
Wisconsin	 	45.2	 	60.6	 	—  	 	—  	 	71.1	 	57.0	 	207.8	 	441.7	 	3.8	%	
Ohio	 	40.5	 	118.9	 	—  	 	—  	 	59.1	 	57.5	 	163.3	 	439.3	 	3.8	%	
Missouri/Kansas	 	54.1	 	181.8	 	—  	 	—  	 	46.3	 	15.4	 	5.2	 	302.8	 	2.6	%	
Louisiana	 	54.3	 	60.7	 	—  	 	—  	 	38.2	 	22.0	 	124.3	 	299.5	 	2.6	%	
California	 	2.6	 	246.7	 	—  	 	—  	 	1.4	 	—  	 	—  	 	250.7	 	2.2	%	
Indiana	 	22.7	 	110.8	 	—  	 	—  	 	47.1	 	0.9	 	54.4	 	235.9	 	2.1	%	
Georgia	 	32.4	 	87.6	 	—  	 	—  	 	18.8	 	39.8	 	16.4	 	195.0	 	1.7	%	
Tennessee	 	18.2	 	99.6	 	—  	 	—  	 	40.7	 	—  	 	30.9	 	189.4	 	1.6	%	
North Carolina	 	57.6	 	120.5	 	—  	 	—  	 	4.8	 	—  	 	—  	 	182.9	 	1.6	%	
Arizona	 	28.7	 	48.2	 	—  	 	—  	 	43.9	 	19.4	 	31.0	 	171.2	 	1.5	%	
Michigan	 	20.8	 	101.6	 	—  	 	—  	 	44.8	 	—  	 	3.2	 	170.4	 	1.5	%	
New York	 	1.6	 	153.8	 	—  	 	—  	 	—  	 	—  	 	—  	 	155.4	 	1.3	%	
Virginia	 	44.8	 	95.5	 	—  	 	—  	 	1.2	 	—  	 	—  	 	141.5	 	1.2	%	
Pennsylvania	 	14.9	 	119.1	 	—  	 	—  	 	3.2	 	—  	 	—  	 	137.2	 	1.2	%	
Mississippi	 	9.6	 	84.1	 	—  	 	—  	 	15.1	 	—  	 	2.3	 	111.1	 	1.0	%	
Colorado	 	13.5	 	38.7	 	—  	 	—  	 	57.9	 	0.5	 	—  	 	110.6	 	1.0	%	
Minnesota	 	33.8	 	71.3	 	—  	 	—  	 	—  	 	—  	 	0.2	 	105.3	 	0.9	%	
Puerto Rico ASO	 	—  	 	—  	 	180.6	 	—  	 	—  	 	—  	 	—  	 	180.6	 	1.6	%	
Military services	 	—  	 	—  	 	—  	 	1,719.1	 	—  	 	—  	 	—  	 	1,719.1	 	15.0	%	
Military services ASO	 	—  	 	—  	 	—  	 	1,146.8	 	—  	 	—  	 	—  	 	1,146.8	 	10.0	%	
Others	 	149.0	 	1,037.6	 	—  	 	—  	 	22.4	 	—  	 	93.6	 	1,302.6	 	11.4	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Totals	 	1,143.0	 	3,442.0	 	565.0	 	2,865.9	 	1,215.8	 	592.8	 	1,643.0	 	11,467.5	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provider Arrangements
We provide our members with access to health care services through our networks of health care providers with whom we have contracted, including hospitals and other independent facilities such as outpatient surgery centers, primary care physicians, specialist physicians, dentists and providers of ancillary health care services and facilities. These ancillary services and facilities include ambulance services, medical equipment services, home health agencies, mental health providers, rehabilitation facilities, nursing homes, optical services, and pharmacies. Our membership base and the ability to influence where our members seek care generally enable us to obtain contractual discounts with providers.
 
10

Table of Contents
We use a variety of techniques to provide access to effective and efficient use of health care services for our members. These techniques include the coordination of care for our members, product and benefit designs, hospital inpatient management systems and enrolling members into various disease management programs. The focal point for health care services in many of our HMO networks is the primary care physician who, under contract with us, provides services to our members, and may control utilization of appropriate services, by directing or approving hospitalization and referrals to specialists and other providers. Some physicians may have arrangements under which they can earn bonuses when certain target goals relating to the provision of quality patient care are met. Our hospitalist programs use specially-trained physicians to effectively manage the entire range of an HMO member’s medical care during a hospital admission and to effectively coordinate the member’s discharge and post-discharge care. We have available a variety of disease management programs related to specific medical conditions such as congestive heart failure, coronary artery disease, prenatal and premature infant care, asthma related illness, end stage renal disease, diabetes, cancer, and certain other conditions.
We typically contract with hospitals on either (1) a per diem rate, which is an all-inclusive rate per day, (2) a case rate or diagnosis-related groups (DRG), which is an all-inclusive rate per admission, or (3) a discounted charge for inpatient hospital services. Outpatient hospital services generally are contracted at a flat rate by type of service, ambulatory payment classifications, or APCs, or at a discounted charge. APCs are similar to flat rates except multiple services and procedures may be aggregated into one fixed payment. These contracts are often multi-year agreements, with rates that are adjusted for inflation annually based on the consumer price index or other nationally recognized inflation indexes. Outpatient surgery centers and other ancillary providers typically are contracted at flat rates per service provided or are reimbursed based upon a nationally recognized fee schedule such as the Medicare allowable fee schedule.
Our contracts with physicians typically are renewed automatically each year, unless either party gives written notice, generally ranging from 90 to 120 days, to the other party of their intent to terminate the arrangement. Most of the physicians in our PPO networks and some of our physicians in our HMO networks are reimbursed based upon a fixed fee schedule, which typically provides for reimbursement based upon a percentage of the standard Medicare allowable fee schedule.
Capitation
For 2.3% of our December 31, 2007 medical membership, we contract with hospitals and physicians to accept financial risk for a defined set of HMO membership. In transferring this risk, we prepay these providers a monthly fixed-fee per member, known as a capitation (per capita) payment, to coordinate substantially all of the medical care for their capitated HMO membership, including some health benefit administrative functions and claims processing. For these capitated HMO arrangements, we generally agree to reimbursement rates that target a benefits ratio ranging from 82% to 89%. The benefits ratio measures underwriting profitability and is computed by taking total benefit expenses as a percentage of premium revenues. Providers participating in hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within their system for their HMO membership. Providers participating in physician-based capitated HMO arrangements generally have subcontracted directly with hospitals and specialist physicians, and are responsible for reimbursing such hospitals and physicians for services rendered to their HMO membership.
For another 4.7% of our December 31, 2007 medical membership, we contract with physicians under risk-sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the medical costs of their HMO membership. Although these arrangements do include physician capitation payments for services rendered, we share hospital and other benefit expenses and process substantially all of the claims under these arrangements.
Physicians under capitation arrangements typically have stop loss coverage so that a physician’s financial risk for any single member is limited to a maximum amount on an annual basis. We monitor the financial performance and solvency of our capitated providers. However, we remain financially responsible for health care services to our members in the event our providers fail to provide such services.
 
11

Table of Contents
Medical membership under these various arrangements was as follows at December 31, 2007 and 2006:

 	 	Government Segment	 	 	Commercial Segment	 	 	 	 	
 	 	Medicare
Advantage	 	 	Medicare
stand-alone
PDP	 	 	Military
services	 	 	Military
Services
ASO	 	 	Medicaid	 	 	Total
Segment	 	 	Fully-
Insured	 	 	ASO	 	 	Total
Segment	 	 	Total
Medical	 	
Medical Membership:	 	
 	 	 	 	 	 	 	 	 	 	 	
December 31, 2007	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capitated HMO hospital system based	 	27,000	 	 	—  	 	 	—  	 	 	—  	 	 	—  	 	 	27,000	 	 	24,500	 	 	—  	 	 	24,500	 	 	51,500	 	
Capitated HMO physician group based	 	23,000	 	 	—  	 	 	—  	 	 	—  	 	 	150,500	 	 	173,500	 	 	25,800	 	 	—  	 	 	25,800	 	 	199,300	 	
Risk-sharing	 	275,200	 	 	—  	 	 	—  	 	 	—  	 	 	230,800	 	 	506,000	 	 	26,000	 	 	—  	 	 	26,000	 	 	532,000	 	
Other	 	817,800	 	 	3,442,000	 	 	1,719,100	 	 	1,146,800	 	 	183,700	 	 	7,309,400	 	 	1,732,300	 	 	1,643,000	 	 	3,375,300	 	 	10,684,700	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	1,143,000	 	 	3,442,000	 	 	1,719,100	 	 	1,146,800	 	 	565,000	 	 	8,015,900	 	 	1,808,600	 	 	1,643,000	 	 	3,451,600	 	 	11,467,500	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capitated HMO hospital system based	 	29,800	 	 	—  	 	 	—  	 	 	—  	 	 	—  	 	 	29,800	 	 	33,600	 	 	—  	 	 	33,600	 	 	63,400	 	
Capitated HMO physician group based	 	23,900	 	 	—  	 	 	—  	 	 	—  	 	 	148,300	 	 	172,200	 	 	29,900	 	 	—  	 	 	29,900	 	 	202,100	 	
Risk-sharing	 	279,300	 	 	—  	 	 	—  	 	 	—  	 	 	239,700	 	 	519,000	 	 	25,900	 	 	—  	 	 	25,900	 	 	544,900	 	
Other	 	669,600	 	 	3,536,600	 	 	1,716,400	 	 	1,163,600	 	 	181,100	 	 	7,267,300	 	 	1,664,800	 	 	1,529,600	 	 	3,194,400	 	 	10,461,700	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	1,002,600	 	 	3,536,600	 	 	1,716,400	 	 	1,163,600	 	 	569,100	 	 	7,988,300	 	 	1,754,200	 	 	1,529,600	 	 	3,283,800	 	 	11,272,100	 	

Medical Membership Distribution:	 	
 	 	 	 	 	 	 	 	 	 	 	
December 31, 2007	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capitated HMO hospital system based	 	2.4	%	 	—  	 	 	—  	 	 	—  	 	 	—  	 	 	0.3	%	 	1.4	%	 	—  	 	 	0.7	%	 	0.5	%	
Capitated HMO physician group based	 	2.0	%	 	—  	 	 	—  	 	 	—  	 	 	26.6	%	 	2.2	%	 	1.4	%	 	—  	 	 	0.8	%	 	1.8	%	
Risk-sharing	 	24.1	%	 	—  	 	 	—  	 	 	—  	 	 	40.9	%	 	6.3	%	 	1.4	%	 	—  	 	 	0.8	%	 	4.7	%	
All other membership	 	71.5	%	 	100.0	%	 	100.0	%	 	100.0	%	 	32.5	%	 	91.2	%	 	95.8	%	 	100.0	%	 	97.7	%	 	93.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capitated HMO hospital system based	 	3.0	%	 	—  	 	 	—  	 	 	—  	 	 	—  	 	 	0.4	%	 	1.9	%	 	—  	 	 	1.0	%	 	0.6	%	
Capitated HMO physician group based	 	2.4	%	 	—  	 	 	—  	 	 	—  	 	 	26.1	%	 	2.2	%	 	1.7	%	 	—  	 	 	0.9	%	 	1.8	%	
Risk-sharing	 	27.9	%	 	—  	 	 	—  	 	 	—  	 	 	42.1	%	 	6.4	%	 	1.5	%	 	—  	 	 	0.8	%	 	4.8	%	
All other membership	 	66.7	%	 	100.0	%	 	100.0	%	 	100.0	%	 	31.8	%	 	91.0	%	 	94.9	%	 	100.0	%	 	97.3	%	 	92.8	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capitation expense as a percentage of total benefit expense was as follows for the years ended December 31, 2007, 2006, and 2005:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(dollars in thousands)	 	
Benefit Expenses:	  	 	 	  	 	 	 	 	 	  	 	 	 	 	 	  	 	 	
Capitated HMO expense	  	$	366,075	  	1.8	%	 	$	382,584	  	2.2	%	 	$	456,123	  	3.9	%	
Other benefit expense	  	 	19,904,456	  	98.2	%	 	 	17,038,620	  	97.8	%	 	 	11,195,347	  	96.1	%	
 	  	 	 	  	 	 	 	 	 	  	 	 	 	 	 	  	 	 	
Consolidated benefit expense	  	$	20,270,531	  	100.0	%	 	$	17,421,204	  	100.0	%	 	$	11,651,470	  	100.0	%	

12

Table of Contents
Accreditation Assessment
Our accreditation assessment program consists of several internal programs, including those that credential providers and those designed to meet the audit standards of federal and state agencies, as well as external accreditation standards. We also offer quality and outcome measurement and improvement programs such as the Health Plan Employer Data Information Sets, or HEDIS, which is used by employers, government purchasers and the National Committee for Quality Assurance, or NCQA, to evaluate HMOs based on various criteria, including effectiveness of care and member satisfaction.
Physicians participating in our HMO networks must satisfy specific criteria, including licensing, patient access, office standards, after-hours coverage, and other factors. Most participating hospitals also meet accreditation criteria established by CMS and/or the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO.
Recredentialing of participating providers occurs every two to three years, depending on applicable state laws. Recredentialing of participating physicians includes verification of their medical licenses; review of their malpractice liability claims histories; review of their board certifications, if applicable; and review of applicable quality information. Committees, composed of a peer group of physicians, review the applications of physicians being considered for credentialing and recredentialing.
We request accreditation for certain of our HMO plans from NCQA and the American Accreditation Healthcare Commission, also known as the Utilization Review Accreditation Commission, or URAC. URAC performs reviews for utilization management standards and for health plan and health network standards in quality management, credentialing, rights and responsibilities, and network management. Accreditation or external review by an approved organization is mandatory in the states of Florida and Kansas for licensure as an HMO. Accreditation specific to the utilization review process also is required in the state of Georgia for licensure as an HMO or PPO. Certain commercial businesses, like those impacted by a third-party labor agreement or those where a request is made by the employer, may require or prefer accredited health plans.
NCQA performs reviews of standards for quality improvement, credentialing, utilization management, and member rights and responsibilities. We have achieved and maintained NCQA accreditation in all of our commercial HMO markets except Puerto Rico and in select PPO markets.
Sales and Marketing
We use various methods to market our Medicare, Medicaid, and commercial products, including television, radio, the Internet, telemarketing, and direct mailings.
At December 31, 2007, we employed approximately 1,800 sales representatives, who are each paid a salary and per member commission to market our Medicare and Medicaid products in the United States and Puerto Rico. We employed approximately 600 telemarketing representatives who assisted in the marketing of Medicare and Medicaid products by making appointments for sales representatives with prospective members. We also market our Medicare products via a strategic alliance with Wal-Mart Stores, Inc., or Wal-Mart. This alliance includes stationing Humana representatives in certain Wal-Mart stores, SAM’S CLUB locations, and Neighborhood Markets across the country providing an opportunity to enroll Medicare eligible individuals in person. In addition, we market our Medicare products through licensed independent brokers and agents including strategic alliances with State Farm ®  and USAA. We generally pay brokers a commission based on premiums, including bonuses based on sales volume.
Individuals become members of our commercial HMOs and PPOs through their employers or other groups which typically offer employees or members a selection of health insurance products, pay for all or part of the
 
13

Table of Contents
premiums, and make payroll deductions for any premiums payable by the employees. We attempt to become an employer’s or group’s exclusive source of health insurance benefits by offering a variety of HMO, PPO, and specialty products that provide cost-effective quality health care coverage consistent with the needs and expectations of their employees or members. We also offer commercial health insurance and specialty products directly to individuals.
At December 31, 2007, we used licensed independent brokers and agents and approximately 700 licensed employees to sell our commercial products. Many of our employer group customers are represented by insurance brokers and consultants who assist these groups in the design and purchase of health care products. We generally pay brokers a commission based on premiums, with commissions varying by market and premium volume. In addition to a commission based directly on premium volume for sales to particular customers, we also have programs that pay brokers and agents based on other metrics. These include commission bonuses based on sales that attain certain levels or involve particular products. We also pay additional commissions based on aggregate volumes of sales involving multiple customers.
Risk Management
Through the use of internally developed underwriting criteria, we determine the risk we are willing to assume and the amount of premium to charge for our commercial products. In most instances, employer and other groups must meet our underwriting standards in order to qualify to contract with us for coverage. Small group 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 our Medicare, military services, or Medicaid products because government regulations require us to accept all eligible applicants regardless of their health or prior medical history.
Competition
The health benefits industry is highly competitive. Our competitors vary by local market and include other managed care companies, national insurance companies, and other HMOs and PPOs, including HMOs and PPOs owned by Blue Cross/Blue Shield plans. Many of our competitors have larger memberships and/or greater financial resources than our health plans in the markets in which we compete. Our ability to sell our products and to retain customers may be influenced by such factors as those described on page 17 in Item 1A.—Risk Factors.
Government Regulation
Federal regulation
Government regulation of health care products and services is a changing area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have broad discretion to issue regulations and interpret and enforce laws and rules. The passing of the Medicare Modernization Act of 2003, or MMA, represents the most sweeping changes to Medicare since the BBA in 1997. Changes in applicable laws and regulations are continually being considered, and the interpretation of existing laws and rules also may change periodically. These regulatory revisions could affect our operations and financial results. Also, it may become increasingly difficult to control medical costs if federal and state bodies continue to consider and enact significant and sometimes onerous managed care laws and regulations.
State and local regulation
We are also subject to substantial regulation by the states in which we do business. We regularly are audited and subject to various enforcement actions by state departments of insurance. These departments enforce laws
 
14

Table of Contents
relating to all aspects of our operations, including benefit offerings, marketing, claim payments, subsidiary capital requirements, and premium rate setting, especially with regard to our small group business. Although any of the pending government actions could result in assessment of damages, civil or criminal fines or penalties, and other sanctions against us, including exclusion from participation in government programs, we do not believe the results of any of these actions, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or cash flows.
Pending federal and state legislation
Diverse legislative and regulatory initiatives continue at both the federal and state levels to affect aspects of the nation’s health care system.
Our management works proactively to ensure compliance with all governmental laws and regulations affecting our business. We are unable to predict how existing federal or state laws and regulations may be changed or interpreted, what additional laws or regulations affecting our 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 our financial position, results of operations or cash flows.
For a complete description of all of the current activities in the federal and state legislative areas, see Item 1A.—Risk Factors on page 22.
Other
Captive Insurance Company
We bear general business risks associated with operating our Company such as professional and general liability, employee workers’ compensation, and officer and director errors and omissions risks. Professional and general liability risks may include, for example, medical malpractice claims and disputes with members regarding benefit coverage. We retain certain of these risks through our wholly-owned, captive insurance subsidiary. We reduce exposure to these risks by insuring levels of coverage for losses in excess of our retained limits with a number of third-party insurance companies. We remain liable in the event these insurance companies are unable to pay their portion of the losses. In an effort to minimize credit risk, we insure our risks with a number of insurance companies having a long history of strong financial ratings.
Centralized Management Services
We provide centralized management services to each of our health plans and both of our business segments from our headquarters and service centers. These services include management information systems, product development and administration, finance, human resources, accounting, law, public relations, marketing, insurance, purchasing, risk management, internal audit, actuarial, underwriting, claims processing, and customer service.
Employees
As of December 31, 2007, we had approximately 25,000 employees, including 28 employees covered by collective bargaining agreements. We believe we have good relations with our employees and have not experienced any work stoppages.
 
15

Table of Contents
ITEM 1A.	RISK FACTORS	
This document includes both historical and forward-looking statements. The forward-looking statements are made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events, trends and uncertainties. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below. In making these statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or results. Our business is highly complicated, regulated and competitive with many different factors affecting results.
If the premiums we charge are insufficient to cover the cost of health care services delivered to our members, or if our estimates of benefits payable or future policy benefits payable based upon our estimates of future benefit claims are inadequate, our profitability could decline.
We use a significant portion of our revenues to pay the costs of health care services delivered to our members. These costs include claims payments, capitation payments, and various other costs incurred to provide health insurance coverage to our members. These costs also include estimates of future payments to hospitals and others for medical care provided to our members. Generally, premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in excess of our benefit cost projections generally are not recovered in the contract year through higher premiums. We estimate the costs of our future benefit claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical inflation, historical developments, including claim inventory levels and claim receipt patterns, and other relevant factors. We also record benefits payable for future payments. We continually review estimates of future payments relating to benefit claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves. However, many factors may and often do cause actual health care costs to exceed what was estimated and used to set our premiums. These factors may include:
 
 	•	 	increased use of medical facilities and services, including prescription drugs;	
 
 	•	 	increased cost of such services;	
 
 	•	 	our membership mix;	
 
 	•	 	variances in actual versus estimated levels of cost associated with new products, benefits or lines of business, product changes or benefit level changes;	
 
 	•	 	membership in markets lacking adequate provider networks;	
 
 	•	 	changes in the demographic characteristics of an account or market;	
 
 	•	 	termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements;	
 
 	•	 	changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals;	
 
 	•	 	possible changes in our pharmacy rebate program with drug manufacturers;	
 
 	•	 	catastrophes, including acts of terrorism, public health epidemics, or severe weather (e.g. hurricanes, earthquakes, etc.);	
 
 	•	 	the introduction of new or costly treatments, including new technologies;	
 
 	•	 	medical cost inflation; and	
 
 	•	 	government mandated benefits or other regulatory changes.	
 
16

Table of Contents
Failure to adequately price our products or estimate sufficient benefits payable or future policy benefits payable may result in a material adverse effect on our financial position, results of operations and cash flows.
If we do not design and price our products properly and competitively, our membership and profitability could decline.
We are in a highly competitive industry. Some of our competitors are more established in the health care industry in terms of a larger market share and have greater financial resources than we do in some markets. In addition, other companies may enter our markets in the future, including emerging competitors in the Medicare program as well as in Smart plans and other consumer health plans, such as high deductible health plans with HSAs. We believe that barriers to entry in many markets are not substantial, so the addition of new competitors can occur relatively easily, and customers enjoy significant flexibility in moving between competitors. Contracts for the sale of commercial products are generally bid upon or renewed annually. While health plans compete on the basis of many factors, including service and the quality and depth of provider networks, we expect that price will continue to be a significant basis of competition. In addition to the challenge of controlling health care costs, we face intense competitive pressure to contain premium prices. Factors such as business consolidations, strategic alliances, legislative reform and marketing practices create pressure to contain premium price increases, despite being faced with increasing medical costs.
Premium increases, introduction of new product designs, and our relationship with our providers in various markets, among other issues, could also affect our membership levels. Other actions that could affect membership levels include our possible exit from or entrance into Medicare or Commercial markets, or the termination of a large contract, including our TRICARE contract.
If we do not compete effectively in our markets, if we set rates too high or too low in highly competitive markets to keep or increase our market share, if membership does not increase as we expect, if membership declines, or if we lose accounts with favorable medical cost experience while retaining or increasing membership in accounts with unfavorable medical cost experience, our business and results of operations could be materially adversely affected.
If we fail to effectively implement our operational and strategic initiatives, including our Medicare initiatives, our business could be materially adversely affected.
Our future performance depends in large part upon our management team’s ability to execute our strategy to position the Company for the future. This strategy includes opportunities created by the MMA. The MMA offers new opportunities in our Medicare programs, including our HMO, PPO, and PFFS Medicare Advantage products, as well as our stand-alone PDP products. We have made substantial additional investments in the Medicare program to enhance our ability to participate in these expanded programs. Over the last few years we have increased the size of our Medicare geographic reach since the enactment of the MMA through expanded Medicare product offerings. We are offering both the stand-alone Medicare Prescription Drug Coverage and Medicare Advantage Health Plan with Prescription Drug Coverage in addition to our other product offerings. We have been approved to offer the Medicare prescription drug plan in 50 states as well as Puerto Rico and the District of Columbia.
The growth of our Medicare business is an important part of our business strategy. Any failure to achieve this growth may have a material adverse effect on our financial position, results of operations or cash flows. In addition, the expansion of our Medicare business in relation to our other businesses may intensify the risks to us inherent in the Medicare business, which are described elsewhere in this document. These expansion efforts may result in less diversification of our revenue stream.
Additionally, our strategy includes the growth of our Commercial segment business, with emphasis on our ASO and individual products, introduction of new products and benefit designs, including our Smart plans and other consumer offerings such as HSAs, and our specialty products, as well as the adoption of new technologies and the integration of acquired businesses and contracts.
 
17

Table of Contents
There can be no assurance that we will be able to successfully implement our operational and strategic initiatives that are intended to position us for future growth or that the products we design will be accepted or adopted in the time periods assumed. Failure to implement this strategy may result in a material adverse effect on our financial position, results of operations and cash flows.
If we fail to properly maintain the integrity of our data, to strategically implement new information systems, or to protect our proprietary rights to our systems, our business could be materially adversely affected.
Our business depends significantly on effective information systems and the integrity and timeliness of the data we use to run our business. Our business strategy involves providing members and providers with easy to use products that leverage our information to meet their needs. Our ability to adequately price our products and services, provide effective and efficient service to our customers, and to timely and accurately report our financial results depends significantly on the integrity of the data in our information systems. As a result of our past and on-going acquisition activities, we have acquired additional information systems. We have been taking steps to reduce the number of systems we operate, have upgraded and expanded our information systems capabilities, and are gradually migrating existing business to fewer systems. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain effectively our information systems and data integrity, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, have regulatory or other legal problems, have increases in operating expenses, lose existing customers, have difficulty in attracting new customers, or suffer other adverse consequences.
We depend on independent third parties for significant portions of our systems-related support, equipment, facilities, and certain data, including data center operations, data network, voice communication services and pharmacy data processing. This dependence makes our operations vulnerable to such third parties’ failure to perform adequately under the contract, due to internal or external factors. A change in service providers could result in a decline in service quality and effectiveness or less favorable contract terms which could adversely affect our operating results.
We rely on our agreements with customers, confidentiality agreements with employees, and our trade secrets and copyrights to protect our proprietary rights. These legal protections and precautions may not prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry. We expect software products to be increasingly subject to third-party infringement claims as the number of products and competitors in this area grows.
Our business plans also include becoming a quality e-business organization by enhancing interactions with customers, brokers, agents, and other stakeholders through web-enabling technology. Our strategy includes sales and distribution of health benefit products through the Internet, and implementation of advanced self-service capabilities, for internal and external stakeholders.
There can be no assurance that our process of improving existing systems, developing new systems to support our expanding operations, integrating new systems, protecting our proprietary information, and improving service levels will not be delayed or that additional systems issues will not arise in the future. Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, results of operations and cash flows.
 
18

Table of Contents
We are involved in various legal actions, which, if resolved unfavorably to us, could result in substantial monetary damages.
We are a party to a variety of legal actions that affect our business, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, and tort claims.
In addition, because of the nature of the health care business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of products and services. These include and could include in the future:
 
 	•	 	claims relating to the methodologies for calculating premiums;	
 
 	•	 	claims relating to the denial of health care benefit payments;	
 
 	•	 	claims relating to the denial or rescission of insurance coverage;	
 
 	•	 	challenges to the use of some software products used in administering claims;	
 
 	•	 	claims relating to our administration of our Medicare Part D offerings;	
 
 	•	 	medical malpractice actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers’ alleged malpractice;	
 
 	•	 	allegations of anti-competitive and unfair business activities;	
 
 	•	 	provider disputes over compensation and termination of provider contracts;	
 
 	•	 	disputes related to ASO business, including actions alleging claim administration errors;	
 
 	•	 	claims related to the failure to disclose some business practices;	
 
 	•	 	claims relating to customer audits and contract performance; and	
 
 	•	 	claims relating to dispensing of drugs associated with our in-house mail order pharmacy.	
In some cases, substantial non-economic or punitive damages as well as treble damages under the federal False Claims Act, Racketeer Influenced and Corrupt Organizations Act and other statutes may be sought. While we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of our insurance may not be enough to cover the damages awarded. Additionally, the cost of business insurance coverage has increased significantly. As a result, we have increased the amount of risk that we self-insure, particularly with respect to matters incidental to our business. In addition, some types of damages, like punitive damages, may not be covered by insurance. In some jurisdictions, coverage of punitive damages is prohibited. Insurance coverage for all or some forms of liability may become unavailable or prohibitively expensive in the future.
See “Legal Proceedings” in Note 14 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. We cannot predict the outcome of these suits with certainty.
As a government contractor, we are exposed to additional risks that could adversely affect our business or our willingness to participate in government health care programs.
A significant portion of our revenues relates to federal and state government health care coverage programs, including the Medicare, Military, and Medicaid programs. Our Government segment accounted for approximately 74% of our total premiums and ASO fees for the year ended December 31, 2007 and we expect the Government segment to account for a greater percentage of our total premiums and ASO fees in 2008. These programs involve various risks, including:
 
 	•	 	at December 31, 2007, under our contracts with CMS we provided health insurance coverage to approximately 507,700 Medicare members in Florida. These contracts accounted for approximately	
 
19

Table of Contents
 	17% of our total premiums and ASO fees for the year ended December 31, 2007. The loss of these and other CMS contracts or significant changes in the Medicare program as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows;	
 
 	•	 	at December 31, 2007, our military services business, which accounted for approximately 12% of our total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of the TRICARE South Region contract. The 5-year South Region contract, which expires March 31, 2009, is subject to annual renewals on April 1 of each year at the government’s option. Effective April 1, 2007, the South Region contract was extended into the fourth option period, which runs from April 1, 2007 to March 31, 2008 and covers 2.9 million beneficiaries. We have received a notice from the government of its intent to renew the fifth option period which runs from April 1, 2008 to March 31, 2009. The Department of Defense has the option to extend the current contract for up to six months under existing terms. Congressional authority has also been granted to extend the contract in one year increments for a maximum of two additional years. In the second quarter of 2007, a draft solicitation related to the new TRICARE contracts, currently scheduled to begin April 1, 2009, was issued for industry comment. Currently, we are anticipating a formal request for proposal, or RFP, for the TRICARE contracts. If we were not awarded a new TRICARE contract, it would have a material adverse effect on our business, results of operation and financial condition. As required under the contract, the target underwritten health care cost and underwriting fee amounts for the fourth option period were negotiated. Any variance from the target health care cost is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated target health care cost amount could have a material adverse effect on our business. These changes may include, for example, an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease U.S. military deployments. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business;	
 
 	•	 	at December 31, 2007, under our contracts with the Puerto Rico Health Insurance Administration, we provided health insurance coverage to approximately 525,400 Medicaid members in Puerto Rico. These contracts accounted for approximately 2% of our total premiums and ASO fees for the year ended December 31, 2007. These contracts for the East and Southeast regions of Puerto Rico are effective from November 1, 2006 through June 30, 2008. In 2007, we also entered into an ASO contract with the Puerto Rico Health Administration for the Metro North Region which is effective from November 1, 2006 through October 31, 2009. The loss of these contracts or significant changes in the Puerto Rico Medicaid program as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows;	
 
 	•	 	the possibility of temporary or permanent suspension from participating in government health care programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal conduct in the performance of a health care program or if there is an adverse decision against us under the federal False Claims Act;	
 
 	•	 	CMS has implemented a risk adjustment model which apportions premiums paid to Medicare health plans according to health severity. A risk adjustment model pays more for enrollees with predictably higher costs. Under the risk adjustment methodology, all Medicare health plans must collect, capture and submit the necessary diagnosis code information from inpatient and ambulatory treatment settings to CMS within prescribed deadlines. The CMS risk adjustment model uses this diagnosis data to calculate the risk adjusted premium payment to Medicare health plans. CMS has transitioned to the risk adjustment model for Medicare Advantage plans. In 2006, the portion of risk adjusted payment was increased to 75% from 50% in 2005. The phase-in of risk adjusted payment was increased to 100% in 2007;	
 
20

Table of Contents
 	•	 	commensurate with phase-in of the risk-adjustment methodology, payments to Medicare Advantage plans have been increased by a “budget neutrality” factor. The budget neutrality factor was implemented to prevent overall health plan payments from being reduced during the transition to the risk-adjustment payment model. The payment adjustments for budget neutrality were first developed in 2002 and began to be used with the 2003 payments. The budget neutrality adjustment began phasing out in 2007 and will be fully eliminated by 2011. This does not mean, however, that the aggregate per-member payments to Medicare plans will be reduced. As plans enroll less healthy beneficiaries, the need for the budget neutrality adjustment declines as the underlying risk adjusted Medicare rates paid to plans increase to account for their enrollees’ greater healthcare needs. As a result of the CMS payment methodology described previously, the amount and timing of our CMS monthly premium payments per member may change materially, either favorably or unfavorably;	
 
 	•	 	Our CMS contracts which cover members’ prescription drugs under the Part D provisions of the MMA contain provisions for 1) risk sharing and 2) reimbursements of prescription drug costs for which we are not at risk.	
The premiums from CMS are subject to risk corridor provisions which compare costs targeted in our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received. We estimate and recognize an adjustment to premium revenues related to the risk corridor payment settlement based upon pharmacy claims experience. The estimate of the settlement associated with these risk corridor provisions requires us to consider factors that may not be certain including member eligibility differences with CMS. Beginning in 2008, the risk corridor thresholds increase which means we will bear more risk. Our estimate of the settlement associated with the Medicare Part D risk corridor provisions was a net liability of $102.6 million at December 31, 2007.
Reinsurance and low-income cost subsidies represent reimbursements from CMS in connection with the Medicare Part D program for which we assume no risk. Reinsurance subsidies represent reimbursements for CMS’s portion of claims costs which exceed the member’s out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. A reconciliation and settlement of CMS’s prospective subsidies against actual prescription drug costs we paid is made after the end of the year.
Settlement of the reinsurance and low-income cost subsidies as well as the risk corridor payment is based on a reconciliation made approximately 6 months after the close of each calendar year. This reconciliation process requires us to submit claims data necessary for CMS to administer the program. Our claims data may not pass CMS’s claims edit processes due to various reasons, including but not limited to, discrepancies in eligibility or classification of low-income members. To the extent our data does not pass CMS’s claim edit processes, we may bear the risk for all or a portion of the claim which otherwise may have been subject to the risk corridor provision or reimbursement as a low-income or reinsurance claim. In addition, in the event the settlement represents an amount CMS owes us, there is a negative impact on our cash flows and financial condition as a result of financing CMS’s share of the risk. The opposite is true in the event the settlement represents an amount we owe CMS;
 
 	•	 	future changes to these government programs which may affect our ability or willingness to participate in these programs;	
 
 	•	 	higher comparative medical costs;	
 
 	•	 	government regulatory and reporting requirements; and	
 
 	•	 	higher marketing and advertising costs per member as a result of marketing to individuals as opposed to groups.	
 
21

Table of Contents
Our industry is currently subject to substantial government regulation, which, along with possible increased governmental regulation or legislative reform, increases our costs of doing business and could adversely affect our profitability.
The health care industry in general, and health insurance, particularly HMOs and PPOs are subject to substantial federal and state government regulation.
Our licensed subsidiaries are subject to regulation under state insurance holding company and Puerto Rico regulations. These regulations generally require, among other things, prior approval and/or notice of new products, rates, benefit changes, and certain material transactions, including dividend payments, purchases or sales of assets, intercompany agreements, and the filing of various financial and operational reports.
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
Based on the most recent statutory financial statements as of December 31, 2007, we maintained aggregate statutory capital and surplus of $2,905.2 million in our state regulated subsidiaries. This compares to applicable statutory requirements which aggregated $1,810.5 million. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level. Given our anticipated continued premium growth in 2008, capital requirements will increase. We expect to fund these increased requirements with capital contributions from Humana Inc., our parent company, of approximately $200 million in 2008.
Most states rely on risk-based capital requirements, or RBC, to define their required levels of equity discussed above. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. If RBC were adopted by the remaining states and Puerto Rico at December 31, 2007, we would have $966.3 million of aggregate capital and surplus above any of the levels that require corrective action under RBC, or individual state requirements based on the most recent statutory financial statements as of December 31, 2007.
The use of individually identifiable health data by our business is regulated at federal and state levels. These laws and rules are changed frequently by legislation or administrative interpretation. Various state laws address the use and maintenance of individually identifiable health data. Most are derived from the privacy provisions in the federal Gramm-Leach-Bliley Act and HIPAA. HIPAA includes administrative provisions directed at simplifying electronic data interchange through standardizing transactions, establishing uniform health care provider, payer, and employer identifiers and seeking protections for confidentiality and security of patient data. The rules do not provide for complete federal preemption of state laws, but rather preempt all inconsistent state laws unless the state law is more stringent.
These regulations set standards for the security of electronic health information. Violations of these rules could subject us to significant criminal and civil penalties, including significant monetary penalties. Compliance with HIPAA regulations requires significant systems enhancements, training and administrative effort. HIPAA could also expose us to additional liability for violations by our business associates. A business associate is a person or entity, other than a member of the work force, who on behalf of a covered entity performs or assists in the performance of a function or activity involving the use or disclosure of individually identifiable health information, or provides legal, accounting, consulting, data aggregation, management, administrative, accreditation, or financial services.
 
22

Table of Contents
Laws in each of the states (including Puerto Rico) in which we operate our HMOs, PPOs and other health insurance-related services regulate our 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 we offer are sold under licenses issued by the applicable insurance regulators. Our licensed subsidiaries are also subject to regulation under state insurance holding company and Puerto Rico regulations.
We are also subject to various governmental audits and investigations. Under state laws, our HMOs and health insurance companies are audited by state departments of insurance for financial and contractual compliance. Our HMOs are audited for compliance with health services by state departments of health. Audits and investigations are also conducted by state attorneys general, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, and the Defense Contract Audit Agency. Several departments of insurance are currently investigating the practices of insurance brokers, particularly in the Medicare marketing area. All of these activities could result in the loss of licensure or the right to participate in various programs, or the imposition of fines, penalties and other civil and criminal sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our industry or our reputation in various markets and make it more difficult for us to sell our products and services.
Other areas subject to substantial regulation include:
 
 	•	 	licensing requirements;	
 
 	•	 	approval of policy language and benefits;	
 
 	•	 	mandated benefits and processes;	
 
 	•	 	approval of entry, withdrawal or re-entry into a state or market;	
 
 	•	 	premium rates; and	
 
 	•	 	periodic examinations by state and federal agencies.	
Two areas of legislation that can impact the company are experiencing an increase in activity. These are Medicare funding under MMA and proposals to expand health insurance coverage. MMA funding and associated program structure is an area of substantial legislative attention that may be influenced by federal budget considerations and Medicare spending trends. The federal and state efforts to expand access to health coverage may offer opportunities to serve individuals who are not currently in the health insurance market through public program expansions, coverage connectors or premium assistance programs. Some access proposals also include increased regulation of our commercial business, particularly small group and individual, through a combination of benefit mandates, underwriting restrictions, rating limitations and assessments.
State and federal governmental authorities are continually considering changes to laws and regulations applicable to us and are currently considering regulations relating to:
 
 	•	 	health insurance access and affordability;	
 
 	•	 	regulation of broker licensing, particularly in the Medicare marketing area;	
 
 	•	 	e-connectivity;	
 
 	•	 	universal health coverage;	
 
 	•	 	disclosure of provider fee schedules and other data about payments to providers, sometimes called transparency;	
 
 	•	 	disclosure of provider quality information; and	
 
 	•	 	formation of regional/national association health plans for small employers.	
 
23

Table of Contents
All of these proposals could apply to us and could result in new regulations that increase the cost of our operations.
There can be no assurance that we will be able to continue to obtain or maintain required governmental approvals or licenses or that legislative or regulatory change will not have a material adverse effect on our business. Delays in obtaining or failure to obtain or maintain required approvals could adversely affect entry into new markets, our revenues or the number of our members, increase our costs or adversely affect our ability to bring new products to market as forecasted.
We are also subject to potential changes in the political environment that can affect public policy and can adversely affect the markets for our products.
While it is not possible to predict when and whether fundamental policy changes would occur, these could include policy changes on the local, state, and federal level that could fundamentally change the dynamics of our industry, such as a larger role of the government in the health care arena. Changes in public policy could materially affect our profitability and cash flow, our ability to retain or grow our business, and our financial position.
Any failure to manage administrative costs could hamper profitability.
The level of our administrative expenses impacts our profitability. While we proactively attempt to effectively manage such expenses, increases in staff-related expenses, investment in new products, including our opportunities in the Medicare programs, greater emphasis on small group and individual health insurance products, acquisitions, and implementation of regulatory requirements, among others, may occur from time to time.
There can be no assurance that we will be able to successfully contain our administrative expenses in line with our membership and this may result in a material adverse effect on our financial position, results of operations and cash flows.
Any failure by us to manage acquisitions, and other significant transactions successfully could harm our financial results, business and prospects.
As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, and outsourcing transactions and often enter into agreements relating to such transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates for and successfully complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. In 2007, we acquired KMG America Corporation, CompBenefits Corporation, and DefenseWeb Technologies, Inc. The failure to successfully integrate each and all of these entities may adversely impact our revenues and results of operations. If we fail to identify and complete successfully transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally. We may also be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our results of operations, financial position or cash flows.
If we fail to develop and maintain satisfactory relationships with the providers of care to our members, our business could be adversely affected.
We contract with physicians, hospitals and other providers to deliver health care to our members. Our products encourage or require our customers to use these contracted providers. These providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner.
 
24

Table of Contents
In any particular market, providers could refuse to contract with us, demand to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician specialty groups, physician/hospital organizations or multi-specialty physician groups, may have significant market positions and negotiating power. In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, may compete directly with us. If these providers refuse to contract with us, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be adversely affected.
In some situations, we have contracts with individual or groups of primary care physicians for an actuarially determined, fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members. This type of contract is referred to as a “capitation” contract. The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us. In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members. The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers to demand payment from us even though we have made our regular fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers. Any of these events could have an adverse effect on the provision of services to our members and our operations.
Our recently implemented mail order pharmacy business subjects us to additional regulations in addition to those we face with our core health benefits businesses.
We have opened a mail order pharmacy business that subjects us to extensive federal, state and local regulation. We are also subject to risks inherent in the packaging and distribution of pharmaceuticals and other health care products, and the application of state laws related to the operation of internet and mail-services pharmacies. The failure to adhere to these laws and regulations could expose our pharmacy subsidiary to civil and criminal penalties.
Our ability to obtain funds from our subsidiaries is restricted.
Because we operate as a holding company, we are dependent upon dividends and administrative expense reimbursements from our subsidiaries to fund the obligations of Humana Inc., our parent company. These subsidiaries generally are regulated by states’ Departments of Insurance. We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries. The levels of capitalization required depend primarily upon the volume of premium generated. A significant increase in premium volume will require additional capitalization from our parent company. In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends from these subsidiaries that exceed specified amounts, or, in some states, any amount. In addition, we normally notify the state Departments of Insurance prior to making payments that do not require approval. In the event that we are unable to provide sufficient capital to fund the obligations of Humana Inc., our operations or financial position may be adversely affected.
Downgrades in our debt ratings, should they occur, may adversely affect our business, financial condition and results of operations.
Claims paying ability, financial strength, and debt ratings by recognized rating organizations are an increasingly important factor in establishing the competitive position of insurance companies. Ratings information is broadly disseminated and generally used throughout the industry. We believe our claims paying
 
25

Table of Contents
ability and financial strength ratings are an important factor in marketing our products to certain of our customers. Our debt ratings impact both the cost and availability of future borrowings. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency’s opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to policyholders, but are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such. Downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations.
Changes in economic conditions could adversely affect our business and results of operations.
Recent events, including fallout from problems in the U.S. credit markets, indicate a potential near-term recession in the U.S. economy. The state of the U.S. economy could adversely affect our employer group renewal prospects and our ability to collect or increase premiums. The state of the U.S. economy could also adversely affect the budget of individual states and of the federal government. That could result in attempts to reduce payments in our federal and state government health care coverage programs, including the Medicare, military services, and Medicaid programs, and could result in an increase in taxes and assessments on our activities. Although we could attempt to mitigate or cover our exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover all of such costs which could adversely affect our financial position, results of operations, and cash flows.
Increased litigation and negative publicity could increase our cost of doing business.
The health benefits industry continues to receive significant negative publicity reflecting the public perception of the industry. This publicity and perception have been accompanied by increased litigation, including some large jury awards, legislative activity, regulation and governmental review of industry practices. These factors may adversely affect our ability to market our products or services, may require us to change our products or services, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines. Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations, and cash flows.
 
ITEM 1B.	UNRESOLVED STAFF COMMENTS	
None.
 
26

Table of Contents
ITEM 2.	PROPERTIES	
Our principal executive office is located in the Humana Building, 500 West Main Street, Louisville, Kentucky 40202. In addition to this property, our other principal operating facilities are located in Louisville, Kentucky, Green Bay, Wisconsin, Tampa Bay, Florida, Cincinnati, Ohio and San Juan, Puerto Rico, all of which are used for customer service, enrollment, and claims processing. Our Louisville and Green Bay facilities also house other corporate functions.
We own or lease these principal operating facilities in addition to other administrative market offices and medical centers. We no longer operate most of these medical centers but, rather, lease or sublease them to their provider operators. The following table lists the location of properties we owned or leased, including our principal operating facilities, at December 31, 2007:

 	  	Medical Centers	  	Administrative
Offices	  	 	
 	  	Owned	  	Leased	  	Owned	  	Leased	  	Total	
Florida	  	5	  	46	  	6	  	70	  	127	
Texas	  	—  	  	—  	  	2	  	35	  	37	
Kentucky	  	—  	  	—  	  	10	  	13	  	23	
Ohio	  	—  	  	—  	  	—  	  	17	  	17	
Puerto Rico	  	—  	  	—  	  	—  	  	17	  	17	
Georgia	  	—  	  	—  	  	—  	  	16	  	16	
Louisiana	  	—  	  	—  	  	—  	  	13	  	13	
South Carolina	  	—  	  	—  	  	6	  	5	  	11	
Illinois	  	1	  	1	  	—  	  	7	  	9	
Wisconsin	  	—  	  	—  	  	1	  	8	  	9	
Others	  	—  	  	—  	  	—  	  	115	  	115	
 	  	 	  	 	  	 	  	 	  	 	
Total	  	6	  	47	  	25	  	316	  	394	

ITEM 3.	LEGAL PROCEEDINGS	
We are party to a variety of legal actions in the ordinary course of business, including employment matters, breach of contract actions, and tort claims. See “Legal Proceedings” in Note 14 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. We cannot predict the outcome of these suits with certainty.
 
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	
Not applicable.
 
27

Table of Contents
PART II
 
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	
 
a)	Market Information	
Our 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 Price for each quarter in the years ended December 31, 2007 and 2006:

 	  	High	  	Low	
Year Ended December 31, 2007	  	 	 	  	 	 	
First quarter	  	$	63.45	  	$	52.25	
Second quarter	  	$	65.81	  	$	59.05	
Third quarter	  	$	71.13	  	$	58.39	
Fourth quarter	  	$	78.46	  	$	70.20	
 	 	 	
Year Ended December 31, 2006	  	 	 	  	 	 	
First quarter	  	$	57.67	  	$	48.91	
Second quarter	  	$	53.76	  	$	41.60	
Third quarter	  	$	67.94	  	$	51.54	
Fourth quarter	  	$	67.97	  	$	51.60	
 
b)	Holders of our Capital Stock	
As of January 31, 2008, there were approximately 5,200 holders of record of our common stock and approximately 89,000 beneficial holders of our common stock.
 
c)	Dividends	
Since February 1993, we have not declared or paid any cash dividends on our common stock. We do not presently intend to pay dividends, and we currently plan to retain our earnings for future operations and growth of our businesses.
 
d)	Equity Compensation Plan	
The information required by this part of Item 5 is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Equity Compensation Plan Information” of such Proxy Statement.
 
28

Table of Contents
e)	Stock Performance	
The following graph compares the performance of the our common stock to the Standard & Poor’s Composite 500 Index (“S&P 500”) and the Morgan Stanley Health Care Payer Index (“Peer Group”) for the five years ended December 31, 2007. The graph assumes an investment of $100 in each of our common stock, the S&P 500, and the Peer Group on December 31, 2002.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	12/31/02	  	12/31/03	  	12/31/04	  	12/31/05	  	12/31/06	  	12/31/07	
HUM	  	$	100	  	$	229	  	$	297	  	$	543	  	$	553	  	$	753	
S&P 500	  	$	100	  	$	126	  	$	138	  	$	142	  	$	161	  	$	167	
Peer Group	  	$	100	  	$	169	  	$	246	  	$	338	  	$	360	  	$	419	
 
f)	Issuer Purchases of Equity Securities	
On February 21, 2008, the Board of Directors authorized the use of up to $150 million for the repurchase of our common shares exclusive of shares repurchased in connection with employee stock plans. The shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions.
There were no common shares acquired by the Company in open market transactions in 2007. During 2007, we acquired 406,377 shares of our common stock in connection with employee stock plans at an aggregate cost of $27.4 million, or an average of $67.45 per share.
 
29

Table of Contents
ITEM 6.	SELECTED FINANCIAL DATA	

 	  	2007 (a)	 	 	2006 (b)	 	 	2005 (c)	 	 	2004 (d)	 	  	2003 (e)	 	
 	  	(in thousands, except per common share results, membership and ratios)	 	
Summary of Operations:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Premiums	  	$	24,434,347	 	 	$	20,729,182	 	 	$	14,001,591	 	 	$	12,689,432	 	  	$	11,825,283	 	
Administrative services fees	  	 	391,515	 	 	 	341,211	 	 	 	259,437	 	 	 	272,796	 	  	 	271,676	 	
Investment income	  	 	314,239	 	 	 	291,880	 	 	 	142,976	 	 	 	132,838	 	  	 	122,041	 	
Other revenue	  	 	149,888	 	 	 	54,264	 	 	 	14,123	 	 	 	9,259	 	  	 	7,311	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total revenues	  	 	25,289,989	 	 	 	21,416,537	 	 	 	14,418,127	 	 	 	13,104,325	 	  	 	12,226,311	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Operating expenses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Benefits	  	 	20,270,531	 	 	 	17,421,204	 	 	 	11,651,470	 	 	 	10,669,647	 	  	 	9,879,421	 	
Selling, general and administrative	  	 	3,476,468	 	 	 	3,021,509	 	 	 	2,195,604	 	 	 	1,894,336	 	  	 	1,866,531	 	
Depreciation and amortization	  	 	184,812	 	 	 	148,598	 	 	 	128,858	 	 	 	117,792	 	  	 	126,779	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total operating expenses	  	 	23,931,811	 	 	 	20,591,311	 	 	 	13,975,932	 	 	 	12,681,775	 	  	 	11,872,731	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Income from operations	  	 	1,358,178	 	 	 	825,226	 	 	 	442,195	 	 	 	422,550	 	  	 	353,580	 	
Interest expense	  	 	68,878	 	 	 	63,141	 	 	 	39,315	 	 	 	23,172	 	  	 	17,367	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Income before income taxes	  	 	1,289,300	 	 	 	762,085	 	 	 	402,880	 	 	 	399,378	 	  	 	336,213	 	
Provision for income taxes	  	 	455,616	 	 	 	274,662	 	 	 	106,150	 	 	 	129,431	 	  	 	112,474	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net income	  	$	833,684	 	 	$	487,423	 	 	$	296,730	 	 	$	269,947	 	  	$	223,739	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Basic earnings per common share	  	$	5.00	 	 	$	2.97	 	 	$	1.83	 	 	$	1.68	 	  	$	1.41	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Diluted earnings per common share	  	$	4.91	 	 	$	2.90	 	 	$	1.79	 	 	$	1.66	 	  	$	1.38	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Financial Position:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Cash and investments	  	$	6,690,820	 	 	$	5,347,454	 	 	$	3,477,955	 	 	$	3,074,189	 	  	$	2,927,213	 	
Total assets	  	 	12,879,074	 	 	 	10,098,486	 	 	 	6,846,851	 	 	 	5,645,523	 	  	 	5,375,449	 	
Benefits payable	  	 	2,696,833	 	 	 	2,410,407	 	 	 	1,849,142	 	 	 	1,389,845	 	  	 	1,260,546	 	
Debt	  	 	1,687,823	 	 	 	1,269,100	 	 	 	815,044	 	 	 	636,696	 	  	 	642,638	 	
Stockholders’ equity	  	 	4,028,937	 	 	 	3,053,886	 	 	 	2,508,874	 	 	 	2,124,248	 	  	 	1,868,972	 	
Key Financial Indicators:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Benefits ratio	  	 	83.0	%	 	 	84.0	%	 	 	83.2	%	 	 	84.1	%	  	 	83.5	%	
SG&A expense ratio	  	 	13.9	%	 	 	14.3	%	 	 	15.4	%	 	 	14.6	%	  	 	15.4	%	
Medical Membership by Segment:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Government:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Medicare Advantage	  	 	1,143,000	 	 	 	1,002,600	 	 	 	557,800	 	 	 	377,200	 	  	 	328,600	 	
Medicare stand-alone PDP	  	 	3,442,000	 	 	 	3,536,600	 	 	 	—  	 	 	 	—  	 	  	 	—  	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total Medicare	  	 	4,585,000	 	 	 	4,539,200	 	 	 	557,800	 	 	 	377,200	 	  	 	328,600	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Military services insured	  	 	1,719,100	 	 	 	1,716,400	 	 	 	1,750,900	 	 	 	1,789,400	 	  	 	1,849,700	 	
Military services ASO	  	 	1,146,800	 	 	 	1,163,600	 	 	 	1,138,200	 	 	 	1,082,400	 	  	 	1,057,200	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total military services	  	 	2,865,900	 	 	 	2,880,000	 	 	 	2,889,100	 	 	 	2,871,800	 	  	 	2,906,900	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Medicaid insured	  	 	384,400	 	 	 	390,700	 	 	 	457,900	 	 	 	478,600	 	  	 	468,900	 	
Medicaid ASO	  	 	180,600	 	 	 	178,400	 	 	 	—  	 	 	 	—  	 	  	 	—  	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total Medicaid	  	 	565,000	 	 	 	569,100	 	 	 	457,900	 	 	 	478,600	 	  	 	468,900	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total Government	  	 	8,015,900	 	 	 	7,988,300	 	 	 	3,904,800	 	 	 	3,727,600	 	  	 	3,704,400	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Commercial:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Fully-insured	  	 	1,808,600	 	 	 	1,754,200	 	 	 	1,999,800	 	 	 	2,286,500	 	  	 	2,352,800	 	
ASO	  	 	1,643,000	 	 	 	1,529,600	 	 	 	1,171,000	 	 	 	1,018,600	 	  	 	712,400	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total Commercial	  	 	3,451,600	 	 	 	3,283,800	 	 	 	3,170,800	 	 	 	3,305,100	 	  	 	3,065,200	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total medical membership	  	 	11,467,500	 	 	 	11,272,100	 	 	 	7,075,600	 	 	 	7,032,700	 	  	 	6,769,600	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Specialty Membership:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Dental	  	 	3,639,800	 	 	 	1,452,000	 	 	 	1,456,500	 	 	 	1,246,700	 	  	 	1,147,400	 	
Vision	  	 	2,272,800	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	  	 	—  	 	
Other supplemental benefits	  	 	871,200	 	 	 	450,800	 	 	 	445,600	 	 	 	461,500	 	  	 	520,700	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total specialty membership	  	 	6,783,800	 	 	 	1,902,800	 	 	 	1,902,100	 	 	 	1,708,200	 	  	 	1,668,100	 	

(a)	Includes the acquired operations of DefenseWeb Technologies, Inc. from March 1, 2007, the acquired operations of CompBenefits Corporation from October 1, 2007, and the acquired operations of KMG America Corporation from November 30, 2007. Also includes the benefit of $68.9 million ($43.0 million after tax, or $0.25 per diluted share) related to our 2006 Medicare Part D reconciliation with CMS and the settlement of some TRICARE contractual provisions related to prior years.	
(b)	Includes the acquired operations of CHA Service Company from May 1, 2006.	
(c)	Includes the acquired operations of CarePlus Health Plans of Florida from February 16, 2005, and the acquired operations of Corphealth, Inc. from December 20, 2005. Also includes expenses of $71.9 million ($44.8 million after tax, or $0.27 per diluted common share) for a class action litigation settlement, as well as expenses of $27.0 million ($16.9 million after tax, or $0.10 per diluted common share) related to Hurricane Katrina. These expenses were partially offset by the realization of a tax gain contingency of $22.8 million, or $0.14 per diluted share.	
(d)	Includes the acquired operations of Ochsner Health Plan from April 1, 2004.	
(e)	Includes expenses of $30.8 million pretax ($18.8 million after tax, or $0.12 per diluted common share) for the writedown of building and equipment and software abandonment expenses. These expenses were partially offset by a gain of $15.2 million pretax ($10.1 million after tax, or $0.06 per diluted common share) for the sale of a venture capital investment. The net impact of these items reduced pretax income by $15.6 million ($8.7 million after tax, or $0.05 per diluted common share).	
 
30

Table of Contents
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
The consolidated financial statements of Humana Inc. in this document present the Company’s financial position, results of operations and cash flows, and should be read in conjunction with the following discussion and analysis. References to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries. This discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in filings with the Securities and Exchange Commission, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in Item 1A.—Risk Factors. In making these statements, we are not undertaking to address or update these factors in future filings or communications regarding our business or results except as required by law. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.
Overview
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health and supplemental benefits companies, based on our 2007 revenues of $25.3 billion. We are a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government benefit programs, and individuals. As of December 31, 2007, we had approximately 11.5 million members in our medical benefit plans, as well as approximately 6.8 million members in our specialty products.
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. We identified our segments in accordance with the aggregation provisions of SFAS 131 ,  which aggregates products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
Our results are impacted by many factors, but most notably are influenced by our ability to establish and maintain a competitive and efficient cost structure and to accurately and consistently establish competitive premium, ASO fee, and plan benefit levels that are commensurate with our benefit and administrative costs. Benefit costs are subject to a high rate of inflation due to many forces, including new higher priced technologies and medical procedures, new prescription drugs and therapies, an aging population, lifestyle challenges including obesity and smoking, the tort liability system, and government regulation.
Our industry relies on two key statistics to measure performance. The benefits ratio, which is computed by taking total benefit expenses as a percentage of premium revenues, represents a statistic used to measure underwriting profitability. The selling, general, and administrative expense ratio, or SG&A expense ratio, which is computed by taking total selling, general and administrative expenses as a percentage of premium revenues, administrative services fees and other revenues, represents a statistic used to measure administrative spending efficiency.
 
31

Table of Contents
Government Segment
Our strategy and commitment to the expanded Medicare programs, including new product choices and pharmacy benefits for seniors, has led to significant growth. Medicare Advantage membership increased to 1,143,000 members at December 31, 2007, up 14.0% from 1,002,600 at December 31, 2006 and up 104.9% from 557,800 at December 31, 2005, primarily due to sales of Private Fee-For-Service, or PFFS, products. Average Medicare Advantage membership was 26.4% higher for the year ended December 31, 2007 compared to the year ended December 31, 2006, and average stand-alone PDP membership was 19.5% higher. Likewise, Medicare premium revenues have increased $3.3 billion, or 28.5%, to $14.8 billion for the year ended December 31, 2007 from $11.5 billion for the year ended December 31, 2006. We expect Medicare Advantage membership to continue to grow into 2008, adding between 200,000 and 250,000 members by December 31, 2008, with a shift in sales mix towards our PPO and HMO offerings.
Our quarterly Government segment earnings are particularly impacted by the Medicare Part D benefit design and changes in the composition of our membership. The Medicare Part D benefit design results in coverage that varies as a member’s cumulative out-of-pocket costs pass through successive stages of a member’s plan period which begins January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total pharmacy costs in the early stages and less in the latter stages. As a result the Government segment’s benefits ratio generally improves as the year progresses. In addition, the number of low-income senior members as well as year over year changes in the mix of membership in our stand-alone PDP products, Standard, Enhanced, and Complete, affect the quarterly benefits ratio pattern. We expect the combination of these items will result in a greater proportion of earnings for 2008 to be earned in the first half versus the second half when compared to the quarterly earnings pattern in 2007.
Commercial Segment
We continue to increase the diversification of our Commercial segment membership base and continue to exercise pricing discipline relative to our fully-insured accounts. Commercial segment medical membership increased by 167,800 members from December 31, 2006 to 3,451,600 at December 31, 2007 primarily as a result of the acquisition of KMG America Corporation, discussed more fully below, which added approximately 95,900 members, primarily ASO. The remaining increase primarily was due to enrollment gains in strategic areas of commercial growth including Smart plans and other consumer offerings, individual, small group, and ASO products, partially offset by a decline in the fully-insured larger group product membership. Membership changes from exercising pricing discipline and sales focused on strategic growth areas resulted in a decline in the benefits ratio to 80.5% for the year ended December 31, 2007 compared to 81.7% for the year ended December 31, 2006.
In addition, we are diversifying our Commercial segment revenues through expanded and new specialty product offerings with the acquisitions of CompBenefits Corporation and KMG America Corporation in the fourth quarter of 2007, each discussed further below. These acquisitions significantly increased our dental membership and added new product offerings including vision and other supplemental health and life benefit plans primarily sold on a voluntary basis. The supplemental health plans cover, for example, some of the costs associated with cancer and critical illness. Along with our 2005 acquisition of Corphealth, Inc., a behavioral health care management company, these specialty acquisitions are anticipated to enhance our Commercial segment margins and our ability to appeal to more customers.
Other Highlights
 
 	•	 	Earnings increased 69% to $4.91 per diluted common share in 2007 from $2.90 per diluted common share in 2006, primarily due to increased premium revenue from higher average Medicare membership.	
 
 	•	 	Year over year comparisons were impacted by changes in estimates associated with our 2006 Medicare Part D reconciliation with CMS and the settlement of some TRICARE contractual provisions related to prior years which increased our Government segment’s results by $68.9 million pretax, or $0.25 per	
 
32

Table of Contents
 	diluted common share, for the year ended December 31, 2007. In addition, a gain in the first quarter of 2006 of $51.7 million pretax, or $0.19 per diluted common share, from the sale of a venture capital investment also impacted year over year comparisons.	
 
 	•	 	Cash flows from operations decreased $462.4 million to $1,224.3 million for the year ended December 31, 2007 compared to $1,686.7 million for the year ended December 31, 2006. Our operating cash flows were unfavorably impacted by the Part D provisions of our Medicare contracts, primarily the 2007 payment of the $725.5 million risk corridor payable to CMS associated with the 2006 contract year, partially offset by improvement in operating earnings.	
 
 	•	 	In September 2007, we received approval from CMS to resume marketing of individual Medicare PFFS plans. This announcement ended the June 15, 2007 voluntary suspension agreed to in conjunction with other industry participants.	
 
 	•	 	In October 2007, we were awarded the Department of Veterans Affairs first specialty network demonstration project, known as Project HERO (Healthcare Effectiveness through Resource Optimization), to support healthcare delivery to veterans.	
 
 	•	 	Currently, we are anticipating a formal request for proposal, or RFP, for the TRICARE contracts.	
We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain critical accounting principles and estimates impact our financial statements.
Recent Acquisitions
On November 30, 2007, our Commercial segment acquired KMG America Corporation, or KMG, for cash consideration of $156.3 million including direct transaction costs, plus the assumption of $36.1 million of long-term debt. KMG provides long-duration insurance benefits including supplemental health and life benefit plans. On October 1, 2007, our Commercial segment acquired CompBenefits Corporation, or CompBenefits, for cash consideration of $369.1 million including direct transaction costs. CompBenefits provides dental and vision insurance benefits. These acquisitions, which were financed through a combination of cash and borrowings under our credit agreement, expand our commercial product offerings allowing for significant cross-selling opportunities with our medical insurance products.
On March 1, 2007, our Government segment acquired DefenseWeb Technologies, Inc., or DefenseWeb, a company responsible for delivering customized software solutions for the Department of Defense, for cash consideration of $27.0 million.
On May 1, 2006, our Commercial segment acquired CHA Service Company, or CHA Health, a health plan serving employer groups in Kentucky, for cash consideration of $67.5 million.
On December 20, 2005, our Commercial segment acquired Corphealth, Inc., a behavioral health care management company, for cash consideration of approximately $54.0 million. This acquisition allowed Humana to integrate coverage of medical and behavior health benefits.
On February 16, 2005, we acquired CarePlus Health Plans of Florida, or CarePlus, as well as its affiliated 10 medical centers and pharmacy company for approximately $444.9 million in cash, adding approximately 50,400 Medicare Advantage members in Miami-Dade, Broward and Palm Beach counties. This acquisition enhanced our Medicare market position in South Florida.
Certain of these transactions are more fully described in Note 3 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.
 
33

Table of Contents
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 141 (Revised 2007), Business Combination, or SFAS 141R. SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items including expensing transaction and restructuring costs and adjusting earnings in periods subsequent to the acquisition for changes in deferred tax asset valuation allowances and income tax uncertainties as well as changes in the fair value of acquired contingent liabilities. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 with early adoption prohibited .  Accordingly, we are required to record and disclose business combinations following existing GAAP until January 1, 2009. We currently are evaluating the provisions of SFAS 141R.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 5,  or SFAS 160 .  SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning January 1, 2009. Like SFAS 141R discussed above, earlier adoption is prohibited. We currently are evaluating the provisions of SFAS 160.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities , or SFAS 159. SFAS 159 allows us an option to report selected financial assets and liabilities at fair value and establishes related presentation and disclosure requirements. We were required to make an election regarding this fair value option in the first quarter of 2008, and we did not elect to adopt this fair value option under SFAS 159.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require new fair value measurements. We adopted SFAS 157 on January 1, 2008. The adoption of SFAS 157 did not have a material impact on our financial position or results of operations. We are evaluating the disclosure provisions of SFAS 157 required in connection with the filing of our first quarter 2008 Form 10-Q.
 
34

Table of Contents
Comparison of Results of Operations for 2007 and 2006
Certain financial data for our two segments was as follows for the years ended December 31, 2007 and 2006:

 	  	 	 	 	Change	 	
 	  	2007	 	 	2006	 	 	Dollars	 	 	Percentage	 	
 	  	(dollars in thousands)	 	 	 	 	
Premium revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare Advantage	  	$	11,173,417	 	 	$	8,499,064	 	 	$	2,674,353	 	 	31.5	%	
Medicare stand-alone PDP	  	 	3,668,425	 	 	 	3,050,304	 	 	 	618,121	 	 	20.3	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare	  	 	14,841,842	 	 	 	11,549,368	 	 	 	3,292,474	 	 	28.5	%	
Military services	  	 	2,839,790	 	 	 	2,543,930	 	 	 	295,860	 	 	11.6	%	
Medicaid	  	 	555,594	 	 	 	520,520	 	 	 	35,074	 	 	6.7	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Government	  	 	18,237,226	 	 	 	14,613,818	 	 	 	3,623,408	 	 	24.8	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fully-insured	  	 	5,663,000	 	 	 	5,704,378	 	 	 	(41,378	)	 	(0.7	)%	
Specialty	  	 	534,121	 	 	 	410,986	 	 	 	123,135	 	 	30.0	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Commercial	  	 	6,197,121	 	 	 	6,115,364	 	 	 	81,757	 	 	1.3	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	24,434,347	 	 	$	20,729,182	 	 	$	3,705,165	 	 	17.9	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative services fees:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	73,659	 	 	$	49,442	 	 	$	24,217	 	 	49.0	%	
Commercial	  	 	317,856	 	 	 	291,769	 	 	 	26,087	 	 	8.9	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	391,515	 	 	$	341,211	 	 	$	50,304	 	 	14.7	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	1,027,531	 	 	$	513,845	 	 	$	513,686	 	 	100.0	%	
Commercial	  	 	261,769	 	 	 	248,240	 	 	 	13,529	 	 	5.4	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	1,289,300	 	 	$	762,085	 	 	$	527,215	 	 	69.2	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefits ratios(a):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	83.8	%	 	 	85.0	%	 	 	 	 	 	(1.2	)%	
Commercial	  	 	80.5	%	 	 	81.7	%	 	 	 	 	 	(1.2	)%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	83.0	%	 	 	84.0	%	 	 	 	 	 	(1.0	)%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SG&A expense ratios(b):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	11.2	%	 	 	11.8	%	 	 	 	 	 	(0.6	)%	
Commercial	  	 	21.5	%	 	 	20.0	%	 	 	 	 	 	1.5	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	13.9	%	 	 	14.3	%	 	 	 	 	 	(0.4	)%	

(a)	Represents total benefit expense as a percentage of premium revenue. Also known as the benefits ratio.	
(b)	Represents total selling, general, and administrative expenses as a percentage of premium revenues, administrative services fees, and other revenues. Also known as the SG&A expense ratio.	
 
35

Table of Contents
Medical membership was as follows at December 31, 2007 and 2006:

 	  	 	  	 	  	Change	 	
 	  	2007	  	2006	  	Members	 	 	Percentage	 	
Government segment medical members:	  	 	  	 	  	 	 	 	 	 	
Medicare Advantage	  	1,143,000	  	1,002,600	  	140,400	 	 	14.0	%	
Medicare stand-alone PDP	  	3,442,000	  	3,536,600	  	(94,600	)	 	(2.7	)%	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicare	  	4,585,000	  	4,539,200	  	45,800	 	 	1.0	%	
 	  	 	  	 	  	 	 	 	 	 	
Military services	  	1,719,100	  	1,716,400	  	2,700	 	 	0.2	%	
Military services ASO	  	1,146,800	  	1,163,600	  	(16,800	)	 	(1.4	)%	
 	  	 	  	 	  	 	 	 	 	 	
Total military services	  	2,865,900	  	2,880,000	  	(14,100	)	 	(0.5	)%	
 	  	 	  	 	  	 	 	 	 	 	
Medicaid	  	384,400	  	390,700	  	(6,300	)	 	(1.6	)%	
Medicaid ASO	  	180,600	  	178,400	  	2,200	 	 	1.2	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicaid	  	565,000	  	569,100	  	(4,100	)	 	(0.7	)%	
 	  	 	  	 	  	 	 	 	 	 	
Total Government	  	8,015,900	  	7,988,300	  	27,600	 	 	0.3	%	
 	  	 	  	 	  	 	 	 	 	 	
Commercial segment medical members:	  	 	  	 	  	 	 	 	 	 	
Fully-insured	  	1,808,600	  	1,754,200	  	54,400	 	 	3.1	%	
ASO	  	1,643,000	  	1,529,600	  	113,400	 	 	7.4	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Commercial	  	3,451,600	  	3,283,800	  	167,800	 	 	5.1	%	
 	  	 	  	 	  	 	 	 	 	 	
Total medical membership	  	11,467,500	  	11,272,100	  	195,400	 	 	1.7	%	
 	  	 	  	 	  	 	 	 	 	 	
These tables of financial data should be reviewed in connection with the discussion on the following pages.
Summary
Net income was $833.7 million, or $4.91 per diluted common share, in 2007 compared to $487.4 million, or $2.90 per diluted common share, in 2006. The year-over-year increase in earnings primarily resulted from higher operating earnings in our Government segment largely due to increased premium revenue from higher average Medicare membership.
Premium Revenues and Medical Membership
Premium revenues increased $3.7 billion, or 17.9%, to $24.4 billion for 2007, compared to $20.7 billion for 2006 primarily due to higher premium revenues in the Government segment. Premium revenues reflect changes in membership and increases in average per member premiums. Items impacting average per member premiums include changes in premium rates as well as changes in the geographic mix of membership, the mix of product offerings, the mix of benefit plans selected by our membership, the impact of the risk corridor provisions, and changes in health status factors or risk adjustment provisions.
Government segment premium revenues increased $3.6 billion, or 24.8%, to $18.2 billion for 2007 compared to $14.6 billion for 2006 primarily attributable to higher average Medicare membership from the expanded participation in various Medicare products. Average membership is calculated by summing the ending membership for each month in a period and dividing the result by the number of months in a period. Average Medicare Advantage membership increased 26.4% for 2007 compared to 2006. Sales of our PFFS products drove the majority of the 140,400 increase in ending Medicare Advantage members since December 31, 2006. Average Medicare stand-alone PDP membership increased 19.5% for 2007 compared to 2006.
Commercial segment premium revenues increased $81.8 million, or 1.3%, to $6.2 billion for 2007 primarily due to our specialty product offerings, including dental, vision, and other supplemental health and life products,
 
36

Table of Contents
as a result of the CompBenefits and KMG acquisitions. Increases in average fully-insured per member premiums were offset by a decrease in average fully-insured membership. Average fully-insured group membership decreased 6.9% for 2007 compared to 2006, primarily as a result of a large group account moving from fully-insured to ASO on July 1, 2006, partially offset by membership gains in strategic areas of commercial growth including Smart plans and other consumer offerings, individual, and small group product lines. Average per member premiums for our fully-insured group medical members increased approximately 5.2% from 2006 to 2007.
Administrative Services Fees
Our administrative services fees were $391.5 million for 2007, an increase of $50.3 million, or 14.7%, from $341.2 million for 2006. The increase was due to increases in both our Government and Commercial segments.
For the Government segment, administrative services fees increased $24.2 million, or 49.0%, to $73.7 million for 2007 as a result of the DefenseWeb acquisition and the award of a new Puerto Rico ASO contract during the fourth quarter of 2006.
For the Commercial segment, administrative services fees increased $26.1 million, or 8.9%, from $291.8 million for 2006 to $317.9 million for 2007 primarily from higher average ASO membership, increasing 5.7% for 2007 compared to 2006.
Investment Income
Investment income totaled $314.2 million for 2007, an increase of $22.3 million from $291.9 million for 2006 primarily due to higher average investment balances in 2007 partially offset by a decrease in realized gains related to the sale of venture capital investments in 2006. Investment income for 2006 included a $51.7 million realized gain related to the sale of a venture capital investment in the first quarter.
Other Revenue
Other revenue totaled $149.9 million for 2007, an increase of $95.6 million from $54.3 million for 2006. The increase primarily was attributable to increased revenue from growth related to  Right Source SM , our mail order pharmacy.
Benefit Expenses
Consolidated benefit expense was $20.3 billion for 2007, an increase of $2.9 billion, or 16.7%, from $17.4 billion for 2006. The increase primarily was driven by the increase in the average number of Medicare members and an increase in average per member claims costs primarily from the effects of health care inflation.
The consolidated benefits ratio for 2007 was 83.0%, a 100 basis point decrease from 84.0% for 2006. The decrease primarily was attributable to improvements in the benefits ratio for both the Commercial and Government segments.
The Government segment’s benefit expenses increased $2.9 billion, or 23.0%, during 2007 compared to 2006 primarily due to an increase in the average number of Medicare members, including those enrolled in our PDPs, and to a lesser extent, an increase in average per member claims costs.
The Government segment’s benefits ratio for 2007 was 83.8%, a 120 basis point decrease from 2006 of 85.0%. The decrease in the benefits ratio resulted from the combination of the extended enrollment period in 2006, improvement in the stand-alone PDP Complete plan, changes in estimates associated with our 2006 Medicare Part D reconciliation with CMS as well as the settlement of some TRICARE contractual provisions
 
37

Table of Contents
related to prior years. Part D benefit designs result in us sharing a greater portion of the responsibilities for total pharmacy costs in the early stages of a member’s plan period and less in the later stages, resulting in a declining benefits ratio as the year progresses. The extended enrollment period in 2006, which ended June 30, 2006, skewed the standard pattern associated with the progression of members through the stages of Medicare Part D benefits. Regarding the Complete plan, benefit design changes improved the performance of that offering. Changes in estimates associated with our 2006 Medicare Part D reconciliation with CMS and the settlement of some TRICARE contractual provisions related to the prior years decreased the benefits ratio 40 basis points for 2007. These changes in estimates resulted from 1) the resolution of first year Medicare Part D implementation matters including enrollment discrepancies, of which similar adjustments in the future are not expected to be material due to the program’s operational improvement in 2007; and 2) the adjustment of certain TRICARE reserves as a result of the settlement of claims payment accuracy and risk share provisions for prior option periods.
The Commercial segment’s benefit expense decreased $6.2 million, or 0.1%, from 2006 to 2007. This decrease primarily results from the decrease in fully-insured group membership partially offset by the increase in average per member claims costs due to medical expense inflation.
The benefits ratio for the Commercial segment of 80.5% for 2007 decreased 120 basis points from the 2006 benefits ratio of 81.7%. The decrease in the benefits ratio primarily reflects an increase in the percentage of individual and small group members comprising our total fully-insured block, the CompBenefits and KMG acquisitions which added dental, vision, and other supplemental health and life members, and improving medical cost utilization. Individual and smaller group as well as specialty, primarily dental and vision, accounts generally carry a lower benefits ratio and a higher SG&A expense ratio compared to larger group accounts due to higher distribution costs. See related SG&A expense ratio discussion in the following section.
SG&A Expense
Consolidated SG&A expenses increased $455.0 million, or 15.1%, during 2007 compared to 2006. The increase primarily resulted from an increase in the number of employees due to the Medicare expansion, expenses associated with  Right Source SM , our mail order pharmacy, and higher Medicare marketing expenses associated with higher sales goals for 2008 compared to 2007. The number of employees increased by 2,700 to 25,000 at December 31, 2007 from 22,300 at December 31, 2006, or 12.1%.
The consolidated SG&A expense ratio for 2007 was 13.9%, decreasing 40 basis points from 14.3% for 2006. The SG&A expense ratio decrease resulted from improving administrative cost efficiency and productivity gains associated with servicing our members offset by our expanding mail order pharmacy business as well as differences in the composition of our medical membership portfolio for 2007 versus 2006. The consolidated SG&A expense ratio is expected to be in the range of 13.5% to 14.0% for 2008.
Our Government and Commercial segments bear both direct and shared indirect overhead SG&A expenses. We allocate the indirect overhead expenses shared by the two segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
SG&A expenses in the Government segment increased $312.0 million, or 18.0%, during 2007 compared to 2006. The Government segment SG&A expense ratio decreased 60 basis points from 11.8% for 2006 to 11.2% for 2007. The decrease primarily resulted from efficiency and productivity gains associated with servicing higher average Medicare membership.
The Commercial segment SG&A expenses increased $143.0 million, or 11.1%, during 2007 compared to 2006. The Commercial segment SG&A expense ratio increased 150 basis points from 20.0% for 2006 to 21.5% for 2007. This increase primarily resulted from the continued shift in the mix of membership towards ASO, an increase in the percentage of individual and small group members comprising our fully-insured membership, and
 
38

Table of Contents
administrative costs associated with increased business for our mail order pharmacy. For 2007, 46.8% of our Commercial segment average medical membership was related to ASO business compared to 44.5% for 2006. Likewise, at December 31, 2007, 29.3% of our Commercial segment average medical membership was related to individual and small group accounts compared to 27.7% at December 31, 2006. Fee based ASO business carries a higher SG&A expense ratio than fully-insured business since there is no benefit expense or offsetting premium revenue. Additionally, individual and smaller group accounts carry a higher SG&A expense ratio due to higher distribution costs compared to larger group accounts.
Depreciation and Amortization
Depreciation and amortization for 2007 totaled $184.8 million compared to $148.6 million for 2006, an increase of $36.2 million, or 24.4%. The increase primarily resulted from increased capital expenditures related to the Medicare expansion.
Interest Expense
Interest expense was $68.9 million for 2007, compared to $63.1 million for 2006, an increase of $5.8 million, primarily due to higher average outstanding debt partially offset by lower interest rates.
Income Taxes
Our effective tax rate for 2007 of 35.3% compared to the effective tax rate of 36.0% for 2006. The decrease is primarily due to a lower state tax rate. The lower state tax rate results from a shift in the geographic mix of revenues to states with lower tax rates. See Note 9 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate. We expect the 2008 effective tax rate to be in the range of 35.5% to 36.0%.
Comparison of Results of Operations for 2006 and 2005
Year over year comparisons have been impacted by litigation and Hurricane Katrina expenses in 2005 that did not recur in 2006, as more fully discussed in the following sections.
2005 Settlement of Class Action Litigation
On October 17, 2005, we reached an agreement with representatives of more than 700,000 physicians to settle a nationwide class action suit. In connection with the settlement and other related litigation costs, we recorded pretax administrative expenses of $71.9 million ($44.8 million after taxes, or $0.27 per diluted common share) in the third quarter of 2005. Of the $71.9 million, $33.4 million was included in the Government segment results and the remaining $38.5 million was included in the Commercial segment results. These amounts were paid in 2006.
2005 Hurricane Katrina
Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of Hurricane Katrina in August 2005. Expenses related to Hurricane Katrina primarily stemmed from our efforts, in cooperation with Departments of Insurance in the affected states, to help our members by offering participating-provider benefits at non-participating providers’ rates, paying claims for members who were unable at the time to meet their premium obligations and similar measures. In connection with Hurricane Katrina, we recorded pretax medical and administrative expenses of $27.0 million ($16.9 million after taxes, or $0.10 per diluted common share) during the third and fourth quarters of 2005. Of the $27.0 million, $5.9 million was included in the Government segment results and the remaining $21.1 million was included in the Commercial segment results.
 
39

Table of Contents
Results of Operations
Certain financial data for our two segments was as follows for the years ended December 31, 2006 and 2005:

 	  	 	 	 	 	 	 	Change	 	
 	  	2006	 	 	2005	 	 	Dollars	 	 	Percentage	 	
 	  	(dollars in thousands)	 	 	 	 	
Premium revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare Advantage	  	$	8,499,064	 	 	$	4,590,362	 	 	$	3,908,702	 	 	85.2	%	
Medicare stand-alone PDP	  	 	3,050,304	 	 	 	—  	 	 	 	3,050,304	 	 	100.0	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Medicare	  	 	11,549,368	 	 	 	4,590,362	 	 	 	6,959,006	 	 	151.6	%	
Military services	  	 	2,543,930	 	 	 	2,407,653	 	 	 	136,277	 	 	5.7	%	
Medicaid	  	 	520,520	 	 	 	548,714	 	 	 	(28,194	)	 	(5.1	)%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Government	  	 	14,613,818	 	 	 	7,546,729	 	 	 	7,067,089	 	 	93.6	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fully-insured	  	 	5,704,378	 	 	 	6,068,115	 	 	 	(363,737	)	 	(6.0	)%	
Specialty	  	 	410,986	 	 	 	386,747	 	 	 	24,239	 	 	6.3	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Commercial	  	 	6,115,364	 	 	 	6,454,862	 	 	 	(339,498	)	 	(5.3	)%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	20,729,182	 	 	$	14,001,591	 	 	$	6,727,591	 	 	48.0	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative services fees:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	49,442	 	 	$	50,059	 	 	$	(617	)	 	(1.2	)%	
Commercial	  	 	291,769	 	 	 	209,378	 	 	 	82,391	 	 	39.4	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	341,211	 	 	$	259,437	 	 	$	81,774	 	 	31.5	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	$	513,845	 	 	$	316,676	 	 	$	197,169	 	 	62.3	%	
Commercial	  	 	248,240	 	 	 	86,204	 	 	 	162,036	 	 	188.0	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	762,085	 	 	$	402,880	 	 	$	359,205	 	 	89.2	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefits ratios(a):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	85.0	%	 	 	83.1	%	 	 	 	 	 	1.9	%	
Commercial	  	 	81.7	%	 	 	83.3	%	 	 	 	 	 	(1.6	)%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	84.0	%	 	 	83.2	%	 	 	 	 	 	0.8	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SG&A expense ratios(b):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Government	  	 	11.8	%	 	 	12.7	%	 	 	 	 	 	(0.9	)%	
Commercial	  	 	20.0	%	 	 	18.5	%	 	 	 	 	 	1.5	%	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	14.3	%	 	 	15.4	%	 	 	 	 	 	(1.1	)%	

(a)	Represents total benefit expense as a percentage of premium revenue. Also known as the benefits ratio.	
(b)	Represents total selling, general, and administrative expenses as a percentage of premium revenues, administrative services fees, and other revenues. Also known as the SG&A expense ratio.	
 
40

Table of Contents
Medical membership was as follows at December 31, 2006 and 2005:

 	  	 	  	 	  	Change	 	
 	  	2006	  	2005	  	Members	 	 	Percentage	 	
Government segment medical members:	  	 	  	 	  	 	 	 	 	 	
Medicare Advantage	  	1,002,600	  	557,800	  	444,800	 	 	79.7	%	
Medicare stand-alone PDP	  	3,536,600	  	—  	  	3,536,600	 	 	100.0	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicare	  	4,539,200	  	557,800	  	3,981,400	 	 	713.8	%	
 	  	 	  	 	  	 	 	 	 	 	
Military services	  	1,716,400	  	1,750,900	  	(34,500	)	 	(2.0	)%	
Military services ASO	  	1,163,600	  	1,138,200	  	25,400	 	 	2.2	%	
 	  	 	  	 	  	 	 	 	 	 	
Total military services	  	2,880,000	  	2,889,100	  	(9,100	)	 	(0.3	)%	
 	  	 	  	 	  	 	 	 	 	 	
Medicaid	  	390,700	  	457,900	  	(67,200	)	 	(14.7	)%	
Medicaid ASO	  	178,400	  	—  	  	178,400	 	 	100.0	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Medicaid	  	569,100	  	457,900	  	111,200	 	 	24.3	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Government	  	7,988,300	  	3,904,800	  	4,083,500	 	 	104.6	%	
 	  	 	  	 	  	 	 	 	 	 	
Commercial segment medical members:	  	 	  	 	  	 	 	 	 	 	
Fully-insured	  	1,754,200	  	1,999,800	  	(245,600	)	 	(12.3	)%	
ASO	  	1,529,600	  	1,171,000	  	358,600	 	 	30.6	%	
 	  	 	  	 	  	 	 	 	 	 	
Total Commercial	  	3,283,800	  	3,170,800	  	113,000	 	 	3.6	%	
 	  	 	  	 	  	 	 	 	 	 	
Total medical membership	  	11,272,100	  	7,075,600	  	4,196,500	 	 	59.3	%	
 	  	 	  	 	  	 	 	 	 	 	
These tables of financial data should be reviewed in connection with the discussion on the following pages.
Summary
Net income was $487.4 million, or $2.90 per diluted common share, in 2006 compared to $296.7 million, or $1.79 per diluted common share, in 2005. Net income for 2005 included expenses resulting from the physician class action settlement ($44.8 million after taxes, or $0.27 per diluted common share) and costs associated with Hurricane Katrina ($16.9 million after taxes, or $0.10 per diluted common share) described previously. Net income for 2005 also included the beneficial effect of an effective tax rate of approximately 26.3% compared to 36.0% in 2006, primarily due to the resolution of a contingent gain ($22.8 million, or $0.14 per diluted common share) during the first quarter of 2005 in connection with the expiration of the statute of limitations on an uncertain tax position related to the 2000 tax year. After considering litigation and Hurricane Katrina expenses and the favorable tax gain contingency in 2005, the remaining year over year improvement in 2006 results from earnings increases in both the Government and Commercial segments.
Premium Revenues and Medical Membership
Premium revenues reflect changes in membership and increases in average per member premiums. Items impacting average per member premiums include changes in premium rates as well as changes in the geographic mix of membership, the mix of product offerings, and the mix of benefit plans selected by our membership. Premium revenues increased 48.0% to $20.7 billion for 2006, compared to $14.0 billion for 2005. Higher Government segment premium revenues were partially offset by a decrease in Commercial segment premium revenues. Premium revenues reflect higher enrollment in our Medicare Advantage plans and the addition of our stand-alone PDP business.
Government segment premium revenues increased $7.1 billion, or 93.6% to $14.6 billion for 2006, compared to $7.5 billion for 2005. This increase primarily was attributable to the expanded participation in various Medicare products and geographic markets. Sales of our PFFS products drove the majority of the 79.7%
 
41

Table of Contents
increase in Medicare Advantage members since December 31, 2005. At December 31, 2006, approximately 47% of the company’s Medicare Advantage members were in PFFS plans versus 22% at December 31, 2005. Additionally, our new Medicare stand-alone PDP products added 3,536,600 members and $3.1 billion in new premium revenues during 2006. Medicaid membership increased 111,200 members from December 31, 2005 due primarily to the award of a new Puerto Rico regional ASO contract in the fourth quarter of 2006 partially offset by eligible Puerto Rico Medicaid members choosing to move into the Medicare program.
Commercial segment premium revenues decreased 5.3% to $6.1 billion for 2006 compared to $6.5 billion for 2005. Lower premium revenues primarily resulted from a reduction of fully-insured membership. Our fully- insured membership decreased 12.3%, or 245,600 members, to 1,754,200 at December 31, 2006 compared to 1,999,800 at December 31, 2005 primarily as a result of continued attrition within the fully-insured group accounts, partially offset by membership gains from the CHA acquisition, and membership increases in the individual as well as Smart plans and other consumer product lines. Attrition in the fully-insured group accounts results from a competitive pricing environment. Average per member premiums for our fully-insured group medical members increased approximately 5.7% from 2005 to 2006. The average per member premium increase reflects a shift in the mix in our fully-insured group membership from large groups to individuals and small groups as large groups continue to move to an administrative services only offering. Average per member premiums are lower for individuals and small groups than large groups.
Administrative Services Fees
Our administrative services fees for 2006 were $341.2 million, an increase of $81.8 million, or 31.5%, from $259.4 million for 2005. The increase was due to increases in our Commercial segment administrative services fees.
For the Commercial segment, administrative services fees increased $82.4 million, or 39.4%, from $209.4 million for 2005 to $291.8 million for 2006. This increase resulted from increased membership. ASO membership of 1,171,000 members at December 31, 2005 increased 30.6% to 1,529,600 at December 31, 2006. Average per member fees increased approximately 19% in 2006. ASO fees from our Commercial segment represent 86% of total ASO fees.
Investment Income
Investment income totaled $291.9 million for 2006, an increase of $148.9 million from $143.0 million for 2005. The increase in investment income for 2006 primarily resulted from higher venture capital gains, and higher average invested balances and interest rates. Investment income for 2006 includes $75.7 million in net realized gains related to venture capital investments compared to $5.7 million in 2005.
Other Revenue
Other revenue totaled $54.3 million for 2006, an increase of $40.2 million from $14.1 million for 2005. The increase primarily was attributable to revenue from our new in-house mail order pharmacy operations in 2006.
Benefit Expenses
Consolidated benefit expense was $17.4 billion for 2006, an increase of $5.7 billion, or 48.7%, from $11.7 billion for 2005. The increase was primarily driven by the increase in the number of members, particularly higher cost Medicare members, and an increase in average per member claims costs primarily from the effects of health care inflation.
The consolidated benefits ratio for 2006 was 84.0%, an 80 basis point increase from 83.2% for 2005. Higher benefit expenses from Hurricane Katrina increased the 2005 benefits ratio 20 basis points. An improvement in the Commercial segment benefits ratio was more than offset by a higher Government segment benefits ratio impacted by the new Medicare stand-alone PDP offerings.
 
42

Table of Contents
The Government segment’s benefit expenses increased $6.2 billion, or 98.1%, during 2006 compared to 2005. The increase was primarily due to an increase in the number of Medicare members, including those enrolled in our stand-alone PDPs.
The Government segment’s benefits ratio for 2006 was 85.0%, a 190 basis point increase from 2005 of 83.1%. The increase was primarily attributable to the introduction of the stand-alone PDPs in January 2006 with a benefits ratio of 92.5% for 2006. The stand-alone PDP benefits ratio was negatively impacted by a benefits ratio in our Complete plan of 115.9% for 2006, one of three stand-alone PDP offerings representing approximately 12% of our stand-alone PDP members.
The Commercial segment’s benefit expenses decreased $382.3 million, or 7.1%, from 2005 to 2006. This decrease primarily results from the decrease in fully-insured group membership partially offset by the increase in average per member claims costs. The increase in average per member claims costs for fully-insured group members was approximately 6% for 2006.
The benefits ratio for the Commercial segment of 81.7% in 2006 decreased 160 basis points from the 2005 benefits ratio of 83.3%. Higher benefit expenses from Hurricane Katrina increased the 2005 benefits ratio 30 basis points. The decrease in the benefits ratio primarily reflects improving medical cost utilization trends and an increase in the percentage of individual and small group members comprising our total fully-insured block. Individual and smaller group accounts generally carry a lower benefits ratio than larger group accounts.
SG&A Expense
Consolidated SG&A expenses increased $825.9 million, or 37.6%, during 2006 compared to 2005. The increase primarily resulted from an increase in the number of employees and increased sales and marketing costs due to the Medicare expansion offset by prior year litigation expenses which did not recur in 2006. The number of employees increased by 3,600 to 22,300 from 18,700 at December 31, 2005, primarily in the customer service and marketing functions associated with the growth in the Medicare business.
The consolidated SG&A expense ratio for 2006 was 14.3%, decreasing 110 basis points from 15.4% for 2005. Expenses related to the litigation settlement increased the SG&A expense ratio 50 basis points for 2005. After considering the effects of the litigation settlement, the remaining decrease resulted from growth in revenues from higher average medical membership outpacing the related increase in administrative spending on a consolidated basis during 2006.
Our Government and Commercial segments bear both direct and shared indirect overhead SG&A expenses. We allocate the indirect overhead expenses shared by the two segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
Government segment SG&A expenses of $1,730.2 million for 2006 increased $766.9 million, or 79.6%, from 2005. The increase primarily resulted from higher expenses associated with the infrastructure build out of our expanded Medicare offerings in the latter half of 2005 through the first half of 2006 as well as increased sales and marketing costs in 2006 also related to the Medicare expansion.
The Government segment SG&A expense ratio decreased 90 basis points from 12.7% for 2005 to 11.8% for 2006. Expenses related to the litigation settlement increased the SG&A expense ratio 50 basis points for 2005. After considering the effect of the litigation, the decrease from 2005 to 2006 resulted from average membership and related revenue associated with the Medicare expansion reaching the levels contemplated by the now complete build-out of infrastructure and support functions which began in the latter half of 2005, providing more leverage against administrative costs in 2006.
The Commercial segment SG&A expenses increased $59.0 million, or 4.8%, during 2006 compared to 2005. The Commercial segment SG&A expense ratio of 20.0% for 2006 increased 150 basis points from 18.5%
 
43

Table of Contents
for 2005. Expenses related to the litigation settlement increased the SG&A expense ratio 60 basis points for 2005. After considering the effect of the litigation, the increase primarily resulted from an increase in the percentage of small group members comprising our total fully-insured membership as well as the continued shift in the mix of membership towards ASO. At December 31, 2005, 37% of our Commercial segment medical membership related to ASO business compared to 47% at December 31, 2006. Small group accounts bear a higher SG&A ratio than larger group accounts and ASO business bears a significantly higher SG&A ratio than fully-insured business.
Depreciation and Amortization
Depreciation and amortization for 2006 totaled $148.6 million compared to $128.9 million in 2005, an increase of $19.7 million, or 15.3%. The increase resulted primarily from capital expenditures related to the Medicare expansion.
Interest Expense
Interest expense was $63.1 million for 2006, compared to $39.3 million for 2005, an increase of $23.8 million. This increase primarily resulted from higher average outstanding debt and higher interest rates.
Income Taxes
Our effective tax rate for 2006 of 36.0% increased 9.7% compared to the 26.3% effective tax rate for 2005. The higher effective tax rate for 2006 is primarily due to the resolution of a contingent tax gain of $22.8 million in the first quarter of 2005 in connection with the expiration of the statute of limitations on an uncertain tax position related to the 2000 tax year which did not recur in 2006. See Note 9 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data for a complete reconciliation of the federal statutory rate to the effective tax rate.
Liquidity
Our primary sources of cash include receipts of premiums, ASO fees, investment income, as well as proceeds from the sale or maturity of our investment securities and from borrowings. Our primary uses of cash include disbursements for claims payments, SG&A expenses, interest expense, taxes, purchases of investment securities, acquisitions, capital expenditures, and payments on borrowings. Because premiums generally are collected in advance of claim payments by a period of up to several months in many instances, our business normally should produce positive cash flows during periods of increasing enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing enrollment. We have experienced improving operating cash flows associated with growth in Medicare enrollment. The use of operating cash flows may be limited by regulatory requirements which require, among other items, that our regulated subsidiaries maintain minimum levels of capital.
Cash and cash equivalents increased to $2,040.5 million at December 31, 2007 from $1,740.3 million at December 31, 2006. The change in cash and cash equivalents for the years ended December 31, 2007, 2006 and 2005 is summarized as follows:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Net cash provided by operating activities	  	$	1,224,262	 	 	$	1,686,712	 	 	$	610,082	 	
Net cash used in investing activities	  	 	(1,845,391	)	 	 	(1,654,066	)	 	 	(767,276	)	
Net cash provided by financing activities	  	 	921,278	 	 	 	975,642	 	 	 	309,131	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Increase in cash and cash equivalents	  	$	300,149	 	 	$	1,008,288	 	 	$	151,937	 	

44

Table of Contents
Cash Flow from Operating Activities
The decrease in operating cash flows for 2007 resulted from timing of cash flows associated with our Medicare Part D offerings, offset by Medicare enrollment growth and improved earnings. During 2007, we paid $725.5 million to CMS under the risk corridor terms of our 2006 contracts with CMS. Similarly, the provision for net amounts payable under the risk corridor terms of our 2007 contracts with CMS, which will be paid in 2008, was $102.6 million.
The increase in operating cash flows for 2006 compared to 2005 resulted from Medicare enrollment growth, improved earnings, and the timing of cash flows associated with our Medicare Part D offerings which were new beginning January 1, 2006. Our 2006 Part D results related to both stand-alone PDP and MA-PD offerings reflected provisions for net amounts payable to CMS under the risk corridor terms of our contracts with CMS. This risk corridor amount, which was paid in 2007 as discussed above, reflects favorable experience on allowable risk corridor costs during the second half of 2006 compared to the expectations set out in our original annual bid for 2006 contracts with CMS. The favorable experience was associated with the Medicare Part D portion of our MA-PD offerings as well as our Standard and Enhanced stand-alone plans.
Comparisons of our operating cash flows also are impacted by other changes in our working capital. The most significant drivers of changes in our working capital are typically the timing of receipts for premiums and ASO fees and payments of benefit expenses. We illustrate these changes with the following summaries of receivables and benefits payable.
The detail of total net receivables was as follows at December 31, 2007, 2006 and 2005:

 	  	 	 	 	 	 	 	 	 	 	Change	 	
 	  	2007	 	 	2006	 	 	2005	 	 	2007	 	 	2006	 	
 	  	(in thousands)	 	
Military services:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Base receivable	  	$	404,570	 	 	$	452,509	 	 	$	509,444	 	 	$	(47,939	)	 	$	(56,935	)	
Change orders	  	 	5,168	 	 	 	4,247	 	 	 	32,285	 	 	 	921	 	 	 	(28,038	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Military services subtotal	  	 	409,738	 	 	 	456,756	 	 	 	541,729	 	 	 	(47,018	)	 	 	(84,973	)	
Medicare	  	 	137,345	 	 	 	143,875	 	 	 	66,536	 	 	 	(6,530	)	 	 	77,339	 	
Commercial and other	  	 	126,718	 	 	 	125,899	 	 	 	162,944	 	 	 	819	 	 	 	(37,045	)	
Allowance for doubtful accounts	  	 	(68,260	)	 	 	(45,589	)	 	 	(32,557	)	 	 	(22,671	)	 	 	(13,032	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net receivables	  	$	605,541	 	 	$	680,941	 	 	$	738,652	 	 	 	(75,400	)	 	 	(57,711	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reconciliation to cash flow statement:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for doubtful accounts	  	 	 	 	 	 	 	 	 	 	 	 	 	 	28,922	 	 	 	20,901	 	
Receivables from acquisition	  	 	 	 	 	 	 	 	 	 	 	 	 	 	(14,267	)	 	 	(843	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in receivables per cash flow statement resulting in cash from operations	  	 	 	 	 	 	 	 	 	 	 	 	 	$	(60,745	)	 	$	(37,653	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Military services base receivables consist of estimated claims owed from the federal government for health care services provided to beneficiaries and underwriting fees. The claim reimbursement component of military services base receivables is generally collected over a three to four month period. The timing of claim reimbursements resulted in the decrease in base receivables from 2006 to 2007 as well as from 2005 to 2006. The $28.0 million decrease in military services change order receivables from 2005 to 2006 resulted from the collection of receivables in 2006 related to an equitable adjustment to the contract price negotiated in late 2005 for services not originally specified in the contract.
 
45

Table of Contents
Despite significant growth in Medicare, Medicare receivables declined $6.5 million from 2006 to 2007 due to the net collection of receivables associated with the CMS risk adjustment model. Likewise, the $77.3 million increase in Medicare receivables from 2005 to 2006 resulted from an increase in receivables associated with the CMS risk adjustment model.
The decline in Commercial and other receivables from 2005 to 2006 resulted from the change in the mix of members from fully-insured to ASO.
The $22.7 million increase in the allowance for doubtful accounts from 2006 to 2007 resulted from the growth of the Medicare business.
The detail of benefits payable was as follows at December 31, 2007, 2006 and 2005:

 	 	 	 	 	 	 	 	Change	 	
 	 	2007	 	2006	 	2005	 	2007	 	 	2006	 	
 	 	(in thousands)	 	
IBNR(1)	 	$	1,712,599	 	$	1,600,198	 	$	1,013,949	 	$	112,401	 	 	$	586,249	 	
Military services benefits payable(2)	 	 	341,372	 	 	430,674	 	 	514,426	 	 	(89,302	)	 	 	(83,752	)	
Reported claims in process(3)	 	 	91,938	 	 	98,033	 	 	67,065	 	 	(6,095	)	 	 	30,968	 	
Other benefits payable(4)	 	 	550,924	 	 	281,502	 	 	253,702	 	 	269,422	 	 	 	27,800	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total benefits payable	 	$	2,696,833	 	$	2,410,407	 	$	1,849,142	 	 	286,426	 	 	 	561,265	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reconciliation to cash flow statement:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefits payable from acquisition	 	 	 	 	 	 	 	 	 	 	 	(41,029	)	 	 	(21,198	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in benefits payable in cash flow statement resulting in cash from operations	 	 	 	 	 	 	 	 	 	 	$	245,397	 	 	$	540,067	 	

(1)	IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in a lower IBNR).	
(2)	Military services benefits payable primarily results from the timing of the cost of providing health care services to beneficiaries and the related reimbursement by the federal government as more fully described in Note 2 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. A corresponding receivable is included in the base receivable in the previous receivables table.	
(3)	Reported claims in process represents the estimated valuation of processed claims that are in the post claim adjudication process, which consists of administrative functions such as audit and check batching and handling.	
(4)	Other benefits payable includes capitation and pharmacy payables. The balance due to our pharmacy benefit administrator fluctuates due to bi-weekly payments and the month-end cutoff.	
Benefits payable increased during 2007 and 2006 primarily due to growth in Medicare membership and to a lesser extent medical claims inflation.
Cash Flow from Investing Activities
We reinvested a portion of our operating cash flows over the last several years in investment securities, primarily short-duration fixed income securities, totaling $430.1 million in 2007, $862.1 million in 2006, and $233.3 million in 2005. Our ongoing capital expenditures primarily relate to our information technology initiatives and administrative facilities necessary for activities such as claims processing, billing and collections, medical utilization review, and customer service. Total capital expenditures, excluding acquisitions, were $239.2 million in 2007, $193.2 million in 2006, and $165.8 million in 2005. The increased spending in 2007 primarily resulted from the
 
46

Table of Contents
purchase of three medical centers which were previously leased in South Florida in the first quarter of 2007 for approximately $20.4 million. The increased spending in 2006 and 2005 primarily resulted from our Medicare expansion initiatives. Excluding acquisitions, we expect total capital expenditures in 2008 of approximately $275 million.
During 2007, we paid $369.1 million to acquire CompBenefits, $156.3 million to acquire KMG, and $27.0 million to acquire DefenseWeb. These amounts include $58.9 million of cash acquired.
During 2006, we paid $65.8 million to acquire CHA Health, including $43.5 million of cash acquired, and we paid $5.8 million to settle the purchase price contingencies associated with prior year acquisitions. During 2005, net of cash acquired, we paid $444.9 million to acquire CarePlus, and $54.0 million to acquire Corphealth. These amounts include $96.1 million of cash acquired.
Cash Flow from Financing Activities
During 2007, our net borrowings of $350 million under our credit agreements related to the financing of the CompBenefits and KMG acquisitions. During 2006, our borrowings of $550 million and repayments of $300 million under our credit agreements related to the timing of our senior notes issuance and repayment, and funding of additional capital into certain subsidiaries during 2006 in conjunction with growth in Medicare revenues. During 2005, we borrowed $494 million under our credit agreement related to the financing of the CarePlus acquisition, a portion of which was repaid in 2005.
During 2006, we issued $500 million of 6.45% senior notes due June 1, 2016. Our net proceeds, reduced for the discount and cost of the offering were $494.3 million. We used the proceeds from the offering for the repayment of the outstanding balance under our credit agreement, which at the time of the issuance was $200 million, and the repayment of our $300 million 7.25% senior notes which matured on August 1, 2006.
Receipts from CMS associated with Medicare Part D claim subsidies were $185.1 million less than the corresponding claim payments during 2007 and $122.3 million less than the corresponding claim payments during 2006. See Note 2 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data for further description.
The remainder of financing activities in 2007, 2006, and 2005 resulted primarily from the change in the securities lending payable, proceeds from stock option exercises, the tax benefit from stock compensation, and the change in the book overdraft. The increase in securities lending in 2007 and 2006 coincides with higher average balances of investments to lend and a change in lending terms during 2006. In connection with employee stock plans, we acquired common shares totaling 406,377 in 2007, 467,767 in 2006, and 68,296 in 2005 for an aggregate cost of $27.4 million in 2007, $26.2 million in 2006, and $2.4 million in 2005. On February 21, 2008, the Board of Directors authorized the use of up to $150 million for the repurchase of our common shares exclusive of shares repurchased in connection with employee stock plans.
Senior Notes
We previously issued in the public debt capital markets, $300 million aggregate principal amount of 6.30% senior unsecured notes that mature on August 1, 2018 and $500 million aggregate principal amount of 6.45% senior unsecured notes that mature on June 1, 2016. We have entered into interest rate swap agreements to exchange the fixed interest rate under these senior notes for a variable interest rate based on LIBOR. Our senior notes and related swap agreements are more fully discussed in Note 10 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.
Credit Agreement
Our 5-year $1.0 billion unsecured revolving credit agreement expires in July 2011. Under the credit agreement, at our option, we can borrow on either a revolving credit basis or a competitive advance basis. The revolving credit portion bears interest at either a fixed rate or floating rate based on LIBOR plus a spread. The
 
47

Table of Contents
spread, which varies depending on our credit ratings, ranges from 27 to 80 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 10 basis points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization fee of 10 basis points is payable for each day in which borrowings under the facility exceed 50% of the total $1 billion commitment. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option.
The credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth and a maximum leverage ratio. The terms of the credit agreement also include standard provisions related to conditions of borrowing, including a customary material adverse effect clause which could limit our ability to borrow additional funds. We have not experienced a material adverse effect, and we know of no circumstances or events which would be reasonably likely to result in a material adverse effect. At this time, we do not believe the material adverse effect clause poses a material funding risk to us.
At December 31, 2007, we had $800 million of borrowings under the credit agreement outstanding at an interest rate, which varies with LIBOR, of 5.30%. In addition, we have outstanding letters of credit of $2.0 million secured under the credit agreement. No amounts have ever been drawn on these letters of credit. As of December 31, 2007, we had $198.0 million of remaining borrowing capacity under the credit agreement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Other Long-Term Borrowings
Other long-term borrowings of $38.6 million at December 31, 2007 represent junior subordinated debt assumed in the KMG acquisition of $36.1 million and financing for the renovation of a building of $2.5 million. The junior subordinated debt, which is due in 2037, may be called by us in 2012 and bears a fixed annual interest rate of 8.02% payable quarterly until 2012, and then payable at a floating rate based on LIBOR plus 310 basis points. The debt associated with the building renovation bears interest at 2.00%, is collateralized by the building, and is payable in various installments through 2014.
Shelf Registration
We have a universal shelf registration statement filed with the SEC which allows us to sell our debt or equity securities, from time to time, with the amount, price and terms to be determined at the time of the sale. The net proceeds from any future sales of our securities under the universal shelf registration may be used for our operations and for other general corporate purposes, including repayment or refinancing of borrowings, working capital, capital expenditures, investments, acquisitions, or the repurchase of our outstanding securities.
Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, access to debt and equity markets, and borrowing capacity, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, to fund future expansion opportunities and capital expenditures in the foreseeable future, and to refinance debt as it matures.
Adverse changes in our credit rating may increase the rate of interest we pay and may impact the amount of credit available to us in the future. Our investment-grade credit rating at December 31, 2007 was Baa3 according to Moody’s Investors Services, Inc., or Moody’s, and BBB, according to Standard & Poor’s Ratings Services, or S&P. A downgrade to Ba2 or lower by Moody’s and BB or lower by S&P would give the counterparties of three of our interest rate swap agreements with a $300 million notional amount, the right, but not the obligation, to cancel the interest rate swap agreement. If cancelled, we would pay or receive an amount based on the fair market value of the
 
48

Table of Contents
swap agreement. Assuming these swap agreements had been cancelled on December 31, 2007, we would have received $18.3 million, net, and future net interest payments would increase assuming LIBOR does not change. Other than the swap agreements, adverse changes in our credit ratings do not create, increase, or accelerate any liabilities.
In addition, we operate as a holding company in a highly regulated industry. Our parent company is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. Cash, cash equivalents and short-term investments at the parent company increased $111.3 million to $535.7 million at December 31, 2007 compared to $424.4 million at December 31, 2006 reflecting dividends received net of funding of additional capital into certain subsidiaries during 2007 in conjunction with growth in Medicare revenues. See Schedule I to this Form 10-K beginning on page 107 for our parent company only financial information.
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
Based on the most recent statutory financial statements as of December 31, 2007, we maintained aggregate statutory capital and surplus of $2,905.2 million in our state regulated subsidiaries. This compares to applicable statutory requirements which aggregated $1,810.5 million. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level. Given our anticipated continued premium growth in 2008, capital requirements will increase. We expect to fund these increased requirements with capital contributions from Humana Inc., our parent company, of approximately $200 million in 2008.
Most states rely on risk-based capital requirements, or RBC, to define their required levels of equity discussed above. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. If RBC were adopted by the remaining states and Puerto Rico at December 31, 2007, we would have $966.3 million of aggregate capital and surplus above any of the levels that require corrective action under RBC, or individual state requirements based on the most recent statutory financial statements as of December 31, 2007.
Contractual Obligations
We are contractually obligated to make payments for years subsequent to December 31, 2007 as follows:

 	  	Payments Due by Period	
 	  	Total	  	Less than
1 Year	  	1-3 Years	  	3-5 Years	  	More than 5
Years	
 	  	(in thousands)	
Debt	  	$	1,638,608	  	$	—  	  	$	1,620	  	$	800,614	  	$	836,374	
Interest(1)	  	 	712,307	  	 	94,200	  	 	188,369	  	 	165,313	  	 	264,425	
Operating leases(2)	  	 	417,814	  	 	107,878	  	 	176,318	  	 	85,779	  	 	47,839	
Purchase obligations(3)	  	 	180,088	  	 	57,821	  	 	74,210	  	 	35,101	  	 	12,956	
Future policy benefits payable and other
long-term liabilities(4)	  	 	757,049	  	 	—  	  	 	93,106	  	 	77,805	  	 	586,138	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	3,705,866	  	$	259,899	  	$	533,623	  	$	1,164,612	  	$	1,747,732	

(1)	Interest includes the estimated contractual interest payments under our debt agreements net of the effect of the associated swap agreements assuming no change in the LIBOR rate as of December 31, 2007.	
 
49

Table of Contents
 
(2)	We lease facilities, computer hardware, and other equipment under long-term operating leases that are noncancelable and expire on various dates through 2018. We sublease facilities or partial facilities to third party tenants for space not used in our operations which partially mitigates our operating lease commitments. An operating lease, accounted for under the provisions of SFAS No. 13,  Accounting for Leases , is a type of off-balance sheet arrangement. Assuming we acquired the asset, rather than leased such asset, we would have recognized a liability for the financing of these assets. See also Note 14 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.	
(3)	Purchase obligations include agreements to purchase services, primarily information technology related services, or to make improvements to real estate, in each case that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum levels of service to be purchased; fixed, minimum or variable price provisions; and the appropriate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.	
(4)	Excludes future policy benefits payable ceded to third parties through a 100% coinsurance agreement as more fully described in Note 16 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. The reinsurance carrier, not us, is responsible for cash flows associated with the reinsured contract. Our reinsured reserves are supported by reinsurance recoverables included in other long-term assets. Our potential liability is limited to the credit exposure which exists should the reinsurer be unable to meet its obligations assumed under these reinsurance arrangements. We evaluate the financial condition of these reinsurers on a regular basis.	
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2007, we are not involved in any SPE transactions.
Guarantees and Indemnifications
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our parent also has guaranteed the obligations of our military services subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of us, or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Related Parties
No related party transactions had a material effect on our financial position, results of operations, or cash flows. Certain related party transactions not having a material effect are discussed in our Proxy Statement for the meeting to be held April 24, 2008—see “Certain Transactions with Management and Others.”
Government Contracts
Our Medicare business, which accounted for approximately 60% of our total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed
 
50

Table of Contents
generally for a one-year term each December 31 unless CMS notifies Humana of its decision not to renew by August 1 of the year in which the contract would end, or Humana notifies CMS of its decision not to renew by the first Monday in June of the year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2008.
Our military business, which accounted for approximately 12% of our total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of the TRICARE South Region contract. The 5-year South Region contract, which expires March 31, 2009, is subject to annual renewals on April 1 of each year at the government’s option. Effective April 1, 2007, the South Region contract was extended into the fourth option period, which runs from April 1, 2007 to March 31, 2008. We have received a notice from the government of its intent to renew the fifth option period which runs from April 1, 2008 to March 31, 2009. The Department of Defense has the option to extend the current contract for up to six months under existing terms. Congressional authority has also been granted to extend the contract in one year increments for a maximum of two additional years. In the second quarter of 2007, a draft solicitation related to the new TRICARE contracts, currently scheduled to begin April 1, 2009, was issued for industry comment. Currently, we are anticipating a formal request for proposal, or RFP, for the TRICARE contracts. As required under the contract, the target underwritten health care cost and underwriting fee amounts for the fourth option period were negotiated. Any variance from the target health care cost is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated target health care cost amount could have a material adverse effect on our business. These changes may include, for example, an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease U.S. military deployments. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business.
In October 2007, we were awarded the Department of Veterans Affairs first specialty network demonstration project, known as Project HERO (Healthcare Effectiveness through Resource Optimization), to support healthcare delivery to veterans. The contract is comprised of one base period and four one-year option periods subject to annual renewals at the federal government’s option, with services beginning January 1, 2008.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the year ended December 31, 2007, consisted of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Our Medicaid contracts with the Puerto Rico Health Insurance Administration for the East and Southeast regions of Puerto Rico are effective from November 1, 2006 through June 30, 2008. In 2007, we also entered into an ASO contract with the Puerto Rico Health Administration for the Metro North Region which is effective from November 1, 2006 through October 31, 2009.
The loss of any of the contracts above or significant changes in these programs as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements and accompanying notes requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We continuously evaluate our estimates and those critical accounting policies related primarily to benefit expenses and revenue recognition as well as accounting for impairments related to our investment securities, goodwill, and long-lived assets. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results ultimately may differ from those estimates. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
 
51

Table of Contents
Benefit Expense Recognition
Benefit expenses are recognized in the period in which services are provided and include an estimate of the cost of services which have been incurred but not yet reported, or IBNR. IBNR represents a substantial portion of our benefits payable as follows:

 	  	December 31,
2007	  	Percentage
of Total	 	 	December 31,
2006	  	Percentage
of Total	 	
 	  	(dollars in thousands)	 	
IBNR	  	$	1,712,599	  	63.5	%	 	$	1,600,198	  	66.4	%	
Reported claims in process	  	 	91,938	  	3.4	%	 	 	98,033	  	4.0	%	
Other benefits payable	  	 	550,924	  	20.4	%	 	 	281,502	  	11.7	%	
 	  	 	 	  	 	 	 	 	 	  	 	 	
Benefits payable, excluding military services	  	 	2,355,461	  	87.3	%	 	 	1,979,733	  	82.1	%	
Military services benefits payable	  	 	341,372	  	12.7	%	 	 	430,674	  	17.9	%	
 	  	 	 	  	 	 	 	 	 	  	 	 	
Total benefits payable	  	$	2,696,833	  	100.0	%	 	$	2,410,407	  	100.0	%	
 	  	 	 	  	 	 	 	 	 	  	 	 	
Military services benefits payable primarily consists of our estimate of incurred healthcare services provided to beneficiaries which are in turn reimbursed by the federal government as more fully described in Note 2 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data. This amount is generally offset by a corresponding receivable due from the federal government, as more fully-described on page 45.
Estimating IBNR is complex and involves a significant amount of judgment. Changes in this estimate can materially affect, either favorably or unfavorably, our results of operations and overall financial position. Accordingly, it represents a critical accounting estimate. Most benefit claims are paid within a few months of the member receiving service from a physician or other health care provider. As a result, these liabilities generally are described as having a “short-tail”. As such, we expect that substantially all of the December 31, 2007 estimate of benefits payable will be known and paid during 2008.
Our reserving practice is to consistently recognize the actuarial best point estimate within a level of confidence required by actuarial standards. Actuarial standards of practice generally require a level of confidence such that the liabilities established for IBNR have a greater probability of being adequate versus being insufficient, or such that the liabilities established for IBNR are sufficient to cover obligations under an assumption of moderately adverse conditions. Adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims at the time of the estimate. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim experience. Depending on the period for which incurred claims are estimated, we apply a different method in determining our estimate. For periods prior to the most recent three months, the key assumption used in estimating our IBNR is that the completion factor pattern remains consistent over a rolling 12-month period after adjusting for known changes in claim inventory levels and known changes in claim payment processes. Completion factors result from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For the most recent three months, the incurred claims are estimated primarily from a trend analysis based upon per member per month claims trends developed from our historical experience in the preceding months, adjusted for known changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, product mix, and weekday seasonality.
The completion factor method is used for the months of incurred claims prior to the most recent three months because the historical percentage of claims processed for those months is at a level sufficient to produce a
 
52

Table of Contents
consistently reliable result. Conversely, for the most recent three months of incurred claims, the volume of claims processed historically is not at a level sufficient to produce a reliable result, which therefore requires us to examine historical trend patterns as the primary method of evaluation. Changes in claim processes, including receipt cycle times, claim inventory levels, recoveries of overpayments, outsourcing, system conversions, and processing disruptions due to weather or other events affect views regarding the reasonable choice of completion factors. The receipt cycle time measures the average length of time between when a medical claim was initially incurred and when the claim form was received. Increased electronic claim submissions from providers have decreased the receipt cycle time over the last few years. For example, the average receipt cycle time has decreased from 16.5 days in 2005 to 15.6 days in 2007 which represents a 5.5% reduction in cycle time over the three year period.
Medical cost trends potentially are more volatile than other segments of the economy. The drivers of medical cost trends include increases in the utilization of hospital facilities, physician services, prescription drugs, and new medical technologies, as well as the inflationary effect on the cost per unit of each of these expense components. Other external factors such as government-mandated benefits or other regulatory changes, increases in medical services capacity, direct to consumer advertising for prescription drugs and medical services, an aging population, catastrophes, and epidemics also may impact medical cost trends. Internal factors such as system conversions, claims processing cycle times, changes in medical management practices and changes in provider contracts also may impact our ability to accurately predict estimates of historical completion factors or medical cost trends. All of these factors are considered in estimating IBNR and in estimating the per member per month claims trend for purposes of determining the reserve for the most recent three months. Additionally, we continually prepare and review follow-up studies to assess the reasonableness of the estimates generated by our process and methods over time. The results of these studies are also considered in determining the reserve for the most recent three months. Each of these factors requires significant judgment by management.
The completion and claims per member per month trend factors are the most significant factors impacting the IBNR estimate. The portion of IBNR estimated using completion factors for claims incurred prior to the most recent three months is less variable than the portion of IBNR estimated using trend factors. The following table illustrates the sensitivity of these factors assuming moderate adverse experience and the estimated potential impact on our operating results caused by reasonably likely changes in these factors based on December 31, 2007 data:

Completion Factor(a):	 	 	 	  	Claims Trend Factor(b):	 	
Factor
Change	  	Increase
(Decrease) in
Benefits Payable	 	 	  	  	Factor
Change	 	(Decrease)
Increase in
Benefits Payable	 	
(dollars in thousands)	 	
  1.50%	  	$	(172,100	)	 	 	  	(10%)	 	$	(399,700	)	
  1.00%	  	$	(114,700	)	 	 	  	(8%)	 	$	(319,700	)	
  0.50%	  	$	(57,400	)	 	 	  	(6%)	 	$	(239,800	)	
  0.25%	  	$	(28,700	)	 	 	  	(4%)	 	$	(159,900	)	
(0.50%)	  	$	57,400	 	 	 	  	(2%)	 	$	(79,900	)	
(1.00%)	  	$	114,700	 	 	 	  	  2%	 	$	79,900	 	
 
(a)	Reflects estimated potential changes in benefits payable caused by changes in completion factors for incurred months prior to the most recent three months.	
(b)	Reflects estimated potential changes in benefits payable caused by changes in annualized claims trend used for the estimation of per member per month incurred claims for the most recent three months.	
 
53

Table of Contents
The following table provides a historical perspective regarding the accrual and payment of our benefits payable, excluding military services. Components of the total incurred claims for each year include amounts accrued for current year estimated benefit expenses as well as adjustments to prior year estimated accruals.

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Balances at January 1	  	$	1,979,733	 	 	$	1,334,716	 	 	$	1,074,310	 	
Acquisitions	  	 	41,029	 	 	 	21,198	 	 	 	37,375	 	
Incurred related to:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	18,015,247	 	 	 	15,374,855	 	 	 	9,635,435	 	
Prior years	  	 	(242,922	)	 	 	(178,998	)	 	 	(72,868	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total incurred	  	 	17,772,325	 	 	 	15,195,857	 	 	 	9,562,567	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Paid related to:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	(16,012,828	)	 	 	(13,532,139	)	 	 	(8,392,628	)	
Prior years	  	 	(1,424,798	)	 	 	(1,039,899	)	 	 	(946,908	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total paid	  	 	(17,437,626	)	 	 	(14,572,038	)	 	 	(9,339,536	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Balances at December 31	  	$	2,355,461	 	 	$	1,979,733	 	 	$	1,334,716	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
As summarized in the previous table, claim reserve balances at December 31, 2006 ultimately settled during 2007 for $242.9 million less than the amounts originally estimated. During 2006, claim reserve balances at December 31, 2005 ultimately settled for $179.0 million less than the amounts originally estimated. The $63.9 million change in the amounts incurred related to prior years for 2007 as compared to 2006 primarily relates to favorable development experienced in our Medicare operations. As previously described, our key assumptions consist of trend factors and completion factors using an assumption of moderately adverse conditions. In our Medicare operations, both our trend factor and completion factor assumptions at December 31, 2006 ultimately developed favorable versus our original estimate primarily due to changes in estimates associated with our 2006 Medicare Part D reconciliation and the growth in our Medicare business. First year Medicare Part D enrollment and eligibility issues in 2006 led to actual claim settlements with other health plans and states during 2007 for amounts less than originally estimated. Similar adjustments in the future are not expected to be as significant due to the program’s operational improvement in 2007.
During 2006, claim reserve balances at December 31, 2005 ultimately settled during 2006 for $179.0 million less than the amounts originally estimated. During 2005, claim reserve balances at December 31, 2004 ultimately settled for $72.9 million less than the amounts originally estimated. This $106.1 million change in the amounts incurred related to prior years for 2006 as compared to 2005 primarily was attributable to both our Medicare and commercial lines of business. In each of these lines of business, both our trend factor and completion factor assumptions at December 31, 2005 ultimately developed favorable versus our original estimate primarily due to (1) the utilization of hospital and physician services during the latter half of 2005 ultimately being lower than estimated, (2) the impact of hurricanes in Florida and Louisiana in the second half of 2005 on both utilization of services and claims processing, (3) significant growth in our Medicare PFFS product, (4) reductions in receipt cycle times driven by an increase in electronic claims submissions, and (5) an increase in claim overpayment recovery levels versus our historical overpayment recovery rate.
 
54

Table of Contents
Benefit expenses associated with the TRICARE contract and provisions associated with future policy benefits excluded from the previous table were as follows for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	  	2006	  	2005	
 	  	(in thousands)	
TRICARE	  	$	2,481,814	  	$	2,208,033	  	$	2,060,528	
Future policy benefits	  	 	16,392	  	 	17,314	  	 	28,375	
 	  	 	 	  	 	 	  	 	 	
Total	  	$	2,498,206	  	$	2,225,347	  	$	2,088,903	
 	  	 	 	  	 	 	  	 	 	
Future policy benefits payable of $980.7 million and $320.6 million at December 31, 2007 and 2006, respectively, represent liabilities for long-duration insurance policies including life insurance, annuities and health policies sold to individuals for which some of the premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves are recognized on a net level premium method based on interest, mortality, morbidity, withdrawal and maintenance expense assumptions from published actuarial tables, modified based upon actual experience. Changes in estimates of these reserves are recognized as an adjustment to benefit expenses in the period the changes occur. Future policy benefits payable of $239.7 million at December 31, 2007 and $242.7 million at December 31, 2006 are subject to 100% coinsurance agreements as more fully described in Note 16 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data, and as such are offset by a related reinsurance recoverable included in other long-term assets. Long-duration insurance policies associated with the KMG acquisition increased the balance in future policy benefits payable at December 31, 2007 compared to December 31, 2006.
As previously discussed, our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse experience, which generally results in favorable reserve development, or reserves that are considered redundant. An increase in the absolute dollar amount of redundancy over the last three years primarily has resulted from the growth in our Medicare business, coupled with the application of consistent reserving practices. When we recognize a release of the redundancy, we disclose the amount that is not in the ordinary course of business, if material. We believe we have consistently applied our methodology in determining our best estimate for benefits payable.
Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military services contracts with the federal government and our contracts with various state Medicaid programs generally are multi-year contracts subject to annual renewal provisions.
Our commercial contracts establish rates on a per member basis for each month of coverage. Our Medicare and Medicaid contracts also establish monthly rates per member. However, our Medicare contracts also have additional provisions as outlined in the following separate section.
Premium revenues and ASO fees are estimated by multiplying the membership covered under the various contracts by the contractual rates. In addition, we adjust revenues for estimated changes in an employer’s enrollment and individuals that ultimately may fail to pay. Enrollment changes not yet reported by an employer group, an individual, or the government, also known as retroactive membership adjustments, are estimated based on available data and historical trends. We routinely monitor the collectibility of specific accounts, the aging of receivables, historical retroactivity trends, as well as prevailing and anticipated economic conditions, and reflect any required adjustments in the current period’s revenue.
We bill and collect premium and administrative fee remittances from employer groups and members in our Medicare and individual products monthly. We receive monthly premiums and administrative fees from the
 
55

Table of Contents
federal government and various states according to government specified reimbursement rates and various contractual terms. Changes in revenues from CMS for our Medicare products resulting from the periodic changes in risk adjustment scores for our membership are recognized when the amounts become determinable and the collectibility is reasonably assured.
Medicare Part D Provisions
On January 1, 2006, we began covering prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The payments we receive monthly from CMS and members, which are determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We recognize premium revenues for providing this insurance coverage ratably over the term of our annual contract. Our CMS payment is subject to risk sharing through the Medicare Part D risk corridor provisions. In addition, we receive and disburse amounts for portions of prescription drug costs for which we are not at risk, as described more fully below.
The risk corridor provisions compare costs targeted in our bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received. We estimate and recognize an adjustment to premium revenues related to these risk corridor provisions based upon pharmacy claims experience to date as if the annual contract were to terminate at the end of the reporting period. Accordingly, this estimate provides no consideration to future pharmacy claims experience. We record a receivable or payable at the contract level and classify the amount as current or long-term in the consolidated balance sheets based on the expected settlement.
The estimate of the settlement associated with risk corridor provisions requires us to consider factors that may not be certain, including, among others, member eligibility differences with CMS. In 2007, we paid $725.5 million related to our reconciliation with CMS regarding the 2006 Medicare Part D risk corridor provisions compared to our estimate of $738.7 million at December 31, 2006. 2006 marked the first year of providing for the risk corridor estimate and required us to consider factors which were not certain, including certain first year implementation issues. The net liability associated with the 2007 risk corridor estimate, which will be settled in 2008, was $102.6 million at December 31, 2007.
Reinsurance and low-income cost subsidies represent reimbursements from CMS in connection with the Medicare Part D program for which we assume no risk. Reinsurance subsidies represent reimbursements for CMS’s portion of prescription drug costs which exceed the member’s out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. A reconciliation and related settlement of CMS’s prospective subsidies against actual prescription drug costs we paid is made after the end of the year. We account for these subsidies as a deposit in our consolidated balance sheets and as a financing activity in our consolidated statements of cash flows. We do not recognize premium revenues or benefit expense for these subsidies. Receipt and payment activity is accumulated at the contract level and recorded in our consolidated balance sheets in other current assets or trade accounts payable and accrued expenses depending on the contract balance at the end of the reporting period. Gross financing receipts were $2,866.2 million and gross financing withdrawals were $3,051.2 million during 2007. CMS subsidy activity recorded to the consolidated balance sheets at December 31, 2007 was $580.4 million to other current assets and $273.0 million to trade accounts payable and accrued expenses.
In order to allow plans offering enhanced benefits the maximum flexibility in designing alternative prescription drug coverage, CMS provided a demonstration payment option in lieu of the reinsurance subsidy for plans offering enhanced coverage, or coverage beyond CMS’s defined standard benefits. The demonstration payment option is an arrangement in which CMS pays a capitation amount to a plan for assuming the
 
56

Table of Contents
government’s portion of prescription drug costs in the catastrophic layer of coverage. The capitation amount represents a fixed monthly amount per member to provide prescription drug coverage in the catastrophic layer. We chose the demonstration payment option for all of our enhanced benefit plans. This capitation amount, derived from our annual bid submissions, is recorded as premium revenue. The variance between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of the risk corridor settlement.
Settlement of the reinsurance and low-income cost subsidies as well as the risk corridor payment is based on a reconciliation made approximately 6 months after the close of each calendar year. This reconciliation process requires us to submit claims data necessary for CMS to administer the program.
Medicare Risk Adjustment Provisions
CMS has implemented a risk adjustment model which apportions premiums paid to all health plans according to health severity. The CMS risk adjustment model pays more for members with predictably higher costs, as more fully described in Item 1.—Business on page 5. Under this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used to calculate the risk adjusted premium payment to us. We collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. We do not have access to diagnosis data with respect to our stand-alone PDP members.
CMS has transitioned to the risk adjustment model while the old demographic model was phased out. The demographic model based the monthly premiums paid to health plans on factors such as age, sex and disability status. The monthly premium amount for each member is separately determined under both the risk adjustment and demographic model. These separate payment amounts are then blended according to the transition schedule. CMS transitioned to the risk adjustment model for Medicare Advantage plans as follows: 30% in 2004, 50% in 2005, 75% in 2006, and 100% in 2007. The stand-alone PDP payment methodology is based 100% on the risk adjustment model. As a result of this process and the phasing in of the risk adjustment model, as well as budget neutrality as described in Item 1.—Business on page 5, our CMS monthly premium payments per member may change materially, either favorably or unfavorably.
Military services
In 2007, military services revenues represented 12% of total premiums and administrative services fees. Military services revenue primarily is derived from our TRICARE South Region contract with the Department of Defense and in addition, beginning January 1, 2008, from our contract with the Department of Veterans Affairs. Revenues associated with our contract with the Department of Veterans Affairs are recognized in the period services are performed. The single TRICARE contract for the South Region includes multiple revenue generating activities and as such was evaluated under Emerging Issues Task Force (EITF) Issue No. 00-21,  Accounting for Revenue Arrangements with Multiple Deliverables . We allocate the consideration to the various components based on the relative fair values of the components. TRICARE revenues consist generally of (1) an insurance premium for assuming underwriting risk for the cost of civilian health care services delivered to eligible beneficiaries; (2) health care services provided to beneficiaries which are in turn reimbursed by the federal government; and (3) administrative services fees related to claim processing, customer service, enrollment, disease management and other services. We recognize the insurance premium as revenue ratably over the period coverage is provided. Health care services reimbursements are recognized as revenue in the period health services are provided. Administrative services fees are recognized as revenue in the period services are performed.
The TRICARE contract contains provisions whereby the federal government bears a substantial portion of the risk associated with financing the cost of health benefits. Annually, we negotiate a target health care cost
 
57

Table of Contents
amount, or target cost, with the federal government and determine an underwriting fee. Any variance from the target cost is shared. We earn more revenue or incur additional costs based on the variance in actual health care costs versus the negotiated target cost. We receive 20% for any cost underrun, subject to a ceiling that limits the underwriting profit to 10% of the target cost. We pay 20% for any cost overrun, subject to a floor that limits the underwriting loss to negative 4% of the target cost. A final settlement occurs 12 to 18 months after the end of each contract year to which it applies. We defer the recognition of any revenues for favorable contingent underwriting fee adjustments related to cost underruns until the amount is determinable and the collectibility is reasonably assured. We estimate and recognize unfavorable contingent underwriting fee adjustments related to cost overruns currently in operations as an increase in benefit expenses. We continually review these benefit expense estimates of future payments to the government for cost overruns and make necessary adjustments to our reserves.
The military services contracts contain provisions to negotiate change orders. Change orders occur when we perform services or incur costs under the directive of the federal government that were not originally specified in our contract. Under federal regulations we may be entitled to an equitable adjustment to the contract price in these situations. Change orders may be negotiated and settled at any time throughout the year. We record revenue applicable to change orders when services are performed and these amounts are determinable and the collectibility is reasonably assured.
Investment Securities
Investment securities totaled $4,650.4 million, or 36% of total assets at December 31, 2007. Debt securities totaled $4,639.1 million, or nearly 100% of this investment portfolio. More than 98% of our debt securities were of investment-grade quality, with an average credit rating of AA+ by S&P at December 31, 2007. Most of the debt securities that are below investment grade are rated at the higher end (BB or better) of the non-investment grade spectrum. We have minimal exposure to sub-prime mortgages as we acceded to approximately $8 million of sub-prime and second-lien mortgages with our acquisition of KMG in the fourth quarter of 2007. However, by the end of January 2008, we had reduced that amount to approximately $4 million of sub-prime mortgages, each of which have maintained at least an AA+ rating after subsequent reviews by the rating agencies. There are no collateralized debt obligations or structured investment vehicles in our investment portfolio. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Duration is indicative of the relationship between changes in market value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our debt securities to changes in interest rates. However, actual market values may differ significantly from estimates based on duration. The average duration of our debt securities was approximately 3.9 years at December 31, 2007. Given that short term interest rates were higher than long term rates during most of 2007, cash was invested in cash equivalents instead of longer duration investment securities. Including cash equivalents, the average duration was approximately 2.6 years. Based on the duration including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $172 million.
Our investment securities, which consist primarily of debt securities, have been categorized as available for sale and, as a result, are stated at fair value. Fair value of actively traded debt and equity securities are based on quoted market prices. Fair value of inactively traded debt securities are based on quoted market prices of identical or similar securities or based on observable inputs like interest rates. Fair value of privately held debt securities, including venture capital investments are estimated using a variety of valuation methodologies where an observable quoted market does not exist. Such methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. Investment securities available for current operations are classified as current assets. Unrealized holding gains and losses, net of applicable deferred taxes, are included as a component of stockholders’ equity and comprehensive income until realized from a sale or other than temporary impairment.
 
58

Table of Contents
Gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at December 31, 2007.

  	  	Less than 12 months	 	 	12 months or more	 	 	Total	 	
2007	  	Fair Value	  	Unrealized
Losses	 	 	Fair Value	  	Unrealized
Losses	 	 	Fair Value	  	Unrealized
Losses	 	
 	  	(in thousands)	 	
U.S. Government obligations	  	$	46,272	  	$	(391	)	 	$	169,599	  	$	(1,718	)	 	$	215,871	  	$	(2,109	)	
Tax exempt municipal securities	  	 	265,816	  	 	(4,098	)	 	 	284,644	  	 	(2,147	)	 	 	550,460	  	 	(6,245	)	
Corporate and other securities	  	 	323,102	  	 	(8,645	)	 	 	52,564	  	 	(1,164	)	 	 	375,666	  	 	(9,809	)	
Mortgage-backed securities	  	 	104,656	  	 	(1,282	)	 	 	124,071	  	 	(2,299	)	 	 	228,727	  	 	(3,581	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Debt securities	  	 	739,846	  	 	(14,416	)	 	 	630,878	  	 	(7,328	)	 	 	1,370,724	  	 	(21,744	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Non-redeemable preferred stocks	  	 	6,400	  	 	(1,575	)	 	 	—  	  	 	—  	 	 	 	6,400	  	 	(1,575	)	
Common stocks	  	 	3	  	 	(2	)	 	 	—  	  	 	—  	 	 	 	3	  	 	(2	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Equity securities	  	 	6,403	  	 	(1,577	)	 	 	—  	  	 	—  	 	 	 	6,403	  	 	(1,577	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total investment securities	  	$	746,249	  	$	(15,993	)	 	$	630,878	  	$	(7,328	)	 	$	1,377,127	  	$	(23,321	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
We regularly evaluate our investment securities for impairment. We consider factors affecting the issuer, factors affecting the industry the issuer operates within, and general debt and equity market trends. We consider the length of time an investment’s fair value has been below carrying value, the severity of the decline, the near term prospects for recovery to cost, and our intent and ability to hold the investment until maturity or market recovery is realized. If and when a determination is made that a decline in fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair value through a charge to earnings. The risks inherent in assessing the impairment of an investment include the risk that market factors may differ from our expectations; facts and circumstances factored into our assessment may change with the passage of time; or we may decide to subsequently sell the investment. The determination of whether a decline in the value of an investment is other than temporary requires us to exercise significant diligence and judgment. The discovery of new information and the passage of time can significantly change these judgments. The status of the general economic environment and significant changes in the national securities markets influence the determination of fair value and the assessment of investment impairment.
Unrealized losses at December 31, 2007 resulted from 472 positions out of a total of 1,165 positions held. Approximately 14% of the carrying value of our investment securities have been in an unrealized loss position greater than one year. Of these investment securities in an unrealized loss position longer than a year, approximately 99% of the carrying value are within 5% of recovering fair value up to cost. The unrealized losses at December 31, 2007 primarily were caused by increases in interest rates. All issuers of securities trading at an unrealized loss remain current on all contractual payments and we believe it is probable that we will be able to collect all amounts due according to the contractual terms of the debt securities. After taking into account these and other factors, including the severity of the decline and our ability and intent to hold these securities until recovery or maturity, we determined the unrealized losses on these investment securities were temporary and, as such, no impairment was required.
Goodwill and Long-lived Assets
At December 31, 2007, goodwill and other long-lived assets represented 20% of total assets and 63% of total stockholders’ equity.
SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, requires that we test at least annually for impairment at a level of reporting referred to as the reporting unit and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A reporting unit is our operating segments or one level below the operating segments which comprise our reportable Commercial and Government segments.
 
59

Table of Contents
The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. Goodwill is assigned to the reporting unit that is expected to benefit from a specific acquisition.
Our strategy, long-range business plan, and annual planning process support our goodwill impairment tests. These tests are based primarily on an evaluation of future discounted cash flows under several scenarios. Outcomes from the discounted cash flow analysis were compared to other market approach valuation methodologies for reasonableness. We used a range of discount rates that correspond to a market-based weighted-average cost of capital. Key assumptions, including changes in membership, premium yields, medical cost trends and certain government contract extensions, are consistent with those utilized in our long-range business plan and annual planning process. If these assumptions differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected. Goodwill impairment tests completed in each of the last three years did not result in an impairment loss.
Long-lived assets consist of property and equipment and other finite-lived intangible assets. These assets are depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating depreciation or amortization for these assets. There were no impairment losses in the last three years. See Note 6 to the consolidated financial statements included in Item 8.—Financial Statements and Supplementary Data.
 
60

Table of Contents
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
The level of our pretax earnings is subject to market risk due to changes in investment income from our fixed income portfolio which is partially offset by both our debt position and the short-term duration of the fixed income investment portfolio.
We evaluated the impact on our investment income and debt expense resulting from a hypothetical change in interest rates of 100, 200 and 300 basis points over the next twelve-month period, as reflected in the following table. The evaluation was based on our investment portfolio and our debt position as of December 31, 2007 and 2006. Our investment portfolio consists of cash, cash equivalents and investment securities. The modeling technique used to calculate the pro forma net change in pretax earnings considered the cash flows related to fixed income investments and debt, which are subject to interest rate changes during a prospective twelve-month period. This evaluation measures parallel shifts in interest rates and may not account for certain unpredictable events that may effect interest income, including, among others, unexpected changes of cash flow into and out of the portfolio, shifts in the asset mix between taxable and tax-exempt securities, and spread changes specific to various investment categories. In the past ten years, changes in 3 month LIBOR rates during the year have exceeded 300 basis points once, have not changed between 200 and 300 basis points, have changed between 100 and 200 basis points four times and have changed by less than 100 basis points five times. LIBOR was 4.70% at December 31, 2007.

 	  	Increase (decrease) in
pretax earnings given an
interest rate decrease of
X basis points	 	 	Increase (decrease) in
pretax earnings given an
interest rate increase of
X basis points	 	
 	  	(300)	 	 	(200)	 	 	(100)	 	 	100	 	 	200	 	 	300	 	
 	  	(in thousands)	 	
As of December 31, 2007	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment portfolio	  	$	(93,191	)	 	$	(62,603	)	 	$	(34,478	)	 	$	 29,613	 	 	$	 59,066	 	 	$	 88,782	 	
Debt	  	 	35,173	 	 	 	23,449	 	 	 	11,724	 	 	 	(11,724	)	 	 	(23,449	)	 	 	(35,173	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(58,018	)	 	$	(39,154	)	 	$	(22,754	)	 	$	 17,889	 	 	$	 35,617	 	 	$	 53,609	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2006	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment portfolio	  	$	(100,088	)	 	$	(66,422	)	 	$	(30,927	)	 	$	 30,809	 	 	$	 61,808	 	 	$	 93,019	 	
Debt	  	 	30,910	 	 	 	20,607	 	 	 	10,303	 	 	 	(10,303	)	 	 	(20,607	)	 	 	(30,910	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(69,178	)	 	$	(45,815	)	 	$	(20,624	)	 	$	 20,506	 	 	$	 41,201	 	 	$	 62,109	 	

61

Table of Contents
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	
Humana Inc.
CONSOLIDATED BALANCE SHEETS

 	  	December 31,	 	
 	  	2007	 	 	2006	 	
 	  	(in thousands, except
share amounts)	 	
ASSETS	  	 	 	 	 	 	 	 	
Current assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	2,040,453	 	 	$	1,740,304	 	
Investment securities	  	 	3,635,317	 	 	 	3,192,273	 	
Receivables, less allowance for doubtful accounts of $68,260 in 2007 and $45,589 in 2006:	  	 	 	 	 	 	 	 	
Premiums	  	 	592,761	 	 	 	667,657	 	
Administrative services fees	  	 	12,780	 	 	 	13,284	 	
Securities lending collateral	  	 	1,337,049	 	 	 	627,990	 	
Other current assets	  	 	1,114,486	 	 	 	1,062,455	 	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	8,732,846	 	 	 	7,303,963	 	
 	  	 	 	 	 	 	 	 	
Property and equipment, net	  	 	637,241	 	 	 	545,004	 	
Other assets:	  	 	 	 	 	 	 	 	
Long-term investment securities	  	 	1,015,050	 	 	 	414,877	 	
Goodwill	  	 	1,663,939	 	 	 	1,310,631	 	
Other long-term assets	  	 	829,998	 	 	 	524,011	 	
 	  	 	 	 	 	 	 	 	
Total other assets	  	 	3,508,987	 	 	 	2,249,519	 	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	12,879,074	 	 	$	10,098,486	 	
 	  	 	 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current liabilities:	  	 	 	 	 	 	 	 	
Benefits payable	  	$	2,696,833	 	 	$	2,410,407	 	
Trade accounts payable and accrued expenses	  	 	1,268,963	 	 	 	1,626,658	 	
Book overdraft	  	 	269,226	 	 	 	293,605	 	
Securities lending payable	  	 	1,337,049	 	 	 	627,990	 	
Unearned revenues	  	 	219,780	 	 	 	155,298	 	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	5,791,851	 	 	 	5,113,958	 	
Long-term debt	  	 	1,687,823	 	 	 	1,269,100	 	
Future policy benefits payable	  	 	980,686	 	 	 	320,573	 	
Other long-term liabilities	  	 	389,777	 	 	 	340,969	 	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	8,850,137	 	 	 	7,044,600	 	
 	  	 	 	 	 	 	 	 	
Commitments and contingencies	  	 	 	 	 	 	 	 	
Stockholders’ equity:	  	 	 	 	 	 	 	 	
Preferred stock, $1 par; 10,000,000 shares authorized; none issued	  	 	—  	 	 	 	—  	 	
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 186,738,885 shares issued in 2007 and 182,947,691 shares issued in 2006	  	 	31,123	 	 	 	30,491	 	
Capital in excess of par value	  	 	1,497,998	 	 	 	1,357,077	 	
Retained earnings	  	 	2,742,782	 	 	 	1,909,098	 	
Accumulated other comprehensive income (loss)	  	 	14,021	 	 	 	(13,205	)	
Treasury stock, at cost, 16,720,528 shares in 2007 and 16,314,151 shares in 2006	  	 	(256,987	)	 	 	(229,575	)	
 	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	4,028,937	 	 	 	3,053,886	 	
 	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	12,879,074	 	 	$	10,098,486	 	
 	  	 	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
62

Table of Contents
Humana Inc.
CONSOLIDATED STATEMENTS OF INCOME

 	  	For the year ended December 31,	
 	  	2007	  	2006	  	2005	
 	  	(in thousands, except per share results)	
Revenues:	  	 	 	  	 	 	  	 	 	
Premiums	  	$	24,434,347	  	$	20,729,182	  	$	14,001,591	
Administrative services fees	  	 	391,515	  	 	341,211	  	 	259,437	
Investment income	  	 	314,239	  	 	291,880	  	 	142,976	
Other revenue	  	 	149,888	  	 	54,264	  	 	14,123	
 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	25,289,989	  	 	21,416,537	  	 	14,418,127	
 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	
Benefits	  	 	20,270,531	  	 	17,421,204	  	 	11,651,470	
Selling, general and administrative	  	 	3,476,468	  	 	3,021,509	  	 	2,195,604	
Depreciation and amortization	  	 	184,812	  	 	148,598	  	 	128,858	
 	  	 	 	  	 	 	  	 	 	
Total operating expenses	  	 	23,931,811	  	 	20,591,311	  	 	13,975,932	
 	  	 	 	  	 	 	  	 	 	
Income from operations	  	 	1,358,178	  	 	825,226	  	 	442,195	
Interest expense	  	 	68,878	  	 	63,141	  	 	39,315	
 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	 	1,289,300	  	 	762,085	  	 	402,880	
Provision for income taxes	  	 	455,616	  	 	274,662	  	 	106,150	
 	  	 	 	  	 	 	  	 	 	
Net income	  	$	833,684	  	$	487,423	  	$	296,730	
 	  	 	 	  	 	 	  	 	 	
Basic earnings per common share	  	$	5.00	  	$	2.97	  	$	1.83	
 	  	 	 	  	 	 	  	 	 	
Diluted earnings per common share	  	$	4.91	  	$	2.90	  	$	1.79	
 	  	 	 	  	 	 	  	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
63

Table of Contents
Humana Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 	 	Common Stock	 	 	Capital In
Excess of
Par Value	 	Retained
Earnings	 	Accumulated
Other
Comprehensive
Income (Loss)	 	 	Treasury
Stock	 	 	Total
Stockholders’
Equity	 	 	
 	 	Issued
Shares	 	 	Amount	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	(in thousands)	 	 	 	 	
Balances, January 1, 2005	 	176,045	 	 	$	29,340	 	 	$	1,154,437	 	$	1,124,945	 	$	16,526	 	 	$	(201,000	)	 	$	2,124,248	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	—  	 	 	 	—  	 	 	 	—  	 	 	296,730	 	 	—  	 	 	 	—  	 	 	 	296,730	 	 	 	 	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized investment gains, net of $4,441 tax	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	8,306	 	 	 	—  	 	 	 	8,306	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	305,036	 	 	 	 	
Common stock repurchases	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	(2,364	)	 	 	(2,364	)	 	 	 	
Stock-based compensation	 	—  	 	 	 	—  	 	 	 	30,153	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	30,153	 	 	 	 	
Restricted stock grants	 	525	 	 	 	88	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	88	 	 	 	 	
Restricted stock forfeitures	 	(16	)	 	 	(3	)	 	 	3	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	 	
Stock option exercises	 	2,509	 	 	 	418	 	 	 	35,877	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	36,295	 	 	 	 	
Stock option and restricted stock tax benefit	 	—  	 	 	 	—  	 	 	 	15,418	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	15,418	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances, December 31, 2005	 	179,063	 	 	 	29,843	 	 	 	1,235,888	 	 	1,421,675	 	 	24,832	 	 	 	(203,364	)	 	 	2,508,874	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	—  	 	 	 	—  	 	 	 	—  	 	 	487,423	 	 	—  	 	 	 	—  	 	 	 	487,423	 	 	 	 	
Other comprehensive loss:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized investment losses, net of $(20,853) tax	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	(34,608	)	 	 	—  	 	 	 	(34,608	)	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	452,815	 	 	 	 	
Adjustment to initially apply SFAS 158, net of $(2,064) tax	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	(3,429	)	 	 	—  	 	 	 	(3,429	)	 	 	 	
Common stock repurchases	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	(26,211	)	 	 	(26,211	)	 	 	 	
Stock-based compensation	 	—  	 	 	 	—  	 	 	 	32,558	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	32,558	 	 	 	 	
Restricted stock grants	 	728	 	 	 	121	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	121	 	 	 	 	
Restricted stock forfeitures	 	(68	)	 	 	(11	)	 	 	8	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(3	)	 	 	 	
Stock option exercises	 	3,225	 	 	 	538	 	 	 	49,982	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	50,520	 	 	 	 	
Stock option and restricted stock tax benefit	 	—  	 	 	 	—  	 	 	 	38,641	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	38,641	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances, December 31, 2006	 	182,948	 	 	 	30,491	 	 	 	1,357,077	 	 	1,909,098	 	 	(13,205	)	 	 	(229,575	)	 	 	3,053,886	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	—  	 	 	 	—  	 	 	 	—  	 	 	833,684	 	 	—  	 	 	 	—  	 	 	 	833,684	 	 	 	 	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized investment gains and other, net of $16,052 tax	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	27,226	 	 	 	—  	 	 	 	27,226	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	860,910	 	 	 	 	
Common stock repurchases	 	—  	 	 	 	—  	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	(27,412	)	 	 	(27,412	)	 	 	 	
Stock-based compensation	 	—  	 	 	 	—  	 	 	 	42,132	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	42,132	 	 	 	 	
Restricted stock grants	 	852	 	 	 	142	 	 	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	142	 	 	 	 	
Restricted stock forfeitures	 	(64	)	 	 	(11	)	 	 	8	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(3	)	 	 	 	
Stock option exercises	 	3,003	 	 	 	501	 	 	 	61,528	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	62,029	 	 	 	 	
Stock option and restricted stock tax benefit	 	—  	 	 	 	—  	 	 	 	37,253	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	37,253	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances, December 31, 2007	 	186,739	 	 	$	31,123	 	 	$	1,497,998	 	$	2,742,782	 	$	14,021	 	 	$	(256,987	)	 	$	4,028,937	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
64

Table of Contents
Humana Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 	 	For the year ended December 31,	 	
 	 	2007	 	 	2006	 	 	2005	 	
 	 	(in thousands)	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	833,684	 	 	$	487,423	 	 	$	296,730	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	184,812	 	 	 	148,598	 	 	 	128,858	 	
Stock-based compensation	 	 	42,132	 	 	 	32,558	 	 	 	30,153	 	
(Gain) loss on sale of property and equipment, net	 	 	(13,597	)	 	 	1,153	 	 	 	152	 	
Gain on sale of investment securities, net	 	 	(11,668	)	 	 	(67,496	)	 	 	(18,323	)	
(Benefit) provision for deferred income taxes	 	 	(32,736	)	 	 	70,062	 	 	 	(39,007	)	
Provision for doubtful accounts	 	 	28,922	 	 	 	20,901	 	 	 	4,566	 	
Changes in operating assets and liabilities, net of effect of businesses acquired:	 	 	 	 	 	 	 	 	 	 	 	 	
Receivables	 	 	60,745	 	 	 	37,653	 	 	 	(161,314	)	
Other assets	 	 	105,689	 	 	 	(365,454	)	 	 	(63,962	)	
Benefits payable	 	 	245,397	 	 	 	540,067	 	 	 	421,922	 	
Other liabilities	 	 	(317,855	)	 	 	752,032	 	 	 	53,992	 	
Unearned revenues	 	 	64,482	 	 	 	29,870	 	 	 	(45,610	)	
Other	 	 	34,255	 	 	 	(655	)	 	 	1,925	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	1,224,262	 	 	 	1,686,712	 	 	 	610,082	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions, net of cash acquired	 	 	(493,493	)	 	 	(28,062	)	 	 	(402,844	)	
Purchases of property and equipment	 	 	(239,244	)	 	 	(193,151	)	 	 	(165,846	)	
Proceeds from sales of property and equipment	 	 	26,514	 	 	 	9,623	 	 	 	4,497	 	
Purchases of investment securities	 	 	(3,488,631	)	 	 	(4,269,221	)	 	 	(3,717,916	)	
Maturities of investment securities	 	 	1,387,967	 	 	 	1,664,332	 	 	 	1,761,588	 	
Proceeds from sales of investment securities	 	 	1,670,555	 	 	 	1,742,793	 	 	 	1,723,015	 	
Change in securities lending collateral	 	 	(709,059	)	 	 	(580,380	)	 	 	30,230	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	 	 	(1,845,391	)	 	 	(1,654,066	)	 	 	(767,276	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Receipts from CMS contract deposits	 	 	2,866,170	 	 	 	2,002,451	 	 	 	—  	 	
Withdrawals from CMS contract deposits	 	 	(3,051,241	)	 	 	(2,124,717	)	 	 	—  	 	
Borrowings under credit agreement	 	 	1,685,000	 	 	 	550,000	 	 	 	494,000	 	
Repayments under credit agreement	 	 	(1,335,000	)	 	 	(300,000	)	 	 	(294,000	)	
Proceeds from issuance of senior notes	 	 	—  	 	 	 	498,545	 	 	 	—  	 	
Repayment of senior notes	 	 	—  	 	 	 	(300,000	)	 	 	—  	 	
Debt issue costs	 	 	—  	 	 	 	(5,980	)	 	 	—  	 	
Change in book overdraft	 	 	(24,379	)	 	 	13,600	 	 	 	87,945	 	
Change in securities lending payable	 	 	709,059	 	 	 	580,380	 	 	 	(30,230	)	
Common stock repurchases	 	 	(27,412	)	 	 	(26,211	)	 	 	(2,364	)	
Tax benefit from stock-based compensation	 	 	37,443	 	 	 	38,839	 	 	 	15,545	 	
Proceeds from stock option exercises and other	 	 	61,638	 	 	 	48,735	 	 	 	38,235	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by financing activities	 	 	921,278	 	 	 	975,642	 	 	 	309,131	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase in cash and cash equivalents	 	 	300,149	 	 	 	1,008,288	 	 	 	151,937	 	
Cash and cash equivalents at beginning of year	 	 	1,740,304	 	 	 	732,016	 	 	 	580,079	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of year	 	$	2,040,453	 	 	$	1,740,304	 	 	$	732,016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Supplemental cash flow disclosures:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest payments	 	$	67,954	 	 	$	66,579	 	 	$	45,258	 	
Income tax payments, net	 	$	443,904	 	 	$	160,233	 	 	$	179,300	 	
Details of businesses acquired in purchase transactions:	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of assets acquired, net of cash acquired	 	$	1,315,492	 	 	$	63,961	 	 	$	508,443	 	
Less: Fair value of liabilities assumed	 	 	(821,999	)	 	 	(35,899	)	 	 	(105,599	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid for acquired businesses, net of cash acquired	 	$	493,493	 	 	$	28,062	 	 	$	402,844	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of the consolidated financial statements.
 
65

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REPORTING ENTITY
Nature of Operations
Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health and supplemental benefits companies, based on our 2007 revenues of $25.3 billion. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana,” mean Humana Inc. and its subsidiaries. We are a full-service benefits solutions company, offering a wide array of health and supplemental benefit plans for employer groups, government benefit programs, and individuals. We derived approximately 71% of our premiums and administrative services fees from contracts with the federal government in 2007. Under our federal government contracts with the Centers for Medicare and Medicaid Services, or CMS, we provide health insurance coverage for Medicare members in Florida, accounting for approximately 17% of our total premiums and administrative services fees in 2007. CMS is the federal government’s agency responsible for administering the Medicare program. Under a federal government contract with the Department of Defense, we provide health insurance coverage to TRICARE members, accounting for approximately 12% of our total premiums and administrative services fees in 2007.
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. We identified our segments in accordance with the aggregation provisions of SFAS 131 ,  which aggregates products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The accounting policies of each segment are the same and are described in Note 2. The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Our consolidated financial statements include the accounts of Humana Inc. and subsidiaries that the Company controls. All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, the impact of risk sharing provisions related to our Medicare and TRICARE contracts, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may ultimately differ materially from those estimates.
 
66

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, money market funds, commercial paper, other money market instruments, 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 maturity of the investments.
Investment Securities
Investment securities, which consist primarily of debt securities, have been categorized as available for sale and, as a result, are stated at fair value. Fair value of actively traded debt and equity securities are based on quoted market prices. Fair value of inactively traded debt securities are based on quoted market prices of identical or similar securities or based on observable inputs like interest rates. Fair value of privately held debt securities, including venture capital investments are estimated using a variety of valuation methodologies where an observable quoted market does not exist. Such methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. Investment securities available for current operations are classified as current assets. Investment securities available for our long-term insurance product and professional liability funding requirements, as well as restricted statutory deposits and venture capital investments, are classified as long-term assets. Unrealized holding gains and losses, net of applicable deferred taxes, are included as a component of stockholders’ equity and comprehensive income until realized from a sale or other than temporary impairment.
For the purpose of determining gross realized gains and losses, which are included as a component of investment income in the consolidated statements of income, the cost of investment securities sold is based upon specific identification. We regularly evaluate our investment securities for impairment. We consider factors affecting the issuer, factors affecting the industry the issuer operates within, and general debt and equity market trends. We consider the length of time an investment’s fair value has been below carrying value, the severity of the decline, the near term prospects for recovery to cost, and our intent and ability to hold the investment until maturity or market recovery is realized. If and when a determination is made that a decline in fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair value through a charge to earnings.
We participate in a securities lending program to maximize investment income. We loan certain investment securities for short periods of time in exchange for collateral initially equal to at least 102% of the fair value of the investment securities on loan. The fair value of the loaned investment securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair value of the loaned investment securities fluctuates. The collateral, which may be in the form of cash or U.S. Government securities, is deposited by the borrower with an independent lending agent. Any cash collateral is invested by the lending agent according to our investment guidelines, primarily in cash equivalents or other liquid investments. Cash collateral is recorded on our consolidated balance sheets, along with a liability to reflect our obligation to return the collateral. Collateral received in the form of securities is not recorded in our consolidated balance sheets because we do not have the right to sell, pledge or otherwise reinvest securities collateral. Loaned securities continue to be carried as investment securities on the consolidated balance sheets. Revenue, net of related expense, is recorded as investment income.
Receivables and Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military services contracts with the federal government and our contracts with various state Medicaid programs generally are multi-year contracts subject to annual renewal provisions.
 
67

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
We bill and collect premium and administrative fee remittances from employer groups and members in our Medicare and individual products monthly. We receive monthly premiums and administrative fees from the federal government and various states according to government specified reimbursement rates and various contractual terms. Changes in revenues from CMS for our Medicare products resulting from the periodic changes in risk adjustment scores for our membership are recognized when the amounts become determinable and the collectibility is reasonably assured.
Premium revenues are recognized as income in the period members are entitled to receive services, and are net of estimated uncollectible amounts and retroactive membership adjustments. Retroactive membership adjustments result from enrollment changes not yet processed, or not yet reported by an employer group or the government. We routinely monitor the collectibility of specific accounts, the aging of receivables, historical retroactivity trends, as well as prevailing and anticipated economic conditions, and reflect any required adjustments in current operations.
Medicare Part D
On January 1, 2006, we began covering prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. The payments we receive monthly from CMS and members, which are determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We recognize premium revenues for providing this insurance coverage ratably over the term of our annual contract. Our CMS payment is subject to risk sharing through the Medicare Part D risk corridor provisions. In addition, receipts for reinsurance and low-income cost subsidies represent reimbursements of prescription drug costs for which we are not at risk.
The risk corridor provisions compare costs targeted in our bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received. We estimate and recognize an adjustment to premium revenues related to these risk corridor provisions based upon pharmacy claims experience to date as if the annual contract were to terminate at the end of the reporting period. Accordingly, this estimate provides no consideration to future pharmacy claims experience. We record a receivable or payable at the contract level and classify the amount as current or long-term in the consolidated balance sheets based on the expected settlement.
Reinsurance and low-income cost subsidies represent reimbursements from CMS in connection with the Medicare Part D program for which we assume no risk. Reinsurance subsidies represent reimbursements for CMS’s portion of prescription drug costs which exceed the member’s out-of-pocket threshold, or the catastrophic coverage level. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. A reconciliation and related settlement of CMS’s prospective subsidies against actual prescription drug costs we paid is made after the end of the year. We account for these subsidies as a deposit in our consolidated balance sheets and as a financing activity in our consolidated statements of cash flows. We do not recognize premium revenues or benefit expense for these subsidies. Receipt and payment activity is accumulated at the contract level and recorded in our consolidated balance sheets in other current assets or trade accounts payable and accrued expenses depending on the contract balance at the end of the reporting period.
For plans where we provide enhanced benefits and selected the alternative demonstration payment option in lieu of the reinsurance subsidy, we receive a monthly per member capitation amount from CMS determined from
 
68

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
our annual bid submissions. The capitation amount we receive from CMS for assuming the government’s portion of prescription drug costs in the catastrophic layer of coverage is recorded as premium revenue. The variance between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of the risk corridor settlement.
See Note 5 for detail regarding amounts recorded to the consolidated balance sheets related to the risk corridor settlement and subsidies from CMS.
Military Services
Military services revenue primarily is derived from our TRICARE South Region contract with the Department of Defense. We account for the TRICARE South Region contract under EITF Issue No. 00-21,  Accounting for Revenue Arrangements with Multiple Deliverables,  and as such allocate the consideration to the various components of the contract based on the relative fair value of the components. TRICARE revenues consist generally of (1) an insurance premium for assuming underwriting risk for the cost of civilian health care services delivered to eligible beneficiaries; (2) health care services provided to beneficiaries which are in turn reimbursed by the federal government; and (3) administrative services fees related to claim processing, customer service, enrollment, disease management and other services. We recognize the insurance premium as revenue ratably over the period coverage is provided. Health care services reimbursements are recognized as revenue in the period health services are provided. Administrative services fees are recognized as revenue in the period services are performed. Our TRICARE South Region contract contains provisions to share the risk associated with financing the cost of health benefits with the federal government. We earn more revenue or incur additional costs based on the variance of actual health care costs versus a negotiated target cost. We defer the recognition of any contingent revenues for favorable variances until the end of the contract period when the amount is determinable and the collectibility is reasonably assured. We estimate and recognize contingent benefit expense for unfavorable variances currently in our results of operations. We continually review the contingent benefit expense estimates of future payments to the government for cost overruns and make necessary adjustments to our reserves.
Revenues also may include change orders and bid price adjustments attributable to our military services contracts. Change orders represent equitable adjustments for services not originally specified in the contracts. Bid price adjustments, or BPAs, represent adjustments defined in our former contracts subject to negotiations with the federal government. Revenues for these adjustments are recognized when a settlement amount becomes determinable and the collectibility is reasonably assured.
Administrative Services Fees
Administrative services fees cover the processing of claims, offering access to our provider networks and clinical programs, and responding to customer service inquiries from members of self-funded groups. Revenues from providing administration services, also known as administrative services only, or ASO, are recognized in the period services are performed. Under ASO contracts, self-funded employers retain the risk of financing substantially all of the cost of health benefits. However, many ASO customers purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs. Accordingly, we have recorded premiums and benefit expenses related to these stop loss arrangements.
Premium and ASO fee receivables are shown net of allowances for estimated uncollectible accounts and retroactive membership adjustments. Premiums and ASO fees received prior to the service period are recorded as unearned revenues.
 
69

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Other Revenue
Other revenues primarily relate to RightSourceSM, our mail order pharmacy. These revenues are recognized in connection with the shipment of the prescriptions.
Policy Acquisition Costs
Policy acquisition costs are those costs that vary with and primarily are related to the acquisition of new and renewal business. Such costs include commissions, costs of policy issuance and underwriting, and other costs we incur to acquire new business or renew existing business. We expense policy acquisition costs related to our employer-group prepaid health services policies as incurred in accordance with the  Health Care Organization Audit and Accounting Guide . These short-duration employer-group prepaid health services policies typically have a one-year term and may be cancelled upon 30 days notice by the employer group.
Life insurance, annuities, health and other supplemental policies sold to individuals are accounted for as long-duration insurance products under the provisions of SFAS No. 60,  Accounting and Reporting by Insurance Enterprises,  or SFAS 60, because they are expected to remain in force for an extended period beyond one year due to contractual and regulatory requirements .  As a result, we defer policy acquisition costs and amortize them over the estimated life of the policies in proportion to premiums earned. Deferred acquisition costs are reviewed annually to determine if they are recoverable from future income.
Long-Lived Assets
Property and equipment is recorded at cost. Gains and losses on sales or disposals of property and equipment are included in administrative expense. Certain costs related to the development or purchase of internal-use software are capitalized in accordance with AICPA Statement of Position 98-1,  Accounting for the Costs of Computer Software Developed or Obtained for Internal Use . Depreciation is computed using the straight-line method over estimated useful lives ranging from 3 to 10 years for equipment, 3 to 7 years for computer software, and 20 to 40 years for buildings. Improvements to leased facilities are depreciated over the shorter of the remaining lease term or the anticipated life of the improvement.
We periodically review long-lived assets, including property and equipment and other intangible assets, for impairment whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. Losses are recognized for a long-lived asset to be held and used in our operations when the undiscounted future cash flows expected to result from the use of the asset are less than its carrying value. We recognize an impairment loss based on the excess of the carrying value over the fair value of the asset. A long-lived asset held for sale is reported at the lower of the carrying amount or fair value less costs to sell. Depreciation expense is not recognized on assets held for sale. Losses are recognized for a long-lived asset to be abandoned when the asset ceases to be used. In addition, we periodically review the estimated lives of all long-lived assets for reasonableness.
Goodwill and Other Intangible Assets
Goodwill represents the unamortized excess of cost over the fair value of the net tangible and other intangible assets acquired. SFAS No. 142, Goodwill and Other Intangible Assets , or SFAS 142, requires that we test at least annually for impairment at a level of reporting referred to as the reporting unit and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A reporting unit is our operating segments or one level below the operating segments which comprise our reportable Commercial and Government segments. The Government segment consists of beneficiaries of government benefit programs, and
 
70

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. Goodwill is assigned to the reporting unit that is expected to benefit from a specific acquisition.
SFAS 142 requires a two-step process to review goodwill for impairment. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. Impairment tests are performed, at a minimum, in the fourth quarter of each year supported by our long-range business plan and annual planning process. Impairment tests completed for 2007, 2006 and 2005 did not result in an impairment loss.
Other intangible assets primarily relate to acquired customer and provider contracts and are included with other long-term assets in the consolidated balance sheets. Other intangible assets are amortized over the useful life, based upon the pattern of future cash flows attributable to the asset. This sometimes results in an accelerated method of amortization for customer contracts because the asset tends to dissipate at a more rapid rate in earlier periods. Other than customer contracts, other intangible assets generally are amortized using the straight-line method. We review other finite-lived intangible assets for impairment under our long-lived asset policy.
Benefits Payable and Benefit Expense Recognition
Benefit expenses include claim payments, capitation payments, pharmacy costs net of rebates, allocations of certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well as estimates of future payments to hospitals and others for medical care and other supplemental benefits provided prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to primary care physicians and other providers who are responsible for providing medical care to members. Pharmacy costs represent payments for members’ prescription drug benefits, net of rebates from drug manufacturers. Receivables for such pharmacy rebates are included in other current assets in the consolidated balance sheets. Other supplemental benefits include dental, vision, and other voluntary benefits.
We estimate the costs of our benefit expense payments using actuarial methods and assumptions based upon claim payment patterns, medical cost inflation, historical developments such as claim inventory levels and claim receipt patterns, and other relevant factors, and record benefit reserves for future payments. We continually review estimates of future payments relating to claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves.
We reassess the profitability of our contracts for providing insurance coverage to our members when current operating results or forecasts indicate probable future losses. We establish a premium deficiency liability in current operations to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds related future premiums under contract without consideration of investment income. For purposes of premium deficiencies, contracts are grouped in a manner consistent with our method of acquiring, servicing, and measuring the profitability of such contracts. Losses recognized as a premium deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged to the liability previously established. Because the majority of our member contracts renew annually, we do not anticipate recording a material premium deficiency liability, except when unanticipated adverse events or changes in circumstances indicate otherwise.
We believe our benefits payable are adequate to cover future claims payments required. However, such estimates are based on knowledge of current events and anticipated future events. Therefore, the actual liability could differ materially from the amounts provided.
 
71

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Future policy benefits payable
Future policy benefits payable include liabilities for long-duration insurance policies including life insurance, annuities and health policies sold to individuals for which some of the premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves are recognized on a net level premium method based on interest, mortality, morbidity, withdrawal and maintenance expense assumptions from published actuarial tables, modified based upon actual experience. Changes in estimates of these reserves are recognized as an adjustment to benefit expenses in the period the changes occur.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks frequently result in overdraft balances for accounting purposes and are classified as a current liability in the consolidated balance sheets. Changes in book overdrafts from period to period are reported in the consolidated statement of cash flows as a financing activity.
Income Taxes
We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. We also recognize the future tax benefits such as net operating and capital loss carryforwards as deferred tax assets. A valuation allowance is provided against these deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future years’ tax expense may be increased or decreased by adjustments to the valuation allowance or to the estimated accrual for income taxes.
We record tax benefits when it is more likely than not that the tax return position taken with respect to a particular transaction will be sustained. A liability, if recorded, is not considered resolved until the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, or the tax position is ultimately settled through examination, negotiation, or litigation.
Derivative Financial Instruments
We use interest rate swap agreements to manage our exposure to interest rate risk. The differential between fixed and variable rates to be paid or received is accrued and recognized over the life of the agreements as adjustments to interest expense in the consolidated statements of income. Our interest rate swap agreements convert the fixed interest rates on our senior notes to a variable rate and are accounted for as fair value hedges. Our interest rate swap agreements are more fully described in Note 10.
Stock-Based Compensation
We recognize stock-based compensation expense, as determined on the date of grant at fair value, straight-line over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). We estimate expected forfeitures and recognize compensation expense only for those awards which are expected to vest. We estimate the grant-date fair value of stock awards using the Black-Scholes option-pricing model. In addition, we report certain tax effects of stock-based compensation as a financing activity rather than an operating activity in the consolidated statement of cash flows. Additional detail regarding our stock-based compensation plans is included in Note 11.
 
72

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Earnings Per Common Share
We compute basic earnings per common share on the basis of the weighted average number of unrestricted common shares outstanding. Diluted earnings per common share is computed on the basis of the weighted average number of unrestricted common shares outstanding plus the dilutive effect of outstanding employee stock options and restricted shares using the treasury stock method.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 141 (Revised 2007), Business Combination, or SFAS 141R. SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items including expensing transaction and restructuring costs and adjusting earnings in periods subsequent to the acquisition for changes in deferred tax asset valuation allowances and income tax uncertainties as well as changes in the fair value of acquired contingent liabilities. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 with early adoption prohibited .  Accordingly, we are required to record and disclose business combinations following existing GAAP until January 1, 2009. We currently are evaluating the provisions of SFAS 141R.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 5,  or SFAS 160 .  SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning January 1, 2009. Like SFAS 141R discussed above, earlier adoption is prohibited. We currently are evaluating the provisions of SFAS 160.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities , or SFAS 159. SFAS 159 allows us an option to report selected financial assets and liabilities at fair value and establishes related presentation and disclosure requirements. We were required to make an election regarding this fair value option in the first quarter of 2008, and we did not elect to adopt this fair value option under SFAS 159.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require new fair value measurements. We adopted SFAS 157 on January 1, 2008. The adoption of SFAS 157 did not have a material impact on our financial position or results of operations. We are evaluating the disclosure provisions of SFAS 157 required in connection with the filing of our first quarter 2008 Form 10-Q.
Reclassification
The balance sheet reflects the reclassification of future policy benefits payable to conform to the current year presentation.
 
73

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
3. ACQUISITIONS
On November 30, 2007, our Commercial segment acquired KMG America Corporation, or KMG, for cash consideration of $156.3 million including direct transaction costs, plus the assumption of $36.1 million of long-term debt. KMG provides long-duration insurance benefits including supplemental health and life benefit plans. On October 1, 2007, our Commercial segment acquired CompBenefits Corporation, or CompBenefits, for cash consideration of $369.1 million including direct transaction costs. CompBenefits provides dental and vision insurance benefits. These acquisitions, which were financed through a combination of cash and borrowings under our credit agreement, expand our commercial product offerings allowing for significant cross-selling opportunities with our medical insurance products.
The purchase price was allocated to the fair value of KMG’s and CompBenefits’ assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired resulted in $335.8 million of non-deductible goodwill for the Commercial segment.
The preliminary fair values of KMG’s and CompBenefits’ assets acquired and liabilities assumed at the date of the acquisition are summarized as follows:

 	  	KMG	 	 	CompBenefits	 	
 	  	(in thousands)	 	
Current assets	  	$	38,638	 	 	$	55,144	 	
Other intangible assets	  	 	102,638	 	 	 	54,143	 	
Goodwill	  	 	36,383	 	 	 	299,439	 	
Other long-term assets	  	 	733,461	 	 	 	20,960	 	
 	  	 	 	 	 	 	 	 	
Total assets acquired	  	 	911,120	 	 	 	429,686	 	
 	  	 	 	 	 	 	 	 	
Current liabilities	  	 	(39,871	)	 	 	(36,365	)	
Future policy benefits payable	  	 	(647,057	)	 	 	—  	 	
Long-term debt	  	 	(36,083	)	 	 	—  	 	
Other long-term liabilities	  	 	(31,846	)	 	 	(24,178	)	
 	  	 	 	 	 	 	 	 	
Total liabilities assumed	  	 	(754,857	)	 	 	(60,543	)	
 	  	 	 	 	 	 	 	 	
Net assets acquired	  	$	156,263	 	 	$	369,143	 	
 	  	 	 	 	 	 	 	 	
The other intangible assets, which primarily consist of customer and provider contracts, have a weighted average useful life of 19.6 years for KMG and 11.5 years for CompBenefits. The long-durational nature of KMG’s customer contracts contributes to a longer useful life and corresponding higher fair value. The purchase price allocations are preliminary, subject to completion of valuation analyses including, for example, refining assumptions used to calculate the fair value of other intangible assets and future policy benefits payable.
On March 1, 2007, our Government segment acquired DefenseWeb Technologies, Inc., or DefenseWeb, a company responsible for delivering customized software solutions for the Department of Defense, for cash consideration of $27.0 million.
On May 1, 2006, our Commercial segment acquired CHA Service Company, or CHA Health, a health plan serving employer groups in Kentucky, for cash consideration of $67.5 million.
The results of operations and financial condition of KMG, CompBenefits, DefenseWeb and CHA Health have been included in our consolidated statements of income and consolidated balance sheets from the respective acquisition dates. The proforma financial information assuming these acquisitions had occurred as of the beginning of each respective period was not material to our results of operations.
 
74

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
4. INVESTMENT SECURITIES
Investment securities classified as current assets were as follows at December 31, 2007 and 2006:

 	 	2007	 	2006	
 	 	Amortized
Cost	 	Gross
Unrealized
Gains	 	Gross
Unrealized
Losses	 	 	Fair
Value	 	Amortized
Cost	 	Gross
Unrealized
Gains	 	Gross
Unrealized
Losses	 	 	Fair
Value	
 	 	(in thousands)	
U.S. Government obligations	 	$	710,459	 	$	9,592	 	$	(1,619	)	 	$	718,432	 	$	843,798	 	$	2,029	 	$	(8,539	)	 	$	837,288	
Tax exempt municipal securities	 	 	1,735,163	 	 	10,011	 	 	(5,774	)	 	 	1,739,400	 	 	1,331,894	 	 	3,200	 	 	(11,462	)	 	 	1,323,632	
Corporate and other securities	 	 	507,385	 	 	7,183	 	 	(6,522	)	 	 	508,046	 	 	459,888	 	 	1,258	 	 	(3,559	)	 	 	457,587	
Mortgage-backed securities	 	 	656,404	 	 	9,360	 	 	(2,143	)	 	 	663,621	 	 	566,748	 	 	4,137	 	 	(4,355	)	 	 	566,530	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt securities	 	 	3,609,411	 	 	36,146	 	 	(16,058	)	 	 	3,629,499	 	 	3,202,328	 	 	10,624	 	 	(27,915	)	 	 	3,185,037	
Non-redeemable preferred stocks	 	 	7,250	 	 	—  	 	 	(1,432	)	 	 	5,818	 	 	7,251	 	 	—  	 	 	(15	)	 	 	7,236	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment securities	 	$	3,616,661	 	$	36,146	 	$	(17,490	)	 	$	3,635,317	 	$	3,209,579	 	$	10,624	 	$	(27,930	)	 	$	3,192,273	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment securities classified as long-term assets were as follows at December 31, 2007 and 2006:

 	 	2007	 	2006	
 	 	Amortized
Cost	 	Gross
Unrealized
Gains	 	Gross
Unrealized
Losses	 	 	Fair
Value	 	Amortized
Cost	 	Gross
Unrealized
Gains	 	Gross
Unrealized
Losses	 	 	Fair
Value	
 	 	(in thousands)	
U.S. Government obligations	 	$	263,125	 	$	2,936	 	$	(490	)	 	$	265,571	 	$	156,770	 	$	63	 	$	(1,789	)	 	$	155,044	
Tax exempt municipal securities	 	 	125,231	 	 	831	 	 	(471	)	 	 	125,591	 	 	106,453	 	 	90	 	 	(1,140	)	 	 	105,403	
Corporate and other securities	 	 	424,424	 	 	3,198	 	 	(3,287	)	 	 	424,335	 	 	108,004	 	 	120	 	 	(265	)	 	 	107,859	
Mortgage-backed securities	 	 	178,758	 	 	1,206	 	 	(1,438	)	 	 	178,526	 	 	27,684	 	 	116	 	 	(304	)	 	 	27,496	
Redeemable preferred stocks	 	 	14,658	 	 	900	 	 	—  	 	 	 	15,558	 	 	12,741	 	 	4,750	 	 	—  	 	 	 	17,491	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt securities	 	 	1,006,196	 	 	9,071	 	 	(5,686	)	 	 	1,009,581	 	 	411,652	 	 	5,139	 	 	(3,498	)	 	 	413,293	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-redeemable preferred stocks	 	 	1,517	 	 	16	 	 	(143	)	 	 	1,390	 	 	724	 	 	—  	 	 	(1	)	 	 	723	
Common stocks	 	 	4,081	 	 	—  	 	 	(2	)	 	 	4,079	 	 	861	 	 	—  	 	 	—  	 	 	 	861	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	5,598	 	 	16	 	 	(145	)	 	 	5,469	 	 	1,585	 	 	—  	 	 	(1	)	 	 	1,584	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term investment securities	 	$	1,011,794	 	$	9,087	 	$	(5,831	)	 	$	1,015,050	 	$	413,237	 	$	5,139	 	$	(3,499	)	 	$	414,877	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term investment securities with a fair value of $116.6 million at December 31, 2007 and $99.1 million at December 31, 2006 were on deposit at financial institutions in certain states pursuant to the respective states’ insurance regulations.
Gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at December 31, 2007 and 2006:

 	  	Less than 12 months	 	 	12 months or more	 	 	Total	 	
2007	  	Fair
Value	  	Unrealized
Losses	 	 	Fair
Value	  	Unrealized
Losses	 	 	Fair
Value	  	Unrealized
Losses	 	
 	  	(in thousands)	 	
U.S. Government obligations	  	$	46,272	  	$	(391	)	 	$	169,599	  	$	(1,718	)	 	$	215,871	  	$	(2,109	)	
Tax exempt municipal securities	  	 	265,816	  	 	(4,098	)	 	 	284,644	  	 	(2,147	)	 	 	550,460	  	 	(6,245	)	
Corporate and other securities	  	 	323,102	  	 	(8,645	)	 	 	52,564	  	 	(1,164	)	 	 	375,666	  	 	(9,809	)	
Mortgage-backed securities	  	 	104,656	  	 	(1,282	)	 	 	124,071	  	 	(2,299	)	 	 	228,727	  	 	(3,581	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Debt securities	  	 	739,846	  	 	(14,416	)	 	 	630,878	  	 	(7,328	)	 	 	1,370,724	  	 	(21,744	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Non-redeemable preferred stocks	  	 	6,400	  	 	(1,575	)	 	 	—  	  	 	—  	 	 	 	6,400	  	 	(1,575	)	
Common stocks	  	 	3	  	 	(2	)	 	 	—  	  	 	—  	 	 	 	3	  	 	(2	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Equity securities	  	 	6,403	  	 	(1,577	)	 	 	—  	  	 	—  	 	 	 	6,403	  	 	(1,577	)	
 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total investment securities	  	$	746,249	  	$	(15,993	)	 	$	630,878	  	$	(7,328	)	 	$	1,377,127	  	$	(23,321	)	

75

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 	 	Less than 12 months	 	 	12 months or more	 	 	Total	 	
2006	 	Fair
Value	 	Unrealized
Losses	 	 	Fair
Value	 	Unrealized
Losses	 	 	Fair
Value	 	Unrealized
Losses	 	
 	 	(in thousands)	 	
U.S. Government obligations	 	$	389,393	 	$	(3,073	)	 	$	339,043	 	$	(7,255	)	 	$	728,436	 	$	(10,328	)	
Tax exempt municipal securities	 	 	533,409	 	 	(1,659	)	 	 	501,129	 	 	(10,943	)	 	 	1,034,538	 	 	(12,602	)	
Corporate and other securities	 	 	162,169	 	 	(846	)	 	 	167,415	 	 	(2,978	)	 	 	329,584	 	 	(3,824	)	
Mortgage-backed securities	 	 	184,394	 	 	(1,523	)	 	 	72,449	 	 	(3,136	)	 	 	256,843	 	 	(4,659	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt securities	 	 	1,269,365	 	 	(7,101	)	 	 	1,080,036	 	 	(24,312	)	 	 	2,349,401	 	 	(31,413	)	
Non-redeemable preferred stocks	 	 	7,959	 	 	(16	)	 	 	—  	 	 	—  	 	 	 	7,959	 	 	(16	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investment securities	 	$	1,277,324	 	$	(7,117	)	 	$	1,080,036	 	$	(24,312	)	 	$	2,357,360	 	$	(31,429	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized losses at December 31, 2007 resulted from 472 positions out of a total of 1,165 positions held. Approximately 14% of the carrying value of our investment securities have been in an unrealized loss position greater than one year. Of these investment securities in an unrealized loss position longer than a year, approximately 99% of the carrying value are within 5% of recovering fair value up to cost. The unrealized losses at December 31, 2007 primarily were caused by increases in interest rates. All issuers of securities trading at an unrealized loss remain current on all contractual payments and we believe it is probable that we will be able to collect all amounts due according to the contractual terms of the debt securities. After taking into account these and other factors, including the severity of the decline and our ability and intent to hold these securities until recovery or maturity, we determined the unrealized losses on these investment securities were temporary and, as such, no impairment was required.
The contractual maturities of debt securities available for sale at December 31, 2007, 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
Cost	  	Fair Value	
 	  	(in thousands)	
Due within one year	  	$	175,557	  	$	175,534	
Due after one year through five years	  	 	1,134,865	  	 	1,143,965	
Due after five years through ten years	  	 	759,990	  	 	763,774	
Due after ten years	  	 	2,545,195	  	 	2,555,807	
 	  	 	 	  	 	 	
Total debt securities	  	$	4,615,607	  	$	4,639,080	
 	  	 	 	  	 	 	
Gross realized investment gains were $20.6 million in 2007, $82.0 million in 2006, and $21.8 million in 2005. Gross realized gains included gains from the sale of venture capital investments of $16.0 million in 2007, $76.2 million in 2006, and $5.7 million in 2005.
Gross realized investment losses were $8.9 million in 2007, $13.6 million in 2006, and $3.5 million in 2005.
We participate in a securities lending program where we loan certain investment securities for short periods of time in exchange for collateral, consisting of cash or U.S. Government securities, initially equal to at least 102% of the fair value of the investment securities on loan. As of December 31, 2007, investment securities with a fair value of $1,336.1 million were on loan. Net investment income earned on securities lending transactions was $6.6 million in 2007, $1.1 million in 2006, and $0.2 million in 2005.
 
76

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
5. MEDICARE PART D
As discussed in Note 2, on January 1, 2006, we began covering prescription drug benefits in accordance with Medicare Part D under multiple contracts with CMS. In 2007, we paid $725.5 million related to our reconciliation with CMS regarding the 2006 Medicare Part D risk corridor provisions. The consolidated balance sheets include the following amounts associated with Medicare Part D as of December 31, 2007 and 2006:

 	  	2007	 	 	2006	 	
 	  	Risk
Corridor
Settlement	 	 	CMS
Subsidies	 	 	Risk
Corridor
Settlement	 	 	CMS
Subsidies	 	
 	  	(in thousands)	 	
Other current assets	  	$	30,578	 	 	$	580,383	 	 	$	18,365	 	 	$	449,984	 	
Trade accounts payable and accrued expenses	  	 	(133,169	)	 	 	(273,045	)	 	 	(757,084	)	 	 	(327,718	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net current (liability) asset	  	$	(102,591	)	 	$	307,338	 	 	$	(738,719	)	 	$	122,266	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
6. PROPERTY AND EQUIPMENT, NET
Property and equipment was comprised of the following at December 31, 2007 and 2006:

 	  	2007	 	 	2006	 	
 	  	(in thousands)	 	
Land	  	$	16,699	 	 	$	15,912	 	
Buildings	  	 	320,180	 	 	 	291,437	 	
Equipment and computer software	  	 	1,256,382	 	 	 	1,080,093	 	
Assets held for sale	  	 	—  	 	 	 	3,645	 	
 	  	 	 	 	 	 	 	 	
 	  	 	1,593,261	 	 	 	1,391,087	 	
Accumulated depreciation	  	 	(956,020	)	 	 	(846,083	)	
 	  	 	 	 	 	 	 	 	
Property and equipment, net	  	$	637,241	 	 	$	545,004	 	
 	  	 	 	 	 	 	 	 	
Depreciation expense was $162.4 million in 2007, $128.6 million in 2006, and $105.1 million in 2005.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill, by operating segment, for the year ended December 31, 2007 were as follows:

 	  	Commercial	  	Government	  	Total	
 	  	(in thousands)	
Balance at December 31, 2005	  	$	741,260	  	$	523,315	  	$	1,264,575	
CHA acquisition	  	 	39,912	  	 	—  	  	 	39,912	
Contingent purchase price settlements related to:	  	 	 	  	 	 	  	 	 	
Prior years acquisitions	  	 	1,329	  	 	4,815	  	 	6,144	
 	  	 	 	  	 	 	  	 	 	
Balance at December 31, 2006	  	 	782,501	  	 	528,130	  	 	1,310,631	
DefenseWeb acquisition	  	 	—  	  	 	17,486	  	 	17,486	
CompBenefits acquisition	  	 	299,439	  	 	—  	  	 	299,439	
KMG acquisition	  	 	36,383	  	 	—  	  	 	36,383	
 	  	 	 	  	 	 	  	 	 	
Balance at December 31, 2007	  	$	1,118,323	  	$	545,616	  	$	1,663,939	

77

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Other intangible assets primarily relate to acquired customer contracts and are included with other long-term assets in the consolidated balance sheets. Amortization expense for other intangible assets was approximately $22.4 million in 2007, $20.0 million in 2006 and $23.8 million in 2005. The following table presents our estimate of amortization expense for each of the five next succeeding fiscal years:

 	  	(in thousands)	
For the years ending December 31,:	  	 	 	
2008	  	$	35,571	
2009	  	$	26,950	
2010	  	$	23,423	
2011	  	$	21,433	
2012	  	$	19,610	
The following table presents details of our other intangible assets included in other long-term assets in the accompanying consolidated balance sheets at December 31, 2007 and 2006:

 	 	Weighted
Average
Life	 	2007	 	2006	 	
 	 	 	 	Cost	 	Accumulated
Amortization	 	Net	 	Cost	 	Accumulated
Amortization	 	Net	 	
 	 	(in thousands)	 	
Other intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer contracts	 	13.5 yrs	 	$	251,107	 	$	55,266	 	$	195,841	 	$	114,944	 	$	36,449	 	$	78,495	 	
Provider contracts	 	17.7 yrs	 	 	27,783	 	 	3,022	 	 	24,761	 	 	11,500	 	 	2,012	 	 	9,488	 	
Trade names and other	 	9.5 yrs	 	 	20,416	 	 	4,245	 	 	16,171	 	 	11,602	 	 	3,929	 	 	7,673	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other intangible assets	 	13.8 yrs	 	$	299,306	 	$	62,533	 	$	236,773	 	$	138,046	 	$	42,390	 	$	95,656	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
8. BENEFITS PAYABLE
Activity in benefits payable, excluding military services, was as follows for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Balances at January 1	  	$	1,979,733	 	 	$	1,334,716	 	 	$	1,074,310	 	
Acquisitions	  	 	41,029	 	 	 	21,198	 	 	 	37,375	 	
Incurred related to:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	18,015,247	 	 	 	15,374,855	 	 	 	9,635,435	 	
Prior years	  	 	(242,922	)	 	 	(178,998	)	 	 	(72,868	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total incurred	  	 	17,772,325	 	 	 	15,195,857	 	 	 	9,562,567	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Paid related to:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	(16,012,828	)	 	 	(13,532,139	)	 	 	(8,392,628	)	
Prior years	  	 	(1,424,798	)	 	 	(1,039,899	)	 	 	(946,908	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total paid	  	 	(17,437,626	)	 	 	(14,572,038	)	 	 	(9,339,536	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Balances at December 31	  	$	2,355,461	 	 	$	1,979,733	 	 	$	1,334,716	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Military services benefits payable of $341.4 million and $430.7 million at December 31, 2007 and 2006, respectively, primarily consisted of our estimate of incurred healthcare services provided to beneficiaries which
 
78

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
are in turn reimbursed by the federal government, as more fully described in Note 2 to the consolidated financial statements. This amount is generally offset by a corresponding receivable due from the federal government.
Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately settled for amounts less than originally estimated (favorable development).
As summarized in the previous table, claim reserve balances at December 31, 2006 ultimately settled during 2007 for $242.9 million less than the amounts originally estimated. During 2006, claim reserve balances at December 31, 2005 ultimately settled for $179.0 million less than the amounts originally estimated. The $63.9 million change in the amounts incurred related to prior years for 2007 as compared to 2006 primarily relates to favorable development experienced in our Medicare operations. This favorable development primarily was due to changes in estimates associated with our 2006 Medicare Part D reconciliation and the growth in our Medicare business. First year Medicare Part D enrollment and eligibility issues in 2006 led to actual claim settlements with other health plans and states during 2007 for amounts less than originally estimated. Similar adjustments in the future are not expected to be as significant due to the program’s operational improvement in 2007.
During 2006, claim reserve balances at December 31, 2005 ultimately settled during 2006 for $179.0 million less than the amounts originally estimated. During 2005, claim reserve balances at December 31, 2004 ultimately settled for $72.9 million less than the amounts originally estimated. This $106.1 million change in the amounts incurred related to prior years for 2006 as compared to 2005 primarily was attributable to both our Medicare and commercial lines of business. The favorable development experienced in our Medicare and commercial operations primarily was due to (1) the utilization of hospital and physician services during the latter half of 2005 ultimately being lower than estimated, (2) the impact of hurricanes in Florida and Louisiana in the second half of 2005 on both utilization of services and claims processing, (3) significant growth in our Medicare PFFS product, (4) reductions in receipt cycle times driven by an increase in electronic claims submissions, and (5) an increase in claim overpayment recovery levels versus our historical overpayment recovery rate.
Benefit expenses associated with the TRICARE contract and provisions associated with future policy benefits excluded from the previous table were as follows for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	  	2006	  	2005	
 	  	(in thousands)	
TRICARE	  	$	2,481,814	  	$	2,208,033	  	$	2,060,528	
Future policy benefits	  	 	16,392	  	 	17,314	  	 	28,375	
 	  	 	 	  	 	 	  	 	 	
Total	  	$	2,498,206	  	$	2,225,347	  	$	2,088,903	

79

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
9. INCOME TAXES
The provision for income taxes consisted of the following for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	 	 	2006	  	2005	 	
 	  	(in thousands)	 	
Current provision:	  	 	 	 	 	 	 	  	 	 	 	
Federal	  	$	452,286	 	 	$	192,878	  	$	127,653	 	
States and Puerto Rico	  	 	36,066	 	 	 	11,722	  	 	17,504	 	
 	  	 	 	 	 	 	 	  	 	 	 	
Total current provision	  	 	488,352	 	 	 	204,600	  	 	145,157	 	
Deferred benefit	  	 	(32,736	)	 	 	70,062	  	 	(39,007	)	
 	  	 	 	 	 	 	 	  	 	 	 	
Provision for income taxes	  	$	455,616	 	 	$	274,662	  	$	106,150	 	
 	  	 	 	 	 	 	 	  	 	 	 	
The provision for income taxes was different from the amount computed using the federal statutory rate for the years ended December 31, 2007, 2006 and 2005 due to the following:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Income tax provision at federal statutory rate	  	$	451,255	 	 	$	266,730	 	 	$	141,008	 	
States, net of federal benefit and Puerto Rico	  	 	23,377	 	 	 	18,301	 	 	 	13,169	 	
Tax exempt investment income	  	 	(20,254	)	 	 	(15,713	)	 	 	(11,917	)	
Capital loss valuation allowance	  	 	—  	 	 	 	—  	 	 	 	(5,198	)	
Contingent tax reserves (benefits)	  	 	—  	 	 	 	1,570	 	 	 	(27,365	)	
Examination settlements	  	 	—  	 	 	 	—  	 	 	 	(3,518	)	
Other, net	  	 	1,238	 	 	 	3,774	 	 	 	(29	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	  	$	455,616	 	 	$	274,662	 	 	$	106,150	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
The $27.4 million reduction in 2005 tax expense primarily related to the recognition of a $22.8 million contingent tax benefit and associated $3.1 million reversal of accrued interest resulting from the resolution of an uncertain tax position associated with the 2000 tax year during the first quarter of 2005 in connection with the expiration of the statute of limitations.
Changes in the capital loss valuation allowance in 2005 resulted from our regular evaluation of probable capital gain realization in the allowable carryforward period given our recent and historical capital gain experience and the consideration of alternative tax planning strategies. The capital loss carryforward expired on December 31, 2005. As such, the remaining unused deferred tax asset and associated allowance were written off.
 
80

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Deferred income tax balances reflect the impact of temporary differences between the tax bases of assets or liabilities and their reported amounts in our consolidated financial statements, and are stated at enacted tax rates expected to be in effect when the reported amounts are actually recovered or settled. Principal components of our net deferred tax balances at December 31, 2007 and 2006 were as follows:

 	  	Assets (Liabilities)	 	
 	  	2007	 	 	2006	 	
 	  	(in thousands)	 	
Compensation and other	  	$	115,518	 	 	$	92,797	 	
Future policy benefits payable	  	 	65,919	 	 	 	29,010	 	
Net operating loss carryforwards	  	 	39,842	 	 	 	10,810	 	
Unearned premiums	  	 	20,452	 	 	 	11,381	 	
Professional liability risks	  	 	13,235	 	 	 	13,866	 	
Benefits payable	  	 	—  	 	 	 	8,959	 	
Investment securities	  	 	—  	 	 	 	5,891	 	
 	  	 	 	 	 	 	 	 	
Total deferred income tax assets	  	 	254,966	 	 	 	172,714	 	
 	  	 	 	 	 	 	 	 	
Depreciable property and intangible assets	  	 	(186,673	)	 	 	(138,131	)	
Prepaid expenses and other	  	 	(80,312	)	 	 	(83,169	)	
Investment securities	  	 	(8,096	)	 	 	—  	 	
Benefits payable	  	 	(605	)	 	 	—  	 	
 	  	 	 	 	 	 	 	 	
Total deferred income tax liabilities	  	 	(275,686	)	 	 	(221,300	)	
 	  	 	 	 	 	 	 	 	
Total net deferred income tax liabilities	  	$	(20,720	)	 	$	(48,586	)	
 	  	 	 	 	 	 	 	 	
Amounts recognized in the consolidated balance sheets:	  	 	 	 	 	 	 	 	
Other current assets	  	$	14,986	 	 	$	457	 	
Other long-term liabilities	  	 	(35,706	)	 	 	(49,043	)	
 	  	 	 	 	 	 	 	 	
Total net deferred income tax liabilities	  	$	(20,720	)	 	$	(48,586	)	
 	  	 	 	 	 	 	 	 	
At December 31, 2007, we had approximately $107.8 million of net operating losses to carryforward related to prior acquisitions. These net operating loss carryforwards, if not used to offset future taxable income, will expire from 2008 through 2022. Based on our historical record of producing taxable income and profitability, we have concluded that future operating income will be sufficient to give rise to tax expense to recover all deferred tax assets.
We file income tax returns in the United States and certain foreign jurisdictions. In 2007, the Internal Revenue Service (IRS) completed its examination of our U.S. income tax returns for 2003 and 2004 which did not result in a material adjustment. With few exceptions, which are immaterial in the aggregate, we are no longer subject to state, local and foreign tax examinations by tax authorities for years before 2004. The IRS commenced an examination of our U.S. income tax returns for 2005 and 2006 during 2007 that is anticipated to be completed in 2009. As of December 31, 2007, we are not aware of any significant adjustments the IRS may propose.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The liability for unrecognized tax benefits was $14.6 million at December 31, 2007 and 2006, all of which would affect the effective tax rate if recognized. There were no changes in the liability during the twelve months ended December 31, 2007, and there are no positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. We recognize interest accrued related to unrecognized tax benefits and penalties in tax expense.
 
81

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
10. DEBT
Long-term debt outstanding was as follows at December 31, 2007 and 2006:

 	 	2007	 	2006	
 	 	(in thousands)	
Long-term debt:	 	 	 	 	 	 	
6.45% senior, unsecured notes due 2016, net of unamortized discount of $1,282 at December 31, 2007 and $1,393 at December 31, 2006	 	$	498,718	 	$	498,607	
6.30% senior, unsecured notes due 2018, net of unamortized discount of $608 at December 31, 2007 and $665 at December 31, 2006	 	 	299,392	 	 	299,335	
Fair value of interest rate swap agreements	 	 	51,105	 	 	18,093	
 	 	 	 	 	 	 	
Total senior notes	 	 	849,215	 	 	816,035	
Credit agreement	 	 	800,000	 	 	450,000	
Other long-term borrowings	 	 	38,608	 	 	3,065	
 	 	 	 	 	 	 	
Total long-term debt	 	$	1,687,823	 	$	1,269,100	
 	 	 	 	 	 	 	
Senior Notes
We previously issued in the public debt capital markets, $300 million aggregate principal amount of 6.30% senior unsecured notes that mature on August 1, 2018 and $500 million aggregate principal amount of 6.45% senior unsecured notes that mature on June 1, 2016. We have entered into interest rate swap agreements to exchange the fixed interest rate under these senior notes for a variable interest rate based on LIBOR.
Swap Agreements
In order to hedge the risk of changes in the fair value of all our senior notes attributable to fluctuations in interest rates, we entered into interest rate swap agreements. Interest rate swap agreements, which are considered derivatives, are contracts that exchange interest payments on a specified principal amount, or notional amount, for a specified period. Our interest rate swap agreements, which have a notional amount of $800 million, exchange the fixed interest rate under all our senior notes for a variable interest rate based on LIBOR. At December 31, 2007, the weighted average effective interest rate for all of our senior notes was 5.9%.
The interest rate swap agreements, which have the same critical terms as our senior notes, are designated as fair value hedges. Changes in the fair value of the senior notes and the swap agreements due to changing interest rates are assumed to offset each other completely, resulting in no impact to earnings from hedge ineffectiveness. Our swap agreements are recognized in our consolidated balance sheets at fair value with an equal and offsetting adjustment to the carrying value of our senior notes. The fair value of our interest rate swap agreements are estimated based on quoted market prices of comparable agreements, and reflect the amounts we would receive (or pay) to terminate the agreements at the reporting date.
At December 31, 2007, the fair value of all our swap agreements was in our favor by $51.1 million and included in other long-term assets. Likewise, the carrying values of all of our senior notes have been increased $51.1 million to reflect their fair values. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.
 
82

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Credit Agreement
Our 5-year $1.0 billion unsecured revolving credit agreement expires in July 2011. Under the credit agreement, at our option, we can borrow on either a revolving credit basis or a competitive advance basis. The revolving credit portion bears interest at either a fixed rate or floating rate based on LIBOR plus a spread. The spread, which varies depending on our credit ratings, ranges from 27 to 80 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 10 basis points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization fee of 10 basis points is payable for each day in which borrowings under the facility exceed 50% of the total $1 billion commitment. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option. The credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth and a maximum leverage ratio.
At December 31, 2007, we had $800 million of borrowings under the credit agreement outstanding at an interest rate, which varies with LIBOR, of 5.30%. In addition, we have outstanding letters of credit of $2.0 million secured under the credit agreement. No amounts have ever been drawn on these letters of credit. As of December 31, 2007, we had $198.0 million of remaining borrowing capacity under the credit agreement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Other Long-Term Borrowings
Other long-term borrowings of $38.6 million at December 31, 2007 represent junior subordinated debt assumed in the KMG acquisition of $36.1 million and financing for the renovation of a building of $2.5 million. The junior subordinated debt, which is due in 2037, may be called by us in 2012 and bears a fixed annual interest rate of 8.02% payable quarterly until 2012, and then payable at a floating rate based on LIBOR plus 310 basis points. The debt associated with the building renovation bears interest at 2.00%, is collateralized by the building, and is payable in various installments through 2014.
Shelf Registration
We have a universal shelf registration statement filed with the SEC which allows us to sell our debt or equity securities, from time to time, with the amount, price and terms to be determined at the time of the sale. The net proceeds from any future sales of our securities under the universal shelf registration may be used for our operations and for other general corporate purposes, including repayment or refinancing of borrowings, working capital, capital expenditures, investments, acquisitions, or the repurchase of our outstanding securities.
11. EMPLOYEE BENEFIT PLANS
Employee Savings Plan
We have defined contribution retirement and savings plans covering eligible employees. Our contribution to these plans is based on various percentages of compensation, and in some instances, on the amount of our employees’ contributions to the plans. The cost of these plans amounted to approximately $69.7 million in 2007, $56.0 million in 2006, and $42.9 million in 2005, all of which was funded currently to the extent it was deductible for federal income tax purposes. Based on the year end closing stock price of $75.31, approximately 26% of the retirement and savings plan’s assets were invested in our common stock representing 3% of the shares outstanding as of December 31, 2007. Through December 31, 2006, the Company match was invested in
 
83

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
the Humana common stock fund. However, a participant could reinvest any funds, including the Company match in the Humana common stock fund, in any other plan investment option at any time. Beginning January 1, 2007, the Company’s cash match is invested pursuant to the participant’s contribution direction.
Stock-Based Compensation
We have plans under which options to purchase our common stock and restricted stock awards have been granted to executive officers, directors, key employees and consultants. The terms and vesting schedules for stock-based awards vary by type of grant. Generally, the awards vest upon time-based conditions. Upon exercise, stock-based compensation awards are settled with authorized but unissued company stock. The compensation expense that has been charged against income for these plans was as follows for the years ended December 31, 2007, 2006, and 2005:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Stock-based compensation expense by type:	  	 	 	 	 	 	 	 	 	 	 	 	
Stock options	  	$	15,408	 	 	$	18,025	 	 	$	24,304	 	
Restricted stock awards	  	 	26,724	 	 	 	14,533	 	 	 	5,849	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Total stock-based compensation expense	  	 	42,132	 	 	 	32,558	 	 	 	30,153	 	
Tax benefit recognized	  	 	(15,732	)	 	 	(12,028	)	 	 	(11,337	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation expense, net of tax	  	$	26,400	 	 	$	20,530	 	 	$	18,816	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Since 2006, a greater proportion of the awards granted to employees, excluding executive officers, were restricted stock awards as opposed to stock options when compared to grants made in prior years.
The tax benefit recognized in our consolidated financial statements is based on the amount of compensation expense recorded for book purposes. The actual tax benefit realized in our tax return is based on the intrinsic value, or the excess of the market value over the exercise or purchase price, of stock options exercised and restricted stock awards vested during the period. The actual tax benefit realized for the deductions taken on our tax returns from option exercises and restricted stock vesting totaled $48.0 million in 2007, $47.8 million in 2006, and $22.3 million in 2005. There was no capitalized stock-based compensation expense.
Beginning April 2006, the stock plans provide that one restricted share is equivalent to 1.7 stock options. At December 31, 2007, there were 15,774,996 shares reserved for stock award plans, including 9,994,245 shares of common stock available for future grants assuming all stock options or 5,878,968 shares available for future grants assuming all restricted shares.
Stock Options
Stock options are granted with an exercise price equal to the average market value of the underlying common stock on the date of grant. Our stock plans, as approved by the Board of Directors and stockholders, define average market value as the average of the highest and lowest stock prices reported by the New York Stock Exchange on a given date. Exercise provisions vary, but most options vest in whole or in part 1 to 3 years after grant and expire 7 to 10 years after grant. Upon grant, stock options are assigned a fair value based on the Black-Scholes valuation model. Compensation expense is recognized on a straight-line basis over the total requisite service period, generally the total vesting period, for the entire award.
 
84

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
The weighted average fair value of each option granted during 2007, 2006, and 2005 is provided below. The fair value was estimated on the date of grant using the Black-Scholes pricing model with the weighted average assumptions indicated below:

 	  	2007	 	 	2006	 	 	2005	 	
Weighted average fair value at grant date	  	$	21.07	 	 	$	19.10	 	 	$	12.93	 	
Expected option life (years)	  	 	4.8	 	 	 	4.8	 	 	 	5.0	 	
Expected volatility	  	 	28.9	%	 	 	31.6	%	 	 	37.2	%	
Risk-free interest rate	  	 	4.5	%	 	 	4.6	%	 	 	3.9	%	
Dividend yield	  	 	None	 	 	 	None	 	 	 	None	 	
When valuing employee stock options, we stratify the employee population into homogenous groups that historically have exhibited similar exercise behaviors. These groups include executive officers, directors, and all other employees. We value the stock options based on the unique assumptions for each of these employee groups.
We calculate the expected term for our employee stock options based on historical employee exercise behavior and base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially equal to the option’s expected term.
The volatility used to value employee stock options is based on historical volatility. We calculate historical volatility using a simple average calculation methodology based on daily price intervals as measured over the expected term of the option. We have consistently applied this methodology since our adoption of the disclosure provisions of SFAS No. 123,  Accounting for Stock-Based Compensation , or SFAS 123. The decrease in the historical volatility used to value our employee stock options is due to changes in the stock price pattern over the past several years.
We base the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially equal to the option’s expected term.
Activity for our option plans was as follows for the year ended December 31, 2007:

 	  	Shares Under
Option	 	 	Weighted
Average
Exercise Price	 	
 	  	 	 	 	 	 	
Options outstanding at December 31, 2006	  	7,286,011	 	 	$	26.12	 	
Granted	  	1,015,786	 	 	 	63.79	 	
Exercised	  	(3,002,465	)	 	 	20.90	 	
Forfeited	  	(219,903	)	 	 	27.56	 	
 	  	 	 	 	 	 	 	
Options outstanding at December 31, 2007	  	5,079,429	 	 	$	36.68	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Shares
Under
Option	  	Weighted
Average
Exercise
Price	  	Weighted
Average
Remaining
Contractual
Term	  	Aggregate
Intrinsic
Value Per
Share(1)	  	Aggregate
Intrinsic
Value
($000)(1)	
Options exercisable at December 31, 2007	  	2,733,028	  	$	23.44	  	4.5 Years	  	$	52.03	  	$	142,205	
Options vested and expected to vest at December 31, 2007(2)	  	5,040,830	  	$	36.50	  	4.8 Years	  	$	38.99	  	$	196,547	
 
(1)	Computed based upon the amount by which the fair market value of our common stock at December 31, 2007 of $75.47 per share exceeded the weighted average exercise price.	
(2)	We began estimating forfeitures under SFAS 123R upon adoption on January 1, 2006.	
 
85

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
The total intrinsic value of stock options exercised during 2007 was $133.9 million, compared with $133.7 million during 2006 and $57.8 million during 2005. Cash received from stock option exercises for the years ended December 31, 2007, 2006, and 2005 totaled $62.7 million, $49.2 million, and $36.4 million, respectively.
Total compensation expense related to nonvested options not yet recognized was $23.6 million at December 31, 2007. We expect to recognize this compensation expense over a weighted average period of approximately 1.6 years.
Restricted Stock Awards
Restricted stock awards are granted with a fair value equal to the market price of our common stock on the date of grant. Compensation expense is recorded straight-line over the vesting period, generally three years from the date of grant.
The weighted average grant date fair value of our restricted stock awards was $63.59, $54.36, and $32.81 for the years ended December 31, 2007, 2006, and 2005, respectively. Activity for our restricted stock awards was as follows for the year ended December 31, 2007:

 	  	Shares	 	 	Weighted
Average
Grant-Date
Fair Value	
Nonvested restricted stock at December 31, 2006	  	1,107,455	 	 	$	45.86	
Granted	  	852,353	 	 	 	63.59	
Vested	  	(51,206	)	 	 	56.93	
Forfeited	  	(63,624	)	 	 	49.65	
 	  	 	 	 	 	 	
Nonvested restricted stock at December 31, 2007	  	1,844,978	 	 	$	53.61	
 	  	 	 	 	 	 	
The fair value of shares vested during the years ended December 31, 2007, 2006, and 2005 was $3.4 million, $2.3 million, and $0.6 million, respectively. Total compensation expense related to nonvested restricted stock awards not yet recognized was $44.7 million at December 31, 2007. We expect to recognize this compensation expense over a weighted average period of approximately 1.4 years. There are no other contractual terms covering restricted stock awards once vested.
 
86

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
12. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	  	2006	  	2005	
 	  	(in thousands, except per share results)	
Net income available for common stockholders	  	$	833,684	  	$	487,423	  	$	296,730	
 	  	 	 	  	 	 	  	 	 	
Weighted average outstanding shares of common stock used to compute basic earnings per common share	  	 	166,871	  	 	164,137	  	 	161,714	
Dilutive effect of:	  	 	 	  	 	 	  	 	 	
Employee stock options	  	 	2,251	  	 	3,542	  	 	3,751	
Restricted stock	  	 	698	  	 	317	  	 	95	
 	  	 	 	  	 	 	  	 	 	
Shares used to compute diluted earnings per common share	  	 	169,820	  	 	167,996	  	 	165,560	
 	  	 	 	  	 	 	  	 	 	
Basic earnings per common share	  	$	5.00	  	$	2.97	  	$	1.83	
 	  	 	 	  	 	 	  	 	 	
Diluted earnings per common share	  	$	4.91	  	$	2.90	  	$	1.79	
 	  	 	 	  	 	 	  	 	 	
Restricted stock and stock options to purchase 1,017,381 shares in 2007, 854,379 shares in 2006, and 826,587 shares in 2005 were anti-dilutive and, therefore, were not included in the computations of diluted earnings per common share.
13. STOCKHOLDERS’ EQUITY
Stock Repurchases
On February 21, 2008, the Board of Directors authorized the use of up to $150 million for the repurchase of our common shares exclusive of shares repurchased in connection with employee stock plans. The shares may be purchased from time to time at prevailing prices in the open market, by block purchases, or in privately-negotiated transactions.
In connection with employee stock plans, we acquired 406,377 of our common shares at an aggregate cost of $27.4 million during 2007, and 467,767 of our common shares at an aggregate cost of $26.2 million during 2006.
Regulatory Requirements
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
Based on the most recent statutory financial statements as of December 31, 2007, we maintained aggregate statutory capital and surplus of $2,905.2 million in our state regulated subsidiaries. This compares to applicable
 
87

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
statutory requirements which aggregated $1,810.5 million. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level.
Most states rely on risk-based capital requirements, or RBC, to define their required levels of equity discussed above. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. If RBC were adopted by the remaining states and Puerto Rico at December 31, 2007, we would have $966.3 million of aggregate capital and surplus above any of the levels that require corrective action under RBC, or individual state requirements based on the most recent statutory financial statements as of December 31, 2007.
14. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Leases
We lease facilities, computer hardware, and other equipment under long-term operating leases that are noncancelable and expire on various dates through 2018. We sublease facilities or partial facilities to third party tenants for space not used in our operations. Rent with scheduled escalation terms are accounted for on a straight-line basis over the lease term. Rent expense and sublease rental income, which are recorded net as an administrative expense, for all operating leases were as follows for the years ended December 31, 2007, 2006 and 2005:

 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Rent expense	  	$	121,163	 	 	$	104,711	 	 	$	81,357	 	
Sublease rental income	  	 	(10,254	)	 	 	(10,442	)	 	 	(11,192	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Net rent expense	  	$	110,909	 	 	$	94,269	 	 	$	70,165	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Future annual minimum payments due subsequent to December 31, 2007 under all of our noncancelable operating leases with initial terms in excess of one year are as follows:

 	  	Minimum
Lease
Payments	  	Sublease
Rental
Receipts	 	 	Net Lease
Commitments	
 	  	(in thousands)	
For the years ending December 31:	  	 	 	 	
2008	  	$	107,878	  	$	(1,640	)	 	$	106,238	
2009	  	 	93,395	  	 	(655	)	 	 	92,740	
2010	  	 	82,923	  	 	(450	)	 	 	82,473	
2011	  	 	57,030	  	 	(436	)	 	 	56,594	
2012	  	 	28,749	  	 	(389	)	 	 	28,360	
Thereafter	  	 	47,839	  	 	(219	)	 	 	47,620	
 	  	 	 	  	 	 	 	 	 	 	
Total	  	$	417,814	  	$	(3,789	)	 	$	414,025	
 	  	 	 	  	 	 	 	 	 	 	
Purchase Obligations
We have agreements to purchase services, primarily information technology related services, or to make improvements to real estate, in each case that are enforceable and legally binding on us and that specify all
 
88

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
significant terms, including: fixed or minimum levels of service to be purchased; fixed, minimum or variable price provisions; and the appropriate timing of the transaction. We have purchase obligation commitments of $57.8 million in 2008, $42.0 million in 2009, $32.2 million in 2010, $22.9 million in 2011 and $25.2 million thereafter. Purchase obligations exclude agreements that are cancelable without penalty.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2007, we are not involved in any SPE transactions.
Guarantees and Indemnifications
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our parent also has guaranteed the obligations of our military services subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of us, or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Government Contracts
Our Medicare business, which accounted for approximately 60% of our total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of products covered under the Medicare Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a one-year term each December 31 unless CMS notifies Humana of its decision not to renew by August 1 of the year in which the contract would end, or Humana notifies CMS of its decision not to renew by the first Monday in June of the year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare business have been renewed for 2008.
Our military business, which accounted for approximately 12% of our total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of the TRICARE South Region contract. The 5-year South Region contract, which expires March 31, 2009, is subject to annual renewals on April 1 of each year at the government’s option. Effective April 1, 2007, the South Region contract was extended into the fourth option period, which runs from April 1, 2007 to March 31, 2008. We have received a notice from the government of its intent to renew the fifth option period which runs from April 1, 2008 to March 31, 2009. The Department of Defense has the option to extend the current contract for up to six months under existing terms. Congressional authority has also been granted to extend the contract in one year increments for a maximum of two additional years. In the second quarter of 2007, a draft solicitation related to the new TRICARE contracts, currently scheduled to begin April 1, 2009, was issued for industry comment. Currently, we are anticipating a formal
 
89

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
request for proposal, or RFP, for the TRICARE contracts. As required under the contract, the target underwritten health care cost and underwriting fee amounts for the fourth option period were negotiated. Any variance from the target health care cost is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated target health care cost amount could have a material adverse effect on our business. These changes may include, for example, an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease U.S. military deployments. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business.
In October 2007, we were awarded the Department of Veterans Affairs first specialty network demonstration project, known as Project HERO (Healthcare Effectiveness through Resource Optimization), to support healthcare delivery to veterans. The contract is comprised of one base period and four one-year option periods subject to annual renewals at the federal government’s option, with services beginning January 1, 2008.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the year ended December 31, 2007, consisted of contracts in Puerto Rico and Florida, with the vast majority in Puerto Rico. Our Medicaid contracts with the Puerto Rico Health Insurance Administration for the East and Southeast regions of Puerto Rico are effective from November 1, 2006 through June 30, 2008. In 2007, we also entered into an ASO contract with the Puerto Rico Health Administration for the Metro North Region which is effective from November 1, 2006 through October 31, 2009.
The loss of any of the contracts above or significant changes in these programs as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows.
Legal Proceedings
Our current and past business practices are subject to review by various state insurance and health care regulatory authorities and other state and federal regulatory authorities. These authorities regularly scrutinize the business practices of health insurance and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, competitive practices, commission payments, privacy issues, utilization management practices, and sales practices. Some of these reviews have historically resulted in fines imposed on us and some have required changes to some of our practices. We continue to be subject to these reviews, which could result in additional fines or other sanctions being imposed on us or additional changes in some of our practices.
On February 13, 2008, New York Attorney General Andrew Cuomo announced he had issued subpoenas to 16 health plans in conjunction with a lawsuit his office is filing against UnitedHealth Group and its subsidiary, Ingenix, as part of an industry-wide investigation into certain provider-payment practices. We received a subpoena in connection with this matter and intend to cooperate fully with the investigation. The matters covered by the subpoena do not involve our Medicare operations in New York or any other state. Our operations in New York consist primarily of Medicare business.
We also are involved in various lawsuits that arise, for the most part, in the ordinary course of our business operations, including employment litigation, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, failure to disclose network discounts and various other provider arrangements, intellectual property matters, and challenges to subrogation practices.
 
90

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
We also are subject to claims relating to performance of contractual obligations to providers, members, and others, including failure to properly pay claims, challenges to our implementation of the new Medicare prescription drug program and other litigation.
Personal injury claims and claims for extracontractual damages arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.
The outcome of current suits or likelihood or outcome of future suits or governmental investigations cannot be accurately predicted with certainty. Although it is not reasonably possible to estimate whether a loss will occur as a result of these legal matters, or if a loss should occur, the amount of such loss, we do not believe that any legal matters to which we are a party are likely to have a material adverse effect on our financial position, results of operations, and cash flows. However, there can be no assurance that any pending legal matters or any legal matters that may arise in the future would not have a material adverse effect on our financial position, results of operations, and cash flows.
15. SEGMENT INFORMATION
We manage our business with two segments: Government and Commercial. The Government segment consists of beneficiaries of government benefit programs, and includes three lines of business: Medicare, Military, and Medicaid. The Commercial segment consists of members enrolled in our medical and specialty products marketed to employer groups and individuals. We identified our segments in accordance with the aggregation provisions of SFAS 131 ,  which aggregates products with similar economic characteristics. These characteristics include the nature of customer groups as well as pricing, benefits, and underwriting requirements. These segment groupings are consistent with information used by our Chief Executive Officer.
The accounting policies of each segment are the same and are described in Note 2. The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other revenue, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share indirect overhead costs and assets. As a result, the profitability of each segment is interdependent.
 
91

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Our segment results were as follows for the years ended December 31, 2007, 2006, and 2005:

 	  	Government Segment	
 	  	2007	  	2006	  	2005	
 	  	(in thousands)	
Revenues:	  	 	 	  	 	 	  	 	 	
Premiums:	  	 	 	  	 	 	  	 	 	
Medicare Advantage	  	$	11,173,417	  	$	8,499,064	  	$	4,590,362	
Medicare stand-alone PDP	  	 	3,668,425	  	 	3,050,304	  	 	—  	
 	  	 	 	  	 	 	  	 	 	
Total Medicare	  	 	14,841,842	  	 	11,549,368	  	 	4,590,362	
Military services	  	 	2,839,790	  	 	2,543,930	  	 	2,407,653	
Medicaid	  	 	555,594	  	 	520,520	  	 	548,714	
 	  	 	 	  	 	 	  	 	 	
Total premiums	  	 	18,237,226	  	 	14,613,818	  	 	7,546,729	
Administrative services fees	  	 	73,659	  	 	49,442	  	 	50,059	
Investment income	  	 	182,616	  	 	116,075	  	 	18,280	
Other revenue	  	 	1,705	  	 	1,783	  	 	2,843	
 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	18,495,206	  	 	14,781,118	  	 	7,617,911	
 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	
Benefits	  	 	15,279,610	  	 	12,424,047	  	 	6,272,045	
Selling, general and administrative	  	 	2,042,249	  	 	1,730,243	  	 	963,354	
Depreciation and amortization	  	 	108,291	  	 	85,071	  	 	56,310	
 	  	 	 	  	 	 	  	 	 	
Total operating expenses	  	 	17,430,150	  	 	14,239,361	  	 	7,291,709	
 	  	 	 	  	 	 	  	 	 	
Income from operations	  	 	1,065,056	  	 	541,757	  	 	326,202	
Interest expense	  	 	37,525	  	 	27,912	  	 	9,526	
 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	$	1,027,531	  	$	513,845	  	$	316,676	
 	  	 	 	  	 	 	  	 	 	
Premium and administrative services revenues derived from our contracts with the federal government, as a percentage of our total premium and ASO revenues, were approximately 71% for 2007, 67% for 2006 and 51% for 2005.
 
92

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 	  	Commercial Segment	
 	  	2007	  	2006	  	2005	
 	  	(in thousands)	
Revenues:	  	 	 	  	 	 	  	 	 	
Premiums:	  	 	 	  	 	 	  	 	 	
Fully-insured:	  	 	 	  	 	 	  	 	 	
PPO	  	$	3,664,019	  	$	3,684,442	  	$	3,635,347	
HMO	  	 	1,998,981	  	 	2,019,936	  	 	2,432,768	
 	  	 	 	  	 	 	  	 	 	
Total fully-insured	  	 	5,663,000	  	 	5,704,378	  	 	6,068,115	
Specialty	  	 	534,121	  	 	410,986	  	 	386,747	
 	  	 	 	  	 	 	  	 	 	
Total premiums	  	 	6,197,121	  	 	6,115,364	  	 	6,454,862	
Administrative services fees	  	 	317,856	  	 	291,769	  	 	209,378	
Investment income	  	 	131,623	  	 	175,805	  	 	124,696	
Other revenue	  	 	148,183	  	 	52,481	  	 	11,280	
 	  	 	 	  	 	 	  	 	 	
Total revenues	  	 	6,794,783	  	 	6,635,419	  	 	6,800,216	
 	  	 	 	  	 	 	  	 	 	
Operating expenses:	  	 	 	  	 	 	  	 	 	
Benefits	  	 	4,990,921	  	 	4,997,157	  	 	5,379,425	
Selling, general and administrative	  	 	1,434,219	  	 	1,291,266	  	 	1,232,250	
Depreciation and amortization	  	 	76,521	  	 	63,527	  	 	72,548	
 	  	 	 	  	 	 	  	 	 	
Total operating expenses	  	 	6,501,661	  	 	6,351,950	  	 	6,684,223	
 	  	 	 	  	 	 	  	 	 	
Income from operations	  	 	293,122	  	 	283,469	  	 	115,993	
Interest expense	  	 	31,353	  	 	35,229	  	 	29,789	
 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	$	261,769	  	$	248,240	  	$	86,204	
 	  	 	 	  	 	 	  	 	 	
16. REINSURANCE
Certain blocks of insurance assumed in acquisitions, primarily life, long-term care and annuities in run-off status, are subject to reinsurance where some or all of the underwriting risk related to these policies has been ceded to a third party. In addition, a large portion of our reinsurance takes the form of 100% coinsurance agreements where, in addition to all of the underwriting risk, all administrative responsibilities, including premium collections and claim payment, have also been ceded to a third party. We acquired these policies and related reinsurance agreements with the purchase of stock of companies in which the policies were originally written. We acquired these companies for business reasons unrelated to these particular policies, including the companies’ other products and licenses necessary to fulfill strategic plans.
A reinsurance agreement between two entities transfers the underwriting risk of policyholder liabilities to a reinsurer while the primary insurer retains the contractual relationship with the ultimate insured. As such, these reinsurance agreements do no completely relieve us of our potential liability to the ultimate insured. However, given the transfer of underwriting risk, our potential liability is limited to the credit exposure which exists should the reinsurer be unable to meet its obligations assumed under these reinsurance agreements.
Reinsurance recoverables represent the portion of future policy benefits payable that are covered by reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the methods used to determine future policy benefits payable as detailed in Note 2. Reinsurance recoverables, included in other long-term assets, were $341.6 million at December 31, 2007 and $242.7 million at December 31, 2006. The percentage of these reinsurance recoverables resulting from 100% coinsurance agreements was 70% at
 
93

Table of Contents
Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
December 31, 2007 and 100% at December 31, 2006. The decrease primarily was related to the November 30, 2007 KMG acquisition. Premiums ceded were $13.4 million in 2007, $15.7 million in 2006 and $21.7 million in 2005.
We evaluate the financial condition of these reinsurers on a regular basis. These reinsurers are well-known and well-established, as evidenced by the strong financial ratings at December 31, 2007 presented below:

Reinsurer	  	Total
Recoverable	  	A.M. Best Rating	
 	  	(in thousands)	  	 	
Protective Life Insurance Company	  	$	214,821	  	A+ (superior)	
All others	  	 	126,817	  	A+ to A- (excellent)	
 	  	 	 	  	 	
 	  	$	341,638	  	 	
 	  	 	 	  	 	
The all other category represents approximately 20 reinsurers with individual balances less than $25.0 million. Two of these reinsurers have placed $31.0 million in trusts equivalent to the amount recoverable from the reinsurer.
 
94

Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
    of Humana Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Humana Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15 (2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying 2007 Annual Report to Stockholders. Our responsibility is to express opinions on these financial statements, financial statement schedules and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/    PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
February 22, 2008
 
95

Table of Contents
Humana Inc.
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
A summary of our quarterly unaudited results of operations for the years ended December 31, 2007 and 2006 follows:

 	  	2007	
 	  	First	  	Second	  	Third	  	Fourth	
 	  	(in thousands, except per share results)	
Total revenues	  	$	6,204,813	  	$	6,426,797	  	$	6,319,584	  	$	6,338,795	
Income before income taxes	  	 	112,221	  	 	339,590	  	 	478,502	  	 	358,987	
Net income	  	 	71,241	  	 	216,846	  	 	302,378	  	 	243,219	
Basic earnings per common share	  	 	0.43	  	 	1.30	  	 	1.81	  	 	1.45	
Diluted earnings per common share	  	 	0.42	  	 	1.28	  	 	1.78	  	 	1.43	
 	 	
 	  	2006	
 	  	First	  	Second	  	Third	  	Fourth	
 	  	(in thousands, except per share results)	
Total revenues	  	$	4,704,365	  	$	5,407,169	  	$	5,649,784	  	$	5,655,219	
Income before income taxes	  	 	131,208	  	 	140,322	  	 	249,374	  	 	241,181	
Net income	  	 	83,715	  	 	89,489	  	 	159,198	  	 	155,021	
Basic earnings per common share	  	 	0.51	  	 	0.55	  	 	0.97	  	 	0.94	
Diluted earnings per common share	  	 	0.50	  	 	0.53	  	 	0.95	  	 	0.92	
 
96

Table of Contents
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	
Not applicable.
 
ITEM 9A.	CONTROLS AND PROCEDURES	
Management’s Responsibility for Financial Statements and Other Information
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts based on our estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.
Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Business Ethics Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of independent outside directors, meets periodically with members of management, the internal auditors and our independent registered public accounting firm to review and discuss internal controls over financial reporting and accounting and financial reporting matters. Our independent registered public accounting firm and internal auditors report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to members of senior management and the Board of Directors.
Based on our evaluation as of December 31, 2007, we as the principal executive officer, the principal financial officer and the principal accounting officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as specified in Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
97

Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in  Internal Control—Integrated Framework . Based on our assessment, we determined that, as of December 31, 2007, the Company’s internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, who also audited the Company’s consolidated financial statements included in our Annual Report on Form 10-K, as stated in their report which appears on page 95.
Michael B. McCallister
President and Chief Executive Officer
James H. Bloem
Senior Vice President and Chief Financial Officer
Steven E. McCulley
Vice President and Controller, Principal Accounting Officer
 
ITEM 9B.	OTHER INFORMATION	
None.
 
98

Table of Contents
PART III
 
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	
Directors
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Election of Directors” of such Proxy Statement.
Executive Officers of the Registrant
Set forth below are names and ages of all of our current executive officers as of February 1, 2008, their positions, and the date first elected an officer:

Name	  	Age	  	Position	  	First
Elected
Officer	
Michael B. McCallister	  	55	  	President and Chief Executive Officer	  	09/89(1)	
James E. Murray	  	54	  	Chief Operating Officer	  	08/90(2)	
James H. Bloem	  	57	  	Senior Vice President—Chief Financial Officer and Treasurer	  	02/01(3)	
Bruce J. Goodman	  	66	  	Senior Vice President—Chief Service and Information Officer	  	04/99(4)	
Bonita C. Hathcock	  	59	  	Senior Vice President—Chief Human Resources Officer	  	05/99(5)	
Arthur P. Hipwell	  	59	  	Senior Vice President	  	08/90(6)	
Thomas J. Liston	  	46	  	Senior Vice President—Strategy and Corporate Development	  	01/97(7)	
Jonathan T. Lord, M.D.  	  	53	  	Senior Vice President—Chief Innovation Officer	  	04/00(8)	
Heidi S. Margulis	  	54	  	Senior Vice President—Government Relations	  	12/95(9)	
Steven E. McCulley	  	46	  	Vice President & Controller (Principal Accounting Officer)	  	08/04(10)	
Steven O. Moya	  	58	  	Senior Vice President—Chief Marketing Officer	  	01/01(11)	
Kathleen Pellegrino	  	61	  	Vice President—Acting General Counsel	  	08/90(12)	
 
(1)	Mr. McCallister was elected President, Chief Executive Officer and a member of the Board of Directors in February 2000. Mr. McCallister joined the Company in June 1974.	
(2)	Mr. Murray currently serves as Chief Operating Officer, having held this position since February 2006. Prior to that, Mr. Murray held the position of Chief Operating Officer—Market and Business Segment Operations from September 2002 to February 2006. Mr. Murray joined the Company in October 1989.	
(3)	Mr. Bloem currently serves as Senior Vice President, Chief Financial Officer and Treasurer, having held this position since July 2002. Mr. Bloem joined the Company in February 2002.	
(4)	Mr. Goodman currently serves as Senior Vice President and Chief Service and Information Officer having held this position since September 2002. Mr. Goodman joined the Company in April 1999.	
(5)	Ms. Hathcock currently serves as Senior Vice President and Chief Human Resources Officer having held this position since May 1999 when she joined the Company.	
(6)	Mr. Hipwell currently serves as Senior Vice President having held this position since March 2007. Prior to that, Mr. Hipwell was Senior Vice President and General Counsel from September 1999 to March 2007. Mr. Hipwell joined the Company in 1979.	
(7)	Mr. Liston currently serves as Senior Vice President—Strategy & Corporate Development having held this position since July 2000. Mr. Liston joined the Company in 1995.	
(8)	Dr. Lord currently serves as Senior Vice President and Chief Innovation Officer having held this position since September 2002. Dr. Lord joined the Company in April 2000.	
(9)	Ms. Margulis currently serves as Senior Vice President—Government Relations having held this position since January 2000. Ms. Margulis joined the Company in November 1985.	
(10)	Mr. McCulley currently serves as Vice President & Controller (Principal Accounting Officer) having held this position since August 2004. Prior to that, he served as Vice President & Controller from January 2001 to August 2004. Mr. McCulley joined the Company in 1990.	
 
99

Table of Contents
(11)	Mr. Moya currently serves as Senior Vice President and Chief Marketing Officer having held this position since January 2001, when he joined the Company.	
(12)	Ms. Pellegrino currently serves as Vice President and Acting General Counsel having held this position since June 1, 2007. Prior to that, she served as Vice President and Deputy General Counsel from April 2006 until June 2007, and Vice President and Associate General Counsel from May 1998 to April 2006. Ms. Pellegrino joined the Company in 1982.	
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.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of such Proxy Statement.
Code of Ethics for Chief Executive Officer and Senior Financial Officers
The Company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers, violations of which should be reported to the Audit Committee. The code may be viewed on our web site at www.humana.com. Any amendment to or waiver of the application of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers will be promptly disclosed on the Company’s web site at www.humana.com.
Code of Business Conduct and Ethics
Since 1995, the Company has operated under an omnibus Code of Ethics and Business Conduct, known as the Humana Inc. Principles of Business Ethics, which includes provisions ranging from restrictions on gifts to conflicts of interest. All employees and directors are required to annually affirm in writing their acceptance of the code. The Humana Inc. Principles of Business Ethics was adopted by our Board of Directors in February 2004 as the document to comply with the New York Stock Exchange Corporate Governance Standard 303A.10. The Humana Inc. Principles of Business Ethics is available at our web site www.humana.com and upon a written request addressed to Humana Inc. Vice President and Corporate Secretary at 500 West Main Street, 27 th  Floor, Louisville, Kentucky 40202. Any waiver of the application of the Humana Inc. Principles of Business Ethics to directors or executive officers must be made by the Board of Directors and will be promptly disclosed on our web site at www.humana.com.
Corporate Governance Items
We have made available free of charge on or through the Investor Relations section of our Internet web site (http://www.humana.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements, and all of our other reports, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also available on our Internet web site is information about our Board of Directors, including a determination of independence for each member, the various committees of our Board of Directors, the members of each committee, the charters of these committees, the name(s) of the Directors designated as a financial expert under rules and regulations promulgated by the SEC, the process for designating a lead director to act at executive sessions of the non-management Directors, the pre-approval process of non-audit services provided by our independent accountants, our by-laws and Certificate of Incorporation, our Major Vote policy, our Related Persons Transaction Policy, the process by which stockholders can communicate with Directors, the process by which stockholders can make Director nominations, the Company’s Corporate
 
100

Table of Contents
Governance Guidelines, the Humana Principles of Business Ethics, and the Code of Ethics for the Chief Executive Officer and Senior Financial Officers. Any waivers or amendments for Directors or Executive Officers to the Principles of Business Ethics and the Code of Ethics for the Chief Executive Officer and Senior Financial Officers will be promptly displayed on our web site. The Company will provide any of these documents in print without charge to any stockholder who makes a written request to: Vice President and Corporate Secretary, Humana Inc., 500 West Main Street, 27 th  floor, Louisville, Kentucky 40202. Additional information about these items can be found in, and is incorporated by reference to, the Company’s Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Registrant’s Board of Directors
None.
Audit Committee Financial Expert
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Corporate Governance-Audit Committee” of such Proxy Statement.
Audit Committee Composition and Independence
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Corporate Governance-Committee Composition” of such Proxy Statement.
Certifications
Our CEO and CFO have signed the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act. These certifications are filed as Exhibits to this Annual Report on Form 10-K. Additionally, our CEO has signed the certificate as to compliance with the Corporate Governance Listing Standards of the New York Stock Exchange as of December 31, 2006 and will sign the certificate as to such compliance as of December 31, 2007.
 
ITEM 11.	EXECUTIVE COMPENSATION	
Additional information required by this Item is incorporated herein by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the captions “Compensation Committee Interlocks and Insider Participation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Organization & Compensation Committee Report,” and “Executive Compensation of the Company” of such Proxy Statement.
 
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the captions “Security Ownership of Certain Beneficial Owners of Company Common Stock” and “Equity Compensation Plan Information” of such Proxy Statement.
 
101

Table of Contents
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the captions “Certain Transactions with Management and Others” and “Independent Directors” of such Proxy Statement.
 
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	
The information required by this Item is herein incorporated by reference from our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 24, 2008 appearing under the caption “Audit Committee Report” of such Proxy Statement.
 
102

Table of Contents
PART IV
 
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	
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 15 is submitted as Item 8 of Part II of this report.	
 
 	(2)	The following Consolidated Financial Statement Schedules are included herein:	
Schedule I Parent Company Financial Information
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable.
 
 	(3)	Exhibits:	

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 No.1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994, is incorporated by reference herein.	
 	 	
  (b)	  	Copy of by-laws, as amended on January 4, 2007. Exhibit 3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, is incorporated by reference herein.	
 	 	
4(a)	  	Indenture dated August 5, 2003 covering the Company’s Senior Debt Securities. Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated by reference herein.	
 	 	
  (b)	  	First Supplemental Indenture dated August 5, 2003 covering the Company’s 6.30% Senior Notes due 2018. Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated by reference herein.	
 	 	
  (c)	  	Second Supplemental Indenture dated May 31, 2006 covering the Company’s 6.450% Senior Notes due 2016. Exhibit 4.1 to the Company’s 8-K filed on May 31, 2006, is incorporated by reference herein.	
 	 	
  (d)	  	Indenture dated March 30, 2006 by and between the Company and The Bank of New York Trust Company, N.A., as trustee. Exhibit 4.2 to the Company’s Form S-3 filed on March 31, 2006, is incorporated by reference herein.	
 	 	
  (e)	  	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 herein in Note 10 to Consolidated Financial Statements. The Company agrees to furnish copies of all such instruments defining the rights of the holders of such indebtedness not otherwise filed as an Exhibit to the Form 10-K to the Commission upon request.	
 	 	
10(a)*	  	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.	
 	 	
    (b)*	  	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.	
 
103

Table of Contents
 	 	 	
10(c)*	  	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.	
 	 	
    (d)*	  	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.	
 	 	
    (e)*	  	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.	
 	 	
    (f)*	  	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.	
 	 	
    (g)*	  	Humana Inc. Non-Qualified Stock Option Plan for Employees. Exhibit 99 to the Company’s Form S-8 Registration Statement No. 333-86801 filed on September 9, 1999, is incorporated by reference herein.	
 	 	
    (h)*	  	Form of Company’s Stock Option Agreement under the 1996 Stock Incentive Plan for Employees (Non-Qualified Stock Options). Exhibit 10(a) to the Company’s Form 8-K filed on August 26, 2004, is incorporated by reference herein.	
 	 	
    (i)*	  	Form of Company’s Stock Option Agreement under the 1996 Stock Incentive Plan for Employees (Incentive Stock Options). Exhibit 10(b) to the Company’s Form 8-K filed on August 26, 2004, is incorporated by reference herein.	
 	 	
    (j)*	  	Form of Company’s Stock Option Agreement under the 2003 Stock Incentive Plan (Non-Qualified Stock Options). Exhibit 10(c) to the Company’s Form 8-K filed on August 26, 2004, is incorporated by reference herein.	
 	 	
    (k)*	  	Form of Company’s Stock Option Agreement under the 2003 Stock Incentive Plan (Incentive Stock Options). Exhibit 10(d) to the Company’s Form 8-K filed on August 26, 2004, is incorporated by reference herein.	
 	 	
    (l)*	  	Humana Inc. Amended and Restated 2003 Stock Incentive Plan. Appendix A to the Company’s Proxy Statement covering the Annual Meeting of Stockholders held on April 27, 2006, is incorporated by reference herein.	
 	 	
   (m)*	  	Humana Inc. 2003 Executive Management Incentive Compensation Plan as amended on October 25, 2007, filed herewith.	
 	 	
    (n)*	  	Form of Change of Control Agreement amended on October 25, 2007, filed herewith.	
 	 	
    (o)*	  	Employment Agreement—Michael B. McCallister. Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, is incorporated by reference herein.	
 	 	
    (p)*	  	Trust under Humana Inc. Deferred Compensation Plans. Exhibit 10(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, is incorporated by reference herein.	
 	 	
    (q)*	  	The Humana Inc. Deferred Compensation Plan for Non-Employee Directors (As amended through August 23, 2007). Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, is incorporated by reference herein.	
 	 	
    (r)*	  	Severance policy as amended and restated on October 25, 2007, filed herewith.	
 	 	
    (s)*	  	Humana Officers’ Target Retirement Plan, as amended and restated on October 25, 2007, filed herewith.	
 
104

Table of Contents
 	 	 	
10(t)*	  	Summary of Changes to Humana Inc. Retirement Plans, as amended. Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated by reference herein.	
 	 	
    (u)*	  	Humana Supplemental Executive Retirement and Savings Plan, as amended and restated on December 13, 2007, filed herewith.	
 	 	
    (v)*	  	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.	
 	 	
    (w)*	  	Executive Long-Term Disability Program. Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is incorporated by reference herein.	
 	 	
    (x)*	  	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.	
 	 	
    (y)*	  	Form of Company’s Restricted Stock Agreement under the 1996 Stock Incentive Plan. Exhibit 10(cc) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference herein.	
 	 	
    (z)*	  	Form of Company’s Restricted Stock Agreement under the 2003 Stock Incentive Plan. Exhibit 10(dd) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference herein.	
 	 	
  (aa)*	  	Summary of the Company’s Financial Planning Program for eight executive officers. Current Report on Form 8-K dated December 15, 2005, is incorporated by reference herein.	
 	 	
  (bb)*	  	Form of Company’s Combined Option and Restricted Stock Agreement with Restrictive Covenants under the 2003 Stock Incentive Plan. Exhibit 10(ee) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, is incorporated by reference herein.	
 	 	
  (cc)*	  	Form of Company’s Stock Option Agreement and Agreement Not to Compete or Solicit under the Amended and Restated 2003 Stock Incentive Plan, filed herewith.	
 	 	
(dd)	  	Five-Year Credit Agreement. Exhibit 10 to the Company’s 8-K filed on July 19, 2006, is incorporated by reference herein.	
 	 	
(ee)	  	Agreement between the United States Department of Defense and Humana Military Healthcare Services, Inc., a wholly owned subsidiary of the Company dated as September 1, 2003. Exhibit 10(gg) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference herein.	
 	 	
  (ff)	  	Form of CMS Coordinated Care Plan Agreement. Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 	 	
(gg)	  	Form of CMS Private Fee for Service Agreement. Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 	 	
(hh)	  	Addendum to Agreement Providing for the Operation of a Medicare Voluntary Prescription Drug Plan. Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 	 	
  (ii)	  	Addendum to Agreement Providing for the Operation of an Employer/Union-only Group Medicare Advantage Prescription Drug Plan. Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 
105

Table of Contents
 	 	 	
10(jj)	  	Addendum to Agreement Providing for the Operation of an Employer/Union-only Group Medicare Advantage-Only Plan. Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 	 	
  (kk)	  	Addendum to Agreement Providing for the Operation of a Medicare Advantage Regional Coordinated Care Plan. Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, is incorporated by reference herein.	
 	 	
    (ll)	  	Explanatory Note regarding Medicare Prescription Drug Plan Contracts between Humana and CMS. Exhibit 10(nn) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, is incorporated by reference herein.	
 	 	
12   	  	Computation of ratio of earnings to fixed charges, filed herewith.	
 	 	
14   	  	Code of Conduct for Chief Executive Officer & Senior Financial Officers. Exhibit 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, is incorporated by reference herein.	
 	 	
21   	  	List of subsidiaries, filed herewith.	
 	 	
23   	  	Consent of PricewaterhouseCoopers LLP, filed herewith.	
 	 	
31.1	  	CEO certification pursuant to Rule 13a-14(a)/15d-14(a), filed herewith.	
 	 	
31.2	  	CFO certification pursuant to Rule 13a-14(a)/15d-14(a), filed herewith.	
 	 	
32   	  	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002, filed herewith.	
 
*	Exhibits 10(a) through and including 10(cc) are compensatory plans or management contracts.	
 
106

Table of Contents
Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS

 	  	December 31,	 	
 	  	2007	 	 	2006	 	
 	  	(in thousands, except share
amounts)	 	
ASSETS	  	 	 	 	 	 	 	 	
Current assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	509,328	 	 	$	319,340	 	
Investment securities	  	 	26,346	 	 	 	105,024	 	
Receivable from operating subsidiaries	  	 	288,967	 	 	 	330,891	 	
Securities lending collateral	  	 	401,292	 	 	 	1,081	 	
Other current assets	  	 	298,963	 	 	 	325,002	 	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	1,524,896	 	 	 	1,081,338	 	
 	 	 	
Property and equipment, net	  	 	440,215	 	 	 	407,345	 	
Investments in subsidiaries	  	 	5,482,145	 	 	 	4,117,757	 	
Other long-term assets	  	 	71,485	 	 	 	44,278	 	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	7,518,741	 	 	$	5,650,718	 	
 	  	 	 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current liabilities:	  	 	 	 	 	 	 	 	
Payable to operating subsidiaries	  	$	886,030	 	 	$	902,463	 	
Current portion of notes payable to operating subsidiaries	  	 	27,600	 	 	 	27,600	 	
Book overdraft	  	 	57,029	 	 	 	56,153	 	
Other current liabilities	  	 	390,762	 	 	 	254,205	 	
Securities lending payable	  	 	401,292	 	 	 	1,081	 	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	1,762,713	 	 	 	1,241,502	 	
 	 	 	
Long-term debt	  	 	1,651,740	 	 	 	1,269,100	 	
Notes payable to operating subsidiaries	  	 	8,550	 	 	 	18,000	 	
Other long-term liabilities	  	 	66,801	 	 	 	68,230	 	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	3,489,804	 	 	 	2,596,832	 	
 	  	 	 	 	 	 	 	 	
Commitments and contingencies	  	 	 	 	 	 	 	 	
Stockholders’ equity:	  	 	 	 	 	 	 	 	
Preferred stock, $1 par; 10,000,000 shares authorized; none issued	  	 	—  	 	 	 	—  	 	
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 186,738,885 shares issued in 2007, and 182,947,691 shares issued in 2006	  	 	31,123	 	 	 	30,491	 	
Treasury stock, at cost, 16,720,528 shares in 2007 and 16,314,151 shares in 2006	  	 	(256,987	)	 	 	(229,575	)	
Other stockholders’ equity	  	 	4,254,801	 	 	 	3,252,970	 	
 	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	4,028,937	 	 	 	3,053,886	 	
 	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	7,518,741	 	 	$	5,650,718	 	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the parent company financial statements.
 
107

Table of Contents
Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF OPERATIONS

 	  	For the year ended December 31,	 	
 	  	2007	 	 	2006	  	2005	 	
 	  	(in thousands)	 	
Revenues:	  	 	 	 	 	 	 	  	 	 	 	
Management fees charged to operating subsidiaries	  	$	829,515	 	 	$	798,472	  	$	581,362	 	
Investment income and other income, net	  	 	22,403	 	 	 	91,109	  	 	23,657	 	
 	  	 	 	 	 	 	 	  	 	 	 	
 	  	 	851,918	 	 	 	889,581	  	 	605,019	 	
 	 	 	 	
Expenses:	  	 	 	 	 	 	 	  	 	 	 	
Selling, general and administrative	  	 	683,562	 	 	 	676,613	  	 	499,787	 	
Depreciation	  	 	119,076	 	 	 	96,215	  	 	81,634	 	
Interest	  	 	71,258	 	 	 	63,587	  	 	40,935	 	
 	  	 	 	 	 	 	 	  	 	 	 	
 	  	 	873,896	 	 	 	836,415	  	 	622,356	 	
 	  	 	 	 	 	 	 	  	 	 	 	
(Loss) income before income taxes and equity in net earnings of subsidiaries	  	 	(21,978	)	 	 	53,166	  	 	(17,337	)	
(Benefit) provision for income taxes	  	 	(16,103	)	 	 	25,181	  	 	(44,174	)	
 	  	 	 	 	 	 	 	  	 	 	 	
(Loss) income before equity in net earnings of subsidiaries	  	 	(5,875	)	 	 	27,985	  	 	26,837	 	
Equity in net earnings of subsidiaries	  	 	839,559	 	 	 	459,438	  	 	269,893	 	
 	  	 	 	 	 	 	 	  	 	 	 	
Net income	  	$	833,684	 	 	$	487,423	  	$	296,730	 	
 	  	 	 	 	 	 	 	  	 	 	 	
See accompanying notes to the parent company financial statements.
 
108

Table of Contents
Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CASH FLOWS

 	  	For the year ended December 31,	 	
 	  	2007	 	 	2006	 	 	2005	 	
 	  	(in thousands)	 	
Net cash provided by operating activities	  	$	682,374	 	 	$	330,722	 	 	$	414,790	 	
 	 	 	 	
Cash flows from investing activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions	  	 	(548,251	)	 	 	(2,810	)	 	 	(498,948	)	
Purchases of investment securities	  	 	(25,147	)	 	 	(119,753	)	 	 	(200,048	)	
Proceeds from sale of investment securities	  	 	100,001	 	 	 	264,439	 	 	 	193,391	 	
Maturities of investment securities	  	 	15,213	 	 	 	29,005	 	 	 	22,041	 	
Purchases of property and equipment, net	  	 	(139,962	)	 	 	(147,719	)	 	 	(141,124	)	
Capital contributions to operating subsidiaries	  	 	(307,340	)	 	 	(723,501	)	 	 	(116,000	)	
Surplus note redemption from operating subsidiaries	  	 	—  	 	 	 	7,000	 	 	 	10,000	 	
Change in securities lending collateral	  	 	(400,211	)	 	 	902	 	 	 	6,008	 	
Other	  	 	—  	 	 	 	29	 	 	 	—  	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(1,305,697	)	 	 	(692,408	)	 	 	(724,680	)	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Borrowings under credit agreement	  	 	1,685,000	 	 	 	550,000	 	 	 	494,000	 	
Repayments under credit agreement	  	 	(1,335,000	)	 	 	(300,000	)	 	 	(294,000	)	
Proceeds from issuance of senior notes	  	 	—  	 	 	 	498,545	 	 	 	—  	 	
Repayments of senior notes	  	 	—  	 	 	 	(300,000	)	 	 	—  	 	
Debt issue costs	  	 	—  	 	 	 	(5,980	)	 	 	—  	 	
Repayment of notes issued to operating subsidiaries	  	 	(9,450	)	 	 	—  	 	 	 	—  	 	
Change in book overdraft	  	 	876	 	 	 	9,306	 	 	 	(6,679	)	
Change in securities lending payable	  	 	400,211	 	 	 	(902	)	 	 	(6,008	)	
Common stock repurchases	  	 	(27,412	)	 	 	(26,211	)	 	 	(2,364	)	
Tax benefit from stock-based compensation	  	 	37,443	 	 	 	38,839	 	 	 	15,545	 	
Proceeds from stock option exercises and other	  	 	61,643	 	 	 	48,223	 	 	 	35,734	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by financing activities	  	 	813,311	 	 	 	511,820	 	 	 	236,228	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in cash and cash equivalents	  	 	189,988	 	 	 	150,134	 	 	 	(73,662	)	
Cash and cash equivalents at beginning of year	  	 	319,340	 	 	 	169,206	 	 	 	242,868	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of year	  	$	509,328	 	 	$	319,340	 	 	$	169,206	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the parent company financial statements.
 
109

Table of Contents
Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Parent company financial information has been derived from our consolidated financial statements and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with our consolidated financial statements.
2. TRANSACTIONS WITH SUBSIDIARIES
Management Fee
Through intercompany service agreements approved, if required, by state regulatory authorities, Humana Inc., our parent company, charges a management fee for reimbursement of certain centralized services provided to its subsidiaries including information systems, disbursement, investment and cash administration, marketing, legal, finance, and medical and executive management oversight.
Dividends
Cash dividends received from subsidiaries and included as a component of net cash provided by operating activities were $377.0 million in 2007, $247.5 million in 2006 and $236.0 million in 2005.
Guarantee
Through indemnity agreements approved by state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by our parent company in the event of insolvency for; (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our parent has also guaranteed the obligations of our military services subsidiaries.
Notes Receivables from Operating Subsidiaries
We funded certain subsidiaries with surplus note agreements. These notes are generally non-interest bearing and may not be entered into or repaid without the prior approval of the applicable Departments of Insurance.
Notes Payable to Operating Subsidiaries
We borrowed funds from certain subsidiaries with notes generally collateralized by real estate. These notes, which have various payment and maturity terms, bear interest ranging from 5.53% to 6.65% and are payable between 2008 and 2009. We recorded interest expense of $2.7 million, $2.6 million and $2.2 million related to these notes for the years ended December 31, 2007, 2006 and 2005, respectively. During 2007, we repaid a $9.5 million note payable to operating subsidiaries in connection with the sale of the underlying building.
3. REGULATORY REQUIREMENTS
Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.
 
110

Table of Contents
Humana Inc.
SCHEDULE I—PARENT COMPANY FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)
 
Based on the most recent statutory financial statements as of December 31, 2007, we maintained aggregate statutory capital and surplus of $2,905.2 million in our state regulated subsidiaries. This compares to applicable statutory requirements which aggregated $1,810.5 million. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level.
Most states rely on risk-based capital requirements, or RBC, to define their required levels of equity discussed above. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels. If RBC were adopted by the remaining states and Puerto Rico at December 31, 2007, we would have $966.3 million of aggregate capital and surplus above any of the levels that require corrective action under RBC, or individual state requirements based on the most recent statutory financial statements as of December 31, 2007.
4. ACQUISITIONS
Refer to Note 3 of the notes to consolidated financial statements in the Annual Report on Form 10-K for a description of acquisitions.
5. INCOME TAXES
The reduction in 2005 tax expense primarily related to the recognition of a $22.8 million contingent tax benefit and associated $3.1 million reversal of accrued interest resulting from the resolution of an uncertain tax position associated with the 2000 tax year during the first quarter of 2005 in connection with the expiration of the statute of limitations. Refer to Note 9 of the notes to consolidated financial statements in the Annual Report on Form 10-K for a description of income taxes.
 
111

Table of Contents
Humana Inc.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006, and 2005
(in thousands)

 	  	 	  	 	  	Additions	 	 	 	 	 	 	
 	  	Balance at
Beginning
of Period	  	Acquired
Balances	  	Charged
(Credited) to
Costs and
Expenses	 	 	Charged to
Other
Accounts(1)	 	 	Deductions
or
Write-offs	 	 	Balance at
End of
Period	
Allowance for loss on receivables:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2007	  	$	45,589	  	$	—  	  	$	28,922	 	 	$	796	 	 	$	(7,047	)	 	$	68,260	
2006	  	 	32,557	  	 	—  	  	 	20,901	 	 	 	(717	)	 	 	(7,152	)	 	 	45,589	
2005	  	 	34,506	  	 	—  	  	 	4,566	 	 	 	(1,027	)	 	 	(5,488	)	 	 	32,557	
 	 	 	 	 	 	 	
Deferred tax asset valuation allowance:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2007	  	 	—  	  	 	—  	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	
2006	  	 	—  	  	 	—  	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	
2005	  	 	20,123	  	 	—  	  	 	(5,198	)	 	 	—  	 	 	 	(14,925	)	 	 	—  	
 
(1)	Represents changes in retroactive membership adjustments to premium revenues as more fully described in Note 2 to the consolidated financial statements.	
 
112

Table of Contents
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.	
 	 	
By: 	 	/s/    JAMES H. BLOEM        	
 	 	James H. Bloem	
 	 	Senior Vice President and	
 	 	Chief Financial Officer	
 	 	(Principal Financial Officer)	
 	
Date: February 25, 2008	
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.

Signature	  	Title	 	Date	
 	 	 	
/s/    JAMES H. BLOEM        
James H. Bloem	  	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	 	February 25, 2008	
 	 	 	
/s/    STEVEN E. MCCULLEY        
Steven E. McCulley	  	Vice President and Controller (Principal Accounting Officer)	 	February 25, 2008	
 	 	 	
/s/    DAVID A. JONES, JR.        
David A. Jones, Jr.	  	Chairman of the Board	 	February 25, 2008	
 	 	 	
/s/    FRANK A. D’AMELIO        
Frank A. D’Amelio	  	Director	 	February 25, 2008	
 	 	 	
/s/    W. ROY DUNBAR        
W. Roy Dunbar	  	Director	 	February 25, 2008	
 	 	 	
/s/    KURT J. HILZINGER        
Kurt J. Hilzinger	  	Director	 	February 25, 2008	
 	 	 	
/s/    MICHAEL B. MCCALLISTER        
Michael B. McCallister	  	Director, President and Chief Executive Officer	 	February 25, 2008	
 	 	 	
/s/    WILLIAM J. MCDONALD        
William J. McDonald	  	Director	 	February 25, 2008	
 	 	 	
/s/    JAMES J. O’BRIEN        
James J. O’Brien	  	Director	 	February 25, 2008	
 	 	 	
/s/    W. ANN REYNOLDS, PH.D.        
W. Ann Reynolds, Ph.D.	  	Director	 	February 25, 2008	
 
113

Exhibit 10(m)
HUMANA INC.
2003 EXECUTIVE MANAGEMENT INCENTIVE COMPENSATION PLAN
 
I.	OBJECTIVES.	
The objective of the Humana Inc. 2003 Executive Management Incentive Compensation Plan (the “Plan”) is to attract, retain and reward selected executive officers for their efforts in optimizing the profitability and growth of Humana Inc. (the “Company”), consistent with sound business practices and the Company’s long and short range business plans.
 
II.	ELIGIBILITY AND AWARDS.	
A. Employees participating in this Plan will consist of the President and Chief Executive Officer (“CEO”) plus any other executive officers designated (a “Participant”) by the Organization & Compensation Committee of the Board of Directors of the Company (the “Committee”). Each Participant shall be notified of his/her selection.
B. Incentive compensation will be computed by measuring the Company’s achievement of predetermined goals relating to (i) consolidated net income or earnings per share (“EPS”), and/or (ii) cash flows from operating activities, return on invested capital, return on assets, or return on equity, and/or (iii) other growth or profit objectives. All such goals (“Performance Targets”) shall be established by the Committee after giving effect to any adjustments applicable pursuant to the Plan in accordance with Internal Revenue Service regulations promulgated under Section 162(m) of the Internal Revenue Code as amended (the “Code”).
C. Incentive compensation for a fiscal year or other relevant period determined by the Committee (“Performance Period”) shall be based on the Participant’s base salary paid or accrued during such fiscal year exclusive of any bonus or fringe benefits paid or accrued during such fiscal year (“Salary”). The Committee shall determine, subject to the limits in the Plan, the potential percentage of Salary which any Participant shall be eligible to receive as incentive compensation, which need not be the same for each Participant. The maximum incentive compensation paid for any fiscal year to any Participant shall not exceed two hundred percent (200%) of Salary. The precise percentage earned shall be based upon a schedule of achievement of Performance Targets. Notwith-standing anything herein to the contrary, the maximum incentive compensation paid for any fiscal year to the CEO may not exceed Three Million Dollars ($3,000,000), or One Million Five Hundred Thousand Dollars ($1,500,000) for any other Participant.
D. The Company’s achievement of any relevant Performance Targets will be determined in accordance with generally accepted accounting principles. Any incentive compensation generated pursuant to incentive plans of the Company, including this Plan, shall be accrued and deducted as an expense in the appropriate fiscal year in determining the achievement of any Performance Targets.
E. Each participant may receive an award (“Award”) if the Performance Target(s) established by the Committee are attained in the applicable Performance Period. The applicable Performance Period and Performance Target(s) shall be determined by the Committee consistent with the terms of the Plan and Section 162(m) of the Code. Notwithstanding the fact that the Performance Target(s) have been attained, the Committee may pay an Award of less than the amount determined by the formula or standard established by the Committee or may pay no Award at all.
F. The specific Performance Target(s) must be established by the Committee in advance of the deadlines applicable under Section 162(m) of the Code and while the performance relating to the Performance Target(s) remains substantially uncertain within the meaning of Section 162(m) of the Code. The Performance Target(s) with
 
- 1 -

respect to any Performance Period may be established on a cumulative basis or in the alternative, and may be established on a stand-alone basis with respect to the Company or on a relative basis with respect to any peer companies or index selected by the Committee. At the time the Performance Target(s) are selected, the Committee shall provide, in terms of an objective formula or standard for each Participant, the method of computing the specific amount of Award payable to the Participant if the Performance Target(s) are attained. The objective formula or standard shall preclude the use of discretion to increase the amount of any Award earned pursuant to the terms of the Award.
G. If services as a Participant commence after the adoption of the Plan and the Performance Target(s) are established for a Performance Period, the Committee may grant an Award that is proportionately adjusted based on the period of actual service, and the amount of any Award paid to such Participant shall not exceed that proportionate amount of the applicable maximum individual Award allowable under the Plan.
H. To preserve the intended incentives and benefits of an Award based on a Performance Target, the Committee may determine at the time Performance Targets are established that certain adjustments shall apply to the objective formula or standard with respect to the applicable Performance Target to take into account, in whole or in part, in any manner specified by the Committee, any one or more of the following with respect to the Performance Period: (i) the gain, loss, income or expense resulting from changes in accounting principles that become effective during the Performance Period; (ii) the gain, loss, income or expense reported publicly by the Company with respect to the Performance Period that are extraordinary or unusual in nature or infrequent in occurrence; (iii) the gains or losses resulting from, and the direct expenses incurred in connection with the disposition of a business, or the sale of investments or non-core assets; (iv) the gain or loss from all or certain claims and/or litigation and all or certain insurance recoveries relating to claims or litigation; (v) the impact of impairment of tangible or intangible assets; including goodwill; (vi) the impact of restructuring or business recharacterization activities, including but not limited to reductions in force, that are reported publicly by the Company; or (vii) the impact of investments or acquisitions made during the year or, to the extent provided by the Committee, any prior year. Each of the adjustments described in this Section may relate to the Company as a whole or any part of the Company’s business operations. The adjustments are to be determined in accordance with generally accepted accounting principles and standards, unless another objective method of measurement is designated by the Committee. In addition to the foregoing, the Committee shall adjust any Performance Targets or other features of an Award that relate to or are wholly or partially based on the number of, or the value of, any stock of the Company, to reflect any stock dividend or split, recapitalization, combination or exchange of shares or other similar changes in such stock.
I. The Committee has the sole discretion to determine the standard or formula pursuant to which each Participant’s Award shall be calculated and whether all or any portion of the amount so calculated will be paid, subject in all cases to the terms, conditions and limits of the Plan. To this same extent, the Committee may at any time establish (and, once established, rescind, waive or amend) additional conditions and terms of payment of Awards (including but not limited to the achievement of other financial, strategic or individual goals, which may be objective or subjective) as it may deem desirable in carrying out the purposes of the Plan and may take into account such other factors as it deems appropriate in administering any aspect of the Plan. The Committee may not, however, increase the maximum amount permitted to be paid to any individual under the Plan or pay Awards under this Plan if applicable Performance Target(s) have not been satisfied.
J. Incentive compensation shall be paid to Participants on or before March 15th of the year following the fiscal year with respect to which it was earned or such earlier date as may be required in order that such amount be deductible under the Code for the fiscal year with respect to which it was earned.
 
III.	ADMINISTRATION OF THIS PLAN.	
The Committee has sole authority (except as specified otherwise herein) to determine all questions of interpretation and application of the Plan, or of the terms and conditions pursuant to which Awards are granted under the Plan and in general, to make all determinations advisable for the administration of the Plan to achieve its purpose. The Committee determinations under the Plan (including without limitation, determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and any
 
- 2 -

agreements evidencing such Awards) need not be uniform and may be made by the Committee selectively among persons who receive or are eligible to receive Awards under the Plan, whether or not such persons are similarly situated. Such determinations shall be final and not subject to further appeal.
 
IV.	INELIGIBILITY DURING FISCAL YEAR.	
A Participant in this Plan who becomes ineligible during the fiscal year due to transfer or change of position shall cease to be eligible for further participation in this Plan on the date of transfer or change to the ineligible position. Subject to the discretion of the Committee as set forth in this Plan, if the Participant, prior to the date of transfer or change, has been a Participant in the Plan for a minimum of two (2) full calendar months of a fiscal year, the Participant will be eligible to receive partial incentive compensation based upon the Participant’s Salary for such period of time and the level of achievement in relation to Performance Targets for the entire Performance Period.
 
V.	TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE.	
Subject to the discretion of the Committee, a Participant who has been employed (i) during the entire fiscal year for which incentive compensation is to be paid, but whose employment is terminated, voluntarily or involuntarily (other than for cause), or who is granted a leave of absence after the end of such fiscal year and prior to the payment date therefor shall receive his/her full incentive compensation with respect to such fiscal year as determined in accordance with the provisions of this Plan, or (ii) any two (2) full calendar months of any fiscal year, but whose employment is terminated, voluntarily or involuntarily (other than for cause), or who is granted a leave of absence after the end of such two (2) full calendar months of any fiscal year but prior to the end of such fiscal year will be eligible to receive partial incentive compensation with respect to such fiscal year based upon the Participant’s Salary for the period of time he/she was a Participant at the level of achievement in relation to Performance Targets for the entire Performance Period. A Participant whose employment is terminated for cause or whose employment is terminated for any other reason prior to serving at least two (2) full calendar months of a fiscal year shall not be eligible to receive any incentive compensation under this Plan, other than any amounts which have been paid to him/her prior to the date he/she is terminated.
 
VI.	DEFERRED COMPENSATION.	
A Participant in this Plan may, if approved by the Committee, irrevocably elect to defer receipt of any amount earned pursuant to this Plan, provided such election is made in writing. The terms of any deferred compensation arrangement must be approved in writing by the Chairman of the Committee or his/her delegate and the Participant. Any amount deferred pursuant to this Plan may bear interest at a rate determined by the Committee, which shall not exceed the relevant applicable federal rate under the Code.
 
VII.	AMENDMENT OF PLAN.	
Subject to any restrictions imposed under Section 162(m) of the Code, the Committee may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part, provided that no such amendment that would require the consent of the Board and/or stockholders of the Company pursuant to Section 162(m) of the Code or the Securities Exchange Act of 1934 as amended, any New York Stock Exchange (or other relevant stock exchange) rule or regulation, or any other applicable law, rule or regulation, shall be effective without such consent.
 
VIII.	GENERAL PROVISIONS.	
A. No person has any claim or right to be included in this Plan or to be granted incentive compensation under this Plan until such individual has been declared a Participant and received official notice thereof in accordance with the procedures as set forth in this Plan. In addition, all of the requirements and applicable rules and regulations of
 
- 3 -

this Plan must have been met including, but not limited to the availability of funds for incentive compensation awards and the determination by the Committee of the extent to which Performance Targets have been met.
B. The designation of an individual as a Participant under this Plan does not in any way alter the nature of the Participant’s employment relationship. Participation in this Plan shall not constitute a contract of employment between the Company or any subsidiary and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person.
C. No benefit provided under the Plan shall be subject to alienation or assignment by a Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), nor shall it be subject to attachment or other legal process except (i) to the extent specifically mandated and directed by applicable state or federal statute; (ii) as requested by the Participant (or by any person entitled to such benefit pursuant to the terms of the Plan), and approved by the Committee, to satisfy income tax withholding; and (iii) as requested by the Participant and approved by the Committee to members of the Participant’s family, or a trust established by the Participant for the benefit of family members.
D. The Company or a subsidiary may withhold any applicable federal, state or local taxes at such time and upon such terms and conditions as required by law or determined by the Company or subsidiary.
E. Each member of the Committee (and each person to whom the Committee or any member thereof has delegated any of its authority or power under this Plan) shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its subsidiaries and upon any other information furnished the Committee in connection with the Plan. In no event shall any person who is or shall have been a member of the Committee be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken including the furnishing or information, or failure to act, if in good faith.
F. In the event the Company becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which the Company will not be the surviving corporation or in which the holders of the common stock of the Company will receive securities of another corporation (in any such case, the “New Company”), then the New Company shall assume the rights and obligations of the Company under this Plan.
G. All matters relating to the Plan or to Awards granted hereunder shall be governed by the laws of the State of Delaware, without regard to the principles of conflict of laws.
H. The expenses of administering the Plan shall be borne by the Company and its subsidiaries.
I. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
 
IX.	STOCKHOLDER APPROVAL.	
Notwithstanding anything herein to the contrary, this Plan is subject to and conditioned upon the approval of the Company’s stockholders at the May 15, 2003 annual meeting of stockholders.
 
X.	INTERNAL REVENUE CODE SECTION 162(m).	
Transactions under this Plan are intended to comply with all applicable conditions of Section 162(m) of the Internal Revenue Code, as amended, or its successor. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee.
 
- 4 -

Exhibit 10(n)
CHANGE IN CONTROL AGREEMENT
This CHANGE IN CONTROL AGREEMENT (“AGREEMENT”) is made as of                     , 2007 by and between HUMANA INC., Louisville, Kentucky (the “COMPANY”), and                                            (the “EMPLOYEE”).
WHEREAS, the Board of Directors (the “Board”) of the Company desires to foster the continuous employment of the Employee and has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of the Employee to his or her duties free from distractions which could arise in the event of a threatened Change in Control of the Company.
[WHEREAS, the Company and the Employee are each a party to a Change in Control Agreement dated [                    ], and whereas the parties desire to amend the Change in Control Agreement to comply with Section 409A of the Internal Revenue Code and the regulations and other interpretive guidance issued thereunder (“Section 409A”) and to make certain other changes to the Change in Control Agreement.]
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Company and the Employee agree as follows:
1. QUALIFYING TERMINATIONS. The Employee shall receive the termination benefits set forth in Section 2 of this Agreement if the Employee’s employment with the Company is terminated
(i) by the Company other than for Cause, or by the Employee for Good Reason within twenty-four (24) months following a Change in Control and during the term of this Agreement, or
(ii) by the Company other than for Cause (A) within six (6) months prior to a Change in Control or (B) prior to the date of a Change in Control if the Executive reasonably demonstrates that such termination was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or was otherwise in contemplation of a Change in Control and in any such case described in (A) or (B) which Change in Control actually occurs during the term of this Agreement.
 
1

2. TERMINATION BENFEITS. In the event of a Qualifying Termination, the Employee shall receive the following termination benefits:
(i) The Company shall, within ten (10) days of the later of the Date of Termination or the date of the Change in Control, pay the Employee:
(a) The Employee’s base salary earned but not yet paid through the Date of Termination at the greater of the rate in effect at the time the Change in Control occurred or when the Notice of Termination was given, 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 Date of Termination. 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; and
(b) A lump sum in an amount equal to                      (            ) times the amount equal to the sum of (A) the Employee’s Annual Base Salary at the greater of the rate in effect at the time the Change in Control occurred or when the Notice of Termination was given plus (B) the maximum 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 the Employee participates. If there is no incentive compensation plan in effect at the time the Notice of Termination is given, 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 the Employee participated at the date of the Change in Control or the most recent plan participated in, whichever would be greater.
(ii) The Company shall, for the period stated below, 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 Date of Termination, provided that continued participation is possible under the general terms and provisions of such plans and programs. The extended benefits shall be continued until the earlier of (A) the second (2nd) anniversary of the Date of Termination, (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 the Employee was entitled to receive
 
2

under such plans and programs. At the end of the period of coverage, the Employee shall have the right to have assigned to him or her, at no cost and with no apportionment of prepaid premiums, any assignable insurance policy relating specifically to him or her. At the conclusion of the coverage provided under this Subsection, Employee shall be entitled to the continuation for a period of 18 months of the health and dental insurance then being provided to him or her at a cost to him or her equal to the amount then being charged to employees of the Company for such coverage provided pursuant to the Consolidated Omnibus Budget Reconciliation Act (COBRA). The coverage provided pursuant to this Subsection shall be in satisfaction of the Company’s obligation to provide coverage under COBRA. The Company will use all commercially reasonable efforts to provide for the continuation of benefits in a manner that (A) does not subject the benefits to Section 409A and (B) does not cause the benefits to be included in the taxable income of the Employee.
3. TIMING OF PAYMENTS AND PROVISION OF BENEFITS.
(i) Notwithstanding any other provision in this Agreement, if the Employee is a “specified employee” as defined under Section 409A, the amount payable to the Employee pursuant to Section 2(i)(b) of this Agreement shall not be made or commenced until the date that is six (6) months and one (1) day after the Employee’s Date of Termination (the “Delay Period”) and shall be paid on such date.
(ii) To the extent that benefits to be provided to the Employee pursuant to Section 2(ii) of this Agreement are not (A)”disability pay,” “death benefit” plans or non-taxable medical benefits within the meaning of Treasury Regulation Section 1.409A-1(a)(5) or or (B) other benefits not considered nonqualified deferred compensation within the meaning of that regulation, such provision of benefits shall be delayed until the end of the Delay Period. Notwithstanding the foregoing, to the extent that the previous sentence applies to the provision of any ongoing benefits that would not be required to be delayed if the premiums were paid by the Employee, the Employee shall pay the full cost of the premiums for such benefits during the Delay Period and the Company shall pay the Employee an amount equal to the amount of such premiums paid by the Employee during the Delay Period within ten (10) days after the end of the Delay Period.
(iii) To the extent that any benefits to be provided to the Employee pursuant to this Agreement are considered nonqualified deferred compensation and are reimbursements subject to Treasury Regulation Section 1.409A-3(i)(1)(iv), the reimbursement of eligible expenses related to such benefits shall be made on or before the last day of the Employee’s taxable year following the Employee’s taxable year in which the expense was incurred.
 
3

4. DEFINITIONS. For purposes of this Agreement, the following definitions shall apply:
(i) “Annual Base Salary” shall mean an Employee’s stated annual compensation without regard to any bonus, perquisite or other benefits.
(ii) A termination for “Cause” shall be termination by reason of the conviction of the Employee, by a court of competent jurisdiction and following the exhaustion of all possible appeals, of a criminal act involving the Company or its assets.
(iii) “Change in Control” shall have the meaning set forth in Appendix A.
(iv) “Company” shall mean Humana Inc. or any successor thereof.
(v) “Date of Termination” shall mean the date specified in the Notice of Termination, not to exceed thirty (30) days from the date such Notice of Termination is given.
(vi) “Good Reason” shall mean the occurrence after a Change in Control of any of the following events without the Employee’s express written consent:
(a) Any material reduction in the Employee’s title, authority or responsibilities, including reporting responsibilities;
(b) A reduction by the Company in the Employee’s Annual Base Salary as in effect on the date hereof or as the same may be increased from time to time;
(c) The relocation of the Employee’s office at which the Employee is to perform his or her duties to a location more than thirty (30) miles from the location at which the Employee performed his or her duties prior to the Change in Control;
(d) The failure by the Company to continue in effect any incentive, bonus or other compensation plan in which the Employee participates, unless the Company substitutes a substantially equivalent benefit;
 
4

(e) The failure by the Company 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 equivalent;
(f) Any material breach by the Company of any provision of this Agreement; or
(g) The failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement.
(vii) “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement which is relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee’s employment under the provision so indicated. Any purported termination by the Company or by the Employee hereunder shall not be effective until communicated by written Notice of Termination to the other party.
(viii) “Qualifying Termination” shall mean a termination of the Employee’s employment with the Company as described in Section 1 of this Agreement.
5. TERM OF AGREEMENT. This Agreement shall continue in effect until December 31, 20     provided, however, commencing on December 31, 20       and on each December 31 thereafter, there shall automatically be an extension of one (1) year on the then-current term of this Agreement, unless either the Company or the Employee shall have given written notice to the other on or before said December 31, that the term of this Agreement shall not be so extended. Notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of twenty-four (24) months after a Change in Control if the Agreement is still in effect on the date of the Change in Control.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform it if no such succession or assignment had taken place.
 
5

(ii) This Agreement shall inure to the benefit of and be enforceable by the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to him or her hereunder if he or she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee’s devisee, legatee or other designee, and if there is no such devisee, legatee or designee, to the Employee’s estate.
7. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment; nor shall such be reduced by any compensation earned by the Employee as a result of employment or otherwise.
8. FEES AND EXPENSES. Following a Change in Control, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of the Employee seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Employee is or may be entitled to receive benefits. The reimbursement of the eligible expense must be made on or before the last day of the Employee’s taxable year following the Employee’s taxable year in which the expense was incurred.
9. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt.
10. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of Kentucky without giving effect to the conflicts of laws principles thereof.
11. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
12. ENTIRE AGREEMENT/TERMINATION OF ANY PRIOR AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes and terminates all prior agreements, understandings and arrangements, oral or written, between the Employee and the Company or any of its subsidiaries or any entity acquired by the Company with respect to the salary and other benefits referenced in Section 2 of this Agreement.
[signature page follows]
 
6

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and the Employee has executed this Agreement, each as of the day and year set forth above.

HUMANA INC.	 	 	 	EMPLOYEE	
 	 	 	 	 	
BY:	 	 	 	 	 	BY:	 	 	
 	 	Name:	 	 	 	 	 	Name:	
 	 	Title:	 	 	 	 	 	Title:	
 	 	 	 	
ATTEST:	 	 	 	 	 	 	
 	 	 	 	 	
BY:	 	 	 	 	 	 	 	 	
 	 	Name:	 	 	 	 	 	 	
 	 	Title: Secretary	 	 	 	 	 	 	
 
7

APPENDIX A
The below definition of Change in Control is the definition used in the Humana Inc. 2003 Stock Incentive Plan. All definitions referred to herein shall have the definitions ascribed to them in the 2003 Stock Incentive Plan.
“Change in Control” shall mean the occurrence of:
 
1)	An acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company’s then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a “Subsidiary”) (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);	
 
2)	The individuals who, as of the effective date of this Plan are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or	
 
8

3)	The consummation of:	
 
 	a)	A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a “Non-Control Transaction.” A “Non-Control Transaction” shall mean a merger, consolidation or reorganization of the Company where:	
 
 	i)	the stockholders of the Company, immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization (the “Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization;	
 
 	ii)	the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Corporation, and no agreement, plan or arrangement is in place to change the composition of the board of directors following the merger, consolidation or reorganization; and	
 
 	iii)	no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities, has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the Surviving Corporation’s then outstanding voting securities.	
 
 	b)	A complete liquidation or dissolution of the Company; or	
 
 	c)	The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).	
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities then outstanding, increases the proportional number of Shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
 
9

Exhibit 10(r)
SEVERANCE POLICY
ADOPTED 9/9/99
AMENDED AND RESTATED AS OF 10/25/07
 
I.	Severance. The severance policy for elected officers without employment contracts who are involuntarily terminated without good cause is as follows.	
 
 	A.	For executive and senior vice presidents–Upon employment, one year’s base salary plus one additional month’s base salary for each of the first six full years of service to a maximum of eighteen months base pay.	
 
 	B.	For other elected officers–Upon employment, six months base salary, plus one additional month’s base salary after each of the seventh through twelfth months of employment, to a maximum of twelve months base pay.	
 
 	C.	In all cases, the officer shall remain eligible to receive prorated incentive compensation to be paid at the normal time after year end for such payments, provided plan targets were met.	
 
 	D.	Severance payments shall require agreements containing certain covenants regarding non-competition, non-disparagement and specific enforcement.	
 
II.	Timing of Payments. Severance payments pursuant to this policy shall in no event be paid later than March 15 of the year following the year in which the termination occurs.	

Exhibit 10(s)
HUMANA OFFICERS’ TARGET RETIREMENT PLAN
AMENDED AND RESTATED AS OF
OCTOBER 25, 2007
WHEREAS, Humana Inc. (“Humana”), a Delaware corporation with its principal place of business in Louisville, Kentucky (“Sponsoring Employer”), has adopted the Humana Officers’ Target Retirement Plan (“Plan”), and
WHEREAS, the Board of Directors of the Sponsoring Employer desires to amend the Plan to provide for the termination of the active participation of all Participants to whom the payment of benefits has not commenced as of October 31, 2007 and the transfer of the present value of their accrued benefits to the Humana SERP, and to make certain other changes required by Section 409A; and
WHEREAS, the Board of Directors has authorized and approved the amendment and restatement of the Plan provided for herein.
NOW, THEREFORE, the Sponsoring Employer, pursuant to the right to amend hereby approves and adopts this amendment and restatement of the Plan effective October 25, 2007, which should read as follows:
ARTICLE 1
PURPOSE AND APPLICABILITY OF PLAN
1.01 The purpose of the Plan shall be to provide supplemental retirement benefits to Participants upon the terms and conditions and subject to the limitations contained herein.
1.02 The provisions of the Plan shall apply only to persons who are Officers of the Sponsoring Employer duly elected by its Board of Directors or other key management employees designated by the Committee on and after the Effective Date.
ARTICLE 2
DEFINITIONS
As used herein the following words and phrases shall have the meanings specified below, unless a different meaning is plainly required by context or otherwise determined by the Committee. The meaning of any term not specifically defined below will be governed by the definition in the Humana Retirement and Savings Plan.
2.01 The term “Annual Retirement Benefit” shall mean an amount equal to the Participant’s Average Participating Compensation multiplied by the lesser of (i) fifty percent (50%), or (ii) a percentage equal to 1.67% times the Participant’s Service.

2.02 The term “Attained Age” shall mean, unless clearly indicated to the contrary, the age of a Participant as of the Participant’s last birthday.
2.03 The term “Average Participating Compensation” shall mean the average of Participating Compensation as determined using the highest three (3) Plan Years of the Participant’s last five (5) Plan Years (including any partial Plan Year) coincident with or preceding the Participant’s Early or Normal Retirement Date, Disability Retirement Date, Late Retirement Date or date of death. If the Participant has fewer than three (3) full Plan Years of Participating Compensation, Average Participating Compensation shall be based on the number of full Plan Years that the Participant has Participating Compensation.
2.04 The term “Beneficiary and Secondary Beneficiary” shall mean the person or persons (or an estate or trust) as set forth under the Employer Retirement Account.
 
2.05	The term “Board of Directors” shall mean the Board of Directors of the Sponsoring Employer.	
2.06 The term “Code” shall mean the Internal Revenue Code of 1986, as it has been and may be amended from time to time. Reference to any section of the Code shall include any provision which is a successor thereto.
2.07 The term “Committee” shall mean the Organization and Compensation Committee (or its equivalent) of the Board of Directors.
2.08 The term “Disability Retirement Date” shall mean the date a Participant’s employment is terminated due to Total and Permanent Disability.
2.09 The term “Disabled Participant” shall mean any Participant who has been credited with at least ten (10) Years of Service and who is Totally and Permanently Disabled.
 
2.10	The term “Disability Payment” shall mean Monthly Retirement Income due a Disabled Participant.	
2.11 The term “Early Retirement Date” shall mean, for each Participant, the first (1st) day of the month immediately following or coinciding with the date such Participant shall retire prior to the Participant’s Normal Retirement Date.
 
2.12	The term “Effective Date” shall mean May 10, 1990.	
2.13 The term “Humana SERSP” shall mean the Humana Supplemental Executive Retirement and Savings Plan as it may be amended from time to time.
2.14 The term “Retirement Account and SERSP Benefit” shall mean an amount equal to the life annuity equivalent of the account balances in the Retirement Account in the Humana Retirement and Savings Plan and the Retirement Account in the Humana SERSP, using a conversion factor based upon an interest rate of eight percent (8%) and the 1983 GAM table with no setback.
 
2

2.15 The term “Late Retirement Date” shall mean the first day of any month subsequent to the Participant’s Normal Retirement Date coinciding with or immediately following the date the Participant terminates employment for any reason other than death.
2.16 The term “Monthly Retirement Income” shall mean a monthly income due a Retired Participant which shall commence as of his Early, Normal or Late Retirement Date, or the commencement date of payments due to disability.
2.17 The term “Normal Retirement Date” shall mean the first (1st) day of the month coinciding with or immediately following the Participant’s sixty-fifth (65th) birthday.
2.18 The term “Officer” shall mean the Chief Executive Officer, Chief Operating Officer, President, all Vice Presidents, Secretary and Treasurer of the Sponsoring Employer who have been duly elected as officers of the Sponsoring Employer by the Board of Directors.
2.19 The term “Participant” shall mean any Officer of the Sponsoring Employer or other key management employee who has become a Participant as provided in Article 3 hereof.
2.20 The term “Participating Compensation” shall mean the Participant’s annual base salary in effect for the first full pay period in the Plan Year, plus any incentive compensation or bonus earned by the Participant in the immediately preceding Plan Year and payable during the current Plan Year, whether or not actually paid to the Participant during the Plan Year.
 
2.21	The term “Plan Administrator” shall mean the Sponsoring Employer.	
2.22 The term “Plan Year” shall mean the twelve (12) month period commencing on the first (1st) day of January and ending on the last day of the immediately following December.
2.23 The term “Primary Insurance Amount” as of any date shall mean the monthly amount of old age benefits payable to a Participant commencing at the Participant’s unreduced Social Security retirement age. The amount will be calculated based on the Social Security Act in effect as of the date of calculation, without regard to any dependent benefits.
2.24 The term “Retired Participant” shall mean any Participant who as of October 31, 2007 has retired from Humana and who is receiving or is entitled to receive a Monthly Retirement Income.
2.25 The term “Retirement and Savings Plan” shall mean the Humana Retirement and Savings Plan adopted effective as of the Distribution Date, as it may be amended from time to time or its successor plan.
2.26 The term “Retirement Account” shall mean the Retirement Account in the Humana Retirement and Savings Plan.
 
3

2.27 The term “Section 409A” shall mean Section 409A of the Internal Revenue Code and the regulations and interpretive guidance issued thereunder.
2.28 The term “SERSP Benefit” shall mean the Retirement Account in the SERSP.
2.29 The term “Service” shall mean all years and completed months of Service with the Sponsoring Employer or any corporation which is a member of the “affiliated group” as defined in Section 1504(a) of the Code of the Sponsoring Employer.
2.30 The term “Sponsoring Employer” shall mean Humana Inc., a Delaware corporation.
2.31 The term “Spouse” shall mean the legally married spouse of the Participant at the Participant’s date of death; provided, however, that for purposes of Section 4.04(b), “Spouse” shall mean the legally married spouse of the Participant at the earlier of the Participant’s date of death or commencement of benefits under that section.
2.32 The term “Target Plan” or “Plan” shall mean the Humana Officers’ Target Retirement Plan provided for herein, as it may be amended from time to time.
2.33 The term “Total and Permanent Disability” shall mean a physical or mental condition that renders the Participant eligible for disability benefits under the Retirement and Savings Plan.
ARTICLE 3
PARTICIPATION IN THE PLAN
3.01 Each person who is an Officer of the Sponsoring Employer on and after the Effective Date or a key management employee designated by or at the direction of the Committee shall be a Participant in this Plan to the extent of the benefits provided herein; provided, however, that no individual shall become a Participant after October 31, 2007.
3.02 Each Officer or key management employee designated hereunder shall be notified upon becoming a Participant.
ARTICLE 4
RETIREMENT INCOME
4.01 When a Participant retires on or prior to October 31, 2007, he or she shall be entitled to receive a Monthly Retirement Income under this Plan in an amount provided in Section 4.01(A), reduced by the amounts provided in Section 4.01(B) and (C).
(A) An amount equal to one twelfth (1/12) of the Participant’s Annual Retirement Benefit.
(B) The amount provided in Section 4.01(A) shall be reduced by the Retirement Account and Humana SERP Benefit.
 
4

(C) The amount provided in Section 4.01(A) shall also be reduced by the Participant’s Primary Insurance Amount; provided that in the case of a Participant taking Early Retirement, such reduction shall only apply when the Participant is eligible for an unreduced Primary Insurance Amount.
4.02 A Participant may remain in the employ of the Sponsoring Employer after his Normal Retirement Date, in which event no Monthly Retirement Income shall be paid until the Participant’s Late Retirement Date, provided such Late Retirement Date occurs on or prior to October 31, 2007. The benefit payable at the Participant’s Late Retirement Date shall be equal to the amount as determined in Section 4.01 except that the Participant’s Average Participating Compensation, Years of Service, Retirement Account and Humana SERP Benefit and Primary Insurance Amount shall be determined as of the Participant’s Normal or Late Retirement Date, whichever would produce the greater benefit under this Plan. Unless otherwise determined by the Committee, in no event, however, will the Participant’s Annual Retirement Benefit exceed fifty percent (50%) of his Average Participating Compensation as of his Normal or Late Retirement Date, whichever is greater.
4.03 Upon the written application of the Participant received by the Plan Administration, a Participant whose Attained Age is at least fifty-five (55) shall be retired as of an Early Retirement Date, provided such Early Retirement Date occurs on or prior to October 31, 2007. Effective December 9, 1998, all Participants shall be deemed to be fifty-five (55), unless their actual age is greater, in which case actual age shall be used in computing benefits hereunder. Commencing at his Early Retirement Date, such Participant shall be entitled to a benefit computed in accordance with Section 4.01; provided, that the amount set forth in Section 4.01(A) shall be reduced by two/twelfths percent (2/12%) of that amount for each full month that payments commence prior to the Participant’s Normal Retirement Date to a maximum reduction not to exceed twenty percent (20%). A Participant taking an Early Retirement Benefit may also request an alternate form of distribution in accordance with Section 4.04.
4.04 The basic form of payment of the Annual Retirement Benefit shall be a Monthly Retirement Income specified in Section 4.01 which shall be paid on a monthly basis commencing on the Participant’s Disability, Early, Normal or Late Retirement Date, payable for the life of the Participant.
A Participant may request the Committee to approve an alternate form of payment of the benefits under this Plan. Such request shall be in writing and shall be filed on or before December 31, 2007. An election shall become irrevocable as of December 31, 2007. Alternative forms of payment are as follows:
(A) A monthly income payable to the Participant for either sixty (60), one hundred and twenty (120), one hundred and eighty (180) or two hundred and forty (240) payments guaranteed. Upon the Participant’s death, distribution of his remaining benefit, if any, shall be made to the Participant’s Beneficiary or Secondary Beneficiary.
 
5

(B) A monthly income payable for the lifetime of the Participant, with one-half ( 1/2) of such amount continuing to the Participant’s Spouse after the Participant’s death for the lifetime of the Spouse.
(C) A single sum payment to the Participant.
(D) Any other form of payment which is actuarially equivalent and is approved by the Committee.
If the single sum present value of the Participant’s Monthly Retirement Income is less than Fifty Thousand Dollars ($50,000), or such lesser amount, if any, permitted under Section 409A, the benefit shall be paid to the Participant as a single sum.
The alternate forms as provided in Section 4.04(A), (B) and (C) above shall be determined using the same conversion factor as is used to determine the Retirement Account and SERP Benefit as defined in Section 2.14.
4.05 If a Participant should die before benefit payments under the Plan commence, a death benefit shall be payable. Such death benefit shall be equal to the present value of the Participant’s Monthly Retirement Income as of the Participant’s date of death calculated in accordance with this Article 4 as if the Participant had retired on his date of death; provided, however, that the reduction for the Primary Insurance Amount set forth in Section 4.01(c) shall not apply. Such death benefit shall be paid to the Participant’s Beneficiary as a single sum in accordance with the provisions of Section 4.04(C).
If a death benefit is payable under this Article 4 and the designated Beneficiary has predeceased the Participant, the death benefit shall be paid to the Secondary Beneficiary. If neither the Beneficiary nor the Secondary Beneficiary is living at the time of the death of the Participant, or if there is not a valid Beneficiary designated, the Sponsoring Employer shall pay the death benefit to the Participant’s estate. If the Beneficiary or Secondary Beneficiary is living at the death of the Participant but such person dies prior to receiving the entire death benefit, the remaining portion of such death benefit shall be paid in a single sum to the estate of such deceased Beneficiary or Secondary Beneficiary.
4.06 Notwithstanding any other provision in the Plan, payments owed to any Participant pursuant to the Plan who is a “specified employee” as defined under Section 409A, shall not be made or commenced pursuant to the Plan until the date that is six (6) months and one (1) day after the Participant’s Separation from Service and shall be paid or commenced on such date; provided, however, that this Section 4.06 shall not apply if the Participant’s Separation from Service occurs by reason of his or her death. If this Section 4.06 applies and the method of payment of the Participant’s benefits is not a lump sum, the first payment to the Participant will include all amounts that would have been paid during the six (6) month and one (1) day period but for this Section 4.06.
 
6

ARTICLE 5
BENEFITS UPON DISABILITY
5.01 If a Participant is determined to be Totally and Permanently Disabled prior to his Normal Retirement Date, such Disabled Participant shall be retired as of the date provided in the Retirement and Savings Plan. In such event, the Disabled Participant’s benefit under this Plan shall be deferred until his Normal Retirement Date. The amount of the Participant’s Monthly Retirement Income payable on account of such Disability Retirement shall be calculated in accordance with Section 4.01, provided that his Average Participating Compensation shall be determined as of his date of disability. Years of Service shall be calculated as though the Disabled Participant had continued in employment until his Normal Retirement Date, and the Participant’s life annuity equivalent of the account balance in the Retirement Plan Account shall be based on such account balance at time of distribution if prior to age sixty-five (65) projected to age sixty-five (65) at eight percent (8%) per annum.
5.02 As an alternative, a Participant who has met the requirements for early Retirement shall be entitled to apply for Benefits pursuant to the provisions of Section 4.03. If such request is granted, the continued accruals provided for above will cease as of the Participant’s receipt of benefits.
5.03 If a Disabled Participant should die before benefit payments under this Plan commence, a death benefit shall be payable. Such death benefit shall be equal to the present value of the Participant’s Monthly Retirement Income as of the Participant’s date of death calculated in accordance with Article 4 and shall be paid to the Participant’s Beneficiary as a single sum in accordance with the provisions of Section 4.04(C).
In calculating the death benefit, the continued accruals of Section 5.01 will cease at date of death and the benefit will be reduced as for Early Retirement (as set forth in Section 4.03). The reduction for the Primary Insurance Amount set forth in Section 4.01(c) shall not apply. A Participant under age fifty-five (55) will be deemed to be age fifty-five (55) for purposes of calculating his benefit.
If a death benefit is payable under this Article 5 and the designated Beneficiary has predeceased the Participant, the death benefit shall be paid to the Secondary Beneficiary. If neither the Beneficiary nor the Secondary Beneficiary is living at the time of the death of the Participant, or if there is not a valid Beneficiary designated, the Sponsoring Employer shall pay the death benefit to the Participant’s estate. If the Beneficiary or Secondary Beneficiary is living at the death of the Participant, but such person dies prior to receiving the entire death benefit, the remaining portion of such death benefit shall be paid in a single sum to the estate of such deceased Beneficiary or Secondary Beneficiary.
ARTICLE 6
TRANSFERING PARTICIPANTS’ ACCOUNTS
6.01 All Participants whose benefits have not commenced to be paid as of October 31, 2007 (the “Transferring Participants”) shall have an amount equal to the present value of their accrued
 
7

benefit as of October 31, 2007 transferred to an account under the Humana SERSP as of November 1, 2007. The amount of such present value is set forth on Appendix A hereto. As of November 1, 2007, all Transferring Participants shall cease to be Participants in this Plan and shall have no further right to any benefit under this Plan.
ARTICLE 7
PLAN ADMINISTRATION
7.01 The Committee shall be responsible for making all policy decisions which arise under the Plan. The Plan Administrator shall be responsible for administering the Plan.
7.02 Subject to the limitations of the Plan, the Plan Administrator shall from time to time establish rules for the administration of the Plan. Without limiting the generality of the preceding sentence, it is specifically provided that the Plan Administrator shall set forth the procedures to be followed in presenting claims for benefits under the Plan. The Plan Administrator shall rely on the records of the Sponsoring Employer, as certified to it, with respect to any and all factual matters dealing with the employment of a Participant. In case of any factual dispute hereunder, the Committee shall resolve such dispute giving due weight to all evidence available to it. The Committee shall interpret the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan. All such determinations shall be final, conclusive and binding.
7.03 Except as otherwise specifically provided herein, every decision and action of the Committee shall be valid if concurred in by a majority of the members then in office, which concurrence may be had without a formal meeting.
7.04 The Plan Administrator shall be responsible for the determination of a Participant’s benefit in accordance with this Plan.
7.05 In discharging its duties under this Plan, the Plan Administrator and the Committee may employ such counsel, accountants and other agents as they shall deem advisable. The Sponsoring Employer shall pay the compensation of such counsel, accountants and other agents and any other expenses incurred by the Plan Administrator and the Committee in carrying out their duties under the plan.
ARTICLE 8
MODIFICATION AND TERMINATION
8.01 The Sponsoring Employer reserves the right at any time, by action of its Board of Directors, to modify or amend, in whole or in part, or to terminate any or all of the provisions of the Plan.
 
8

8.02 Notwithstanding the provisions of Section 7.01, no amendment, suspension or termination shall adversely affect:
(A) the Monthly Retirement Income of any Participant, or the Beneficiary or Secondary Beneficiary of any Participant, who has retired prior thereto, or
(B) the right of any Participant then employed by the Sponsoring Employer who has vested benefits under the Plan to receive upon death, retirement or disability, the benefit to which such person would have been entitled under the Plan prior to its amendment, suspension or termination.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.01 Neither the interest of a Participant or any other person nor the benefit payable hereunder is subject to the claim of creditors of Participants or their Beneficiaries and will not be subject to attachment, garnishment or any other legal process. Neither a Participant nor his Beneficiaries may assign, sell, borrow against or otherwise encumber any of his beneficial interest in the Plan, nor shall any such benefits be in any manner liable for or subject to the deeds, contracts, liabilities, engagements or torts of any Participant or Beneficiary. All such payments and rights thereto are expressly declared to be non-assignable and non-transferable, and in the event of any attempt of assignment or transfer by the Participant or Beneficiaries, the Sponsoring Employer shall have no further liability hereunder.
9.02 This Plan is entirely voluntary on the part of the Sponsoring Employer, and, subject to the provisions of Article 8, the continuance of the Plan is not assumed as a contractual obligation of the Sponsoring Employer.
9.03 Benefits under this Plan shall be paid exclusively from the general assets of the Sponsoring Employer and no Participant or other person shall have any right or claim to the payment of a benefit which in any manner whatsoever is superior to or different from the right or claim of a general and unsecured creditor of the Sponsoring Employer.
9.04 This Plan shall not be deemed to constitute a contract between the Sponsoring Employer and any Participant or to be a consideration or an inducement for the employment of any Participant. Nothing contained in this Plan shall be deemed to give any Participant the right to be retained in the employment of the Sponsoring Employer or to interfere with the right of the Sponsoring Employer to discharge any Participant at any time regardless of the effect which such discharge shall have upon such individual as a Participant in the Plan.
9.05 This Plan shall be construed and enforced according to the laws of the Commonwealth of Kentucky, and all provisions hereunder shall be administered according to the laws thereof. It is intended that this Plan be exempt from Title I of the Employee Retirement Income Security Act of 1974, as amended, under Section 4(b)(5) thereof, as an excess benefit plan which is unfunded, and any ambiguities in construction shall be resolved in favor of interpretation which will effectuate such intention.
 
9

9.06 Any words herein used in the masculine or neuter shall read and be construed in the feminine, masculine or neuter where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply. Titles of articles are inserted for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles shall control.
9.07 In making any payment to or for the benefit of any minor or incompetent Beneficiary, the Plan Administrator, in its sole, absolute and uncontrolled discretion, may, but need not, make such payment to a legal or natural guardian or other relative of such minor or court appointed committee of such incompetent, or to any adult with whom such minor or incompetent temporarily or permanently resides, with any such guardian, committee, relative or other person shall have full authority and discretion to expend such distribution for the use and benefit of such minor or incompetent, and the receipt of such guardian, committee, relative or other person shall be a complete discharge of the Sponsoring Employer, without any responsibility on its part or on the part of the Committee to see to the application thereof.
9.08 If a Participant’s employment is terminated due to his commission of theft, fraud, or criminal acts against the Sponsoring Employer or any corporation which is a member of the “affiliated group” as defined in Section 1504(a) of the Code with the Sponsoring Employer, such Participant shall not be entitled to receive any benefit under this Plan.
IN WITNESS WHEREOF, the Sponsoring Employer has caused this instrument to be executed and attested thereto by its duly authorized officers as of this 25 th  day of October, 2007.

HUMANA INC.	
 	 	
By:	 	/s/ Michael B. McCallister	
Title:	 	President & Chief Executive Officer	
 
10

Exhibit 10(u)
HUMANA SUPPLEMENTAL EXECUTIVE
RETIREMENT
AND SAVINGS PLAN
AMENDED AND RESTATED AS OF
DECEMBER 13, 2007

TABLE OF CONTENTS

 	  	 	  	Page	
 
ARTICLE 1	
 
PURPOSE AND APPLICABILITY OF PLAN	
 	 	 	
1.1	  	Purpose of Plan	  	2	
1.2	  	Applicability of Plan	  	2	
 
ARTICLE 2	
 
DEFINITIONS	
 	 	 	
2.1	  	Accounts	  	2	
2.2	  	Beneficiary and Secondary Beneficiary	  	2	
2.3	  	Board of Directors	  	2	
2.4	  	Change in Control	  	2	
2.5	  	Code	  	2	
2.6	  	Compensation Committee	  	2	
2.7	  	Effective Dates	  	2	
2.8	  	Employee	  	3	
2.9	  	Employer	  	3	
2.10	  	Initial Year Contribution	  	3	
2.11	  	Investment Options	  	3	
2.12	  	OTRP Rollover Account	  	3	
2.13	  	Participant	  	3	
2.14	  	Payment Commencement Date	  	3	
2.15	  	Participation Date	  	3	
2.16	  	Plan	  	3	
2.17	  	Plan Administrator	  	3	
2.18	  	Plan Year	  	4	
2.19	  	Qualified Plans	  	4	
2.20	  	Qualified Pretax Savings Account	  	4	
2.21	  	Qualified Retirement Account	  	4	
2.22	  	Related Employer	  	4	
2.23	  	Retirement and Savings Plan	  	4	
2.24	  	Section 409A	  	4	
2.25	  	Separation from Service	  	4	
2.26	  	Sponsoring Employer	  	4	
2.27	  	Supplemental Benefits	  	4	
2.28	  	Supplemental Pretax Savings Account	  	4	
2.29	  	Supplemental Retirement Account	  	4	
2.30	  	Supplemental Pretax Savings Benefit	  	4	
2.31	  	Supplemental Retirement Benefit	  	4	

TABLE OF CONTENTS

 	  	 	  	Page	
 
ARTICLE 3	
 
PARTICIPATION IN THE PLAN	
 	 	 	
3.1	  	Eligible Employees	  	4	
3.2	  	Provisions of Plan Binding on Participants	  	4	
3.3	  	Notification of Participation	  	5	
3.4	  	Termination of Benefit Accrual	  	5	
 
ARTICLE 4	
 
SUPPLEMENTAL BENEFITS	
 	 	 	
4.1	  	Amount of Supplemental Benefits	  	5	
4.2	  	Accrual of Supplemental Benefits	  	6	
4.3	  	Investment Options	  	6	
4.4	  	Reallocation Among Investment Options	  	6	
4.5	  	Adjustments to Account Balances	  	6	
 
ARTICLE 5	
 
DISTRIBUTION OF BENEFITS	
 	 	 	
5.1	  	Eligibility for Distribution of Supplemental Benefits	  	7	
5.2	  	Form of Payment	  	7	
5.3	  	Initial Election of Form of Distribution	  	7	
5.4	  	Subsequent Election	  	7	
5.5	  	Change in Control Election	  	8	
5.6	  	Rabbi Trust	  	8	
5.7	  	Source of Supplemental Benefits	  	8	
5.8	  	Distributions to Beneficiaries	  	8	
5.9	  	Payments to Specified Employees	  	9	
 
ARTICLE 6	
 
PLAN ADMINISTRATION	
 	 	 	
6.1	  	Duties of the Plan Administrator	  	9	
6.2	  	Establishment of Rules and Claims Procedure	  	9	

TABLE OF CONTENTS

 	  	 	  	Page	
6.3	  	Employment of Counsel, Etc.	  	9	
6.4	  	Payment of Expenses	  	9	
 
ARTICLE 7	
 
AMENDMENTS AND RESERVATION OF COMPANY RIGHTS	
 	 	 	
7.1	  	Rights Generally to Make Amendments	  	10	
7.2	  	Conditions to Amendment, Suspension or Termination	  	10	
7.3	  	Accelerated Distribution Upon Loss of Tax Deferral	  	10	
 
ARTICLE 8	
 
CHANGE IN EMPLOYMENT	
 	 	 	
8.1	  	Participant Transfer from Employer to Employer	  	10	
8.2	  	Participant Transfer from Employer to Related Employer	  	11	
 
ARTICLE 9	
 
MISCELLANEOUS PROVISIONS	
 	 	 	
9.1	  	Prohibition Against Assignment	  	11	
9.2	  	Plan Voluntary on Part of Employers	  	11	
9.3	  	Plan Not Contract of Employment	  	11	
9.4	  	Form of Notice	  	11	
9.5	  	Construction	  	11	
9.6	  	Payments to Minors, etc.	  	12	

HUMANA SUPPLEMENTAL EXECUTIVE RETIREMENT
AND SAVINGS PLAN
AMENDED AND RESTATED AS OF
DECEMBER 13, 2007
WHEREAS, HUMANA INC. (“Humana”), a Delaware corporation with its principal place of business in Louisville, Kentucky (“Sponsoring Employer”), has adopted the Humana Retirement and Savings Plan (“Retirement and Savings Plan”), which is intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (“Code”), and
WHEREAS, certain employees of the Sponsoring Employer and its subsidiaries are eligible for allocations of contributions to retirement accounts and pretax savings accounts under the Retirement and Savings Plan and the Humana Puerto Rico 1165(e) Retirement Plan and plans previously terminated or merged into the Retirement and Savings Plan (collectively, “Qualified Plans”), and
WHEREAS, pursuant to the terms of the Qualified Plans, the benefits of certain employees of the Sponsoring Employer and its subsidiaries have been and will be reduced because of the limitation on compensation of Section 401(a)(17) of the Code, the nondiscrimination requirements of Sections 401(k) and 401(m) of the Code, the limitation on allocations of contributions of Section 415 of the Code and certain other limitations imposed by applicable provisions of the Puerto Rico Internal Revenue Code, and
WHEREAS, the Board of Directors of the Sponsoring Employer (“Board of Directors”) desires to continue to provide a supplemental benefit to a select group of management and highly compensated employees in the amount of the reduction of their benefits and employer contributions under the Qualified Plans, and
WHEREAS, on September 1, 1982, the Sponsoring Employer adopted the Humana Supplemental Executive Retirement Plan, and
WHEREAS, on May 11, 1988, the Sponsoring Employer adopted the Humana Thrift Excess Plan, and
WHEREAS, on December 31, 2003 the Sponsoring Employer merged the Humana Supplemental Executive Retirement Plan and the Humana Thrift Excess Plan, and amended and restated those plans as a single plan, namely the Humana Supplemental Executive Retirement and Savings Plan (the “Plan”), and
WHEREAS, the Sponsoring Employer now desires to amend the Plan to comply with Section 409A and to make certain other changes to the Plan.
NOW, THEREFORE, the Sponsoring Employer, pursuant to the right to amend the Plan contained in Article 7, hereby approves and adopts this amendment and restatement, which, except as otherwise specified herein, shall be effective January 1, 2008.

ARTICLE 1
PURPOSE AND APPLICABILITY OF PLAN
1.1 Purpose of Plan. The purpose of the Plan shall be to provide Supplemental Benefits to Participants whose benefits under the Qualified Plans have been or will be reduced because of the compensation limitation of Section 401(a)(17) of the Code, the nondiscrimination requirements of Sections 401(k) and 401(m) of the Code and certain limitations imposed by applicable provisions of the Puerto Rico Internal Revenue Code, upon the terms and conditions, and subject to the limitations, contained herein.
1.2 Applicability of Plan. The provisions of the Plan shall apply only to persons participating in Qualified Plans on and after the Effective Dates.
ARTICLE 2
DEFINITIONS
As used herein, the following words and phrases shall have the meanings specified below, unless a different meaning is plainly required by the context. Terms not defined herein shall have the meanings specified in the Retirement and Savings Plan.
2.1 Accounts. A Participant’s Supplemental Retirement Account, Supplemental Pretax Savings Account and OTRP Rollover Account.
2.2 Beneficiary and Secondary Beneficiary. The person or persons (or a trust) as set forth under the Qualified Plans unless a Participant shall have elected in writing a different Beneficiary and Secondary Beneficiary for this Plan, in which case the written election for this Plan shall govern.
2.3 Board of Directors. The Board of Directors of the Sponsoring Employer.
2.4 Change in Control. Change in Control shall have the meaning set forth in Appendix A.
2.5 Code. The Internal Revenue Code of 1986, as it has been and may be amended from time to time. Reference to any section of the Code shall include any provision successor thereto.
2.6 Compensation Committee. The Organization and Compensation Committee of the Board of Directors of the Sponsoring Employer.
2.7 Effective Dates. The effective dates of this Plan, which shall be September 1, 1982, in the case of contributions to the Supplemental Retirement Accounts, May 1, 1988, in the case of contributions to the Supplemental Pretax Savings Accounts and November 1, 2007, in the case of contributions to the OTRP Rollover Account.
 
2

2.8 Employee. Any member of a select group of management and highly compensated employees employed by an Employer.
2.9 Employer. The Sponsoring Employer and each corporation which is a member of the “affiliated group” (as defined in Section 1504(a) of the Code) with the Sponsoring Employer. When used with reference to an Employee or Participant, the term shall mean the Employer employing the Employee or Participant.
2.10 Initial Year Contribution. Contributions made to the Accounts of a Participant pursuant to Section 4.1 of the Plan, in respect of the year in which the Participant’s Participation Date occurred, including all gains (or losses) attributable to such contributions.
2.11 Investment Options. The investment vehicles in which a Participant’s Accounts shall be deemed invested. Investment Options shall be limited to those offered to participants in the Retirement and Savings Plan as of that date; provided, however, that no Participant shall be permitted to invest in a brokerage account.
2.12 OTRP Rollover Account. The account which reflects balances transferred from the Humana Officers’ Target Retirement Plan on November 1, 2007.
2.13 Participant. An Employee who has met the requirements of Article 3 for participation hereunder. Where the context so permits or requires, the term shall also include a person who was a Participant prior to the termination of the Participant’s employment with an Employer and who is entitled to a Supplemental Benefit after such person’s employment terminates.
2.14 Payment Commencement Date. The date on which the payment of a Participant’s Supplemental Benefits are scheduled to be paid or commence pursuant to Article V and the applicable election of the Participant.
2.15 Participation Date. The later of the Effective Date or the date a Participant receives the notice described in Section 3.3 of the Plan.
2.16 Plan. The Humana Supplemental Executive Retirement and Savings Plan provided for herein, as it may be amended from time to time.
2.17 Plan Administrator. The Plan Administrator shall be the Sponsoring Employer.
2.18 Plan Year. The twelve consecutive month period commencing on the first day of January and ending on the last day of the immediately following December.
2.19 Qualified Plans. Each of the Humana Retirement and Savings Plan and the Humana Puerto Rico 1165(e) Retirement Plan.
 
3

2.20 Qualified Pretax Savings Account. The Pretax Savings Account of a Participant in a Qualified Plan.
2.21 Qualified Retirement Account. The Retirement Account of a Participant in a Qualified Plan.
2.22 Related Employer. Any subsidiary or affiliate of the Sponsoring Employer, which is designated by the Board of Directors to be a Related Employer.
2.23 Retirement and Savings Plan. The Humana Retirement and Savings Plan, as it may be amended from time to time.
2.24 Section 409A. Section 409A of the Code and the regulations and interpretive guidance issued thereunder.
2.25 Separation from Service. A Participant will be treated as having a Separation from Service if it is not reasonably expected that the Participant will continue to provide services to the Sponsoring Employer or any other Employer who has adopted the Qualified Plans (whether as an employee or independent contractor, but not as a director) that exceeds twenty percent (20%) of the average level of bona fide services performed by the Participant over the immediately preceding thirty-six (36) month period (or the full period of services if the Participant has been providing services less than thirty-six (36) months).
2.26 Sponsoring Employer. Humana Inc., a Delaware corporation.
2.27 Supplemental Benefits. The benefits available under the Plan, including the Supplemental Retirement Benefit, the Supplemental Pretax Savings Benefit, and the amount credited to the OTRP Rollover Account, unless otherwise specified.
2.28 Supplemental Pretax Savings Account. The account established by that name on behalf of a Participant.
2.29 Supplemental Retirement Account. The account established by that name on behalf of a Participant.
2.30 Supplemental Pretax Savings Benefit. The benefit described in Section 4.1(b).
2.31 Supplemental Retirement Benefit. The benefit described in Section 4.1(a).
ARTICLE 3
PARTICIPATION IN THE PLAN
3.1 Eligible Employees. Persons eligible to participate in the Plan include (i) each Employee who is a participant in a Qualified Plan (a) after August 31, 1982, in the case of the
 
4

Supplemental Retirement Account and (b) May 1, 1988, in the case of the Supplemental Pretax Savings Account and (ii) as of November 1, 2007, in the case of persons whose accounts have been transferred to the Plan from the Humana Officers’ Target Retirement Plan. Participants shall participate in this Plan to the extent of the benefits stated herein.
3.2 Provisions of Plan Binding on Participants. Upon becoming a Participant, a Participant shall be bound then and thereafter by the terms of this Plan, including all amendments to the Plan.
3.3 Notification of Participation. Each Employee shall become a Participant on the date he or she receives notification to that effect.
3.4 Termination of Benefit Accrual. An Employee’s accrual of benefits under this Plan shall cease upon the Employee’s Separation from Service.
ARTICLE 4
SUPPLEMENTAL BENEFITS
4.1 Amount of Supplemental Benefits.
(a) Supplemental Retirement Benefits. Each Participant shall become entitled to Supplemental Retirement Benefits for a Plan Year equal to the difference, if any, between the actual contribution by the Employer to a Qualified Retirement Account on behalf of the Participant for such Plan Year and the amount of the contribution which would otherwise have been made by the Employer on behalf of such Participant for such Plan Year but for the compensation limitation of Section 401(a)(17) of the Code and the annual additions limitations imposed by Section 415 of the Code, and effective January 1, 2008 with respect to limitations imposed by applicable sections of the Puerto Rico Internal Revenue Code.
(b) OTRP Rollover Benefits. Amounts that have been transferred to the Plan in respect of a Participant’s accrued benefit under the Humana Officers’ Target Retirement Plan shall be allocated to the Participant’s OTRP Rollover Account as of November 1, 2007.
(c) Supplemental Pretax Savings Benefits. Each Participant shall become entitled to Supplemental Pretax Savings Benefits for a Plan Year equal to the difference, if any, between the actual Employer matching contribution to a Qualified Pretax Savings Account made on behalf of the Participant for such Plan Year and the amount the Employer matching contribution would otherwise have been on behalf of such Participant for such Plan Year but for the legal limitations on the Participant’s contributions and the Employer’s contributions, and effective January 1, 2008 with respect to limitations imposed by applicable section of the Puerto Rico Internal Revenue Code; provided, however, that for Plan Years beginning before 2008, Participants shall be entitled to benefits under this section only if such difference is equal to or greater than eight hundred dollars ($800.00) in such Plan Year.
 
5

4.2 Accrual of Supplemental Benefits. The Supplemental Retirement Benefit and the Supplemental Pretax Savings Benefit shall be deemed to accrue to the Participant’s Supplemental Retirement Account and Supplemental Pretax Savings Account no later than the date on which the annual retirement contribution is made to the applicable Qualified Plan. No benefit will accrue with respect to any Plan Year if the Participant ceases to be an active employee before the end of such Plan Year, unless cessation of employment is due to death, Retirement, disability or a Change in Control, in which case the Participant will be entitled to benefits prorated to the date on which the Participant ceases to be an active employee.
4.3 Investment Options.
(a) Accruals for Plan Years Prior to and Including 2006. With respect to accruals made to a Participant’s Supplemental Retirement Account and Supplemental Pretax Savings Account for plan years prior to and including 2006, accruals were allocated among the Investment Options in accordance with the allocation of a Participant’s Retirement and Savings Plan account. Such allocations were effected at such times and with such exceptions as were established by the Administrator.
(b) Accruals for Plan Years After 2006. Each Participant shall elect the Investment Options in which accruals to the Participant’s Supplemental Retirement Account and Supplemental Pretax Savings Account shall be deemed to be allocated. A Participant’s accruals may be allocated in one percent increments among one or more of the Investment Options. If the Participant allocates less than 100% of his or her accruals pursuant to this Section 4.3(b), unallocated accruals shall be deemed to be allocated to the default investment option established by the Plan Administrator, or if no such default has been established by the Plan Administrator, to the default investment option established under the Retirement and Savings Plan. A Participant may change the allocation of accruals to his or her Supplemental Retirement Account and Supplemental Pretax Savings Account at any time in such manner as the Plan Administrator may prescribe.
(c) OTRP Rollover. Amounts allocated to a Participant’s OTRP Account shall initially be deemed to be invested in the applicable age appropriate target retirement fund Investment Option. Subsequently, a Participant may reallocate the balance in his or her OTRP Rollover Account pursuant to Section 4.4.
4.4 Reallocation Among Investment Options. Each Participant may reallocate the balances in his or her Accounts among the Investment Options in one percent increments. Effective November 1, 2007, changing Investment Options shall be permitted on a daily basis and shall be effected in such manner as the Plan Administrator may prescribe from time to time, which may include an online alternative.
4.5 Adjustments to Account Balances. The balances in Participants’ Accounts shall be adjusted for gains (or losses) as if such amounts were actually invested in the Investment Options selected by the Participants. Upon a Participant’s Separation from Service or cessation of active participation in this Plan for any reason, the balances in the Participant’s Accounts will continue to be allocated among the Investment Options subject to reallocation pursuant to Section 4.4.
 
6

ARTICLE 5
DISTRIBUTION OF BENEFITS
5.1 Eligibility for Distribution of Supplemental Benefits. Except as otherwise provided in Article 5, the payment of the Participant’s Supplemental Benefits shall commence no later than ninety (90) days following the Participant’s Separation from Service (the “ Payment Commencement Date ”). The form of the payment shall be governed by Section 5.2 notwithstanding the form of distribution of the Participant’s benefits from the Retirement and Savings Plan. All payments shall be made in cash.
5.2 Form of Payment. If a Participant does not elect an alternative form of distribution in accordance with Section 5.3, the Participant’s distribution will be made in the form of a lump sum distribution.
5.3 Initial Election of Form of Distribution. Prior to the later of December 31, 2008 and the date that is thirty (30) days after a Participant’s Participation Date, a Participant may elect one of the following alternative forms of distribution for amounts other than the Initial Year Contribution:
(a) Periodic installments (either monthly, quarterly or annually) for a period not to exceed 20 years, to the extent permitted under Section 409A; provided, however, that this form of payment will only be available if the Participant’s balance in the account from which the periodic payments would be made exceeds $100,000, or such lesser amount, if any, permitted under Section 409A. In the event that the benefit payments are in the form of installments, the Participant’s Accounts shall be deemed to be invested in the Stable Value Fund or a fund similar to the Stable Value Fund then available under the Retirement and Savings Plan; or
(b) An annuity in any form permitted from the Retirement and Savings Plan at the time of a Participant’s election; provided, however, that an annuity form of payment will only be available if the Participant’s balance in the account from which the annuity payment would be made exceeds $100,000, or such lesser amount, if any, permitted under Section 409A.
A Participant’s initial election pursuant to this Section 5.3 shall become irrevocable on the later of (i) December 31, 2008 or (ii) the thirtieth (30 th ) day after the Participant’s Participation Date, except for subsequent elections made in accordance with Section 5.4. A Participant’s Initial Year Contribution will be paid at the time and in the manner provided for in Sections 5.1 and 5.2
5.4 Subsequent Election. At any time after the date that is thirty (30) days after a Participant’s Participation Date, a Participant may change the form of payment method to one of the alternatives provided in Section 5.3 and/or 5.5, provided that any such election that is made before January 1, 2009 shall be made in accordance with IRS Notice 2007-86 and any such election that is made after December 31, 2008 (i) will not be effective for twelve (12) months
 
7

after the date on which such election is made, (ii) must be made not less than twelve (12) months prior to the date of the first scheduled payment of the Participant’s Supplemental Benefits and (iii) will result in a Payment Commencement Date that is five (5) years after the previously scheduled Payment Commencement Date or, in the case of an election pursuant to Section 5.5(a), the date of the Change in Control. Once the first installment has been made, no further changes in the timing or duration of the payment method will be permitted.
5.5 Change in Control Election. A Participant may make a separate election within the time frame set forth in Section 5.3 or 5.4, as applicable, that in the event of a Change in Control which also constitutes a “change in ownership or effective control of” the Company or a “change in the ownership of a substantial portion of the assets of” the Company, in each case within the meaning of Section 409A, his or her Supplemental Benefits (other than his or her Initial Year Contribution) shall be distributed in
 
 	(a)	A lump sum to be paid at the effective time of the Change in Control; or	
 
 	(b)	A lump sum to be paid following the Participant’s termination of employment within two (2) years following the Change in Control.	
If the Participant does not make a separate Change in Control election, his or her Supplemental Benefits will be paid at the time and in the manner provided for in Sections 5.1 and 5.2 or, except for the Participant’s Initial Year Contribution, pursuant to the Participant’s alternative election made in accordance with Section 5.3 or 5.4.
5.6 Rabbi Trust. Upon the effective date of a Change in Control, the Sponsoring Employer shall create a “Rabbi Trust” (i.e., a grantor trust designed to hold funds to be used to pay benefits under a deferred compensation arrangement without such funds becoming taxable to the Participants entitled to such benefits until paid to such Participants) in the form set forth on Appendix B with a major financial institution selected by the Sponsoring Employer to which the Sponsoring Employer shall transfer funds in an amount equal to the aggregate balance of all Participants’ Accounts as of the date of the Change in Control, but excluding amounts to be paid in a lump sum immediately following the Change in Control.
5.7 Source of Supplemental Benefits. The Supplemental Benefits shall not be funded but shall constitute liabilities of the Sponsoring Employer, payable when due from the general assets of the Employer or, if a Rabbi Trust has been established pursuant to Section 5.6, such Rabbi Trust. The Sponsoring Employer shall pay all costs, charges and expenses related thereto. No Participant or other person shall have any right or claim to the payment of Supplemental Benefits which in any manner whatsoever is superior to or different from the right or claim of a general and unsecured creditor of the Sponsoring Employer.
5.8 Distributions to Beneficiaries. Effective November 1, 2007, if at the time of a Participant’s death a distribution is still outstanding, the remaining benefits shall be paid to the Participant’s Beneficiary in a single lump sum as soon as practicable following the death of the Participant and the determination of the Beneficiary but in no event later than ninety (90) days after the Participant’s death. If a Participant’s death occurs while any amount remains in the
 
8

Participant’s Accounts and the Participant’s Beneficiary does not survive the Participant, the remaining benefits shall be paid to the Participant’s Secondary Beneficiary. If a deceased Participant is not survived by either a Beneficiary or Secondary Beneficiary (or if no Beneficiary was effectively named), the benefits shall be paid in a single sum to the estate of the Participant and the Plan Administrator shall be fully protected in paying such benefits to such deceased Participant’s personal representative, irrespective of whether payments are actually made to a person or persons who in fact are not the personal representative of the deceased Participant.
5.9 Payments to Specified Employees. Notwithstanding any other provision in the Plan, payments of Supplemental Benefits owed to any Participant pursuant to the Plan who is a “specified employee” as defined under Section 409A, shall not be made or commenced pursuant to the Plan to the Participant until the date that is six (6) months and one (1) day after the Participant’s Separation from Service and shall be paid or commenced on such date; provided, however, that this Section 5.9 shall not apply if the Participant’s Separation from Service occurs by reason of his or her death. If this Section 5.9 applies and the method of payment of the Participant’s Supplemental Benefits is not a lump sum, the first payment to the Participant will include all amounts that would have been paid during the six (6) month and one (1) day period but for this Section 5.9
ARTICLE 6
PLAN ADMINISTRATION
6.1 Duties of Plan Administrator. The Plan Administrator shall be responsible for making all policy decisions which arise under the Plan and shall be responsible for administering the Plan and keeping records of Supplemental Benefits.
6.2 Establishment of Rules and Claims Procedure. Subject to the limitations of the Plan, the Plan Administrator shall from time to time establish rules for the administration of the Plan. Without limiting the generality of the preceding sentence, it is specifically provided that the Plan Administrator shall set forth the procedures to be followed in presenting claims for benefits under the Plan. In case of any factual dispute hereunder, the Compensation Committee shall resolve such dispute giving due weight to all evidence available to it. The Compensation Committee shall interpret the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan. All such determinations shall be final, conclusive and binding.
6.3 Employment of Counsel, Etc. The Compensation Committee may employ such counsel, accountants and other agents, as it shall deem advisable. The Sponsoring Employer shall pay the compensation of such counsel, accountants and other agents and any other expenses incurred by the Compensation Committee in the administration of the Plan.
6.4 Payment of Expenses. The reasonable costs and expenses incurred by the Compensation Committee in the performance of its duties hereunder, excluding compensation for services, but including, without limitation, reasonable fees for legal, accounting and other services rendered, shall be paid by the Sponsoring Employer.
 
9

ARTICLE 7
AMENDMENTS AND RESERVATION OF COMPANY RIGHTS
7.1 Rights Generally to Make Amendments. By action of the Board of Directors, the Sponsoring Employer shall have the right at any time by instrument of writing, to modify, alter, amend or terminate the Plan in whole or in part, provided that any Benefit which has actually accrued and become distributable hereunder shall not be affected thereby, and provided that no amendment increases the obligations of any Employer to make contributions hereunder unless such Employer approves such amendment. Further, no amendment shall be made which shall decrease any Participant’s Account balance. Subject to the foregoing restrictions, the committee appointed pursuant to Article 10 of the Retirement and Savings Plan shall also have the authority to amend the Plan in any manner which is necessary to comply with Section 409A and the authority to adopt any other amendment to the Plan which does not have the effect of materially increasing the liability of any Employer; provided, however, that no amendment by such committee may affect any Participant who is a member of such committee unless it applies to Participants generally.
7.2 Conditions to Amendments, Suspension or Termination. Notwithstanding the provisions of Section 7.1, no amendment, suspension or termination shall adversely affect:
(a) The Supplemental Benefits of any Participant, or the Beneficiary or Secondary Beneficiary of any Participant who has retired prior thereto; or
(b) The right of any Participant then employed by the Employer to receive upon retirement or other termination of employment, or the Participant’s Beneficiary or Secondary Beneficiary to receive upon the Participant’s death, the accrued Supplemental Benefits to which such person would have been entitled under the Plan prior to its amendment, suspension or termination.
7.3 Accelerated Distribution Upon Loss of Tax Deferral. In the event that this Plan fails to satisfy the requirements of Section 409A and as a consequence a Participant becomes subject to federal income tax on all or any portion of his or her Account Balance for which such Participant is not then scheduled to receive a distribution under the Plan, notwithstanding any other provision of the Plan or distribution election made by such Participant, the Plan Administrator shall accelerate the payment of that portion of the Participant’s Accounts which the Plan Administrator reasonably determines to be subject to such taxation in a lump sum payable on a date determined by the Plan Administrator.
ARTICLE 8
CHANGE IN EMPLOYMENT
8.1 Participant Transfer from Employer to Employer. A Participant who transfers employment from one Employer to another Employer shall not be considered as terminating employment with an Employer and shall continue to be a Participant in this Plan without interruption.
 
10

8.2 Participant Transfer from Employer to Related Employer. A Participant who transfers employment to a Related Employer that has not adopted the Qualified Plans shall not be considered as terminating employment with an Employer and shall remain an active Participant in the Plan, except that no further benefits shall be accrued on such Participant’s behalf under Article 4. Although no further benefits may be accrued, the Participant’s Supplemental Benefits may continue to be allocated among the Investments Options in accordance with Section 4.4.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.1 Prohibition Against Assignment. Neither the interest of a Participant or any other person nor the Supplemental Benefits payable hereunder, is subject to the claim of creditors of Participants or their Beneficiaries, and will not be subject to attachment, garnishment or any other legal process. Neither a Participant nor the Participant’s Beneficiaries may assign, sell, borrow on or otherwise encumber any of the Participant’s beneficial interest in the Plan, nor shall any such benefits be in any manner liable for or subject to the deeds, contracts, liabilities, engagements or torts of any Participant or Beneficiary. All such payments and rights thereto are expressly declared to be non-assignable and non-transferable, and in the event of any attempt of assignment or transfer, the Employer shall have no further liability hereunder.
9.2 Plan Voluntary on Part of Employers. Although it is the intention of each Employer that this Plan shall be continued, this Plan is entirely voluntary on the part of each Employer, and the continuance of the Plan is not assumed as a contractual obligation of an Employer other than as may be provided by Article 7.
9.3 Plan Not Contract of Employment. This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon such individual as a Participant in the Plan.
9.4 Form of Notice. Any references in this Plan to written notice may, at the option of the Employer, be made by electronic notice.
9.5 Construction.
(a) This Plan shall be construed and enforced according to the laws of the Commonwealth of Kentucky, and all provisions hereunder shall be administered according to the laws thereof. It is intended that this Plan be exempt from Title I of the Employee Retirement Income Security Act of 1974, as amended, under Section 4(b)(5) thereof, as an excess benefit
 
11

plan and as a plan which is unfunded and maintained by the Employer for the purpose of providing deferred compensation for a select group of highly compensated employees, and any ambiguities in construction shall be resolved in favor of interpretation which will effectuate such intentions.
(b) Any words herein used in the singular shall be read and construed as though used in the plural in all cases where they would so apply.
(c) Titles of articles and headings to sections are inserted for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles and headings, shall control.
9.6 Payment to Minors, Etc. In making any payment to or for the benefit of any minor or incompetent Beneficiary, or incompetent Participant, the Plan Administrator, in its sole, absolute and uncontrolled discretion, may, but need not, make such payment to a legal or natural guardian or other relative of such minor or court appointed committee of such incompetent, or to any adult with whom such minor or incompetent temporarily or permanently resides, and any such guardian, committee, relative or other person shall have full authority and discretion to expend such distribution for the use and benefit of such minor or incompetent, and the receipt by such guardian, committee, relative or other person shall be a complete discharge to the Employer, without any responsibility on its part to see to the application thereof.
[signature page follows]
 
12

IN WITNESS WHEREOF, the Sponsoring Employer has caused this instrument to be executed and attested thereto by its duly authorized officers this 30 th  day of January, 2008.

HUMANA INC.	
 	 	
By:	 	/s/ Michael B. McCallister	
 	 	Michael B. McCallister
President & Chief Executive Officer	

Attest:	
 	
/s/ Joan O. Lenahan	
Joan O. Lenahan
Vice President & Secretary	
 
13

APPENDIX A
The below definition of Change in Control is the definition used in the Humana Inc. 2003 Stock Incentive Plan. All definitions referred to herein shall have the definitions ascribed to them in the 2003 Stock Incentive Plan.
“Change in Control” shall mean the occurrence of:
 
1)	An acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the combined voting power of the Company’s then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a “Subsidiary”) (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);	
 
2)	The individuals who, as of the effective date of this Plan are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or	
 
3)	The consummation of:	
 
 	a)	A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a “Non-Control Transaction.” A “Non-Control Transaction” shall mean a merger, consolidation or reorganization of the Company where:	
i) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following
 
14

such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization (the “Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization;
ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Corporation, and no agreement, plan or arrangement is in place to change the composition of the board of directors following the merger, consolidation or reorganization; and
iii) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, or any Subsidiary, or (iv) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities, has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the Surviving Corporation’s then outstanding voting securities.
 
 	b)	A complete liquidation or dissolution of the Company; or	
 
 	c)	The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).	
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities then outstanding, increases the proportional number of Shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
 
15

APPENDIX B
FORM OF RABBI TRUST
APPENDIX B
TRUST UNDER                         
DEFERRED COMPENSATION PLAN
This Trust Agreement (“Trust Agreement”) is made this Click and type Day day of Click and type Month , Click and type Year , by and between (i) <Name of Company Creating Trust>, a  <state of incorporation > corporation (“Company”) and (ii) <Name of Trustee>, (“Trustee”).
RECITALS:
A. Company has adopted the <Name of Company creating Trust> Deferred Compensation Plan (“Plan”), which is a nonqualified deferred compensation plan.
B. Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan.
C. Company wishes to establish a trust (hereinafter called “Trust”) and to contribute to the Trust assets that shall be held therein, subject to the claims of Company’s creditors in the event of Company’s Insolvency (as herein defined), until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan.
D. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended.
E. It is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan.
AGREEMENT:
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
1. ESTABLISHMENTOF TRUST.
(a) Company hereby deposits with Trustee in trust $                        , which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by Company; it shall become irrevocable upon a “Change in Control” as that term is defined in the Plan.
 
16

(c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company’s general creditors under federal and state law in the event of Insolvency.
(e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits.
2. PAYMENTSTO PLAN PARTICIPANTSAND THEIR BENEFICIARIES.
(a) Company shall deliver to Trustee a schedule (the “Payment Schedule”) that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient.
 
17

3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTSTO TRUST BENEFICIARY WHEN COMPANYIS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if Company is Insolvent. Company shall be considered “Insolvent” for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below.
(1) The Board of Directors of Company and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company’s Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company’s Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company’s solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company’s solvency.
(3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company’s general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance.
4. PAYMENTSTO COMPANY. Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to
 
18

Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan.
5. INVESTMENT AUTHORITY.
(a) The Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercised by or rest with the Plan Participants. The Committee shall direct Trustee as to the investment of the Trust assets.
(b) Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.
(c) All amounts paid to Trustee by Company shall be held and administered by Trustee as a single trust and Trustee shall not be required to segregate and invest separately any part of the Trust representing interests of individual Plan participants.
(d) Neither any Plan participant nor their beneficiaries shall have any authority or control whatsoever over the investments of the Trust.
(e) Trustee shall have all the powers necessary to carry out the provisions hereunder. Trustee shall have the custody of all cash, securities and investments received or purchased in accordance with the terms hereof. Trustee may sell or exchange any property or asset of the Trust at public or private sale, with or without advertisement, upon terms acceptable to Trustee and in such manner as Trustee may deem wise and proper. The proceeds of any such sale or exchange may be reinvested as provided hereunder. The purchaser of any such property from Trustee shall not be required to look to the application of the proceeds of any such sale or exchange by Trustee. Trustee may participate in the reorganization, recapitalization, merger or consolidation of any corporation in which Trustee may own stock or securities and may exercise any subscription rights or conversion privileges, and generally may exercise any of the powers of any owner with respect to any stock or other securities or property comprising the Trust. Trustee may, through any duly authorized officer or proxy, vote or refrain from voting any shares of stock or securities which Trustee may own from time to time.
(f) Trust may retain in cash such funds as from time to time it may deem advisable.
(g) Trustee may hold stocks or other securities in its own name as Trustee, with or without the designation of the Trust, or in the name of a nominee selected by it for that purpose, and may deposit securities with a depository trust company, but Trustee shall nevertheless be obligated to account for all securities owned by it as a part of the Trust, notwithstanding the name in which the same may be held.
6. DISPOSITIONOF INCOME. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested.
 
19

7. ACCOUNTINGBY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within 45 days following the close of each calendar year, and within 45 days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.
8. RESPONSIBILITYOF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee’s costs, expenses and liabilities (including, without limitation, reasonable attorneys’ fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein; provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy.
(e) Notwithstanding the provisions of Section 8(d) hereof, Trustee may loan to Company the proceeds of any borrowing against any insurance policy held as an asset of the Trust.
(f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or by applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom within the meaning of Treas. Reg. § 301.7701-2.
 
20

9. COMPENSATIONAND EXPENSESOF TRUSTEE. Company shall pay all administrative and Trustee’s fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust.
10. RESIGNATIONAND REMOVALOF TRUSTEE.
(a) Trustee may resign at any time by written notice to Company, which shall be effective 30 days after receipt of such notice unless Company and Trustee agree otherwise.
(b) Trustee may be removed by Company on 10 days notice or upon shorter notice acceptable by Trustee; provided, however, that upon a Change in Control, Trustee may not be removed by Company for one year.
(c) If Trustee resigns within one year after a Change in Control, Company shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions.
(d) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 30 days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit.
(e) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under Sections 10(a) or 10(b) hereof. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.
11. APPOINTMENTOF SUCCESSOR.
(a) If Trustee resigns or is removed in accordance with Sections 10(a) or 10(b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for, and Company shall indemnify and defend the successor Trustee from, any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
 
21

12. AMENDMENTOR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan unless sooner revoked in accordance with Section 1(b) hereof. Upon termination of the Trust, any assets remaining in the Trust shall be returned to Company.
(c) This Trust Agreement may not be amended by Company for one year following a Change in Control.
13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance with, the laws of the Commonwealth of Kentucky without regard to its conflict of laws rules.
14. EFFECTIVE DATE. The effective date of this Trust Agreement shall be the date of its execution.
IN WITNESS WHEREOF, the parties have executed this Trust Agreement as of the date first written above.

X_NAMEOF COMPANY CREATING TRUST_X	
 	 	
By:	 	 	
Title:	 	 	
 	 	(“x_DefinedName_x”)	

X_NAMEOF TRUSTEE_X	
 	 	
By:	 	 	
Title:	 	 	
 	 	(“x_DefinedName_x”)	
 
22

Exhibit 10(cc)
HUMANA INC.
STOCK OPTION AGREEMENT
AND AGREEMENT NOT TO COMPETE OR SOLICIT
UNDER THE AMENDED AND RESTATED 2003 STOCK INCENTIVE PLAN
THIS AGREEMENT (“Agreement”) made as of [DATE] by and between HUMANA INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter referred to as the  “Company” ), and  [EMPLOYEE NAME],  an employee of the Company (hereinafter referred to as  “Optionee” ) .
WITNESSETH
WHEREAS, the Amended and Restated 2003 Stock Incentive Plan (the “Plan”), for certain employee and non-employee Directors of the Company and its subsidiaries was approved by the Company’s Board of Directors (the  “Board” ) and stockholders; and
WHEREAS, the Company desires to grant to Optionee an option to purchase shares of common stock of the Company in accordance with the Plan.
NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, and other good and valuable consideration, the Company and Optionee agree as follows:
 
I.	OPTION GRANT	
A. Grant of Option. The Company hereby grants to Optionee, as a matter of separate inducement and agreement and not in lieu of salary or other compensation for services, a non-qualified stock option to purchase  [OPTION AMOUNT]  shares of the $.16-2/3 par value common stock of the Company (“Common Stock”) at the purchase price of  [PURCHASE PRICE]  per share (the “Option”) exercisable on the terms and conditions set forth herein .
B.Term. The term of the Option shall commence upon the date of grant, [DATE], and shall expire on [DATE] (“Expiration Date”).
C.Vesting of Option. Except as otherwise set forth herein, this Option shall be exercisable by Optionee or his/her personal representative on and after the first anniversary of the date hereof in cumulative annual installments of one-third of the number of shares covered hereby.
D.Effect of Termination of Employment on Option.
1. If the employment of Optionee by the Company is terminated for Cause, all the rights of Optionee under this Agreement, whether or not exercisable, shall terminate immediately.
2. If the employment of Optionee is terminated for any reason other than for Cause, Retirement, death or Disability, unless otherwise specified herein, all the rights of Optionee
 
1

under this Agreement then exercisable shall remain exercisable at any time within ninety (90) days after the date of such termination, but in no event beyond the Expiration Date.
3. In the event of Optionee’s Retirement, this Option shall be exercisable at any time within two (2) years after the date of Retirement, but in no event beyond the Expiration Date, and only to the extent the Option was exercisable at the date of Retirement.
4. In the event of death or Disability of Optionee while in the employ of the Company, this Option shall become immediately exercisable and shall remain exercisable by Optionee or the person or the persons to whom those rights pass by will or by the laws of descent and distribution or, if appropriate, by the legal representative of the Optionee or the estate of the Optionee at any time within two (2) years after the date of such death or Disability, regardless of the Expiration Date.
5. In the event of a Change in Control, as defined in the Plan, the Option granted in Section I shall become fully vested and immediately exercisable in its entirety. In addition, Optionee will be permitted to surrender for cancellation within sixty (60) days after a Change in Control, any portion of this Option to the extent not yet exercised and Optionee will be entitled to receive a payment in an amount equal to the excess, if any, of (x) the greater of (1) the Fair Market Value on the date of surrender of the Shares subject to this Option or portion thereof surrendered, or (2) the Fair Market Value, as Adjusted, of the Shares subject to this Option or portion thereof surrendered, over (y) the aggregate purchase price for such Shares under this Option or portion thereof surrendered. The form of payment shall be determined by the Committee. In the event Optionee’s employment with the Company is terminated other than for Cause within three (3) years following a Change in Control, each Option held by the Optionee that was exercisable as of the date of termination of the Optionee’s employment or service shall remain exercisable for a period ending the earlier of the second anniversary of the termination of the Optionee’s employment or the expiration of the stated term of the Option.
E.Exercise of Option.
1. This Option shall be exercisable only by written notice to the Secretary of the Company at the Company’s principal executive offices by Optionee or his/her legal representative as herein provided. Such notice shall state the number of shares to be exercised and shall be signed by Optionee or his/her legal representative, as applicable.
2. The purchase price shall be paid as follows:
a) In full in cash upon the exercise of the Option; or
b) By tendering to the Company shares of the Common Stock of Company owned by him/her prior to the date of exercise and having an aggregate fair market value equal to the cash exercise price applicable to his/her Option; or
 
2

 	c)	A combination of I.E.(2)(a) and I.E.(2)(b) above.	
3. Federal, state and local income taxes and other amounts as may be required by law to be collected by the Company in connection with the exercise of this Option shall be paid pursuant to the Plan by Optionee prior to the delivery of any Common Stock under this Agreement.
 
3

II.	AGREEMENT NOT TO COMPETE AND AGREEMENT NOT TO SOLICIT	
A.Agreement Not To Compete. Optionee hereby covenants and agrees that for a period commencing on the date hereof and ending twelve (12) months after the effective date of Optionee’s termination of employment with the Company, Optionee, directly or indirectly, personally, or as an employee, officer, director, partner, member, owner, material shareholder, investor or principal of, or consultant or independent contractor with, another entity, shall not:
Participate in any business which competes with the Company, including, without limitation, health maintenance organizations, insurance companies or prepaid health plan businesses, in which the Company has been actively engaged during any part of the two (2) year period immediately preceding the Optionee’s employment termination date (“Company Business”), in any of the markets in which the Company is then currently doing business.
B. Agreement Not To Solicit. Optionee hereby covenants and agrees that for a period commencing on the date hereof and ending twelve (12) months after the effective date of Optionee’s termination of employment with the Company, Optionee, directly or indirectly, personally, or as an employee, officer, director, partner, member, owner, material shareholder, investor or principal of, or consultant or independent contractor with, another entity, shall not:
1. Interfere with the relationship of the Company and any of its employees, agents, representatives, consultants or advisors.
2. Divert, or attempt to cause the diversion from the Company, any Company Business, nor interfere with relationships of the Company with its policyholders, agents, brokers, dealers, distributors, marketers, sources of supply or customers.
3. Solicit, recruit or otherwise induce or influence any employee of the Company to accept employment in any business which competes with the Company Business, in any of the markets in which the Company is then currently doing business.
C. Effect of Termination of Employment on Agreements Not to Compete and Not to Solicit.
1. In the event Optionee voluntarily resigns or is discharged by Company with Cause at any time prior to the vesting of the Option, the prohibitions on Optionee set forth in Sections II.A and II.B shall remain in full force and effect.
2. In the event Optionee is discharged by Company other than with Cause prior to the vesting herein of the Option, the prohibitions set forth in Section II.A shall remain in full force and effect only if the Company, solely at its option, pays to Optionee an amount at least equal to Optionee’s then current annual base salary, whether such amount is paid pursuant to this provision or pursuant to any other severance or separation plan or other plan or agreement between Optionee and Company.
 
4

3. In the event Optionee is discharged by Company other than with Cause prior to vesting herein of the Option, the prohibitions set forth in Section II.B above shall remain in full force and effect.
4. After the vesting of the Option, the prohibitions on Optionee set forth herein shall remain in full force and effect, except as otherwise provided in Section II.D.
D. Effect Of Change In Control on Agreements Not to Compete and Not to Solicit.
1. In the event of a Change in Control, the prohibitions on Optionee set forth in Section II.A shall remain in full force and effect only if the acquirer or successor to the Company following the Change in Control shall, solely at its option, pay, within thirty (30) days following Optionee’s employment termination date with the Company or its successor, to the Optionee an amount at least equal to Optionee’s then current annual base salary, plus Optionee’s maximum potential bonus pursuant to any bonus plan in which Optionee participated as of the date of the Change in Control. Such sums shall be in addition to any other amounts paid or payable to Optionee with respect to other change in control agreements.
2. In the event of a Change in Control, the prohibitions on Optionee set forth in Section II.B. shall remain in full force and effect.
E. Governing Law. Notwithstanding any other provision herein to the contrary, the provisions of this Section II of the Agreement, shall be governed by, and construed in accordance with, the laws of the Commonwealth of Kentucky without regard to its conflicts or choice of laws rules or principles that might otherwise refer construction or interpretation of this Section II to the substantive law of another jurisdiction.
F. Injunctive Relief; Invalidity of Any Provision. Optionee acknowledges that (1) his or her services to the Company are of a special, unique and extraordinary character, (2) his or her position with the Company will place him or her in a position of confidence and trust with respect to the operations of the Company, (3) he or she will benefit from continued employment with the Company, (4) the nature and periods of restrictions imposed by the covenants contained in this Section II hereof are fair, reasonable and necessary to protect the Company, (5) the Company would sustain immediate and irreparable loss and damage if Optionee were to breach any of such covenants, and (6) the Company’s remedy at law for such a breach will be inadequate. Accordingly, Optionee agrees and consents that the Company, in addition to the recovery of damages and all other remedies available to it, at law or in equity, shall be entitled to seek both preliminary and permanent injunctions to prevent and/or halt a breach or threatened breach by Optionee of any covenant contained in Section II hereof. If any provision of this Section II is determined by a court of competent jurisdiction to be invalid in whole or in part, it shall be deemed to have been amended, whether as to time, area covered or otherwise, as and to the extent
 
5

required for its validity under applicable law, and as so amended, shall be enforceable. The parties further agree to execute all documents necessary to evidence such amendment.
 
III.	MISCELLANEOUS PROVISIONS	
A. Binding Effect & Adjustment. This Agreement shall be binding and conclusive upon each successor and assign of the Company. Optionee’s obligations hereunder shall not be assignable to any other person or entity. It is the intent of the parties to this Agreement that the benefits of any appreciation of the underlying Common Stock during the term of the Award shall be preserved in any event, including but not limited to a recapitalization, merger, consolidation, reorganization, stock dividend, stock split, reverse stock split, spin-off or similar transaction, or other change in corporate structure affecting the Shares, as more fully described in Section 4.6 of the Plan. All obligations imposed upon Optionee and all rights granted to Optionee and to the Company shall be binding upon Optionee’s heirs and legal representatives.
B. Amendment. This Agreement may only be amended by a writing executed by each of the parties hereto.
C. Governing Law. Except as to matters of federal law and as otherwise provided herein, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to its conflict of laws rules.
D. Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the Commonwealth of Kentucky, County of Jefferson, or, if it has or can acquire jurisdiction, in the United States District Court for the Western District of Kentucky, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.
E. No Employment Agreement. Nothing herein confers on the Optionee any rights with respect to the continuance of employment or other service with the Company, nor will it interfere with any right the Company would otherwise have to terminate or modify the terms of Optionee’s employment or other service at any time.
F.Severability. If any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable in any relevant jurisdiction, or would disqualify this Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Agreement shall remain in full force and effect.
 
6

G. Assignment. The Option granted under this Agreement to Optionee may not be assigned, transferred, pledged, alienated or hypothecated in any manner during Optionee’s lifetime, but shall be solely and exclusively the right of Optionee to exercise during his/her lifetime. Should Optionee attempt to assign, transfer, pledge, alienate or hypothecate this Option or any rights hereunder in any manner whatsoever, such action shall constitute a breach of the covenants hereunder and Company may terminate this Option as to any then unexercised shares.
H. Defined Terms. Any term used herein and not otherwise defined herein shall have the same meaning as in the Plan. Any conflict between this Agreement and the Plan will be resolved in favor of the Plan. Any disputes or questions of right or obligation which shall result from or relate to any interpretation of this Agreement shall be determined by the Committee. Any such determination shall be binding and conclusive upon Optionee and any person or persons claiming through Optionee as to any rights hereunder.
IN WITNESS WHEREOF, Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and Optionee has executed this Agreement, each as of the day first above written.

 	 	 	 	“Company”	

ATTEST:	 	 	 	HUMANA INC.	
 	 	 	 	 	
BY:	 	 	 	 	 	BY:	 	 	
 	 	        JOAN O. LENAHAN	 	 	 	 	 	        ARTHUR P. HIPWELL	
 	 	        VICE PRESIDENT AND	 	 	 	 	 	        SENIOR VICE PRESIDENT	
 	 	            CORPORATE SECRETARY	 	 	 	 	 	 	

 	 	 	 	“Optionee”	

 	 	 	 	 	 	 	 	        [NAME]	
 
7

Exhibit 12
Humana Inc.
Computation of Ratio of Earnings to Fixed Charges

 	  	For the year ended December 31,	
 	  	2007	  	2006	  	2005	  	2004	  	2003	
 	 	 	 	 	 	
Income before income taxes	  	$	1,289,300	  	$	762,085	  	$	402,880	  	$	399,378	  	$	336,213	
 	 	 	 	 	 	
Fixed charges	  	 	109,266	  	 	98,045	  	 	66,434	  	 	49,246	  	 	40,972	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total earnings	  	$	1,398,566	  	$	860,130	  	$	469,314	  	$	448,624	  	$	377,185	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Interest charged to expense	  	$	68,878	  	$	63,141	  	$	39,315	  	$	23,172	  	$	17,367	
One-third of rent expense	  	 	40,388	  	 	34,904	  	 	27,119	  	 	26,074	  	 	23,605	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total fixed charges	  	$	109,266	  	$	98,045	  	$	66,434	  	$	49,246	  	$	40,972	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Ratio of earnings to fixed charges (1)(2)	  	 	12.8x	  	 	8.8x	  	 	7.1x	  	 	9.1x	  	 	9.2x	
 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Notes
 
(1)	For the purposes of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes and fixed charges. Fixed charges include gross interest expense, amortization of deferred financing expenses and an amount equivalent to interest included in rental charges. One-third of rental expense represents a reasonable approximation of the interest amount.	
 
(2)	There are no shares of preferred stock outstanding.	

EXHIBIT 21
HUMANA INC.
SUBSIDIARY LIST
ALABAMA
1.	CompBenefits of Alabama, Inc.	
ARKANSAS
1.	American Dental Providers of Arkansas, Inc. - Doing Business As:	
 	a.	CompBenefits	
DELAWARE
1.	American Tax Credit Corporate Georgia Fund III, L.L.C. (1)	
2.	Availity, L.L.C. (2)	
3.	CompBenefits Corporation	
4.	CompBenefits Direct, Inc.	
5.	DefenseWeb Technologies, Inc.	
6.	Dental Health Management, Inc.	
7.	Emphesys, Inc. — Doing Business As:	
 	a.	Texas-Emphesys, Inc. (TX)	
8.	Green Ribbon Health, L.L.C. (3)	
9.	Health Value Management, Inc. – Doing Business As:	
 	a.	ChoiceCare Network	
 	b.	National Transplant Network	
10.	Humana Inc. – Doing Business As:	
 	a.	H.A.C. Inc. (KY)	
 	b.	Humana of Delaware, Inc. (CO)	
11.	Humana Innovation Enterprises, Inc. – Doing Business As:	
 	a.	Personal Nurse (KY)	
12.	Humana Military Healthcare Services, Inc. – Doing Business As:	
 	a.	Humana Military Health Services, Inc. (IL)	
13.	Humana Military Pharmacy Services, Inc.	
14.	Humana Pharmacy, Inc. – Doing Business As:	
 	a.	Humana Mail (FL, IL, KY, TX)	
 	b.	The Pharmacy (TX)	
 	c.	PrescribIT	
 	d.	RightSource	
 	e.	RightSource Mail	
15.	Humana Veterans Healthcare Services, Inc. – Doing Business As:	
 	a.	HVHS, Inc. (TX)	
16.	HumanaDental, Inc.	
17.	KMG Capital Statutory Trust I	
18.	Sensei, Inc. (4)	
ENGLAND & WALES
1.	Humana Europe, Ltd.	

FLORIDA
1.	CAC-Florida Medical Centers, LLC	
2.	CarePlus Health Plans, Inc. - Doing Business As:	
 	a.	Solicare Health Plans	
3.	CompBenefits Company	
4.	CompBenefits Dental and Vision Company	
5.	CPHP Holdings, Inc.	
6.	HUM-e-FL, Inc.	
7.	Humana Health Insurance Company of Florida, Inc.	
8.	Humana Medical Plan, Inc. - Doing Business As:	
 	a.	Coastal Pediatrics-Daytona	
 	b.	Coastal Pediatrics-Port Orange	
 	c.	Coastal Pediatric-Ormond	
 	d.	Flagler Family Practice	
 	e.	Florida Comfort Choice	
 	f.	Florida Dermatology Center	
 	g.	Humana Family	
 	h	Humana Medical Plan-West Palm Beach	
 	i.	Internal Medicine of Daytona	
 	j.	Orange Park Family Health Care	
 	k.	Suncoast Medical Associate	
9.	OHS, Inc.	
10.	Ultimate Optical, Inc.	
GEORGIA
1.	CompBenefits of Georgia, Inc.	
2.	Humana Employers Health Plan of Georgia, Inc.	
ILLINOIS
1.	CompBenefits Dental, Inc.	
2.	Dental Care Plus Management, Corp. – Doing Business As:	
 	a.	CompBenefits	
3.	INFOCUS Technology, Inc.	
4.	The Dental Concern, Ltd. - Doing Business As:	
 	a.	TDC (MO)	
KENTUCKY
1.	CHA HMO, Inc. – Doing Business As:	
 	a.	CHA Health (IN, KY)	
2.	CHA Service Company	
3.	Humana Active Outlook, Inc.	
4.	Humana Health Plan, Inc. - Doing Business As:	
 	a.	Humana Health Care Plans of Indiana (IN)	
 	b.	Humana Health Plan Administrators (CA)	
5.	Humana Insurance Company of Kentucky	
6.	Humana MarketPOINT, Inc. – Doing Business As:	
 	a.	Humana MarketPOINT Insurance Sales (CA)	
7.	Humco, Inc.	
8.	Preservation on Main, Inc.	
9.	The Dental Concern, Inc. - Doing Business As:	
 	a.	The Dental Concern/KY, Inc. (IN)	
 	b.	The Dental Concern/KY, Inc. (MO)	
10.	516-526 West Main Street Condominium Council of Co-Owners, Inc.	

LOUISIANA
1.	Humana Health Benefit Plan of Louisiana, Inc. - Doing Business As:	
 	a.	Humana	
 	b.	Humana of Louisiana	
2.	Humana Health Plan Interests, Inc.	
NEW YORK
1.	Humana Insurance Company of New York	
NORTH CAROLINA
1.	American Dental Plan of North Carolina, Inc.	
OHIO
1.	Humana Health Plan of Ohio, Inc. - Doing Business As:	
 	a.	ChoiceCare/Humana (IL, IN, KY, OH)	
 	b.	Humana/ChoiceCare (IL, IN, KY, OH)	
PUERTO RICO
1.	Healthcare E-Commerce Initiative, Inc.	
2.	Humana Health Plans of Puerto Rico, Inc.	
3.	Humana Insurance of Puerto Rico, Inc.	
4.	Humana MarketPOINT of Puerto Rico, Inc.	
SOUTH CAROLINA
1.	Kanawha Insurance Company	
TENNESSEE
1.	Kanawha Healthcare Solutions, Inc. - Doing Business As:	
 	a.	Kanawha HealthCare Solutions Administrators (CA)	
TEXAS
1.	CompBenefits Insurance Company	
2.	DentiCare, Inc. - Doing Business As:	
 	a.	CompBenefits	
3.	Corphealth Healthcare, Inc.	
4.	Corphealth, Inc.	
5.	Corphealth Provider Link, Inc.	
6.	Emphesys Insurance Company	
7.	Humana Health Plan of Texas, Inc. - Doing Business As:	
 	a.	Humana Health Plan of San Antonio	
8.	Texas Dental Plans, Inc.	
UTAH
1.	Humana Medical Plan of Utah, Inc.	
VERMONT
1.	Managed Care Indemnity, Inc. - Doing Business As:	
 	a.	Witherspoon Parking Garage (KY)	
VIRGINIA
1.	KMG America Corporation	

WISCONSIN
1.	CareNetwork, Inc. - Doing Business As:	
 	a.	CARENETWORK	
2.	Humana Insurance Company	
3.	Humana Wisconsin Health Organization Insurance Corporation - Doing Business As:	
 	a.	WHOIC	
 	b.	WHO	
4.	HumanaDental Insurance Company	
5.	Independent Care Health Plan (5)	
 
(1)	Ownership is 58.1736% by Humana Insurance Company, 1.6029% by The Savannah Bank, N.A., an unaffiliated entity and 40.2133% by GMAC Insurance Georgia, L.L.C., an unaffiliated entity. It is a Delaware L.L.C. investment fund organized for the purpose of investing in apartment complexes generating Georgia state low income housing tax credits.	
 
(2)	Ownership is 28% by HUM-e-FL, Inc., 42% by Navigy, Inc., an unaffiliated entity, and 30% by Health Care Service Corporation, an unaffiliated entity.	
 
(3)	Ownership is 50% by Humana Innovation Enterprises, Inc. and 50% by Pfizer Health Solutions, Inc., an unaffiliated entity.	
 
(4)	Ownership is 50% by Humana Innovation Enterprises, Inc. and 50% by Card Guard AG, an unaffiliated entity.	
 
(5)	Ownership is 50% by CareNetwork, Inc. and 50% by New Health Services, Inc., an unaffiliated entity.	

Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-33072, No. 33-49305, No. 33-54455, No. 333-04435, No. 333-57095, No. 333-86801, No. 333-41408, No. 333-86280, No. 333-105622, and No. 333-134887) and S-3 (No. 333-132878) of Humana, Inc. of our report dated February 22, 2008 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP	
Louisville, Kentucky	
February 22, 2008	
 
1

Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Michael B. McCallister, principal executive officer of Humana Inc., certify that:
 
1.	I have reviewed this annual report on Form 10-K of Humana Inc.;	
 
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;	
 
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2008	
 	 	
Signature: 	 	/s/ Michael B. McCallister	
 	 	Michael B. McCallister	
 	 	Principal Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, James H. Bloem, principal financial officer of Humana Inc., certify that:
 
1.	I have reviewed this annual report on Form 10-K of Humana Inc.;	
 
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;	
 
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2008	
 	 	
Signature: 	 	/s/ James H. Bloem	
 	 	James H. Bloem	
 	 	Principal Financial Officer	

Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Humana Inc. (the “Company”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Humana Inc., that:
 
(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and	
 
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.	

/s/ Michael B. McCallister	
Michael B. McCallister	
President and Chief Executive Officer	
 	
February 25, 2008	
 	
/s/ James H. Bloem	
James H. Bloem	
Senior Vice President and Chief Financial Officer	
 	
February 25, 2008	
A signed original of this written statement required by Section 906 has been provided to Humana Inc. and will be retained by Humana Inc. and furnished to the Securities and Exchange Commission or its staff upon request.