Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172018
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 or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
500 West Main Street
Louisville, Kentucky 40202
(Address of principal executive offices, including zip code)
(502) 580-1000
(Registrant’s telephone number, including area code)
 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerý Accelerated filer¨
     
Non-accelerated filer¨ Smaller reporting company¨
     
Emerging growth company¨   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class of Common StockOutstanding at
SeptemberJune 30, 20172018
$0.16 2/3 par value142,860,096137,763,407 shares

Humana Inc.
FORM 10-Q
SEPTEMBERJUNE 30, 20172018
INDEX
  Page
Part I: Financial Information 
Item 1.Financial Statements (Unaudited) 
   
 
   
 
   
 
   
 
   
 
   
Item 2.
   
Item 3.
   
Item 4.
   
 
   
Item 1.
   
Item 1A.
   
Item 2.
   
Item 3.
   
Item 4.
   
Item 5.
   
Item 6.
   
 
   
 Certifications 


Humana Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
(in millions, except share amounts)(in millions, except share amounts)
ASSETS
      
Current assets:      
Cash and cash equivalents$9,865
 $3,877
$8,052
 $4,042
Investment securities8,622
 7,595
9,464
 9,557
Receivables, less allowance for doubtful accounts of $89 in 2017
and $118 in 2016
922
 1,280
Receivables, less allowance for doubtful accounts of $80 in 2018
and $96 in 2017
1,471
 854
Other current assets3,776
 3,438
4,410
 2,949
Assets held-for-sale3,467
 
Total current assets23,185
 16,190
26,864
 17,402
Property and equipment, net1,560
 1,505
1,626
 1,584
Long-term investment securities2,716
 2,203
379
 2,745
Goodwill3,281
 3,272
3,895
 3,281
Other long-term assets2,214
 2,226
1,506
 2,166
Total assets$32,956
 $25,396
$34,270
 $27,178
LIABILITIES AND STOCKHOLDERS’ EQUITY
      
Current liabilities:      
Benefits payable$4,959
 $4,563
$5,020
 $4,668
Trade accounts payable and accrued expenses4,888
 2,467
6,952
 4,069
Book overdraft171
 212
74
 141
Unearned revenues3,447
 280
3,630
 378
Short-term debt953
 300
398
 150
Liabilities held-for-sale2,694
 
Total current liabilities14,418
 7,822
18,768
 9,406
Long-term debt3,977
 3,792
4,773
 4,770
Future policy benefits payable2,893
 2,834
197
 2,923
Other long-term liabilities457
 263
321
 237
Total liabilities21,745
 14,711
24,059
 17,336
Commitments and contingencies
 
Commitments and contingencies (Note 14)
 
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;
198,572,158 shares issued at September 30, 2017 and 198,495,007 shares
issued at December 31, 2016
33
 33
Common stock, $0.16 2/3 par; 300,000,000 shares authorized;
198,591,361 shares issued at June 30, 2018 and 198,572,458 shares
issued at December 31, 2017
33
 33
Capital in excess of par value2,641
 2,562
2,672
 2,445
Retained earnings13,542
 11,454
14,211
 13,670
Accumulated other comprehensive income (loss)12
 (66)
Treasury stock, at cost, 55,712,062 shares at September 30, 2017 and
49,189,811 shares at December 31, 2016
(5,017) (3,298)
Accumulated other comprehensive (loss) income(176) 19
Treasury stock, at cost, 60,827,954 shares at June 30, 2018 and
60,893,762 shares at December 31, 2017
(6,529) (6,325)
Total stockholders’ equity11,211
 10,685
10,211
 9,842
Total liabilities and stockholders’ equity$32,956
 $25,396
$34,270
 $27,178
See accompanying notes to condensed consolidated financial statements.

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three months ended
September 30,
 Nine months ended
September 30,
Three months ended
June 30,
 Six months ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
(in millions, except per share results)(in millions, except per share results)
Revenues:              
Premiums$12,955
 $13,371
 $39,556
 $40,461
$13,713
 $13,203
 $27,524
 $26,601
Services223
 227
 706
 749
382
 230
 709
 483
Investment income104
 96
 316
 291
164
 101
 305
 212
Total revenues13,282
 13,694
 40,578
 41,501
14,259
 13,534
 28,538
 27,296
Operating expenses:              
Benefits10,642
 10,900
 32,857
 33,806
11,536
 10,889
 23,206
 22,215
Operating costs1,688
 1,739
 4,694
 5,172
1,761
 1,453
 3,510
 3,006
Merger termination fee and related costs, net
 20
 (947) 81

 
 
 (947)
Depreciation and amortization94
 86
 278
 263
100
 92
 200
 184
Total operating expenses12,424
 12,745
 36,882
 39,322
13,397
 12,434
 26,916
 24,458
Income from operations858
 949
 3,696
 2,179
862
 1,100
 1,622
 2,838
Loss on business held-for-sale(790) 
 (790) 
Interest expense59
 47
 166
 141
53
 58
 106
 107
Income before income taxes799
 902
 3,530
 2,038
19
 1,042
 726
 2,731
Provision for income taxes300
 452
 1,266
 1,023
(Benefit) provision for income taxes(174) 392
 42
 966
Net income$499
 $450
 $2,264
 $1,015
$193
 $650
 $684
 $1,765
Basic earnings per common share$3.46
 $3.01
 $15.56
 $6.80
$1.40
 $4.49
 $4.96
 $12.07
Diluted earnings per common share$3.44
 $2.98
 $15.44
 $6.73
$1.39
 $4.46
 $4.93
 $11.98
Dividends declared per common share$0.40
 $0.29
 $1.20
 $0.87
$0.50
 $0.40
 $1.00
 $0.80
See accompanying notes to condensed consolidated financial statements.

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended
September 30,
 Nine months ended
September 30,
Three months ended
June 30,
 Six months ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
(in millions)(in millions)
Net income$499
 $450
 $2,264
 $1,015
$193
 $650
 $684
 $1,765
Other comprehensive income:       
Other comprehensive (loss) income:       
Change in gross unrealized investment
gains/losses
26
 (9) 152
 150
(9) 88
 (212) 126
Effect of income taxes(9) 3
 (56) (55)2
 (33) 54
 (47)
Total change in unrealized
investment gains/losses, net of tax
17
 (6) 96
 95
(7) 55
 (158) 79
Reclassification adjustment for net
realized gains included in
investment income

 (26) (28) (65)
Reclassification adjustment for net
realized gains
(23) (2) (52) (28)
Effect of income taxes
 10
 10
 24
8
 
 15
 10
Total reclassification adjustment, net
of tax

 (16) (18) (41)(15) (2) (37) (18)
Other comprehensive income (loss), net
of tax
17
 (22) 78
 54
Other comprehensive (loss) income, net
of tax
(22) 53
 (195) 61
Comprehensive income$516
 $428
 $2,342
 $1,069
$171
 $703
 $489
 $1,826

See accompanying notes to condensed consolidated financial statements.

Humana Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
For the six months ended
June 30,
2017 20162018 2017
(in millions)(in millions)
Cash flows from operating activities      
Net income$2,264
 $1,015
$684
 $1,765
Adjustments to reconcile net income to net cash provided by
operating activities:
      
Loss on business held-for-sale790
 
Net realized capital gains(28) (65)(82) (28)
Stock-based compensation116
 76
69
 83
Depreciation303
 289
218
 201
Other intangible amortization54
 59
51
 36
(Benefit) provision for deferred income taxes(54) 54
(304) 2
Changes in operating assets and liabilities, net of effect of
businesses acquired and dispositions:
      
Receivables358
 396
(619) (1,150)
Other assets(369) (419)(1,658) (545)
Benefits payable396
 73
410
 275
Other liabilities641
 127
680
 317
Unearned revenues3,167
 2,987
3,252
 3,076
Other, net114
 117
70
 67
Net cash provided by operating activities6,962
 4,709
3,561
 4,099
Cash flows from investing activities      
Acquisitions, net of cash acquired(10) (7)(354) (9)
Purchases of property and equipment(376) (395)
Purchases of property and equipment, net(272) (233)
Purchases of investment securities(4,337) (4,533)(2,624) (3,208)
Maturities of investment securities919
 1,082
555
 649
Proceeds from sales of investment securities2,028
 3,319
2,408
 1,723
Net cash used in investing activities(1,776) (534)(287) (1,078)
Cash flows from financing activities      
Receipts from contract deposits, net1,931
 350
1,515
 2,081
Proceeds from issuance of senior notes, net985
 

 985
Repayment of commercial paper, net(153) (1)
Proceeds (repayment) from issuance of commercial paper, net243
 (102)
Change in book overdraft(41) (118)(67) (95)
Common stock repurchases(1,819) (75)(93) (1,578)
Dividends paid(162) (133)(126) (104)
Proceeds from stock option exercises and other61
 
43
 54
Net cash provided by financing activities802
 23
1,515
 1,241
Increase in cash and cash equivalents5,988
 4,198
4,789
 4,262
Cash and cash equivalents at beginning of period3,877
 2,571
4,042
 3,877
Cash and cash equivalents at end of period$9,865
 $6,769
Cash and cash equivalents at end of period (1)
$8,831
 $8,139
Supplemental cash flow disclosures:      
Interest payments$124
 $102
$98
 $92
Income tax payments, net$1,206
 $851
$405
 $694
(1) - Includes $779 million of cash and cash equivalents classified as held-for-sale at June 30, 2018.
See accompanying notes to condensed consolidated financial statements.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS
The accompanying condensed consolidated financial statements are presented in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or GAAP, or those normally made in an Annual Report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2016,2017, that was filed with the Securities and Exchange Commission, or the SEC, on February 17, 2017.16, 2018. We refer to the Form 10-K as the “2016“2017 Form 10-K” in this document. References throughout this document to “we,” “us,” “our,” “Company,” and “Humana” mean Humana Inc. and its subsidiaries.
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of benefits payable, future policy benefits payable, the impact of risk adjustment provisions related to our Medicare 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. Refer to Note 2 to the consolidated financial statements included in our 20162017 Form 10-K for information on accounting policies that we consider in preparing our consolidated financial statements.
The financial information has been prepared in accordance with our customary accounting practices and has not been audited. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature.
SaleAcquisition of Closed Blocka 40% Minority Interest in Kindred’s Homecare Business and Curo Health Services

On July 2, 2018 we completed the acquisition of Commercial Long-Terma 40% minority interest in the Kindred at Home Division, or Kindred at Home, of Kindred Healthcare, Inc., or Kindred, for cash consideration of approximately $850 million, including our share of transaction and related expenses. TPG Capital, or TPG, and Welsh, Carson, Anderson & Stowe, or WCAS, collectively, the Sponsors, along with us jointly created a consortium to purchase all of the outstanding and issued securities of Kindred. Immediately following the closing of that transaction, Kindred at Home and the Specialty Hospital company were separated, with the result being that the Long Term Acute Care Insurance Businessand Rehabilitation businesses (the Specialty Hospital Company) is owned by the Sponsors and Kindred at Home is owned by a joint venture owned by the Sponsors and us.
On November 6, 2017,July 11, 2018, we, along with the same Kindred at Home Sponsors, TPG and WCAS, collectively referred to as the "Consortium," completed the acquisition of privately-held Curo Health Services, or Curo, one of the nation's leading hospice operators providing care to patients at 245 locations in 22 states. The transaction was structured as a merger of Curo with the hospice business of Kindred at Home, and we thereby purchased a 40% minority interest in Curo for cash consideration of approximately $250 million.
We have entered into a definitiveshareholders agreement with the Sponsors that will provide for certain rights and obligations of each party. The shareholders agreement with the Sponsors includes a put option under which they have the right to require us to purchase their interest in the joint venture starting at the end of year three and ending at the end of year four following the closing. Likewise, we have a call option under which we have the right to require the Sponsors to sell their interest in the stockjoint venture to Humana beginning at the end of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed blockyear four and ending at the end of non-strategic commercial long-term care insurance policies. Based onyear five following the terms of the definitive agreement we expect to record a net loss associated with the sale of KMG of approximately $400 million. The estimated loss includes a pretax loss of approximately $900 million, offset by the expected tax benefit of approximately $500 million. We will fund the transaction with approximately $203 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately$150 million of statutory capital with the sale, which together should be more than offset by the estimated $500 million cash savings associated with the expected tax treatment of the sale. The KMG transaction is anticipated to close by the third quarter of 2018 subject to customary closing conditions, including South Carolina Department of Insurance approval. There can be no assurance we will obtain regulatory approvals needed to sell the business or do so under terms acceptable to us. closing.

Workforce Optimization
During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program. These programs are expected to impactimpacted approximately 2,7003,600 associates, or 5.7%7.8%, of our workforce.workforce in 2017. As a result, we recorded estimated charges of $124 million, or $0.54 per diluted common share. At October 31, 2017, we had approximately 47,200 employees. The estimated charges were recorded at the corporate level and not allocated to the segments. This charge is included with operating costs in the condensed consolidated statements of income for the three and nine month periods ended September 30, 2017. Payments under these programs are made upon termination during the early retirement or severance pay period, primarily starting as of the beginning of the first quarter of 2018. We expect this liability to be primarily paid within the next 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

a result, in 2017 we recorded charges of $148 million, or $0.64 per diluted common share. At December 31, 2017, $140 million was classified as a current liability, included in our condensed consolidated balance sheet in the trade accounts payable and accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period. The remaining workforce optimization liability at June 30, 2018 was $52 million and is expected to be paid in 2018.
Aetna Merger
On July 2, 2015, we entered into anFebruary 16, 2017, under the terms of the Agreement and Plan of Merger, which we refer to in this report as theor Merger Agreement, with Aetna Inc., and certain wholly owned subsidiaries of Aetna Inc., which we collectively refer to collectively as Aetna, which set forth the terms and conditions under which we agreed to merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger.
The Merger was subject to customary closing conditions, including, among other things, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of necessary approvals under state insurance and healthcare laws and regulations and pursuant to certain licenses of certain of Humana’s subsidiaries, and (ii) the absence of legal restraints and prohibitions on the consummation of the Merger.
On July 21, 2016, the U.S. Department of Justice and the attorneys general of certain U.S. jurisdictions filed a civil antitrust complaint in the U.S. District Court for the District of Columbia against us and Aetna, alleging that the Merger would violate Section 7 of the Clayton Antitrust Act and seeking a permanent injunction to prevent the Merger from being completed. On January 23, 2017, the Court ruled in favor of the DOJ and granted a permanent injunction of the proposed transaction. On February 14, 2017, we and Aetna agreed to mutually terminate the Merger Agreement, as our Board determined that an appeal of the Court's ruling would not be in the best interest of our stockholders. On February 16, 2017, under the terms of the Merger Agreement, we received a breakup fee of $1 billion from Aetna, which is included in our condensed consolidated statement of income in the line captioned Merger"Merger termination fee and related costs, net. Prior period Merger related transaction costs, previously"
Revenue Recognition
Our revenues include premium and service revenues. Service revenues include administrative service fees that are recorded based upon established per member per month rates and the number of members for the month and are recognized as services are provided for the month. Additionally, service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For more information about our revenues, refer to Note 2 to the consolidated financial statements included in operating costs, have been reclassified to conform to theour 2017 presentation.
Business Segment Reclassifications
During the three months ended March 31, 2017,Form 10-K for information on accounting policies that we realigned certain ofconsider in preparing our businesses among our reportable segments to correspond with internal management reporting changes and our previously announced planned exit from the Individual Commercial medical business on January 1, 2018. Additionally, we renamed our Group segment to the Group and Specialty segment, and began presenting the Individual Commercial business results as a separate segment rather than as part of the Retail segment. Specialty health insurance benefits, including dental, vision, other supplement health, andconsolidated financial protection products, marketed to individuals are now included in the Group and Specialty segment. Specialty health insurance benefits marketed to employer groups continue to be included in the Group and Specialty segment. As a result of this realignment, our reportable segments now include Retail, Group and Specialty, Healthcare Services, and Individual Commercial. Prior period segment financial information has been recast to conform to the 2017 presentation.statements. See Note 15 for disaggregation of revenue by segment financial information.and type.
At June 30, 2018, accounts receivable related to services were $152 million. For the three and six months ended June 30, 2018, we had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet at June 30, 2018.
For the three and six months ended June 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material. Further revenue expected to be recognized in any future year related to remaining performance obligations was not material.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance that amends the accounting for revenue recognition. The amendments are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. Insurance contracts are not included in the scope of this new guidance. Accordingly, our premiums revenue and investment income, collectively representing approximately 98% of our consolidated external revenues for 2016,the three and six months ended June 30, 2018, are not included in the scope of the new guidance. We will adoptadopted the guidancenew standard effective January 1, 2018, using the modified retrospective approach with a cumulative effect adjustment, if any,approach. As the majority of our revenues are not subject to retained earnings. We are analyzing how we may recognize revenue under the new guidance by reviewing selected sample contracts presently in place. While we expect revenue related to our Pharmacy, Provider Services, ASO and other services businesses to remain primarily unchanged, we are still reviewing the impact ofremaining revenues’ accounting treatment did not materially differ from pre-existing accounting treatment, the new guidance on the customer arrangements for these businesses. Accordingly, we continue to evaluate the impactadoption of the new standard did not have a material impact on our consolidated results of operations, financial condition, cash flows, andor related disclosures. The new guidance is effective for us beginning with annual and interim periods in 2018.
In February 2016, the FASB issued new guidance related to accounting for leases which requires lessees to record
assets and liabilities reflecting the leased assets and lease obligations, respectively, while following the dual model for recognition in statements of income requiring leases to be classified as either operating or finance. Operating leases

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The new guidance is effective for us beginning with annual and interim periods in 2019, with earlier adoption permitted, and requires retrospective application to previously issued annual and interim financial statements.permitted. We have begunare in the process of identifying the population ofimplementing a new lease agreementsaccounting system and other arrangements that may contain embedded leases for purposes of adopting the new standard. While we expect to record significant leased assets and corresponding lease obligations based on our existing population of individual leases, we continue to evaluate theleases. We do not expect a material impact on our results of operations financial position andor cash flows.
In June 2016, the FASB issued guidance introducing a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

1, 2020. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The
new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses
on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions
in the amortized cost of the securities, and provides for additional disclosure requirements. Our investment portfolio consists of available-for-sale debt securities. We are currently evaluating the impact on our results of operations, financial condition, orand cash flows.
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. A goodwill impairment charge would be recognized if the carrying amount of a reporting unit exceeds the estimated fair value of the reporting unit. The new guidance is effective for us beginning with annual and interim periods in 2020, with early adoption permitted, and is to be applied prospectively. The adoption of this new guidance is not expected to have a material impact on our financial position or operating results.

In March 2017, the FASB issued new guidance that amends the accounting for premium amortization on purchased callable debt securities by shortening the amortization period. This amended guidance requires the premium to be amortized to the earliest call date instead of maturity date. The new guidance is effective for us beginning with annual and interim periods in 2019. We do not expect adoption of this guidance will have a material impact on our results of operations, financial condition and cash flows.
In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act.  The new guidance is effective for us beginning January 1, 2019, with early adoption permitted.  We early adopted this guidance in the first quarter of 2018 and it did not have a material impact on our results of operations, financial condition or cash flows.
There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.
3. ACQUISITIONS AND DIVESTITURES
In the third quarter of 2018, we expect to complete the sale of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG's subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care policies. Upon closing, we expect to fund the transaction with approximately $200 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $150 million of statutory capital with the sale.
In connection with the expected sale of KMG, we recognized a pretax loss, including transaction costs, of $790 million which is reported as loss on business held-for-sale in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2018. We recorded a deferred tax benefit of $430 million from the loss which is included in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2018.
During 2017the three months ended June 30, 2018, we entered into reinsurance contracts to transfer the risk associated with certain voluntary benefit and 2016,financial protection products previously issued primarily by KIC to a third party. We transferred approximately $230 million of cash to the third party and recorded a commensurate reinsurance recoverable as a result of these transactions. There was no material impact to operating results from these reinsurance transactions.
As of June 30, 2018, we classified KMG as held-for-sale and aggregated KMG's assets and liabilities separately on the balance sheet. With the carrying value of KMG’s net assets exceeding the fair value less cost to sell, the resulting net loss of $360 million was recognized during the second quarter of 2018, reflecting considerations for costs to sell, changes in the carrying value of net assets and the related tax effect.
KMG revenues for the three and six months ended June 30, 2018 were $93 million and $172 million, respectively. KMG pretax income for the three and six months ended June 30, 2018 were $35 million and $53 million, respectively.


Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The assets and liabilities of KMG that were classified as held-for-sale are as follows:
 June 30, 2018
Assets(in millions)
Cash and cash equivalents$779
Receivables, net2
Investment securities1,574
Other assets1,112
Total assets held-for-sale$3,467
Liabilities 
Benefits payable58
Trade accounts payable and accrued expenses69
Future policy benefits payable2,567
Total liabilities held-for-sale$2,694
On March 1, 2018 we acquired the remaining equity interest in MCCI Holdings, LLC, or MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, as well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million. This resulted in a preliminary purchase price allocation to goodwill of $479 million, other intangible assets of $80 million, and net tangible assets of $27 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 8 years. Goodwill and other intangible assets are amortizable as deductible expenses for tax purposes.
On April 10, 2018, we acquired Family Physicians Group, or FPG, for cash consideration of approximately $185 million, net of cash received. FPG is one of the largest at-risk providers serving Medicare Advantage and Managed Medicaid HMO patients in Greater Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. This resulted in a preliminary purchase price allocation to goodwill of $135 million, other intangible assets of $38 million and net tangible assets of $17 million. The goodwill was assigned to the Retail and Healthcare Services segments. The other intangible assets, which primarily consist of customer contracts, have an estimated weighted average useful life of 4.9 years. The purchase price allocations for MCCI and FPG are preliminary, subject to completion of valuation analysis, including for example, refining assumptions used to calculate the fair value of intangible assets.
During 2018 and 2017, we also acquired other health and wellness related businesses which, individually or in the aggregate, have not had a material impact on our results of operations, financial condition, or cash flows. The results of operations and financial condition of these businesses have been included in our condensed consolidated statements of income and condensed consolidated balance sheets from the respective acquisition dates. Acquisition-related costs recognized in 20172018 and 20162017 were not material to our results of operations. The pro forma financial information assuming the acquisitions had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the year of acquisition, were not material for disclosure purposes.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

4. INVESTMENT SECURITIES
Investment securities classified as current and long-term were as follows at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively:
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(in millions)(in millions)
September 30, 2017       
June 30, 2018       
U.S. Treasury and other U.S. government
corporations and agencies:
              
U.S. Treasury and agency obligations$821
 $1
 $(8) $814
$631
 $
 $(4) $627
Mortgage-backed securities1,423
 5
 (19) 1,409
2,327
 
 (69) 2,258
Tax-exempt municipal securities3,457
 28
 (16) 3,469
3,045
 3
 (49) 2,999
Mortgage-backed securities:              
Residential7
 
 
 7
17
 
 
 17
Commercial399
 3
 (2) 400
533
 
 (16) 517
Asset-backed securities140
 
 
 140
574
 1
 (2) 573
Corporate debt securities4,921
 215
 (37) 5,099
2,946
 2
 (96) 2,852
Total debt securities$11,168
 $252
 $(82) $11,338
$10,073
 $6
 $(236) $9,843
              
December 31, 2016       
December 31, 2017       
U.S. Treasury and other U.S. government
corporations and agencies:
              
U.S. Treasury and agency obligations$800
 $1
 $(15) $786
$532
 $1
 $(2) $531
Mortgage-backed securities1,662
 6
 (31) 1,637
1,625
 4
 (19) 1,610
Tax-exempt municipal securities3,358
 15
 (68) 3,305
3,884
 33
 (28) 3,889
Mortgage-backed securities:              
Residential9
 
 
 9
26
 
 
 26
Commercial307
 1
 (4) 304
455
 3
 (2) 456
Asset-backed securities160
 
 
 160
407
 1
 
 408
Corporate debt securities3,530
 145
 (78) 3,597
5,175
 244
 (37) 5,382
Total debt securities$9,826
 $168
 $(196) $9,798
$12,104
 $286
 $(88) $12,302

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively:
Less than 12 months 12 months or more TotalLess than 12 months 12 months or more Total
Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
 Gross
Unrealized
Losses
(in millions)(in millions)
September 30, 2017           
June 30, 2018           
U.S. Treasury and other U.S.
government corporations
and agencies:
                      
U.S. Treasury and agency
obligations
$522
 $(5) $137
 $(3) $659
 $(8)$437
 $(2) $114
 $(2) $551
 $(4)
Mortgage-backed
securities
986
 (17) 82
 (2) 1,068
 (19)1,596
 (40) 583
 (29) 2,179
 (69)
Tax-exempt municipal
securities
1,320
 (9) 460
 (7) 1,780
 (16)2,245
 (34) 456
 (15) 2,701
 (49)
Mortgage-backed securities:                      
Residential
 
 4
 
 4
 
16
 
 1
 
 17
 
Commercial115
 (2) 
 
 115
 (2)457
 (14) 27
 (2) 484
 (16)
Asset-backed securities64
 
 
 
 64
 
334
 (2) 4
 
 338
 (2)
Corporate debt securities999
 (15) 469
 (22) 1,468
 (37)2,037
 (62) 533
 (34) 2,570
 (96)
Total debt securities$4,006
 $(48) $1,152
 $(34) $5,158
 $(82)$7,122
 $(154) $1,718
 $(82) $8,840
 $(236)
                      
December 31, 2016           
December 31, 2017           
U.S. Treasury and other U.S.
government corporations
and agencies:
                      
U.S. Treasury and agency
obligations
$697
 $(15) $3
 $
 $700
 $(15)$273
 $(1) $130
 $(1) $403
 $(2)
Mortgage-backed
securities
1,528
 (31) 3
 
 1,531
 (31)581
 (2) 672
 (17) 1,253
 (19)
Tax-exempt municipal
securities
2,756
 (67) 43
 (1) 2,799
 (68)1,590
 (16) 661
 (12) 2,251
 (28)
Mortgage-backed securities:                      
Residential
 
 4
 
 4
 
20
 
 3
 
 23
 
Commercial182
 (3) 24
 (1) 206
 (4)131
 (1) 28
 (1) 159
 (2)
Asset-backed securities51
 
 63
 
 114
 
107
 
 10
 
 117
 
Corporate debt securities1,544
 (71) 69
 (7) 1,613
 (78)1,297
 (10) 804
 (27) 2,101
 (37)
Total debt securities$6,758
 $(187) $209
 $(9) $6,967
 $(196)$3,999
 $(30) $2,308
 $(58) $6,307
 $(88)
Approximately 98% of our debt securities were investment-grade quality, with a weighted average credit rating of AAAA+ by Standard & Poor's Rating Service, or S&P, at SeptemberJune 30, 2017.2018. Most of the debt securities that were below investment-grade were rated BB, the higher end of the below investment-grade rating scale. Tax-exempt municipal securities were diversified among general obligation bonds of states and local municipalities in the United States as well as special revenue bonds issued by municipalities to finance specific public works projects such as utilities, water and sewer, transportation, or education. Our general obligation bonds are diversified across the United States with no individual state exceeding 9%. In addition, 2% of our tax-exempt securities were insured by bond insurers and had an

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

equivalent weighted average S&P credit rating of AA exclusive of the bond insurers’ guarantee. Our investment policy limits investments in a single issuer and requires diversification among various asset types.
Our unrealized losses from all securities were generated from approximately 6801,180 positions out of a total of approximately 2,3201,480 positions at SeptemberJune 30, 2017.2018. All issuers of securities we own that were trading at an unrealized loss at SeptemberJune 30, 20172018 remain current on all contractual payments. After taking into account these and other factors previously described, we believe these unrealized losses primarily were caused by an increase in market interest rates in the current markets since the time the securities were purchased. At SeptemberJune 30, 2017,2018, we did not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income, and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss were not other-than-temporarily impaired at SeptemberJune 30, 2017.2018.
The detail of realized gains (losses) related to investment securities and included within investment income was as follows for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
Three months ended
September 30,
 Nine months ended
September 30,
Three months ended
June 30,
 Six months ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
(in millions)(in millions)
Gross realized gains$3
 $37
 $34
 $88
$63
 $4
 $94
 $31
Gross realized losses(3) (11) (6) (23)(10) (2) (12) (3)
Net realized capital gains$
 $26

$28

$65
$53
 $2

$82

$28
There were no material other-than-temporary impairments for the three and ninesix months ended SeptemberJune 30, 20172018 or 2016.2017.
The contractual maturities of debt securities available for sale at SeptemberJune 30, 2017,2018, 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
Amortized
Cost
 Fair
Value
(in millions)(in millions)
Due within one year$501
 $502
$722
 $720
Due after one year through five years2,999
 3,014
3,016
 2,964
Due after five years through ten years2,555
 2,561
2,100
 2,022
Due after ten years3,144
 3,305
784
 772
Mortgage and asset-backed securities1,969
 1,956
3,451
 3,365
Total debt securities$11,168
 $11,338
$10,073
 $9,843

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

5. FAIR VALUE
Financial Assets
The following table summarizes our fair value measurements at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, for financial assets measured at fair value on a recurring basis:
Fair Value Measurements UsingFair Value Measurements Using
Fair
Value
 Quoted Prices
in Active
Markets
(Level 1)
 Other
Observable
Inputs
(Level 2)
 Unobservable
Inputs
(Level 3)
Fair
Value
 Quoted Prices
in Active
Markets
(Level 1)
 Other
Observable
Inputs
(Level 2)
 Unobservable
Inputs
(Level 3)
(in millions)(in millions)
September 30, 2017       
June 30, 2018       
Cash equivalents$9,368
 $9,368
 $
 $
$6,279
 $6,279
 $
 $
Debt securities:              
U.S. Treasury and other U.S. government
corporations and agencies:
              
U.S. Treasury and agency obligations814
 
 814
 
627
 
 627
 
Mortgage-backed securities1,409
 
 1,409
 
2,258
 
 2,258
 
Tax-exempt municipal securities3,469
 
 3,469
 
2,999
 
 2,999
 
Mortgage-backed securities:              
Residential7
 
 7
 
17
 
 17
 
Commercial400
 
 400
 
517
 
 517
 
Asset-backed securities140
 
 140
 
573
 
 573
 
Corporate debt securities5,099
 
 5,098
 1
2,852
 
 2,852
 
Total debt securities11,338
 
 11,337
 1
9,843
 
 9,843
 
Total invested assets$20,706
 $9,368
 $11,337
 $1
$16,122
 $6,279
 $9,843
 $
              
December 31, 2016       
December 31, 2017       
Cash equivalents$3,654
 $3,654
 $
 $
$4,564
 $4,564
 $
 $
Debt securities:              
U.S. Treasury and other U.S. government
corporations and agencies:
              
U.S. Treasury and agency obligations786
 
 786
 
531
 
 531
 
Mortgage-backed securities1,637
 
 1,637
 
1,610
 
 1,610
 
Tax-exempt municipal securities3,305
 
 3,302
 3
3,889
 
 3,889
 
Mortgage-backed securities:              
Residential9
 
 9
 
26
 
 26
 
Commercial304
 
 304
 
456
 
 456
 
Asset-backed securities160
 
 160
 
408
 
 408
 
Corporate debt securities3,597
 
 3,593
 4
5,382
 
 5,381
 1
Total debt securities9,798
 
 9,791
 7
12,302
 
 12,301
 1
Total invested assets$13,452
 $3,654
 $9,791
 $7
$16,866
 $4,564
 $12,301
 $1

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

There were no material transfers between Level 1 and Level 2 during the three and ninesix months ended SeptemberJune 30, 20172018 or 2016.
Our Level 32017. The table above excludes both assets had aheld-for-sale and liabilities held-for-sale, which have been adjusted to fair value, of $1 millionless cost to sell, as a disposal group. See Note 3 for additional disclosures about assets and liabilities held-for-sale at SeptemberJune 30, 2017, less than 0.01% of our total invested assets. During the three and nine months ended September 30, 2017 and 2016, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the following:
 For the three months ended September 30,
 2017 2016
 Private
Placements
 Auction
Rate
Securities
 Total Private
Placements
 Auction
Rate
Securities
 Total
 (in millions)
Beginning balance at July 1$4
 $
 $4
 $6
 $3
 $9
Sales(3) 
 (3) 
 
 
Balance at September 30$1
 $
 $1
 $6
 $3
 $9
            
            
            
 For the nine months ended September 30,
 2017 2016
 Private
Placements
 Auction
Rate
Securities
 Total Private
Placements
 Auction
Rate
Securities
 Total
 (in millions)
Beginning balance at January 1$4
 $3
 $7
 $6
 $5
 $11
Sales(3) 
 (3) 
 
 
Settlements
 (3) (3) 
 (2) (2)
Balance at September 30$1
 $
 $1
 $6
 $3
 $9
2018.
Financial Liabilities
Our debt is recorded at carrying value in our consolidated balance sheets. The carrying value of our senior notes debt outstanding, including the current portion, net of unamortized debt issuance costs, was $4,780$4,773 million at SeptemberJune 30, 20172018 and $3,792$4,770 million at December 31, 2016.2017. The fair value of our senior notes debt including the current portion, was $5,185$4,909 million at SeptemberJune 30, 20172018 and $4,004$5,191 million at December 31, 2016.2017. The fair value of our long-term debt is determined based on Level 2 inputs, including quoted market prices for the same or similar debt, or if no quoted market prices are available, on the current prices estimated to be available to us for debt with similar terms and remaining maturities.
Due to the short-term nature, carrying value approximates fair value for our commercial paper borrowings. There were outstanding commercial paper borrowings of $150$398 million as of SeptemberJune 30, 20172018 and $300$150 million as of December 31, 2016.


Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As disclosed in Note 3, we completed the acquisition of certainacquired MCCI, FPG, and other health and wellness related businesses during 20172018 and 2016.2017. The values of net tangible assets acquired and the resulting goodwill and other intangible assets were recorded at fair value using Level 3 inputs. The majority of the tangible assets acquired and liabilities assumed were recorded at their carrying values as of the respective dates of acquisition, as their carrying values approximated their fair values due to their short-term nature. The fair values of goodwill and other intangible assets acquired in these acquisitions were internally estimated primarily based on the income approach. The income approach estimates fair value based on the present value of the cash flows that the assets are expected to generate in the future. We developed internal estimates for the expected future cash flows and discount rates used in the present value calculations. Other than assets acquired and liabilities assumed in these acquisitions, there were no material assets or liabilities measured at fair value on a nonrecurring basis during 20172018 or 2016.2017.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

6. MEDICARE PART D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with the Centers for Medicare and Medicaid Services, or CMS, as described further in Note 2 to the consolidated financial statements included in our 20162017 Form 10-K. The accompanying condensed consolidated balance sheets include the following amounts associated with Medicare Part D at SeptemberJune 30, 20172018 and December 31, 2016.2017. CMS subsidies/discounts in the table below include the reinsurance and low-income cost subsidies funded by CMS for which we assume no risk as well as brand name prescription drug discounts for Part D plan participants in the coverage gap funded by CMS and pharmaceutical manufacturers.
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Risk
Corridor
Settlement
 CMS
Subsidies/
Discounts
 Risk
Corridor
Settlement
 CMS
Subsidies/
Discounts
Risk
Corridor
Settlement
 CMS
Subsidies/
Discounts
 Risk
Corridor
Settlement
 CMS
Subsidies/
Discounts
(in millions)(in millions)
Other current assets$9
 $1,058
 $8
 $1,001
$6
 $42
 $4
 $101
Trade accounts payable and accrued expenses(118) (2,134) (158) (128)(232) (2,588) (255) (1,085)
Net current (liability) asset(109) (1,076) (150) 873
Net current liability(226) (2,546) (251) (984)
Other long-term assets3
 
 
 
64
 
 
 
Other long-term liabilities(180) 
 
 
(87) 
 (28) 
Net long-term liability(177) 
 
 
(23) 
 (28) 
Total net (liability) asset$(286) $(1,076) $(150) $873
Total net liability$(249) $(2,546) $(279) $(984)
7. HEALTH CARE REFORM
The Patient Protection and Affordable Care Act and theThe Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization programs effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs, are applicable to certain of our commercial medical insurance products, asare further discussed in Note 2 to our 20162017 Form 10-K. Operating resultsThe temporary programs were only applicable for our Individual Commercial medical business compliant with the Health Care Reform Law have been challenged primarily due to unanticipated modifications in the program subsequent to the passing of the Health Care Reform Law, resulting in higher covered population morbidity and the ensuing enrollment and claims issues causing volatility in claims experience. We took a number of actions in 2015 to improve the profitability of our Individual Commercial medical business inyears 2014 through 2016. These actions were subject to regulatory restrictions in certain geographies and included premium increases for the 2016 coverage year related generally to the first half of 2015 claims experience, the discontinuation of certain products as well as exit of certain markets for 2016, network improvements, enhancements to claims and clinical processes and administrative cost control. Despite these actions, the deterioration in the second half of 2015 claims experience together with 2016 open enrollment results indicating the retention of many high-utilizing members

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

for 2016 resulted in a probable future loss. As a result of our then assessment of the profitability ofexit from our individual commercial medical policies compliant withbusiness effective January 1, 2018, the Health Care Reform Law, in the fourth quarter of 2015, we recorded a provision for probable future losses (premium deficiency reserve, or PDR) for the 2016 coverage year of $176 million in benefits payable inpermanent risk adjustment program is currently only applicable to our consolidated balance sheet with a corresponding increase in benefits expense in our consolidated statement of income. During the second quarter of 2016 we increased the premium deficiency reserve for the 2016 coverage year and recorded a change in estimate of $208 million with a corresponding increase in benefits expense in our condensed consolidated statement of income for the three months ended June 30, 2016.commercial small group health insurance business.
On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers, unrelated to us, against the U.S. Department of Health and Human Services, or HHS, to collect risk corridor payments, rejecting all of the insurer’s statutory, contract and Constitutional claims for payment. On November 18, 2016, HHS issued a memorandum indicating a significant funding shortfall for the 2015 coverage year, the second consecutive year of significant shortfalls. Given the successful challenge of the risk corridor provisions in court, Congressional inquiries into the funding of the risk corridor program, and significant funding shortfalls under the first two years of the program, during the fourth quarter of 2016 we wrote-off $583 million in risk corridor receivables outstanding as of September 30, 2016, including $415 million associated with the 2014 and 2015 coverage years. From inception of the risk corridor program through September 30, 2017, we collected approximately $39 million from CMS for risk corridor receivables associated with the 2014 coverage year funded by HHS in accordance with previous guidance, utilizing funds HHS collected from us and other carriers under the risk corridor program. On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under the Health Care Reform Law, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.

On February 14, 2017, we announced we are exiting our Individual Commercial medical business commencing January 1, 2018. As discussed previously, we have worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever we could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums. All of these actions were taken with the expectation that our Individual Commercial medical business would stabilize to the point where we could continue to participate in the program. However, based on our analysis of data associated with our healthcare exchange membership following the 2017 open enrollment period, we saw further signs of an unbalanced risk pool. Therefore, we decided that we cannot continue to offer this coverage and will exit this business commencing January 1, 2018.


Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at SeptemberJune 30, 20172018 and December 31, 2016.2017.
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Risk Adjustment
Settlement
 Reinsurance
Recoverables
 Risk Adjustment
Settlement
 Reinsurance
Recoverables
Risk Adjustment
Settlement
 Reinsurance
Recoverables
 Risk Adjustment
Settlement
 Reinsurance
Recoverables
(in millions)(in millions)
Prior Coverage Years       
Premiums receivable$127  $
 $307  $
$65  $
 $62  $
Other current assets  44
   260
  
   44
Trade accounts payable and
accrued expenses
  
 (117) 
(103) 
 (80) 
Net current asset127  44
 190  260
Other long-term assets  
 6  
Total prior coverage years' net
asset
127  44
 196  260
Current Coverage Year       
Premiums receivable30  
   
Trade accounts payable and
accrued expenses
(57) 
   
Net current liability(27) 
   
Other long-term assets29  
   
1  
 5  
Other long-term liabilities  
   
(27) 
   
Net long-term asset29  
   
Total 2017 coverage year net
asset
2  
   
Total net asset$129  $44
 $196  $260
Total net (liability) asset$(64) $
 $(13) $44
DuringNet collections under the nine3Rs were $46 million during the six months ended SeptemberJune 30, 2017, we received $2832018 and were $64 million for reinsurance recoverables and $176 million for risk adjustment and risk corridor settlements, and paid $152 million in risk adjustment charges, in each case associated with prior coverage years. Duringduring the ninesix months ended SeptemberJune 30, 2016, we received $471 million for reinsurance recoverables as well as $88 million for risk adjustment and risk corridor settlements, and paid $240 million in risk adjustment charges, in each case associated with prior coverage years.2017.
To the extent certain provisions of the Health Care Reform Law are successfully challenged in court or there are changes in legislation or the application of legislation, there can be no guarantee that receivables established under the reinsurance or risk adjustment provisions of the Health Care Reform Law will ultimately be collected. Potential legislative changes, including activities to repeal or replace the Health Care Reform Law, creates uncertainty for our business, and we cannot predict when, or in what form, such legislative changes may occur.
The annual health insurance industry fee has been suspended for calendar year 2017, but is scheduled to resume in calendar year 2018. In September 2016,2018, we paidexpect to pay the federal government $916 millionapproximately $1.04 billion for our portion of the annual health insurance industry fee attributed to calendar year 20162018 in accordance with the Health Care Reform Law. This fee, fixed in amount by law and apportioned to insurance carriers based on market share, is not deductible for tax purposes. Each year on January 1, except for 2017 when the fee was suspended, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost was recorded in operating cost expense of approximately $231$257 million and $687$520 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively,2018, resulting from the amortization of the 20162018 annual health insurance industry fee. The annual health insurance industry fee was suspended for calendar year 2017, and is also, under current law, suspended for calendar year 2019.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for our reportable segments for the six months ended June 30, 2018 were as follows:
 Retail Group and Specialty Healthcare
Services
 Total
 (in millions)
Balance at January 1, 2018$1,059
 $261
 $1,961
 $3,281
Acquisitions476
 
 138
 614
Balance at June 30, 2018$1,535
 $261
 $2,099
 $3,895

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

8. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill for our reportable segments has been retrospectively adjusted to conform to the 2017 business segment reclassifications as discussed in Note 1. There was no impairment. Changes in the carrying amount of goodwill for our reportable segments for the nine months ended September 30, 2017 were as follows:
 Retail Group and Specialty Healthcare
Services
 Total
 (in millions)
Balance at January 1, 2017$1,059
 $261
 $1,952
 $3,272
Acquisitions
 
 9
 9
Balance at September 30, 2017$1,059
 $261
 $1,961
 $3,281
The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at SeptemberJune 30, 20172018 and December 31, 2016.2017.
 September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Weighted
Average
Life
 Cost Accumulated
Amortization
 Net Cost Accumulated
Amortization
 NetWeighted
Average
Life
 Cost Accumulated
Amortization
 Net Cost Accumulated
Amortization
 Net
 ($ in millions) ($ in millions)
Other intangible assets:                        
Customer contracts/
relationships
9.8 years $566
 $388
 $178
 $566
 $347
 $219
8.7 years $646
 $404
 $242
 $566
 $401
 $165
Trade names and
technology
8.2 years 104
 77
 27
 104
 69
 35
6.4 years 84
 80
 4
 104
 84
 20
Provider contracts14.1 years 51
 33
 18
 51
 29
 22
11.9 years 68
 34
 34
 68
 30
 38
Noncompetes and
other
8.1 years 33
 29
 4
 32
 28
 4
8.1 years 34
 30
 4
 32
 29
 3
Total other intangible
assets
9.8 years $754
 $527
 $227
 $753
 $473
 $280
8.7 years $832
 $548
 $284
 $770
 $544
 $226
Amortization expense for other intangible assets was approximately $21 million for the three months ended June 30, 2018 and $18 million for the three months ended SeptemberJune 30, 2017 and 2016.2017. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, amortization expense for other intangible assets was approximately $54$51 million and $59$36 million, respectively. Amortization expense for the six months ended June 30, 2018 included $12 million associated with the write-off of a trade name value reflecting the re-branding of certain provider assets. The following table presents our estimate of amortization expense for 20172018 and each of the five next succeeding years:
 (in millions)
For the years ending December 31, 
2017$71
201863
201952
202048
202114
202211

 (in millions)
For the years ending December 31, 
2018$91
201972
202069
202136
202226
202316

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

9. BENEFITS PAYABLE
On a consolidated basis, activity in benefits payable, excluding military services, was as follows for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
 For the nine months ended September 30, For the six months ended June 30,
 2017 2016 2018 2017
 (in millions) (in millions)
Balances, beginning of period $4,563
 $4,976
 $4,668
 $4,563
Less: Premium deficiency reserve 
 (176)
Less: Reinsurance recoverables (76) (85) (70) (76)
Balances, beginning of period, net 4,487
 4,715
 4,598
 4,487
Incurred related to:        
Current year 33,318
 34,340
 23,543
 22,576
Prior years (430) (525) (338) (345)
Total incurred 32,888
 33,815
 23,205
 22,231
Paid related to:        
Current year (28,741) (29,768) (18,914) (18,332)
Prior years (3,745) (3,996) (3,897) (3,626)
Total paid (32,486) (33,764) (22,811) (21,958)
Premium deficiency reserve 
 206
Reinsurance recoverable 70
 77
 86
 78
Less: Held-for-sale (58) 
Balances, end of period $4,959
 $5,049
 $5,020
 $4,838
Amounts incurred related to prior periods 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).
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.
Benefits expense excluded from the previous table was as follows for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
 For the nine months ended September 30, For the six months ended June 30,
 2017 2016 2018 2017
 (in millions) (in millions)
Premium deficiency reserve - Individual Commercial $
 $30
Military services 
 7
Future policy benefits:        
Individual Commercial (67) (82) $(14) $(36)
Other Businesses 36
 36
 15
 20
Total future policy benefits (31) (46) $1
 $(16)
Total $(31) $(9)




Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Military services benefits expense in the tables above reflect expenses associated with our contracts with the Veterans Administration.
Incurred and Paid Claims Development
The following discussion provides information about incurred and paid claims development for our Retail, Group and Specialty, and Individual Commercial segments as of SeptemberJune 30, 20172018 and 2016,2017, net of reinsurance, and the total of IBNR included within the net incurred claims amounts.
Retail Segment
Activity in benefits payable for our Retail segment was as follows for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
 For the nine months ended September 30, For the six months ended June 30,
 2017 2016 2018 2017
 (in millions) (in millions)
Balances, beginning of period $3,507
 $3,600
 $3,963
 $3,507
Less: Reinsurance recoverables (76) (85) (70) (76)
Balances, beginning of period, net 3,431
 3,515
 3,893
 3,431
Incurred related to:        
Current year 29,356
 28,369
 21,069
 20,010
Prior years (339) (378) (247) (287)
Total incurred 29,017
 27,991
 20,822
 19,723
Paid related to:        
Current year (25,460) (24,822) (17,061) (16,385)
Prior years (2,822) (2,990) (3,327) (2,707)
Total paid (28,282) (27,812) (20,388) (19,092)
Reinsurance recoverable 70
 77
 86
 78
Balances, end of period $4,236
 $3,771
 $4,413
 $4,140
At SeptemberJune 30, 2017,2018, benefits payable for our Retail segment included IBNR of approximately $2.7$2.9 billion, primarily associated with claims incurred in 2017.2018.











Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Group and Specialty Segment
Activity in benefits payable for our Group and Specialty segment, excluding military services, was as follows for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
 For the nine months ended September 30, For the six months ended June 30,
 2017 2016 2018 2017
 (in millions) (in millions)
Balances, beginning of period $578
 $616
 $568
 $578
Incurred related to:        
Current year 3,996
 3,918
 2,665
 2,629
Prior years (44) (42) (34) (31)
Total incurred 3,952
 3,876
 2,631
 2,598
Paid related to:        
Current year (3,452) (3,337) (2,094) (2,117)
Prior years (517) (557) (496) (518)
Total paid (3,969) (3,894) (2,590) (2,635)
Balances, end of period $561
 $598
 $609
 $541
At SeptemberJune 30, 2017,2018, benefits payable for our Group and Specialty segment included IBNR of approximately $490$530 million, primarily associated with claims incurred in 2017.2018.

Individual Commercial Segment
Activity in benefits payable for our Individual Commercial segment was as follows for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
 For the nine months ended September 30, For the six months ended June 30,
 2017 2016 2018 2017
 (in millions) (in millions)
Balances, beginning of period $454
 $740
 $101
 $454
Less: Premium deficiency reserve 
 (176)
Balances, beginning of period, net 454
 564
Incurred related to:        
Current year 502
 2,694
 
 304
Prior years (46) (104) (55) (26)
Total incurred 456
 2,590
 (55) 278
Paid related to:        
Current year (393) (2,273) 
 (223)
Prior years (383) (430) (31) (378)
Total paid (776) (2,703) (31) (601)
Premium deficiency reserve 
 206
Balance, end of period $134
 $657
 $15
 $131

At SeptemberJune 30, 2017,2018, benefits payable for our Individual Commercial segment included IBNR of approximately $120$6 million, primarily associated with claims incurred in 2017.2017 and prior.


Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Reconciliation to Consolidated

The reconciliation of the net incurred and paid claims development tables to benefits payable in the consolidated
statement of financial position is as follows:
 Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance
 
  September 30,
  2017
 Net outstanding liabilities 
 Retail$4,166
 Group and Specialty561
 Individual Commercial134
 Other Businesses28
     Benefits payable, net of reinsurance4,889
   
 Reinsurance recoverable on unpaid claims 
 Retail70
      Total reinsurance recoverable on unpaid claims70
   
      Total benefits payable, gross$4,959
 Reconciliation of the Disclosure of Incurred and Paid Claims Development to Benefits Payable, net of reinsurance
 
  June 30,
  2018
 Net outstanding liabilities 
 Retail$4,327
 Group and Specialty609
 Individual Commercial15
 Other Businesses41
     Benefits payable, net of reinsurance4,992
   
 Reinsurance recoverable on unpaid claims 
 Retail86
      Total reinsurance recoverable on unpaid claims86
 Held-for-sale(58)
      Total benefits payable, gross$5,020
10. EARNINGS PER COMMON SHARE COMPUTATION
Detail supporting the computation of basic and diluted earnings per common share was as follows for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
Three months ended September 30, Nine months ended September 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
(dollars in millions, except per common share results; number of shares in thousands)(dollars in millions, except per common share results; number of shares in thousands)
Net income available for common stockholders$499
 $450
 $2,264
 $1,015
$193
 $650
 $684
 $1,765
Weighted average outstanding shares of common stock
used to compute basic earnings per common share
144,215
 149,417
 145,546
 149,321
137,763
 144,600
 137,833
 146,212
Dilutive effect of:              
Employee stock options165
 210
 174
 216
197
 158
 205
 179
Restricted stock980
 1,277
 902
 1,332
616
 876
 665
 862
Shares used to compute diluted earnings per common share145,360
 150,904
 146,622
 150,869
138,576
 145,634
 138,703
 147,253
Basic earnings per common share$3.46
 $3.01
 $15.56
 $6.80
$1.40
 $4.49
 $4.96
 $12.07
Diluted earnings per common share$3.44
 $2.98
 $15.44
 $6.73
$1.39
 $4.46
 $4.93
 $11.98
Number of antidilutive stock options and restricted stock
excluded from computation
399
 658
 595
 873
171
 449
 408
 693

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

11. STOCKHOLDERS’ EQUITY
Dividends
The following table provides details of dividend payments, excluding dividend equivalent rights for unvested stock awards, in 20162017 and 20172018 under our Board approved quarterly cash dividend policy:
Record
Date
 Payment
Date
 Amount
per Share
 Total
Amount
      (in millions)
2016 payments      
12/30/2015 1/29/2016 $0.29
 $43
3/31/2016 4/29/2016 $0.29
 $43
6/30/2016 7/29/2016 $0.29
 $43
10/13/2016 10/28/2016 $0.29
 $43
2017 payments      
1/12/2017 1/27/2017 $0.29
 $43
3/31/2017 4/28/2017 $0.40
 $58
6/30/2017 7/31/2017 $0.40
 $58
9/29/2017 10/27/2017 $0.40
 $57
On November 2, 2017, the Board declared a cash dividend of $0.40 per share payable on January 26, 2018, to stockholders of record on December 29, 2017.
Record
Date
 Payment
Date
 Amount
per Share
 Total
Amount
      (in millions)
2017 payments      
1/12/2017 1/27/2017 $0.29
 $43
3/31/2017 4/28/2017 $0.40
 $58
6/30/2017 7/31/2017 $0.40
 $58
9/29/2017 10/27/2017 $0.40
 $57
2018 payments      
12/29/2017 1/26/2018 $0.40
 $55
3/30/2018 4/27/2018 $0.50
 $69
6/29/2018 7/27/2018 $0.50
 $69
Stock Repurchases
On FebruaryDecember 14, 2017, our Board of Directors replaced a previous shareauthorized the repurchase authorization of up to $2 billion, of which $1.04 billion remained unused, with a new authorization for repurchases of up to $2.25$3.0 billion of our common shares expiring on December 31, 2017,2020, exclusive of shares repurchased in connection with employee stock plans. Under the share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions, including pursuant to accelerated share repurchase agreements with investment banks, subject to certain regulatory restrictions on volume, pricing, and timing.
On February 16,December 21, 2017, we entered into an accelerated sharestock repurchase agreement, or ASR, Agreement,the December 2017 ASR, with Goldman, Sachs & Co. LLC,Bank of America, N.A., or Goldman Sachs,BofA, to repurchase $1.5$1.0 billion of our common stock as part of the $2.25$3.0 billion share repurchase program referred to above. Under the ASR Agreement, on Februaryauthorization from our Board of Directors. On December 22, 2017, we made a payment of $1.5$1.0 billion to Goldman SachsBofA from available cash on hand and received an initial delivery of 5.833.28 million shares of our common stock from Goldman SachsBofA based on the then current market price of Humana common stock. The payment to Goldman SachsBofA was recorded as a reduction to stockholders’ equity, consisting of a $1.2 billionan $800 million increase in treasury stock, which reflectedreflects the value of the initial 5.833.28 million shares received upon initial settlement, and a $300$200 million decrease in capital in excess of par value, which reflected the value of stock held back by Goldman SachsBofA pending final settlement of the ASR Agreement.December 2017 ASR. Upon settlement of the ASR on August 28, 2017,March 26, 2018, we received an additional 0.840.46 million shares as determined by the average daily volume weighted-average share price of our common stock during the term of the ASR Agreement of $224.81,$267.55, bringing the total shares received under this program to 6.673.74 million. In addition, upon settlement we reclassified the $300$200 million value of stock initially held back by Goldman SachsBofA from capital in excess of par value to treasury stock.
Our remaining repurchase authorization was approximately $239 million as of November 3, 2017.
In connection with employee stock plans, we acquired 0.37 million common shares for $79 million and 0.45 million common shares for $75 million during the nine months ended September 30, 2017 and 2016, respectively.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Excluding the 0.46 million shares received in March 2018 upon final settlement of our ASR Agreement for which no cash was paid during the period, as well as any prior year ASR activity, share repurchases were as follows during the six months ended June 30, 2018 and 2017:
    Six months ended June 30,
    2018 2017
Authorization Date Purchase Not to Exceed Shares Cost Shares Cost
  (in millions)
February 2017 $2,250
 
 $
 
 $
December 2017 $3,000
 0.08
 24
 
 
Total repurchases   0.08
 $24
 
 $
Our remaining repurchase authorization was approximately $2 billion as of August 1, 2018.
In connection with employee stock plans, we acquired 0.25 million common shares for $69 million and 0.37 million common shares for $78 million during the six months ended June 30, 2018 and 2017, respectively.
Treasury Stock Reissuance
We reissued 1.400.85 million shares of treasury stock during the ninesix months ended SeptemberJune 30, 20172018 at a cost of $99$89 million associated with restricted stock unit vestings and option exercises.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included net unrealized losses, net of tax, on our investment securities of $176 million at June 30, 2018 and net unrealized gains, net of tax, on our investment securities of $107 million at September 30, 2017 and net unrealized losses, net of tax, of $17$125 million at December 31, 2016.2017. In addition, accumulated other comprehensive income included $95 million, net of tax, at September 30, 2017 and $49$106 million, net of tax, at December 31, 20162017 for an additional liability that would exist on our closed block of long-term care insurance policies if unrealized gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current yields. Refer to Note 18 to the consolidated financial statements in our 20162017 Form 10-K for further discussion of our long-term care insurance policies.
12. INCOME TAXES
The income tax benefit for the three months ended June 30, 2018 reflects a $430 million deferred tax benefit resulting from the loss on the expected sale of KMG attributable to its original tax basis and subsequent capital contributions to fund accumulated losses. See Note 3 for information on the expected sale of KMG. The effective income tax rate was 37.5%5.8% for the threesix months ended SeptemberJune 30, 2017,2018, compared to 50.1%35.4% for the threesix months ended SeptemberJune 30, 2016 and was 35.9% for the nine months ended September 30, 2017, compared to 50.2% for the nine months ended September 30, 2016, primarily due to the deferred tax benefit recognized from the loss on the expected sale of KMG and tax reform law enacted on December 22, 2017 temporary suspension(the "Tax Reform Law"), which was partially offset by the impact of the reinstatement of the non-deductible health insurance industry fee as well asin 2018. The income tax rate for the six months ended June 30, 2017 included previously non-deductible transaction costs that, as a result of the termination of the Merger Agreement, became deductible for tax purposes and werepurposes. The Tax Reform Law reduced the statutory federal corporate income tax rate to 21 percent from 35 percent, beginning in 2018. The accounting for certain income tax effects of the Tax Reform Law is provisional. Revisions to prior estimates are recorded as such inadditional analysis is completed using information available at each measurement date during 2018, with adjustments to the threeincome tax provision recorded as new information becomes known. Revisions to our prior estimates for the income tax effects of the Tax Reform Law decreased our tax expense for the six months ended March 31, 2017. June 30, 2018 by $12.7 million.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

13.  DEBT
The carrying value of long-term debt outstanding, net of unamortized debt issuance costs, was as follows at SeptemberJune 30, 20172018 and December 31, 20162017:
September 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
(in millions)(in millions)
Short-term:   
Commercial paper$150
 $300
$500 million, 7.20% Senior notes due June 15, 2018501
 
$300 million, 6.30% Senior notes due August 1, 2018302
 
Total short-term debt953
 300
   
Long-term:   
Senior notes:      
$500 million, 7.20% due June 15, 2018
 501
$300 million, 6.30% due August 1, 2018
 304
$400 million, 2.625% due October 1, 2019399
 398
$399
 $399
$400 million, 2.50% due December 15, 2020398
 397
$400 million, 2.90% due December 15, 2022396
 396
$600 million, 3.15% due December 1, 2022596
 595
596
 595
$600 million, 3.85% due October 1, 2024595
 595
596
 595
$600 million, 3.95% due March 15, 2027594
 
595
 594
$250 million, 8.15% due June 15, 2038263
 264
263
 263
$400 million, 4.625% due December 1, 2042396
 396
396
 396
$750 million, 4.95% due October 1, 2044739
 739
739
 739
$400 million, 4.80% due March 15, 2047395
 
395
 396
Total long-term debt3,977
 3,792
$4,773
 $4,770
   
Total debt$4,930
 $4,092
Senior Notes    

In March 2017, we issued $600 million of 3.95% senior notes due March 15, 2027 and $400 million of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million. We intend to use the net proceeds from these issuances for general corporate purposes.
Our senior notes, which are unsecured, may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. The 7.20% and 8.15% senior notes are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded (or subsequently upgraded). In addition, each series of our senior notes (other than the 6.30% senior notes) contain a change of control provision that may require us to purchase the notes under certain circumstances.
Prior to 2009, we were parties to interest-rate swap agreements that exchanged the fixed interest rate under our senior notes for a variable interest rate based on LIBOR. As a result, the carrying value of the senior notes was adjusted to reflect changes in value caused by an increase or decrease in interest rates. During 2008, we terminated all of our swap agreements. The cumulative adjustment to the carrying value of our senior notes was $103 million as of the termination date which is being amortized as a reduction to interest expense over the remaining term of the senior notes. The unamortized carrying value adjustment was $19 million as of September 30, 2017 and $23 million as of December 31, 2016.

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Credit Agreement
In May 2017 we amended and restated our previous 5-year $1.0 billion unsecured revolving credit agreement expiring July 2018 with aOur 5-year, $2.0 billion unsecured revolving credit agreement which expires May 2022. Under the credit agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion bears interest at either LIBOR plus a spread or the base rate plus a spread. The LIBOR spread, currently 110.0 basis points, varies depending on our credit ratings ranging from 91.0 to 150.0 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15.0 basis points, may fluctuate between 9.0 and 25.0 basis points, depending upon our credit ratings. 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 based on LIBOR, at our option.
The terms of the credit agreement include standard provisions related to conditions of borrowing including a customary material adverse effect clause which could limit our ability to borrow additional funds. In addition, the credit agreement contains customary restrictive covenants and a financial covenantscovenant regarding maximum debt to capitalization of 50%, as well as customary events of default, including financial covenants regarding the maintenance of a minimum level of net worth of $9.1 billion at September 30, 2017 and a maximum leverage ratio of 3.0:1.default. We are in compliance with thethis financial covenants,covenant, with actual net worthdebt to capitalization of $11.2 billion and an actual leverage ratio of 1.1:133.6% as measured in accordance with the credit agreement as of SeptemberJune 30, 2017.2018. Upon our agreement with one or more financial institutions, we may expand the aggregate commitments under the credit agreement to a maximum of $2.5 billion, through a $500.0 million incremental loan facility.

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At SeptemberJune 30, 20172018, we had no borrowings and no letters of credit outstanding under the credit agreement. Accordingly, as of SeptemberJune 30, 20172018, we had $2.0 billion of remaining borrowing capacity (which excludes the uncommitted $500 million incremental loan facility under the credit agreement), none of which would be restricted by our financial covenant compliance requirement. We have other customary, arms-length relationships, including financial advisory and banking, with some parties to the credit agreement.
Commercial Paper
We previously entered into aUnder our commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes privately placed on a discount basis through certain broker dealers. On June 15, 2017, we increased the size of the commercial paper program to permit the issuance of the commercial notes with the aggregate face or principal amount outstanding under the programdealers at any time not to exceed $2 billion. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The net proceeds of issuances have been and are expected to be used for general corporate purposes. The maximum principal amount outstanding at any one time during the ninesix months ended SeptemberJune 30, 20172018 was $500$442 million. There were outstanding borrowings of $150$398 million at SeptemberJune 30, 20172018 and $300$150 million at December 31, 2016.2017.
14. GUARANTEES AND CONTINGENCIES
Government Contracts
Our Medicare products, which accounted for approximately 78%80% of our total premiums and services revenue for the ninesix months ended SeptemberJune 30, 2017,2018, 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 calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products have been renewed for 2018, and all2019. However, our offerings of our product offerings filed withproducts under those contracts are subject to approval by CMS, for 2018 have been approved.which we expect to receive in the fall of 2018.
CMS uses a risk-adjustment model which adjusts premiums paid to Medicare Advantage, or MA, plans according to health status of covered members. The risk-adjustment model, which CMS implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits Improvement and Protection Act of 2000 (BIPA), generally pays more

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where a plan's membership has higher expected costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on our estimated cost of providing standard Medicare-covered benefits to an enrollee with a "national average risk profile." That baseline payment amount is adjusted to reflect the health status of our enrolled membership. Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines. The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans, which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program. We generally rely on providers, including certain providers in our network who are our employees, to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data, including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustmentrisk-adjustment model. These compliance efforts include the internal contract level audits described in more detail below.below, as well as ordinary course reviews of our internal business processes.
CMS is phasing-in the process of calculating risk scores using diagnoses data from the Risk Adjustment Processing System, or RAPS, to diagnoses data from the Encounter Data System, or EDS. The RAPS process requires MA plans to apply a filter logic based on CMS guidelines and only submit claimsdiagnoses that satisfy those guidelines. For submissions through EDS, CMS requires MA plans to submit all the encounter data and CMS will apply the risk adjustment filtering logic to determine the risk scores. For 2016, 10%2017, 25% of the risk score was calculated from claims data submitted through EDS, increasing to 25% of the risk score calculated from claims data through EDS for 2017. In April 2017,EDS. CMS has revised the pace of the phase-in. Forphase-in and, for 2018 and 2019, 15% and 25%, respectively, of the risk score will be calculated from claims data submitted through EDS. The phase-in from RAPS to EDS could result in different risk scores from each dataset as a result of plan processing issues, CMS processing issues, or filtering logic differences

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between RAPS and EDS, and could have a material adverse effect on our results of operations, financial position, or cash flows.

CMS is continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits review medical records in an attempt to validate provider medical record documentation and coding practices which influence the calculation of premium payments to MA plans.
In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology provides that, in calculating the economic impact of audit results for an MA contract, if any, the results of the RADV audit sample will be extrapolated to the entire MA contract after a comparison of the audit results to a similar audit of Medicare FFS (we refer to the process of accounting for errors in FFS claims as the "FFS Adjuster"). This comparison of RADV audit results to the FFS error rate is necessary to determine the economic impact, if any, of RADV audit results because the government used the Medicare FFS program data set, including any attendant errors that are present in that data set, to estimate the costs of various health status conditions and to set the resulting adjustments to MA plans’ payment rates. CMS already makes other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the Medicare FFS program dataset).
The final RADV extrapolation methodology, including the first application of extrapolated audit results to determine audit settlements, is expected to be applied to RADV contract level audits conducted for contract year 2011 and subsequent years. CMS is currently conducting RADV contract level audits for contract years 2011, 2012, and 2013 in which two, five and five of our Medicare Advantage plans are being audited, respectively. Per CMS guidance, selected MA contracts will be notified of an audit at some point after the close of the final reconciliation for the payment year being audited.
Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of income, based upon available information. We perform internal contract level audits based on the RADV audit methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For-

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Fee-For Service business which we used to represent a proxy of the FFS Adjuster which has not yet been released. We based our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits and update our estimates as each audit is completed. Estimates derived from these results were not material to our results of operations, financial position, or cash flows. We report the results of these internal contract level audits to CMS, including identified overpayments, if any. However, as indicated, we are awaiting additional guidance from CMS regarding the FFS Adjuster. Accordingly, we cannot determine whether such RADV audits will have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, as part of our internal compliance efforts, we routinely perform ordinary course reviews of our internal business processes related to, among other things, our risk coding and data submissions in connection with the risk- adjustment model. These reviews may also result in the identification of errors and the submission of corrections to CMS, that may, either individually or in the aggregate, be material. As such, the result of these reviews may have a material adverse effect on our results of operations, financial position, or cash flows.
In addition, CMS' comments in formalized guidance regarding “overpayments” to MA plans appear to be inconsistent with CMS' prior RADV audit guidance. These statements, contained in the preamble to CMS’ final rule release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015, appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without reconciliation to the principles underlying the FFS Adjuster referenced above. We will continue to work with CMS to ensure that MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations, financial position, or cash flows.

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At SeptemberJune 30, 2017,2018, our military services business, which accounted for approximately 0.7%1% of our total premiums and services revenue for the ninesix months ended SeptemberJune 30, 2017,2018, primarily consisted of the TRICARE SouthT2017 East Region contract. The current 5-year SouthT2017 East Region contract is a consolidation of the former T3 North and South Regions, comprising thirty-two states and approximately 5.9 million TRICARE beneficiaries, under which wasdelivery of health care services commenced on January 1, 2018. The T2017 East Region contract is a 5-year contract set to expire on MarchDecember 31, 2017,2022 and is subject to annual renewals on AprilJanuary 1 of each year during its term at the government’s option, including an option to extend for a sixth year through March 31, 2018. On March 2, 2017, we received notice that the Defense Health Agency, or DHA, had exercised its option to extend the TRICARE South Region contract for that sixth year. On July 21, 2016, we were notified by the DHA that we were awarded the contract for the new TRICARE East Region, which is a consolidation of the former North and South Regions, with delivery of health care services expected to commence on October 1, 2017. On March 30, 2017, we received notice that the DHA is moving the date upon which delivery of health care services is expected to commence under the new TRICARE East Region contract from October 1, 2017 to January 1, 2018. We expect the sixth option period under the current TRICARE South Region contract would be terminated in the event that delivery of health care services under the new TRICARE East Region contract commences prior to March 31, 2018.government's option.
Our state-based Medicaid business accounted for approximately 5%4% of our total premiums and services revenue for the ninesix months ended SeptemberJune 30, 2017.2018. In addition to our state-based Temporary Assistance for Needy Families, or TANF, Medicaid contracts in Florida and Kentucky, we have contracts in Florida for Long Term Support Services (LTSS), and in Illinois and Virginia for stand-alone dual eligible demonstration programs serving individuals dually eligible for both the federal Medicare program and the applicable state-based Medicaid program, as well as an Integrated Care Program, or ICP, Medicaid contract in Illinois. Our Integrated Care Program Medicaid contract in Illinois, and the Virginia stand-alone dual eligible demonstration program both will terminate at December 31, 2017.program.
The loss of any of the contracts above or significant changes in these programs as a result of legislative or regulatory action, including reductions in premium payments to us, regulatory restrictions on profitability, including reviews by comparison ofregulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and a requirementrequire that they remain within certain ranges of each other, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our results of operations, financial position, and cash flows.

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Legal Proceedings and Certain Regulatory Matters
On January 6, 2012, the Civil Division of the United States Attorney’s Office for the Southern District of Florida advised us that it is seeking documents and information from us and several of our affiliates relating to several matters including the coding of medical claims by one or more South Florida medical providers, and loans to physician practices. On May 1, 2014, the U.S. Attorney's Office filed a Notice of Non-Intervention in connection with a civil qui tam suit related to one of these matters captioned United States of America ex rel. Olivia Graves v. Plaza Medical Centers, et al., and the Court ordered the complaint unsealed. Subsequently, the individual plaintiff amended the complaint and served the Company, opting to continue to pursue the action. As of November 7, 2017, all parties to the lawsuit and the United States have executed a settlement agreement to settle the plaintiff’s claims for damages and penalties, with Humana paying an amount that is not material to our results of operations.  The parties are awaiting the court’s dismissal of the case. 

As previously disclosed, the Civil Division of the United States Department of Justice had provided us with an information request separate from but related to the Plaza Medical matter,in December 2014, concerning our Medicare Part C risk adjustment practices. The request relates to our oversight and submission of risk adjustment data generated by providers in our Medicare Advantage network, including the providers identified in the Plaza Medical matter, as well as to our business and compliance practices related to risk adjustment data generated by our providers and by us, including medical record reviews conducted as part of our data and payment accuracy compliance efforts, the use of health and well-being assessments, and our fraud detection efforts. We believe that this request for information is in connection with a wider review of Medicare Risk Adjustment generally that includes a number of Medicare Advantage plans, providers and vendors. We continue to cooperate with and voluntarily respond to the information requests from the Department of Justice and the U.S. Attorney’s Office.Justice. These matters are expected to result in additional qui tam litigation.
OnAs previously disclosed, on January 19, 2016, an individual filed a qui tam suit captioned United States of America ex rel. Steven Scott v. Humana, Inc., in United States District Court, Central District of California, Western Division. The complaint alleges certain civil violations by us in connection with the actuarial equivalence of the plan benefits under Humana’s Basic PDP plan, a prescription drug plan offered by us under Medicare Part D, as compared to required benefit levels under applicable bid rules.D. The action seeks damages and penalties on behalf of the United States under the False Claims Act. The court ordered the qui tam action unsealed on September 13, 2017, so that the relator cancould proceed, following notice from the U.S. Government that it iswas not intervening at thisthat time. On January 29, 2018, the suit was transferred to the United States District Court, Western District of Kentucky, Louisville Division. We take seriously our obligations to comply with applicable CMS requirements and actuarial best principles,standards of practice, and we intend toare vigorously defenddefending against these allegations.
On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under Health Care Reform, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.   We have not recognized revenue, nor have we recorded a receivable, for any amount due from the federal government for unpaid risk corridor payments as of SeptemberJune 30, 2017.2018.  We have fully recognized all liabilities due to the federal government that we have incurred under the risk corridor program, and have paid all amounts due to the federal government as required. There is no assurance that we will prevail in the lawsuit.
Other Lawsuits and Regulatory Matters
Our current and past business practices are subject to review or other investigations 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, health care delivery and benefits companies. These reviews focus on numerous facets of our business, including claims payment practices, statutory capital requirements, provider contracting, risk adjustment, competitive practices, commission payments, privacy issues, utilization management practices, pharmacy benefits, access to care, and sales practices, among others. 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.
We also are involved in various other lawsuits that arise, for the most part, in the ordinary course of our business operations, certain of which may be styled as class-action lawsuits. Among other matters, this litigation may include

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employment matters, claims of medical malpractice, bad faith, nonacceptance or termination of providers, anticompetitive practices, improper rate setting, provider contract rate and payment disputes, including disputes over reimbursement rates required by statute, general contractual matters, intellectual property matters, and challenges to subrogation practices. For example, a number of hospitals and other providers have asserted that, under their network provider contracts, we are not entitled to reduce Medicare Advantage payments to these providers in connection with changes in Medicare payment systems and in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985, as amended (commonly referred to as “sequestration”). Those challenges have led and could lead to arbitration demands or other litigation. Also, under state guaranty assessment laws, including those related to state cooperative failures in the industry, we may be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of insolvent insurance companies that write the same line or lines of business as we do. Penn Treaty is a financially distressed unaffiliated long-term care insurance company. On March 1, 2017, a court ordered the liquidation of Penn Treaty which triggered assessments from state guaranty associations that resulted in our recording a $54 million estimate in operating costs in the three months ended March 31, 2017.

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As a government contractor, we may also be subject to qui tam litigation brought by individuals who seek to sue
on behalf of the government, alleging that the government contractor submitted false claims to the government including, among other allegations, those resulting from coding and review practices under the Medicare risk adjustment model. Qui tam litigation is filed under seal to allow the government an opportunity to investigate and to decide if it wishes to intervene and assume control of the litigation. If the government does not intervene, the lawsuit is unsealed, and the individual may continue to prosecute the action on his or her own, on behalf of the government. We also are subject to other allegations of non-performance of contractual obligations to providers, members, and others, including failure to properly pay claims, improper policy terminations, challenges to our implementation of the Medicare Part D prescription drug program and other litigation.
A limited number of the claims asserted against us are subject to insurance coverage. Personal injury claims, claims for extra contractual damages, care delivery malpractice, and claims 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.
We record accruals for the contingencies discussed in the sections above to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because of the inherently unpredictable nature of legal proceedings, which also may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.
The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting judgments, penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities or as a result of actions by third parties. Nevertheless, it is reasonably possible that any such outcome of litigation, judgments, penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position, and cash flows, and may also affect our reputation.
15. SEGMENT INFORMATION
During the three months ended March 31, 2017, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and our previously announced planned exit from the Individual Commercial medical business on January 1, 2018. Additionally, we renamed our Group segment to the Group and Specialty segment, and began presenting the Individual Commercial business results as a separate segment rather than as part of the Retail segment. Specialty health insurance benefits, including dental, vision, other supplement health, and financial protection products, marketed to individuals are now included in the Group and Specialty segment. Specialty health insurance benefits marketed to employer groups continue to be included in the Group and Specialty

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segment. As a result of this realignment, our reportable segments now include Retail, Group and Specialty, Healthcare Services, and Individual Commercial. Prior period segment financial information has been recast to conform to the 2017 presentation.
We manage our business with four reportable segments: Retail, Group and Specialty, Healthcare Services and Individual Commercial. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles. These segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health and voluntary insurance benefits and financial protection products, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes military services business, primarily our TRICARE SouthT2017 East Region contract. The Healthcare Services segment includes services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as well ashome health and other services and capabilities to promote wellness and advance population health. The Individual Commercial segment consistsconsisted of our individual commercial fully-insured medical health insurance benefits. We report

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under the category of Other Businesses those businesses that do not align with the reportable segments described above, primarily our closed-block long-term care insurance policies.
Our Healthcare Services intersegment revenues primarily relate to managing prescription drug coverage for members of our other segments through Humana Pharmacy Solutions®, or HPS, and includes the operations of Humana Pharmacy, Inc., our mail order pharmacy business. These revenues consist of the prescription price (ingredient cost plus dispensing fee), including the portion to be settled with the member (co-share) or with the government (subsidies), plus any associated administrative fees. Services revenues related to the distribution of prescriptions by third party retail pharmacies in our networks are recognized when the claim is processed and product revenues from dispensing prescriptions from our mail order pharmacies are recorded when the prescription or product is shipped. Our pharmacy operations, which are responsible for designing pharmacy benefits, including defining member co-share responsibilities, determining formulary listings, contracting with retail pharmacies, confirming member eligibility, reviewing drug utilization, and processing claims, act as a principal in the arrangement on behalf of members in our other segments. As principal, our Healthcare Services segment reports revenues on a gross basis, including co-share amounts from members collected by third party retail pharmacies at the point of service.
In addition, our Healthcare Services intersegment revenues include revenues earned by certain owned providers derived from risk-based and non-risk-based managed care agreements with our health plans. Under risk based agreements, the provider receives a monthly capitated fee that varies depending on the demographics and health status of the member, for each member assigned to these owned providers by our health plans. The owned provider assumes the economic risk of funding the assigned members’ healthcare services. Under non risk-based agreements, our health plans retain the economic risk of funding the assigned members' healthcare services. Our Healthcare Services segment reports provider services revenues associated with risk-based agreements on a gross basis, whereby capitation fee revenue is recognized in the period in which the assigned members are entitled to receive healthcare services. Provider services revenues associated with non-risk-based agreements are presented net of associated healthcare costs.
We present our consolidated results of operations from the perspective of the health plans. As a result, the cost of providing benefits to our members, whether provided via a third party provider or internally through a stand-alone subsidiary, is classified as benefits expense and excludes the portion of the cost for which the health plans do not bear responsibility, including member co-share amounts and government subsidies of $3.6$3.3 billion and $3.2 billion for the three months ended SeptemberJune 30, 2018 and 2017, and 2016.respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 these amounts were $9.8 billion and $9.7 billion, respectively.both $6.2 billion. In addition, depreciation and amortization expense associated with certain businesses in our Healthcare Services segment delivering benefits to our members, primarily associated with our

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provider services and pharmacy operations, are included with benefits expense. The amount of this expense was $26$30 million and $31$27 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the amount of this expense was $79$69 million and $85$53 million, respectively.
Other than those described previously, the accounting policies of each segment are the same and are described in Note 2 to the consolidated financial statements included in our 20162017 Form 10-K. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail, Group and Specialty, and Individual Commercial segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations in the tables presenting segment results below.

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Our segment results were as follows for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
                          
                          
Retail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 ConsolidatedRetail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 Consolidated
(in millions)(in millions)
Three months ended September 30, 2017          
Three months ended June 30, 2018Three months ended June 30, 2018          
Revenues - external customers                          
Premiums:                          
Individual Medicare Advantage$8,077
 $
 $
 $
 $
 $
 $8,077
$8,908
 $
 $
 $
 $
 $
 $8,908
Group Medicare Advantage1,272
 
 
 
 
 
 1,272
1,509
 
 
 
 
 
 1,509
Medicare stand-alone PDP921
 
 
 
 
 
 921
914
 
 
 
 
 
 914
Total Medicare10,270
 
 
 
 
 
 10,270
11,331
 
 
 
 
 
 11,331
Fully-insured121
 1,370
 
 224
 
 
 1,715
125
 1,346
 
 10
 
 
 1,481
Specialty
 331
 
 
 
 
 331

 342
 
 
 
 
 342
Medicaid and other630
 
 
 
 9
 
 639
550
 
 
 
 9
 
 559
Total premiums11,021
 1,701
 
 224
 9
 
 12,955
12,006
 1,688
 
 10
 9
 
 13,713
Services revenue:                          
Provider
 
 60
 
 
 
 60

 
 112
 
 
 
 112
ASO and other2
 140
 
 
 1
 
 143
3
 208
 
 
 2
 
 213
Pharmacy
 
 20
 
 
 
 20

 
 57
 
 
 
 57
Total services revenue2
 140
 80
 
 1
 
 223
3
 208
 169
 
 2
 
 382
Total revenues - external customers11,023
 1,841
 80
 224
 10
 
 13,178
12,009
 1,896
 169
 10
 11
 
 14,095
Intersegment revenues                          
Services
 5
 4,339
 
 
 (4,344) 

 4
 4,194
 
 
 (4,198) 
Products
 
 1,572
 
 
 (1,572) 

 
 1,611
 
 
 (1,611) 
Total intersegment revenues
 5
 5,911
 
 
 (5,916) 

 4
 5,805
 
 
 (5,809) 
Investment income23
 7
 9
 1
 22
 42
 104
30
 6
 17
 
 65
 46
 164
Total revenues11,046
 1,853
 6,000
 225
 32
 (5,874) 13,282
12,039
 1,906
 5,991
 10
 76
 (5,763) 14,259
Operating expenses:                          
Benefits9,294
 1,354
 
 147
 34
 (187) 10,642
10,270
 1,357
 
 (9) 39
 (121) 11,536
Operating costs1,081
 385
 5,726
 49
 3
 (5,556) 1,688
1,210
 447
 5,749
 1
 2
 (5,648) 1,761
Depreciation and amortization61
 21
 34
 3
 
 (25) 94
66
 22
 36
 
 
 (24) 100
Total operating expenses10,436
 1,760
 5,760
 199
 37
 (5,768) 12,424
11,546
 1,826
 5,785
 (8) 41
 (5,793) 13,397
Income (loss) from operations610
 93
 240
 26
 (5) (106) 858
Income from operations493
 80
 206
 18
 35
 30
 862
Loss on business held-for-sale
 
 
 
 
 (790) (790)
Interest expense
 
 
 
 
 59
 59

 
 
 
 
 53
 53
Income (loss) before income taxes$610
 $93
 $240
 $26
 $(5) $(165) $799
$493
 $80
 $206
 $18
 $35
 $(813) $19

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

                          
                          
Retail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 ConsolidatedRetail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 Consolidated
(in millions)(in millions)
Three months ended September 30, 2016          
Three months ended June 30, 2017Three months ended June 30, 2017          
Revenues - external customers                          
Premiums:                          
Individual Medicare Advantage$7,977
 $
 $
 $
 $
 $
 $7,977
$8,282
 $
 $
 $
 $
 $
 $8,282
Group Medicare Advantage1,067
 
 
 
 
 
 1,067
1,277
 
 
 
 
 
 1,277
Medicare stand-alone PDP1,004
 
 
 
 
 
 1,004
925
 
 
 
 
 
 925
Total Medicare10,048
 
 
 
 
 
 10,048
10,484
 
 
 
 
 
 10,484
Fully-insured109
 1,350
 
 882
 
 
 2,341
118
 1,350
 
 247
 
 
 1,715
Specialty
 318
 
 
 
 
 318

 323
 
 
 
 
 323
Medicaid and other652
 2
 
 
 10
 
 664
671
 
 
 
 10
 
 681
Total premiums10,809
 1,670
 
 882
 10
 
 13,371
11,273
 1,673
 
 247
 10
 
 13,203
Services revenue:                          
Provider
 
 69
 
 
 
 69

 
 63
 
 
 
 63
ASO and other2
 147
 
 
 1
 
 150
2
 143
 
 
 2
 
 147
Pharmacy
 
 8
 
 
 
 8

 
 20
 
 
 
 20
Total services revenue2
 147
 77
 
 1
 
 227
2
 143
 83
 
 2
 
 230
Total revenues - external customers10,811
 1,817
 77
 882
 11
 
 13,598
11,275
 1,816
 83
 247
 12
 
 13,433
Intersegment revenues                          
Services
 5
 4,741
 
 
 (4,746) 

 5
 4,309
 
 
 (4,314) 
Products
 
 1,580
 
 
 (1,580) 

 
 1,582
 
 
 (1,582) 
Total intersegment revenues
 5
 6,321
 
 
 (6,326) 

 5
 5,891
 
 
 (5,896) 
Investment income22
 7
 8
 
 17
 42
 96
24
 7
 8
 1
 21
 40
 101
Total revenues10,833
 1,829
 6,406
 882
 28
 (6,284) 13,694
11,299
 1,828
 5,982
 248
 33
 (5,856) 13,534
Operating expenses:                          
Benefits9,031
 1,352
 
 727
 26
 (236) 10,900
9,672
 1,312
 
 86
 32
 (213) 10,889
Operating costs1,143
 421
 6,073
 144
 4
 (6,046) 1,739
963
 394
 5,677
 40
 2
 (5,623) 1,453
Merger termination fee and related costs, net
 
 
 
 
 20
 20
Depreciation and amortization51
 19
 36
 9
 
 (29) 86
57
 21
 35
 4
 
 (25) 92
Total operating expenses10,225
 1,792
 6,109
 880
 30
 (6,291) 12,745
10,692
 1,727
 5,712
 130
 34
 (5,861) 12,434
Income (loss) from operations608
 37
 297
 2
 (2) 7
 949
607
 101
 270
 118
 (1) 5
 1,100
Interest expense
 
 
 
 
 47
 47

 
 
 
 
 58
 58
Income (loss) before income taxes$608
 $37
 $297
 $2
 $(2) $(40) $902
$607
 $101
 $270
 $118
 $(1) $(53) $1,042

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

                          
Retail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 ConsolidatedRetail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 Consolidated
(in millions)(in millions)
Nine months ended September 30, 2017            
Six months ended June 30, 2018Six months ended June 30, 2018            
Revenues - external customersRevenues - external customers            Revenues - external customers            
Premiums:                          
Individual Medicare Advantage$24,735
 $
 $
 $
 $
 $
 $24,735
$17,878
 $
 $
 $
 $
 $
 $17,878
Group Medicare Advantage3,867
 
 
 
 
 
 3,867
3,033
 
 
 
 
 
 3,033
Medicare stand-alone PDP2,787
 
 
 
 
 
 2,787
1,810
 
 
 
 
 
 1,810
Total Medicare31,389
 
 
 
 
 
 31,389
22,721
 
 
 
 
 
 22,721
Fully-insured357
 4,098
 
 754
 
 
 5,209
250
 2,738
 
 5
 
 
 2,993
Specialty
 976
 
 
 
 
 976

 689
 
 
 
 
 689
Medicaid and other1,954
 
 
 
 28
 
 1,982
1,103
 
 
 
 18
 
 1,121
Total premiums33,700
 5,074
 
 754
 28
 
 39,556
24,074
 3,427
 
 5
 18
 
 27,524
Services revenue:                          
Provider
 
 193
 
 
 
 193

 
 177
 
 
 
 177
ASO and other6
 444
 
 
 5
 
 455
5
 427
 
 
 4
 
 436
Pharmacy
 
 58
 
 
 
 58

 
 96
 
 
 
 96
Total services revenue6
 444
 251
 
 5
 
 706
5
 427
 273
 
 4
 
 709
Total revenues - external customers33,706
 5,518
 251
 754
 33
 
 40,262
24,079
 3,854
 273
 5
 22
 
 28,233
Intersegment revenues                          
Services
 15
 12,958
 
 
 (12,973) 

 9
 8,212
 
 
 (8,221) 
Products
 
 4,706
 
 
 (4,706) 

 
 3,146
 
 
 (3,146) 
Total intersegment revenues
 15
 17,664
 
 
 (17,679) 

 9
 11,358
 
 
 (11,367) 
Investment income72
 25
 25
 3
 64
 127
 316
67
 13
 23
 
 100
 102
 305
Total revenues33,778
 5,558
 17,940
 757
 97
 (17,552) 40,578
24,146
 3,876
 11,654
 5
 122
 (11,265) 28,538
Operating expenses:                          
Benefits29,017
 3,952
 
 389
 95
 (596) 32,857
20,822
 2,630
 
 (69) 65
 (242) 23,206
Operating costs2,998
 1,178
 17,083
 151
 9
 (16,725) 4,694
2,432
 910
 11,190
 3
 4
 (11,029) 3,510
Merger termination fee and related costs, net
 
 
 
 
 (947) (947)
Depreciation and amortization176
 63
 103
 10
 
 (74) 278
132
 45
 85
 
 
 (62) 200
Total operating expenses32,191
 5,193
 17,186
 550
 104
 (18,342) 36,882
23,386
 3,585
 11,275
 (66) 69
 (11,333) 26,916
Income (loss) from operations1,587
 365
 754
 207
 (7) 790
 3,696
Income from operations760
 291
 379
 71
 53
 68
 1,622
Loss on business held-for-sale
 
 
 
 
 (790) (790)
Interest expense
 
 
 
 
 166
 166

 
 
 
 
 106
 106
Income (loss) before income taxes$1,587
 $365
 $754
 $207
 $(7) $624
 $3,530
$760
 $291
 $379
 $71
 $53
 $(828) $726

Humana Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Retail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 ConsolidatedRetail Group and Specialty Healthcare
Services
 Individual Commercial Other
Businesses
 Eliminations/
Corporate
 Consolidated
(in millions)(in millions)
Nine months ended September 30, 2016          
Six months ended June 30, 2017Six months ended June 30, 2017          
Revenues - external customersRevenues - external customers            Revenues - external customers            
Premiums:                          
Individual Medicare Advantage$24,054
 $
 $
 $
 $
 $
 $24,054
$16,658
 $
 $
 $
 $
 $
 $16,658
Group Medicare Advantage3,229
 
 
 
 
 
 3,229
2,595
 
 
 
 
 
 2,595
Medicare stand-alone PDP3,058
 
 
 
 
 
 3,058
1,866
 
 
 
 
 
 1,866
Total Medicare30,341
 
 
 
 
 
 30,341
21,119
 
 
 
 
 
 21,119
Fully-insured319
 4,044
 
 2,799
 
 
 7,162
236
 2,728
 
 530
 
 
 3,494
Specialty
 957
 
 
 
 
 957

 645
 
 
 
 
 645
Medicaid and other1,960
 12
 
 
 29
 
 2,001
1,324
 
 
 
 19
 
 1,343
Total premiums32,620
 5,013
 
 2,799
 29
 
 40,461
22,679
 3,373
 
 530
 19
 
 26,601
Services revenue:                          
Provider
 
 214
 
 
 
 214

 
 133
 
 
 
 133
ASO and other5
 500
 1
 
 7
 
 513
4
 304
 
 
 4
 
 312
Pharmacy
 
 22
 
 
 
 22

 
 38
 
 
 
 38
Total services revenue5
 500
 237
 
 7
 
 749
4
 304
 171
 
 4
 
 483
Total revenues - external customers32,625
 5,513
 237
 2,799
 36
 
 41,210
22,683
 3,677
 171
 530
 23
 
 27,084
Intersegment revenues                          
Services
 17
 14,292
 
 
 (14,309) 

 10
 8,619
 
 
 (8,629) 
Products
 
 4,373
 
 
 (4,373) 

 
 3,134
 
 
 (3,134) 
Total intersegment revenues
 17
 18,665
 
 
 (18,682) 

 10
 11,753
 
 
 (11,763) 
Investment income68
 19
 22
 3
 48
 131
 291
49
 18
 16
 2
 42
 85
 212
Total revenues32,693
 5,549
 18,924
 2,802
 84
 (18,551) 41,501
22,732
 3,705
 11,940
 532
 65
 (11,678) 27,296
Operating expenses:                          
Benefits27,991
 3,876
 
 2,545
 82
 (688) 33,806
19,723
 2,598
 
 242
 61
 (409) 22,215
Operating costs3,294
 1,278
 17,989
 465
 12
 (17,866) 5,172
1,917
 793
 11,357
 102
 6
 (11,169) 3,006
Merger termination fee and related costs, net
 
 
 
 
 81
 81

 
 
 
 
 (947) (947)
Depreciation and amortization145
 62
 107
 27
 
 (78) 263
115
 42
 69
 7
 
 (49) 184
Total operating expenses31,430
 5,216
 18,096
 3,037
 94
 (18,551) 39,322
21,755
 3,433
 11,426
 351
 67
 (12,574) 24,458
Income (loss) from operations1,263
 333
 828
 (235) (10) 
 2,179
977
 272
 514
 181
 (2) 896
 2,838
Interest expense
 
 
 
 
 141
 141

 
 
 
 
 107
 107
Income (loss) before income taxes$1,263
 $333
 $828
 $(235) $(10) $(141) $2,038
$977
 $272
 $514
 $181
 $(2) $789
 $2,731

Humana Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condensed 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, or SEC, 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 “believes,” “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 our 20162017 Form 10-K, as modified by any changes to those risk factors included in this document and in other reports we filed subsequent to February 17, 2017,16, 2018, in each case incorporated by reference herein. In making these statements, we are not undertaking to address or update such forward-looking statements in future filings or communications regarding our business or results. 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.
Executive Overview
General
Humana Inc., headquartered in Louisville, Kentucky, is a leading health and well-being company committed to
helping our millions of medical and specialty members achieve their best health. Our successful history in care delivery and health plan administration is helping us create a new kind of integrated care with the power to improve health and well-beingwell being and lower costs. Our efforts are leading to a better quality of life for people with Medicare, families, individuals, military service personnel, and communities at large.
To accomplish that, we support physicians and other health care professionals as they work to deliver the right care in the right place for their patients, our members. Our range of clinical capabilities, resources and tools, - such as in-homein home care, behavioral health, pharmacy services, data analytics and wellness solutions, - combine to produce a simplified experience that makes health care easier to navigate and more effective.
Our industry relies on two key statistics to measure performance. The benefit ratio, which is computed by taking
total benefits expense as a percentage of premiums revenue, represents a statistic used to measure underwriting profitability. The operating cost ratio, which is computed by taking total operating costs, excluding Merger termination fee and related costs, net, and depreciation and amortization, as a percentage of total revenue less investment income, represents a statistic used to measure administrative spending efficiency.
Sale of Closed Block of Commercial Long-Term Care Insurance BusinessAetna Merger
On November 6,February 16, 2017, under the terms of the Merger Agreement with Aetna, we entered intoreceived a definitive agreementbreakup fee of $1 billion from Aetna, which is included in our consolidated statement of income in the line captioned "Merger termination fee and related costs, net."
Acquisitions and Divestitures
In the third quarter of 2018, we expect to sellcomplete the stocksale of our wholly-owned subsidiary KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care insurance policies that serves approximately 30,100 policyholders. Based on the terms of the definitive agreementCGIC. Upon closing, we expect to record a net loss associated with the sale of KMG of approximately $400 million, or $2.75 per diluted common share. The estimated loss includes a pretax loss of approximately $900 million, offset by the expected tax benefit of approximately $500 million. We will fund the transaction with approximately $203$200 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $150 million of statutory capital with the sale, which together should be more than offset bysale.
On July 2, 2018 and July 11, 2018, the estimated $500Consortium completed the acquisitions of Kindred and Curo, respectively, merging Curo with the hospice business of Kindred at Home. As part of these transactions, we acquired a 40% minority interest in Kindred at Home and Curo for total cash consideration of approximately $1.1 billion.
On April 10, 2018, we acquired FPG for cash consideration of approximately $185 million, net of cash received. FPG is one of the largest at-risk providers serving Medicare Advantage and Managed Medicaid HMO patients in Greater

Orlando, Florida with a footprint that includes clinics located in Lake, Orange, Osceola and Seminole counties. The acquisition of FPG advances our strategy of helping physicians and clinicians evolve from treating health episodically to managing health holistically.
On March 1, 2018, we acquired the remaining equity interest in MCCI, a privately held management service organization headquartered in Miami, Florida, that primarily coordinates medical care for Medicare Advantage beneficiaries in Florida and Texas. The purchase price consisted primarily of $169 million cash, savings associatedas well as our existing investment in MCCI and a note receivable and a revolving note with an aggregate balance of $383 million.
These transactions are more fully discussed in Note 1 and Note 3 to the expected tax treatment of the sale. The KMG transaction is anticipated to close by the third quarter of 2018 subject to customary closing conditions, including South Carolina Department of Insurance approval. There can be no assurance we will obtain regulatory approvals needed to sell the business or do so under terms acceptable to us.


condensed consolidated financial statements.

Workforce Optimization
We have been committed to productivity initiatives designed to promote operational excellence, accelerate our strategy, fund critical initiatives and advance our growth objectives. During the third quarter of 2017, we initiated a voluntary early retirement program and an involuntary workforce reduction program that will allow us to achieve these objectives and position us for the future. These programs are expected to impactimpacted approximately 2,7003,600 associates, or 5.7%7.8%, of our workforce.workforce in 2017. As a result, we recorded estimated charges of $124$148 million, or $0.54$0.64 per diluted common share. At OctoberDecember 31, 2017, we had approximately 47,200 employees. The estimated charges were recorded at the corporate level and not allocated to the segments. This charge is$140 million was classified as a current liability, included with operating costsin our condensed consolidated balance sheet in the condensed consolidated statements of income for the threetrade accounts payable and nine month periods ended September 30, 2017.accrued expenses line. Payments under these programs are being made upon termination during the early retirement or severance pay period, primarily starting as of the beginning of the first quarter of 2018. We expect thisperiod. The remaining workforce optimization liability at June 30, 2018 was $52 million and is expected to be primarily paid within the next 12 months and classified it as a current liability, included in trade accounts payable and accrued expenses.
Aetna Merger
On July 2, 2015, we entered into an Agreement and Plan of Merger, which we refer to in this report as the Merger Agreement, with Aetna Inc. and certain wholly owned subsidiaries of Aetna Inc., which we refer to collectively as Aetna, which set forth the terms and conditions under which we agreed to merge with, and become a wholly owned subsidiary of Aetna, a transaction we refer to in this report as the Merger.
The Merger was subject to customary closing conditions, including, among other things, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of necessary approvals under state insurance and healthcare laws and regulations and pursuant to certain licenses of certain of Humana’s subsidiaries, and (ii) the absence of legal restraints and prohibitions on the consummation of the Merger.
On July 21, 2016, the U.S. Department of Justice and the attorneys general of certain U.S. jurisdictions filed a civil antitrust complaint in the U.S. District Court for the District of Columbia against us and Aetna, alleging that the Merger would violate Section 7 of the Clayton Antitrust Act and seeking a permanent injunction to prevent the Merger from being completed. On January 23, 2017, the Court ruled in favor of the DOJ and granted a permanent injunction of the proposed transaction. On February 14, 2017, we and Aetna agreed to mutually terminate the Merger Agreement, as our Board determined that an appeal of the Court's ruling would not be in the best interest of our stockholders. On February 16, 2017, under the terms of the Merger Agreement, we received a breakup fee of $1 billion from Aetna, which is included in our condensed consolidated statement of income in the line captioned Merger termination fee and related costs, net.2018.
Business Segments
During the three months ended March 31, 2017, we realigned certain of our businesses among our reportable segments to correspond with internal management reporting changes and our previously announced planned exit from the Individual Commercial medical business on January 1, 2018. Additionally, we renamed our Group segment to the Group and Specialty segment, and began presenting the Individual Commercial business results as a separate segment rather than as part of the Retail segment. Specialty health insurance benefits, including dental, vision, other supplement health, and financial protection products, marketed to individuals are now included in the Group and Specialty segment. Specialty health insurance benefits marketed to employer groups continue to be included in the Group and Specialty segment. As a result of this realignment, our reportable segments now include Retail, Group and Specialty, Healthcare Services, and Individual Commercial. Prior period segment financial information has been recast to conform to the 2017 presentation. See Note 15 to the condensed consolidated financial statements included in this report for segment financial information.
We manage our business with four reportable segments: Retail, Group and Specialty, Healthcare Services and Individual Commercial. In addition, the Other Businesses category includes businesses that are not individually reportable because they do not meet the quantitative thresholds required by generally accepted accounting principles.

These segments are based on a combination of the type of health plan customer and adjacent businesses centered on well-being solutions for our health plans and other customers, as described below. These segment groupings are consistent with information used by our Chief Executive Officer to assess performance and allocate resources.
The Retail segment consists of Medicare benefits, marketed to individuals or directly via group accounts. In addition, the Retail segment also includes our contract with CMS to administer the Limited Income Newly Eligible Transition, or LI-NET, prescription drug plan program and contracts with various states to provide Medicaid, dual eligible, and Long-Term Support Services benefits, which we refer to collectively as our state-based contracts. The Group and Specialty segment consists of employer group commercial fully-insured medical and specialty health insurance benefits marketed to individuals and employer groups, including dental, vision, and other supplemental health and voluntary insurance benefits and financial protection products, as well as administrative services only, or ASO products. In addition, our Group and Specialty segment includes military services business, primarily our TRICARE SouthT2017 East Region contract. The Healthcare Services segment includes services offered to our health plan members as well as to third parties, including pharmacy solutions, provider services, and clinical care service, such as well ashome health and other services and capabilities to promote wellness and advance population health. The Individual Commercial segment consistsconsisted of our individual commercial fully-insured medical health insurance benefits. We report under the category of Other Businesses those businesses that do not align with the reportable segments described above, primarily our closed-block long-term care insurance policies.
The results of each segment are measured by income before income taxes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail, Group and Specialty, and Individual Commercial segment customers. Intersegment sales and expenses are recorded at fair value and eliminated in consolidation. Members served by our segments often use the same provider networks, enabling us in some instances to obtain more favorable contract terms with providers. Our segments also share indirect costs and assets. As a result, the profitability of each segment is interdependent. We allocate most operating expenses to our segments. Assets and certain corporate income and expenses are not allocated to the segments, including the portion of investment income not supporting segment operations, interest

expense on corporate debt, and certain other corporate expenses. These items are managed at a corporate level. These corporate amounts are reported separately from our reportable segments and are included with intersegment eliminations.
Seasonality
One of the product offerings of our Retail segment is Medicare stand-alone prescription drug plans, or PDPs, under the Medicare Part D program. Our quarterly Retail segment earnings and operating cash flows are 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 annually on January 1 for renewals. These plan designs generally result in us sharing a greater portion of the responsibility for total prescription drug costs in the early stages and less in the latter stages. As a result, the PDP benefit ratio generally decreases 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 affects the quarterly benefit ratio pattern.
In addition, the Retail segment also experiences seasonality in the operating cost ratio as a result of costs incurred in the second half of the year associated with the Medicare marketing season.
Our Group and Specialty segment also experiences seasonality in the benefit ratio pattern. However, the effect is opposite of Medicare stand-alone PDP in the Retail segment, with the Group and Specialty segment’s benefit ratio increasing as fully-insured members progress through their annual deductible and maximum out-of-pocket expenses.
Certain of our fully-insured individual commercial medical products in our Individual Commercial segment experience seasonality in the benefit ratio akin to the Group and Specialty segment, including the effect of existing previously underwritten members transitioning to policies compliant with the Health Care Reform Law with us and other carriers. As previously underwritten members transition, it results in policy lapses and the release of reserves for future policy benefits partially offset by the recognition of previously deferred acquisition costs. The recognition of a

premium deficiency reserve for our Individual Commercial medical business compliant with the Health Care Reform Law in the fourth quarter of 2015, and subsequent changes in estimate, also impacted the quarterly benefit ratio pattern for this business in 2016.
20172018 Highlights
Consolidated
Our consolidated pretax results of $726 million for the threesix months ended SeptemberJune 30, 20172018 as compared to $2.7 billion for the threesix months ended SeptemberJune 30, 2016,2017 were primarily impacted by the estimated charges associated with voluntary and involuntary workforce reduction programs andloss on the expected sale of KMG recognized during the six months ended June 30, 2018, lower year-over-year pretax earnings in the Retail, Healthcare Services segment, partially offset by year-over-year improvement in earnings for our Group and Specialty segment as well as Medicare Advantage and Individual Commercial businesses. Our consolidated pretax results for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily reflectssegments, and the net gain associated with the terminated Merger Agreement, mainly the break-up fee, along withthat was recorded in the year-over year improvementsix months ended June 30, 2018. These items were partially offset by higher year-over-year pretax earnings in earnings for ourthe Group and Specialty segment as well as Medicare Advantage and Individual Commercial businesses. These were partially offset by lower pretax earnings in the Healthcare Services segment andsix months ended June 30, 2017. The year-over-year comparison was further impacted by the recordingguaranty fund assessment expense to support policyholder obligations of estimated charges associatedPenn Treaty, an unaffiliated long-term care insurance company, recorded in the six months ended June 30, 2017.
In connection with voluntary and involuntary workforce reduction programs duringthe expected sale of KMG, we recognized a pretax loss, including transaction costs, of $790 million which is reported as loss on business held-for-sale in the accompanying condensed consolidated statements of income for the three and six months ended SeptemberJune 30, 2017.2018. We recorded a deferred tax benefit of $430 million from the loss which is included in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2018.
Year-over-year comparisons of diluted earnings per common share reflect the same factors impacting our consolidated pretax income comparisons year-over-year as well as the beneficial effect of the lower effective tax rate in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the health insurance industry fee. In addition the year-over-year comparisons wereare favorably impacted by a lower number of shares primarily reflectingused to compute earnings per common share repurchases.from share repurchases and the impact of a lower tax rate for the six months ended June 30, 2018.
Our 20172018 results through SeptemberJune 30, 20172018 reflect the continued implementation of our strategy to offer our members affordable health care combined with a positive consumer experience in growing markets. At the core of this strategy is our integrated care delivery model, which unites quality care, high member engagement, and sophisticated data analytics. Our approach to primary, physician-directed care for our members aims to provide quality care that is consistent, integrated, cost-effective, and member-focused, provided by both employed physicians and physicians with network contract arrangements. The model is designed to improve health outcomes and affordability for individuals and for the health system as a whole, while offering our members a simple, seamless healthcare experience. We believe this strategy is positioning us for long-term growth in both membership and earnings. We offer providers a continuum of opportunities to increase the

integration of care and offer assistance to providers in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings and shared risk relationships. At SeptemberJune 30, 2017,2018, approximately 1,877,8001,978,200 members, or 65.9%65.4%, of our individual Medicare Advantage members were in value-based relationships under our integrated care delivery model, as compared to 1,816,3001,901,300 members, or 64.0%66.5%, at December 31, 20162017 and 1,786,1001,840,000 members, or 63.1%64.8%, at SeptemberJune 30, 2016.2017.
The annual health insurance industry fee was suspended for calendar year 2017, but has resumed in 2018. Operating costs associated with the health insurer fee attributable to the three and six months ended June 30, 2018 was $257 million and $520 million, respectively. This fee is not deductible for tax purposes, which increases our effective income tax rate. The one-year suspension in 2017 of the health insurer fee significantly reduced our operating costs and effective tax rate during the three and six months ended June 30, 2017. The annual health insurance industry fee is also, under current law, suspended for calendar year 2019.
The 2018 quarter includes pretax income from our Individual Commercial business of $18 million, or $0.10 per diluted common share compared to $118 million, or $0.51 per diluted common share, included in the 2017 quarter. The 2018 period includes pretax income from our Individual Commercial business of $71 million, or $0.39 per diluted common share compared to $181 million, or $0.77 per diluted common share, included in the 2017 period.
The 2018 period also includes an adjustment to provisional remeasurement of deferred taxes related to rate change from the tax reform law enacted on December 22, 2017 of $12.7 million, or $0.09 per diluted common share.
We recorded a net gain associated with the terminated Merger Agreement, consisting primarily of the break-up fee, of approximately $947 million, or $4.33$4.31 per diluted common share during the ninesix months ended SeptemberJune 30, 2017. We recorded transaction costs in connection with the Merger of approximately $20 million, or $0.12 per diluted common share, and $81 million, or $0.49 per diluted common share, during the three and nine months ended September 30, 2016, respectively. Certain costs associated with the Merger were previously not deductible for tax purposes, but became deductible, and were recorded as such in the three months ended March 31, 2017 as a result of the termination of the Merger Agreement.
Year-over-year comparisons of results are also impacted by the recognition of a premium deficiency reserve for our Individual Commercial segment related to certain of our 2016 policies as discussed in the Individual Commercial segment highlights that follow. During the nine months ended September 30, 2016, we increased the premium deficiency reserve by $208 million, or $0.86 per diluted common share.

The annual health insurance industry fee has been suspended for calendar year 2017 but is scheduled to resume in calendar year 2018. Operating cost associated with the health insurer fee attributable to the three and nine months ended September 30, 2016 was $231 million and $687 million, respectively. This fee is not deductible for tax purposes, which significantly increased our effective income tax rate. The one-year suspension in 2017 of the health insurer fee has significantly reduced our operating costs and effective tax rate during the three and nine months ended September 30, 2017.
On February 14, 2017, we announced we are exiting our Individual Commercial medical business commencing January 1, 2018. As discussed previously, we have worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever we could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums. All of these actions were taken with the expectation that our Individual Commercial medical business would stabilize to the point where we could continue to participate in the program. However, based on our analysis of data associated with our healthcare exchange membership following the 2017 open enrollment period, we saw further signs of an unbalanced risk pool. Therefore, we decided that we cannot continue to offer this coverage and will exit this business commencing January 1, 2018. The three and nine months ended September 30, 2017 includes pretax income from our Individual Commercial business of $26 million, or $0.11 per diluted common share, and $207 million, or $0.89 per diluted common share, respectively.
On March 1, 2017, a court ordered the liquidation of Penn Treaty (an unaffiliated long-term care insurance company), which triggered assessments from state guaranty associations that resulted in our recording a $54 million, or $0.23 per diluted common share, estimate in operating costs in the three months ended March 31, 2017.
During the third quarter of 2017 we recorded estimated charges of $124 million, or $0.54 per diluted common share associated with both voluntary and involuntary workforce reduction programs that are expected to impact approximately 2,700 associates, or 5.7%, of our workforce.  This charge is included with operating costs in the condensed consolidated statement of income for the three and nine month periods ended September 30, 2017. 

During the nine months ended September 30, 2017, cash flow provided by operations was $7.0 billion as compared to $4.7 billion for the nine months ended September 30, 2016. Our operating cash flows for the nine months ended September 30, 2017 were significantly impacted by the receipt of the $1 billion Merger termination fee, net of related expenses and the portion of taxes paid to date. Our operating cash flows were also significantly impacted in both periods by the early receipt of the Medicare premium remittance for October 2017 of $3.1 billion in September 2017 and the receipt of the Medicare premium remittance for October 2016 of $3.0 billion in September 2016 because the payment dates of October 2017 and October 2016 fell on a weekend. Excluding the Merger termination fee and the timing of the Medicare premium remittances, our operating cash flows were positively impacted by higher earnings and the timing of working capital items. See further discussion under the section titled "Liquidity" in this report.
Retail
On April 3, 2017, CMS2, 2018, the Centers for Medicare and Medicaid Services (CMS) issued its announcement of 20182019 Medicare Advantage Capitation Rates and Medicare Advantage and Part D payment policiesPayment Policies and Final Call Letter which we refer to collectively as the(the Final Rate Notice.Notice). We expect the Final Rate Notice to result in a 0.45% rate increase for Humana versusour individual Medicare Advantage business that is slightly lower than CMS’ estimate for the sector, of 0.85% increase on a comparable basis. The rate increase excludesbasis, excluding the impact of StarEmployer Group Waiver Plan (EGWP) funding changes and quality bonus ratings, the impact of encounter data weighting in risk score calculations and estimates of changes in revenue associated with increased accuracy of risk coding.changes.  The primary difference between our and CMS projections primarily results from the estimates isgeographic distribution of our members relative to the impactnational average. In addition, the Final Rate Notice clarified that CMS has the authority to permit MA organizations to offer tailored supplemental benefits as recommended by a licensed medical professional. We expect that this additional flexibility will allow us to include supplemental benefits that we believe will improve health outcomes for our members.
On April 24, 2018, we received a Notice of fee-for-service county rebasing/re-pricing by CMS.Intent to be Awarded a Comprehensive Medicaid Contract under Florida’s Statewide Managed Medicaid Program in all 11 regions, including the South Florida, Tampa, Jacksonville, and Orlando metro areas. The comprehensive program combines the traditional Medicaid, or TANF, and Long-Term Care programs. The new contract will phase in between December 2018 and February 2019.



Group and Specialty Segment
On March 2, 2017, we received notice that the Defense Health Agency, or DHA, had exercised its option to extend the TRICARE SouthThe T2017 East Region contract through March 31, 2018. On July 21, 2016, we were notified by the DHA that we were awarded the contract for the new TRICARE East Region, which is a consolidation of the former T3 North and South Regions, with delivery of health care services expected to commence on October 1, 2017. On March 30, 2017, we received notice that the DHA is moving the date uponcomprising thirty-two states and approximately 5.9 million TRICARE beneficiaries, under which delivery of health care services is expected to commence under the new TRICAREcommenced on January 1, 2018. The T2017 East Region contract from October 1, 2017is a 5-year contract set to expire on December 31, 2022 and is subject to renewals on January 1 2018.of each year during its term at the government's option. During 2017, we delivered services under the 5-year T3 South Region contract, which expired on December 31, 2017.
Healthcare Services Segment
At September 30, 2017, approximately 51,500 primary care providers were in value-based relationships, an increase of 3.8% from 49,600 at September 30, 2016 and an increase of 2.2% from 50,400 at December 31, 2016. At September 30, 2017, 65.9% of our individual Medicare Advantage members were in value-based relationships compared to 63.1% at September 30, 2016 and 64.0% at December 31, 2016.
Medicare Advantage and dual demonstration program membership enrolled in a Humana chronic care management program was 825,200752,700 at SeptemberJune 30, 2017,2018, a decrease of 21.0%23.3% from 1,044,700981,600 at SeptemberJune 30, 2016,2017, and 24.9%5.3% from 1,099,200794,900 at December 31, 2016.2017. We have undergone an optimization process that ensures the appropriate level of member interaction with clinicians, to driveincluding moving members into a monitoring program as their needs change, and graduating them out of the care management program when they no longer benefit from the services. This drives quality outcomes, which has resulted in reduced segment earnings but higher returns on investment.
Health Care Reform
The Health Care Reform Law enacted significant reforms to various aspects of the U.S. health insurance industry. Certain significant provisions of the Health Care Reform Law include, among others, mandated coverage requirements, mandated benefits and guarantee issuance associated with commercial medical insurance, rebates to policyholders based on minimum benefit ratios, adjustments to Medicare Advantage premiums, the establishment of federally-facilitated or state-based exchanges coupled with programs designed to spread risk among insurers, and the introduction of plan designs based on set actuarial values. In addition, the Health Care Reform Law established insurance industry assessments, including an annual health insurance industry fee and a three-year $25 billion industry wide commercial reinsurance fee, which ends in 2017.fee. The annual health insurance industry fee whichlevied on the insurance industry is $14.3 billion in 2018 and is not deductible for income tax purposes, has been suspended for calendarwhich significantly increases our effective income tax rate. A one year suspension of the health insurer fee, as we experienced in 2017, but is scheduled to resumeand under current law, will experience again in calendar year 2018.
In addition, the Health Care Reform Law expands federal oversight of health plan premium rates. Financing for these reforms comes,2019, significantly impacts our trend in part, from material additional feeskey operating metrics including our operating cost and taxes on us (as discussed above) and other health plans and individuals which began in 2014,medical expense ratios, as well as reductions in certain levels of payments to us and other health plans under Medicare as described in our 2016 Form 10-K.effective tax rate.
As noted above, the Health Care Reform Law required the establishment of health insurance exchanges for individuals and small employers to purchase health insurance that became effective January 1, 2014, with an annual open enrollment period. Insurers participating on the health insuranceAlthough we previously participated in these exchanges must offer a minimum level of benefits and are subject to guidelines on setting premium rates and coverage limitations. We may be adversely selected by individuals who have a higher acuity level than the anticipated pool of participants in this market. In addition, the risk corridor, reinsurance, and risk adjustment provisions of the Health Care Reform Law, established to apportion risk for insurers, may not be effective in appropriately mitigating the financial risks related to our products. In addition, regulatory changes to the implementation of the Health Care Reform Law that allowed individuals to remain in plans that are not compliant with the Health Care Reform Law or to enroll outside of the annual enrollment period may have an adverse effect on our pool of participants in the health insurance exchange. In addition, states may impose restrictions on our ability to increase rates. All of these factors may have a material adverse effect on our results of operations, financial position, or cash flows if our premiums are not adequate or do not appropriately reflect the acuity of these individuals. Any variation from our expectations regarding acuity, enrollment levels, adverse selection, or other assumptions used in setting premium rates could have a material adverse effect on our results of operations, financial position, and cash flows and could impact our decision to participate or continue in the program in certain states. For 2017, we are offering

on-exchange individual commercial medical plans in 11 states, a reduction from the 15 states in which we offered on-exchange coverage in 2016. In addition, we discontinued substantially all Health Care Reform Law compliant off-exchange individual commercial medical plans, effective January 1, 2017. As previously discussed, on February 14, 2017,2018, we announced we are exitinghave exited our Individual Commercial medical business January 1, 2018.
If we fail to effectively implement our operational and strategic initiatives with respect to the implementation of the Health Care Reform Law, our business may be materially adversely affected. Additionally, potential legislative changes, including the Trump Administration's October 12, 2017 announcement to end cost-sharing reduction benefits effective for October 2017 and beyond in all states as well as activities to repeal or replace the Health Care Reform Law, creates uncertainty for our business, and we cannot predict when, or in what form, such legislative changes may occur. We may be unable to adjust our product offerings, geographic footprint, or pricing during any given year such legislative changes occur in sufficient time to mitigate any adverse effects.business.
On November 10, 2016, the U.S. Court of Federal Claims ruled in favor of the government in one of a series of cases filed by insurers, unrelated to us, against HHS to collect risk corridor payments, rejecting all of the insurers statutory, contract and Constitutional claims for payment. On November 18, 2016, HHS issued a memorandum indicating a significant funding shortfall for the 2015 coverage year, the second consecutive year of significant shortfalls. Given the successful challenge of the risk corridor provisions in court, Congressional inquiries into the funding of the risk corridor program, and significant funding shortfalls under the first two years of the program, during the fourth quarter of 2016 we wrote-off $583 million in risk corridor receivables outstanding as of September 30, 2016, including $415 million associated with the 2014 and 2015 coverage years. From inception of the risk corridor program through September 30, 2017, we collected approximately $39 million from CMS for risk corridor receivables associated with the 2014 coverage year funded by HHS in accordance with previous guidance, utilizing funds HHS collected from us and other carriers under the risk corridor program. At September 30, 2017, we estimate that we are entitled to collect a total of $611 million from HHS under the commercial risk corridor program for the 2014 through 2016 program years. On November 2, 2017, we filed suit against the United States of America in the United States Court of Federal Claims, on behalf of our health plans seeking recovery from the federal government of approximately $611 million in payments under the risk corridor premium stabilization program established under the Health Care Reform Law, for years 2014, 2015 and 2016. Our case has been stayed by the Court, pending resolution of similar cases filed by other insurers.
It is reasonably possible that the Health Care Reform Law and related regulations, as well as future legislative, judicial or regulatory changes, including restrictions on our ability to manage our provider network or otherwise operate our business, or restrictions on profitability, including reviews by regulatory bodies that may compare our Medicare Advantage profitability to our non-Medicare Advantage business profitability, or compare the profitability of various products within our Medicare Advantage business, and require that they remain within certain ranges of each other, in the aggregate may have a material adverse effect on our results of operations (including restricting revenue, enrollment and premium growth in certain products and market segments, restricting our ability to expand into new markets, increasing our medical and operating costs, further lowering our Medicare payment rates and increasing our expenses associated with the non-deductible health insurance industry fee and other assessments); our financial position (including our ability to maintain the value of our goodwill); and our cash flows.

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, including the primary factors that accounted for those changes. Transactions between reportable segments primarily consist of sales of services rendered by our Healthcare Services segment, primarily pharmacy, provider, and clinical care services, to our Retail, Group and Specialty, and Individual Commercial segment customers and are described in Note 15 to the condensed consolidated financial statements included in this report.

Comparison of Results of Operations for 20172018 and 20162017
The following discussion primarily deals with our results of operations for the three months ended SeptemberJune 30, 2018, or the 2018 quarter, the three months ended June 30, 2017, or the 2017 quarter, the threesix months ended SeptemberJune 30, 2016,2018, or the 2016 quarter,2018 period, and the ninesix months ended SeptemberJune 30, 2017, or the 2017 period, and the nine months ended September 30, 2016, or the 2016 period.
Consolidated
        
 For the three months ended September 30, Change
 2017 2016 Dollars Percentage
 (dollars in millions, except per common share results)  
Revenues:       
Premiums:       
Retail$11,021
 $10,809
 $212
 2.0 %
Group and Specialty1,701
 1,670
 31
 1.9 %
Individual Commercial224
 882
 (658) (74.6)%
Other Businesses9
 10
 (1) (10.0)%
Total premiums12,955
 13,371
 (416) (3.1)%
Services:       
Retail2
 2
 
  %
Group and Specialty140
 147
 (7) (4.8)%
Healthcare Services80
 77
 3
 3.9 %
Other Businesses1
 1
 
  %
Total services223
 227
 (4) (1.8)%
Investment income104
 96
 8
 8.3 %
Total revenues13,282
 13,694
 (412) (3.0)%
Operating expenses:       
Benefits10,642
 10,900
 (258) (2.4)%
Operating costs1,688
 1,739
 (51) (2.9)%
  Merger termination fee and related costs, net
 20
 (20) (100.0)%
Depreciation and amortization94
 86
 8
 9.3 %
Total operating expenses12,424
 12,745
 (321) (2.5)%
Income from operations858
 949
 (91) (9.6)%
Interest expense59
 47
 12
 25.5 %
Income before income taxes799
 902
 (103) (11.4)%
Provision for income taxes300
 452
 (152) (33.6)%
Net income$499
 $450
 $49
 10.9 %
Diluted earnings per common share$3.44
 $2.98
 $0.46
 15.4 %
Benefit ratio(a)
82.1% 81.5%   0.6 %
Operating cost ratio(b)
12.8% 12.8%    %
Effective tax rate37.5% 50.1%   (12.6)%
(a) Represents total benefits expense as a percentage of premiums revenue.
(b)
        
 For the three months ended June 30, Change
 2018 2017 Dollars Percentage
 (dollars in millions, except per common share results)  
Revenues:       
Premiums:       
Retail$12,006
 $11,273
 $733
 6.5 %
Group and Specialty1,688
 1,673
 15
 0.9 %
Individual Commercial10
 247
 (237) (96.0)%
Other Businesses9
 10
 (1) (10.0)%
Total premiums13,713
 13,203
 510
 3.9 %
Services:       
Retail3
 2
 1
 50.0 %
Group and Specialty208
 143
 65
 45.5 %
Healthcare Services169
 83
 86
 103.6 %
Other Businesses2
 2
 
  %
Total services382
 230
 152
 66.1 %
Investment income164
 101
 63
 62.4 %
Total revenues14,259
 13,534
 725
 5.4 %
Operating expenses:       
Benefits11,536
 10,889
 647
 5.9 %
Operating costs1,761
 1,453
 308
 21.2 %
Depreciation and amortization100
 92
 8
 8.7 %
Total operating expenses13,397
 12,434
 963
 7.7 %
Income from operations862
 1,100
 (238) (21.6)%
Loss on business held-for-sale(790) 
 (790) (100.0)%
Interest expense53
 58
 (5) (8.6)%
Income before income taxes19
 1,042
 (1,023) (98.2)%
(Benefit) provision for income taxes(174) 392
 (566) (144.4)%
Net income$193
 $650
 $(457) (70.3)%
Diluted earnings per common share$1.39
 $4.46
 $(3.07) (68.8)%
Benefit ratio (a)
84.1% 82.5%   1.6 %
Operating cost ratio (b)
12.5% 10.8%   1.7 %
Effective tax raten/m
 37.6%   n/m
n/m- not meaningful
(a)Represents total benefits expense as a percentage of premiums revenue.
(b)Represents total operating costs excluding Merger termination fee and related costs, net, and depreciation and amortization, as a percentage of total revenues less investment income.


              
For the nine months ended
September 30,
 ChangeFor the six months ended
June 30,
 Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(dollars in millions, except per common share results)  (dollars in millions, except per common share results)  
Revenues:              
Premiums:              
Retail$33,700
 $32,620
 $1,080
 3.3 %$24,074
 $22,679
 $1,395
 6.2 %
Group and Specialty5,074
 5,013
 61
 1.2 %3,427
 3,373
 54
 1.6 %
Individual Commercial754
 2,799
 (2,045) (73.1)%5
 530
 (525) (99.1)%
Other Businesses28
 29
 (1) (3.4)%18
 19
 (1) (5.3)%
Total premiums39,556
 40,461
 (905) (2.2)%27,524
 26,601
 923
 3.5 %
Services:              
Retail6
 5
 1
 20.0 %5
 4
 1
 25.0 %
Group and Specialty444
 500
 (56) (11.2)%427
 304
 123
 40.5 %
Healthcare Services251
 237
 14
 5.9 %273
 171
 102
 59.6 %
Other Businesses5
 7
 (2) (28.6)%4
 4
 
  %
Total services706
 749
 (43) (5.7)%709
 483
 226
 46.8 %
Investment income316
 291
 25
 8.6 %305
 212
 93
 43.9 %
Total revenues40,578
 41,501
 (923) (2.2)%28,538
 27,296
 1,242
 4.6 %
Operating expenses:              
Benefits32,857
 33,806
 (949) (2.8)%23,206
 22,215
 991
 4.5 %
Operating costs4,694
 5,172
 (478) (9.2)%3,510
 3,006
 504
 16.8 %
Merger termination fee and related costs, net(947) 81
 (1,028) (1,269.1)%
 (947) 947
 100.0 %
Depreciation and amortization278
 263
 15
 5.7 %200
 184
 16
 8.7 %
Total operating expenses36,882
 39,322
 (2,440) (6.2)%26,916
 24,458
 2,458
 10.0 %
Income from operations3,696
 2,179
 1,517
 69.6 %1,622
 2,838
 (1,216) (42.8)%
Loss on business held-for-sale(790) 
 (790) (100.0)%
Interest expense166
 141
 25
 17.7 %106
 107
 (1) (0.9)%
Income before income taxes3,530
 2,038
 1,492
 73.2 %726
 2,731
 (2,005) (73.4)%
Provision for income taxes1,266
 1,023
 243
 23.8 %42
 966
 (924) (95.7)%
Net income$2,264
 $1,015
 $1,249
 123.1 %$684
 $1,765
 $(1,081) (61.2)%
Diluted earnings per common share$15.44
 $6.73
 $8.71
 129.4 %$4.93
 $11.98
 $(7.05) (58.8)%
Benefit ratio (a)
83.1% 83.6%   (0.5)%84.3% 83.5%   0.8 %
Operating cost ratio (b)
11.7% 12.6%   (0.9)%12.4% 11.1%   1.3 %
Effective tax rate35.9% 50.2%   (14.3)%5.8% 35.4%   (29.6)%
(a)Represents total benefits expense as a percentage of premiums revenue.
(b)Represents total operating costs, excluding Merger termination fee and related costs, net, and depreciation and amortization, as a percentage of total revenues less investment income.

Summary
Net income was $499$193 million, or $3.44$1.39 per diluted common share, in the 2018 quarter compared to $650 million, or $4.46 per diluted common share, in the 2017 quarter compared to $450quarter. Net income was $684 million, or $2.98$4.93 per diluted common share, in the 2016 quarter. The 2017 quarter includes net income from our Individual Commercial segment of $0.112018 period compared to $1.8 billion, or $11.98 per diluted common share, as well as $0.55 per diluted common share beneficial effect of the lower tax rate in light of pricing and benefit design assumptions associated with the 2017 temporaryperiod. This comparison was impacted by the loss on the expected sale of KMG in 2018, the Merger Agreement break-up fee in 2017, the suspension of the health insurance industry fee excluding the Individual Commercial business impact. These were offset by $0.54 per diluted common share in estimated charges associated with both voluntary and involuntary workforce reduction programs. Net income was $2.3 billion, or $15.44 per diluted common share, in thefor calendar year 2017, period compared to $1.0 billion, or $6.73 per diluted common share, in the 2016 period. The 2017 period includes a net gain associated with the terminated Merger Agreement consisting primarily of the break-up fee representing $4.33 per diluted common share. In addition, the 2017 period includes net income from our Individual Commercial segment of $0.89 per diluted common share, as well as $1.60 per diluted common share beneficial effect of the lower tax rate in light of pricing and benefit design assumptions associated with the 2017 temporary suspension of the health insurance industry fee, excluding the Individual Commercial business impact. These were offset by $0.54 per diluted common share in estimated charges associated with both voluntary and involuntary workforce reduction programs, as well as the estimated guaranty fund assessment expense to support the policyholderpolicy holders obligations of Penn Treaty, (an unaffiliated long-term care insurance company)the exit of $0.23 per diluted common share.the Individual Commercial business effective January 1, 2018, and the Tax Reform Law as previously described. Excluding the impact of the items above, the increase in the 2017 quarter and the 2017 periodyear-over-year comparison primarily was due to year-over-year improvement in our Retail segment pretax results as discussedlower earnings in the detailed segment results discussion that follows.Retail, Healthcare Services and Individual Commercial segments.
Premiums Revenue
Consolidated premiums decreased $416increased $510 million, or 3.1%3.9%, from the 20162017 quarter to $13.0$13.7 billion for the 20172018 quarter and decreased $905increased $923 million, or 2.2%3.5%, from the 20162017 period to $39.6$27.5 billion for the 2017 period. These decreases are2018 period primarily due to lower premiums in the Individual Commercial segment, partially offset by higher premiums in the Retail segment, mainly resulting from our Medicare Advantage business, as discussed inand the detailed segment results discussion that follows.Group and Specialty segment. These items were partially offset by lower premiums resulting from the exit of the Individual Commercial business.
Services Revenue
Consolidated services revenue decreased $4increased $152 million, or 1.8%66.1%, from the 20162017 quarter to $223$382 million for the 20172018 quarter and decreased $43increased $226 million, or 5.7%46.8%, from the 20162017 period to $706$709 million for the 2017 period. These decreases are2018 period primarily due to a decreasean increase in services revenue in the Group and Specialty segment as discussed in the detailed segment results discussion that follows.
Investment Income
Investment income totaled $104$164 million for the 2018 quarter, increasing $63 million, or 62.4%, from $101 million for the 2017 quarter, increasing $8 million, or 8.3%, from $96 million for the 2016 quarter. For the 20172018 period, investment income totaled $316$305 million, increasing $25$93 million, or 8.6% 43.9%, from $291$212 million in the 20162017 period. These increases primarily reflect higher realized capital gains, average invested balances, and interest rates, partially offset by lower realized capital gains.rates.
Benefits Expense
Consolidated benefits expense was $10.6$11.5 billion for the 20172018 quarter, a decreasean increase of $258$647 million from the 20162017 quarter. For the 20172018 period, benefits expense was $32.9$23.2 billion, a decreasean increase of $949$991 million from the 20162017 period. These decreases areincreases were primarily due to a decrease in the Individual Commercial segment benefits expense, partially offset by an increase in the Retail and Group and Specialty segmentssegment benefits expense, partially offset by a decrease in the Individual Commercial segment benefits expense. We experienced favorable medical claims reserve development related to prior fiscal years of $85$71 million in the 2018 quarter as compared to $114 million in the 2017 quarter as compared to $90 million in the 2016 quarter. In the 20172018 period, we experienced favorable medical claims reserve development related to prior fiscal years of $430$338 million as compared to $525$345 million in the 20162017 period as discussed in the detailed segment results discussion that follows.
The consolidated benefit ratio increased 60160 basis points to 82.1%84.1% for the 2018 quarter compared to 82.5% for the 2017 quarter compared to 81.5% for the 2016 quarter primarily due to the increase in the Retail segment benefit ratio, partially offset by decreases in the Group

and Specialty and Individual Commercial segment benefit ratios as discussed in the segment results of operation discussion that follows.quarter. The consolidated benefit ratiofor the 2018 period was 84.3%, an 80 basis point increase from 83.5% for the 2017 period. The year-over-year comparison for both the 2018 quarter and period was 83.1%, a 50 basis point decrease from 83.6% forfavorably impacted by the 2016 period, primarily due toexit of the decrease inIndividual Commercial business effective January 1, 2018. Excluding the impact of the Individual Commercial segment, the year-over-year comparison was unfavorably impacted by the enhanced 2018 Medicare Advantage member benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings, as well as lower favorable prior-period reserve development, and an increase in the Group and Specialty benefit ratio year-over-year for the 2018 quarter. These items were partially offset by the increasereinstatement of the health insurance industry fee in 2018, which was contemplated in the Retailpricing and Group and Specialty segment benefit ratio as discussed in the segment resultsdesign of operation discussion that follows. Favorableour products. The 2018 period was also impacted by a more severe flu season.

The favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 7050 basis points in each ofthe 2018 quarter versus approximately 90 basis points in the 2017 quarter and the 2016 quarter. Favorable prior-period medical claims reserve development decreased the consolidated benefit ratio by approximately 110120 basis points in the 20172018 period versus approximately 130 basis points in the 20162017 period.
Operating Costs
Our segments incur both direct and shared indirect operating costs. We allocate the indirect costs shared by the segments primarily as a function of revenues. As a result, the profitability of each segment is interdependent.
Consolidated operating costs decreased $51increased $308 million, or 2.9%21.2%, during the 20172018 quarter compared to the 2016 quarter primarily due to the temporary suspension of the health insurance industry fee for the calendar year 2017, and lower Individual Commercial membership, partially offset by the estimated charges associated with both voluntary and involuntary workforce reduction programs recorded during the 2017 quarter. Consolidated operating costs decreased $478increased $504 million, or 9.2%16.8%, during the 20172018 period compared to the 20162017 period primarily due to an increase in operating costs in the temporary suspension of the health insurance industry fee for the calendar year 2017,Retail and lower Individual Commercial membership,Group and Specialty segments, partially offset by a decrease in operating costs in the estimated charges associated with both voluntaryHealthcare Services and involuntary workforce reduction programs as well as the estimated guaranty fund assessment expense recorded to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company).Individual Commercial segments.
The consolidated operating cost ratio for the 20172018 quarter of 12.8% was unchanged12.5% increased 170 basis points from the 20162017 quarter. The year-over-year comparison was favorably impacted by the temporary suspension of the health insurance industry fee for the calendar year 2017, offset by the loss of scale efficiency from market exits in the 2017 period associated with the Individual Commercial product, the estimated charges associated with both voluntary and involuntary workforce reduction programs recorded in the 2017 quarter, and the increase in employee compensation costs resulting from the continued strong performance. The consolidated operating cost ratio for the 20172018 period decreased 90increased 130 basis points to 11.7%12.4% from 12.6%11.1% in the 20162017 period primarily due to the temporary suspensionreinstatement of the health insurance industry fee in 2018, and long-term sustainability investments in the 2018 quarter and period as a result of the Tax Reform Law. Our long-term sustainability investments include investments in our associate workforce, primarily the establishment of an annual incentive program for a broader range of employees, together with additional investments in the calendar year 2017 as well ascommunities of our members, technology and our integrated delivery model to drive more affordable healthcare and better clinical outcomes. The ratio was further impacted by the growth in our military services business, which carries a higher operating cost efficiencies,ratio than our other products, due to the previously disclosed transition to the TRICARE East Region contract effective January 1, 2018. These items were partially offset by the lossfavorable impact of scale efficiency from market exitssignificant operating cost efficiencies in the 2018 quarter and period driven by productivity initiatives implemented in 2017, the favorable year-over-year comparison of the impact of the guaranty fund assessment expense to support policy holder obligations of Penn Treaty in the 2017 period, associated withand the exit of the Individual Commercial product, the estimated charges associated with both voluntary and involuntary workforce reduction programs recorded in the 2017 quarter, as well as the impact of the estimated guaranty fund assessment expense recorded to support the policyholder obligations of Penn Treaty (an unaffiliated long-term care insurance company).business, which carried a higher operating cost ratio than our other products, effective January 1, 2018. The non-deductible health insurance industry fee impacted the operating cost ratio by 170180 basis points in both the 20162018 quarter and 20162018 period.
Depreciation and Amortization
Depreciation and amortization for the 20172018 quarter totaled $94$100 million compared to $86$92 million for the 20162017 quarter. For the 20172018 period, depreciation and amortization totaled $278$200 million compared to $263$184 million for the 20162017 period.
Interest Expense
Interest expense for the 20172018 quarter totaled $59$53 million, compared to $47 million for the 2016 quarter, and totaled $166$58 million for the 2017 quarter, and totaled $106 million for the 2018 period compared to $141$107 million for the 20162017 period. The increase was due to the issuance of $1 billion of senior notes in March 2017.
Income Taxes
OurFor the 2018 period our effective tax rate during the 2017 quarter was 37.5%5.8% compared to the effective tax rate of 50.1% in the 2016 quarter. For the 2017 period our effective tax rate was 35.9% compared to the effective tax rate of 50.2%35.4% for the 20162017 period. These decreases are primarily due to the 2017 temporary suspensiondeferred tax benefit of $430 million resulting from the expected sale of KMG as well as the Tax Reform Law previously discussed, partially offset by the impact of the reinstatement of the non-deductible health insurance

industry fee as well asin 2018. The income tax rate for the six months ended June 30, 2017 included previously non-deductible transaction costs that, as a result of the termination of the Merger Agreement, became deductible for tax purposes and werepurposes. The Tax Reform Law reduced the statutory federal corporate income tax rate to 21 percent from 35 percent, beginning in 2018. The accounting for certain income tax effects of the Tax Reform Law is provisional. Revisions to prior estimates are recorded as such inadditional analysis is completed using information available at each measurement date during 2018, with adjustments to the threeincome tax provision recorded as new information becomes known. Revisions to our prior estimates for the income tax effects of the Tax Reform Law decreased our tax expense for the six months ended March 31, 2017.June 30, 2018 by $12.7 million.

Retail Segment
September 30, ChangeJune 30, Change
2017 2016 Members Percentage2018 2017 Members Percentage
Membership:              
Medical membership:              
Individual Medicare Advantage2,849,400
 2,831,700
 17,700
 0.6 %3,027,200
 2,840,100
 187,100
 6.6 %
Group Medicare Advantage438,400
 353,900
 84,500
 23.9 %493,100
 433,400
 59,700
 13.8 %
Medicare stand-alone PDP5,290,900
 4,913,400
 377,500
 7.7 %5,008,200
 5,236,400
 (228,200) (4.4)%
Total Retail Medicare8,578,700
 8,099,000
 479,700
 5.9 %8,528,500
 8,509,900
 18,600
 0.2 %
State-based Medicaid363,400
 390,100
 (26,700) (6.8)%325,200
 374,900
 (49,700) (13.3)%
Medicare Supplement234,900
 217,100
 17,800
 8.2 %241,500
 232,700
 8,800
 3.8 %
Total Retail medical members9,177,000
 8,706,200
 470,800
 5.4 %9,095,200
 9,117,500
 (22,300) (0.2)%
              
              
For the three months ended September 30, ChangeFor the three months ended June 30, Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Premiums and Services Revenue:              
Premiums:              
Individual Medicare Advantage$8,077
 $7,977
 $100
 1.3 %$8,908
 $8,282
 $626
 7.6 %
Group Medicare Advantage1,272
 1,067
 205
 19.2 %1,509
 1,277
 232
 18.2 %
Medicare stand-alone PDP921
 1,004
 (83) (8.3)%914
 925
 (11) (1.2)%
Total Retail Medicare10,270
 10,048
 222
 2.2 %11,331
 10,484
 847
 8.1 %
State-based Medicaid630
 652
 (22) (3.4)%550
 671
 (121) (18.0)%
Medicare Supplement121
 109
 12
 11.0 %125
 118
 7
 5.9 %
Total premiums11,021
 10,809
 212
 2.0 %12,006
 11,273
 733
 6.5 %
Services2
 2
 
  %3
 2
 1
 50.0 %
Total premiums and services revenue$11,023
 $10,811
 $212
 2.0 %$12,009
 $11,275
 $734
 6.5 %
Income before income taxes$610
 $608
 $2
 0.3 %$493
 $607
 $(114) (18.8)%
Benefit ratio84.3% 83.6%   0.7 %85.5% 85.8%   (0.3)%
Operating cost ratio9.8% 10.6%   (0.8)%10.1% 8.5%   1.6 %

For the nine months ended
September 30,
 ChangeFor the six months ended
June 30,
 Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Premiums and Services Revenue:              
Premiums:              
Individual Medicare Advantage$24,735
 $24,054
 $681
 2.8 %$17,878
 $16,658
 $1,220
 7.3 %
Group Medicare Advantage3,867
 3,229
 638
 19.8 %3,033
 2,595
 438
 16.9 %
Medicare stand-alone PDP2,787
 3,058
 (271) (8.9)%1,810
 1,866
 (56) (3.0)%
Total Retail Medicare31,389
 30,341
 1,048
 3.5 %22,721
 21,119
 1,602
 7.6 %
State-based Medicaid1,954
 1,960
 (6) (0.3)%1,103
 1,324
 (221) (16.7)%
Medicare Supplement357
 319
 38
 11.9 %250
 236
 14
 5.9 %
Total premiums33,700
 32,620
 1,080
 3.3 %24,074
 22,679
 1,395
 6.2 %
Services6
 5
 1
 20.0 %5
 4
 1
 25.0 %
Total premiums and services revenue$33,706
 $32,625
 $1,081
 3.3 %$24,079
 $22,683
 $1,396
 6.2 %
Income before income taxes$1,587
 $1,263
 $324
 25.7 %$760
 $977
 $(217) (22.2)%
Benefit ratio86.1% 85.8%   0.3 %86.5% 87.0%   (0.5)%
Operating cost ratio8.9% 10.1%   (1.2)%10.1% 8.5%   1.6 %
Pretax Results
Retail segment pretax income was $493 million in the 2018 quarter, a decrease of $610$114 million, or 18.8%, compared to $607 million in the 2017 quarter and was relatively unchanged from $608$760 million in the 2016 quarter, reflecting the year-over-year improvement2018 period, a decrease of $217 million, or 22.2%, compared to $977 million in the operating cost ratio being substantially2017 period. These decreases primarily were due to the result of the investment in benefit design for 2018 Medicare Advantage offerings further discussed below, investments made in the 2018 quarter as a result of the Tax Reform Law as previously described, and lower favorable prior-period reserve development. These items were partially offset by the increase in the benefit ratio. Retail segment pretax income increased $324 million, or 25.7%, to $1.6 billion in the 2017significant operating cost efficiencies further discussed below. The 2018 period from $1.3 billion in the 2016 period, primarily due to the year-over-year improvement in earnings for our Medicare Advantage business.was also impacted by a more severe flu season.
Enrollment
Individual Medicare Advantage membership increased 17,700187,100 members, or 0.6%6.6%, from September 30, 2016 to SeptemberJune 30, 2017 reflecting netto June 30, 2018, primarily due to membership additions for Medicare beneficiaries including the effect of market and product exits in 2017. We decided certain markets and/or products were not meeting long term strategic and financial objectives. Additionally, membership growth was muted due to competitive actions including the uncertainty associated with the then-pending Merger transaction during last year'smost recent Annual Election Period.Period, or AEP, for Medicare beneficiaries.
Group Medicare Advantage membership increased 84,500,59,700, or 23.9%13.8%, from September 30, 2016 to SeptemberJune 30, 2017 reflectingto June 30, 2018, primarily due to increased sales to our existing group accounts during the addition of a large account in January 2017.most recent AEP for Medicare beneficiaries.
Medicare stand-alone PDP membership increased 377,500decreased 228,200 members, or 7.7%4.4%, from September 30, 2016 to SeptemberJune 30, 2017 to June 30, 2018 reflecting net declines during the most recent AEP for Medicare beneficiaries. These declines primarily resulted from the previously disclosed loss of auto assigned members in Florida and South Carolina due to pricing over CMS low income benchmark and continued membership additions, primarily fordeclines in our Humana-WalmartEnhanced Plan. In addition, growth in our co-branded Walmart plan offering, forwas significantly lower than historic levels due to the 2017 plan year.introduction of additional low-priced competitor offerings in many regions.
State-based Medicaid membership decreased 26,70049,700 members, or 6.8%13.3%, from SeptemberJune 30, 20162017 to SeptemberJune 30, 2017,2018, primarily driven by the previously disclosed decision to not participate in Illinois' Integrated Program Medicaid contract, along with lower membership associated with our Florida contracts resulting from network realignments.Medicaid contract due to overall strengthening economic conditions.


Premiums Revenue
Retail segment premiums increased $212$733 million, or 2.0%6.5%, from the 20162017 quarter to the 20172018 quarter and increased $1.1$1.4 billion, or 3.3%6.2%, from the 20162017 period to the 2017 period. These increases2018 period primarily were due to individual and group Medicare Advantage membership growth andin the most recent AEP as well as increased per-member premiums for certain businessesproducts within the segment.segment, partially offset by declines in the state-based contracts and stand-alone PDP revenues resulting from membership declines discussed above. Average group and individual Medicare Advantage membership increased 3.2%7.4% for both the 2017

2018 quarter and 3.5% for the 20172018 period. 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. Premiums revenue reflects changes in membership and 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.
Benefits Expense
The Retail segment benefit ratio increased 70 basis points from 83.6% in the 2016 quarter to 84.3% in the 2017 quarter, and increaseddecreased 30 basis points from 85.8% in the 2016 period2017 quarter to 86.1%85.5% in the 2018 quarter and decreased 50 basis points from 87.0% in the 2017 period to 86.5% in the 2018 period. These increasesdecreases were primarily were due to the impact of the temporary suspensionreinstatement of the health insurance industry fee for calendar year 2017in 2018 which was contemplated in the pricing and benefit design of our products, margin compression associated withproducts. This was partially offset by the competitive environment inunfavorable impact from the groupenhanced 2018 Medicare Advantage businessmember benefits resulting from the investment of the better than expected 2017 individual Medicare Advantage pretax earnings and lower favorable prior-period medical claims reserve development. These increases were partially offsetThe 2018 period was also impacted by the impact of planned exits from certain Medicare Advantage markets that carried a higher benefit ratio than other markets as well as lower than expected medical costs as compared to the assumptions used in the pricing of our individual Medicare Advantage business.more severe flu season.
The Retail segment’s benefits expense for the 20172018 quarter included $52$60 million in favorable prior-period medical claims reserve development versus $80$83 million in favorable prior-period medical claims reserve development in the 20162017 quarter. For the 20172018 period, the Retail segment'ssegment’s benefit expense includesinclude the beneficial effect of $339$247 million in favorable prior-period reserve development versus $379$287 million in the 20162017 period. Prior-period medical claims reserve development decreased the Retail segment benefit ratio by approximately 50 basis points in the 20172018 quarter versus approximately 70 basis points in the 20162017 quarter. Favorable prior-period reserve development decreased the Retail segment benefit ratio by approximately 100 basis points in the 20172018 period versus approximately 120130 basis points in the 20162017 period.
Operating Costs
The Retail segment operating cost ratio of 9.8%10.1% for the 20172018 quarter decreased 80increased 160 basis points from 10.6%8.5% for the 20162017 quarter. The Retail segment operating cost ratio of 8.9%10.1% for the 2018 period increased 160 basis points from 8.5% for the 2017 period decreased 120 basis points from 10.1% forperiod. The year-over-year comparison was negatively impacted by the 2016 period. These decreases primarily were due to the temporary suspensionreinstatement of the health insurance industry fee for calendar year 2017,in 2018 and strategic investments made in the 2018 quarter as a result of the Tax Reform Law. These items were partially offset by significant operating cost efficiencies in the increase2018 quarter driven by productivity initiatives implemented in employee compensation costs resulting from the continued strong performance.2017. The non-deductible health insurance industry fee impacted the operating cost ratio by 170190 basis points in each ofboth the 20162018 quarter and the 20162018 period.











Group and Specialty Segment
September 30, ChangeJune 30, Change
2017 2016 Members Percentage2018 2017 Members Percentage
Membership:              
Medical membership:              
Fully-insured commercial group1,098,800
 1,131,500
 (32,700) (2.9)%1,050,900
 1,107,500
 (56,600) (5.1)%
ASO445,700
 570,300
 (124,600) (21.8)%458,800
 446,800
 12,000
 2.7 %
Military services3,099,000

3,080,900

18,100

0.6 %5,931,500
 3,088,600

2,842,900

92.0 %
Total group and specialty medical members4,643,500
 4,782,700
 (139,200) (2.9)%7,441,200
 4,642,900
 2,798,300
 60.3 %
Specialty membership (a)6,934,000
 6,955,200
 (21,200) (0.3)%6,227,700
 6,917,800
 (690,100) (10.0)%
(a)Specialty products include dental, vision, voluntary benefit products and other supplemental health and financial protection products. Members included in these products may not be unique to each product since members have the ability to enroll in multiple products.
              
              
For the three months ended September 30, ChangeFor the three months ended June 30, Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Premiums and Services Revenue:              
Premiums:              
Fully-insured commercial group$1,370
 $1,350
 $20
 1.5 %$1,346
 $1,350
 $(4) (0.3)%
Group specialty331
 318
 13
 4.1 %342
 323
 19
 5.9 %
Military services
 2
 (2) (100.0)%
Total premiums1,701
 1,670
 31
 1.9 %1,688
 1,673
 15
 0.9 %
Services140
 147
 (7) (4.8)%208
 143
 65
 45.5 %
Total premiums and services revenue$1,841
 $1,817
 $24
 1.3 %$1,896
 $1,816
 $80
 4.4 %
Income before income taxes$93
 $37
 $56
 151.4 %$80
 $101
 $(21) (20.8)%
Benefit ratio79.6% 81.0%   (1.4)%80.4% 78.4%   2.0 %
Operating cost ratio20.9% 23.1%   (2.2)%23.5% 21.6%   1.9 %

For the nine months ended
September 30,
 ChangeFor the six months ended
June 30,
 Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Premiums and Services Revenue:              
Premiums:              
Fully-insured commercial group$4,098
 $4,044
 $54
 1.3 %$2,738
 $2,728
 $10
 0.4 %
Group specialty976
 957
 19
 2.0 %689
 645
 44
 6.8 %
Military services
 12
 (12) (100.0)%
Total premiums5,074
 5,013
 61
 1.2 %3,427
 3,373
 54
 1.6 %
Services444
 500
 (56) (11.2)%427
 304
 123
 40.5 %
Total premiums and services revenue$5,518
 $5,513
 $5
 0.1 %$3,854
 $3,677
 $177
 4.8 %
Income before income taxes$365
 $333
 $32
 9.6 %$291
 $272
 $19
 7.0 %
Benefit ratio77.9% 77.3%   0.6 %76.7% 77.0%   (0.3)%
Operating cost ratio21.3% 23.1%   (1.8)%23.6% 21.5%   2.1 %
Pretax Results
Group and Specialty segment pretax income was $93decreased $21 million, or 20.8%, from $101 million in the 2017 quarter an increase of $56 million, or 151.4%, from $37to $80 million in the 2016 quarter. This2018 quarter primarily reflecting the increase primarily reflectsin the impact ofbenefit ratio, partially offset by higher pretax earnings associated with our fully-insured commercial medical products. Themilitary services and specialty businesses. Group and Specialty segment pretax income was $365increased $19 million, or 7.0%, from $272 million in the 2017 period an increase of $32 million from $333to $291 million in the 2016 period. The increase2018 period primarily reflectsreflecting a decrease in the impact ofbenefit ratio along with higher pretax earnings associated with our fully-insured commercial medical products, partially offset by the impact of the timing of revenues under our TRICARE contract primarily relating to medical cost trend incentives and amounts for additional services requested under the contract.military business.
Enrollment
Fully-insured commercial group medical membership decreased 32,70056,600 members, or 2.9%5.1%, from SeptemberJune 30, 20162017 to SeptemberJune 30, 20172018 reflecting lower membership in small group accounts due in part to more small group accounts selecting level-funded ASO products in 2017.2018.
Group ASO commercial medical membership decreased 124,600increased 12,000 members, or 21.8%2.7%, from September 30, 2016 to SeptemberJune 30, 2017 primarily due to June 30, 2018 reflecting more small group accounts selecting level-funded ASO products in 2018, partially offset by the loss of certain large group accounts as a result of continued discipline in pricing of services for self-funded accounts amid a highly competitive environment, partially offset by more small group accounts selecting ASO products in 2017.environment.
Military services membership increased2,842,900 members, or 92.0%, from June 30, 2017 to June 30, 2018 primarily due to our transition to providing healthcare services to military service members, retirees, and their families under the new T2017 East Region contract covering 32 states, which became effective January 1, 2018.
Specialty membership decreased 21,200690,100 members, or 0.3%10.0%, from SeptemberJune 30, 20162017 to SeptemberJune 30, 20172018 primarily due to declinesreinsuring a portion of our voluntary benefits and financial protection products membership to a third party in other supplemental benefits membership,connection with the previously disclosed expected sale of KMG, as well as a decline in dental ASO membership due to terminationsthe losses of severalsome large group accounts. Other supplemental benefits include life, disability,accounts offering stand-alone dental and fixed benefit products including cancervision products. These decreases were partially offset by an increase in individual dental and critical illness policies.vision membership.
Premiums Revenue
Group and Specialty segment premiums increased $31$15 million, or 1.9%0.9%, from the 20162017 quarter to $1.7 billion for the 20172018 quarter and increased $61$54 million, or 1.2%1.6%, from the 20162017 period to $5.1$3.4 billion for the 20172018 period. These increases were primarily were due to an increasehigher stop-loss premiums related to our small group level

funded accounts and higher per-member premiums across most lines of business in group fully-insured commercial medical per-member premiums,the segment, partially offset by a declinedeclines in average group fully-insured commercial medical membership.


Services Revenue
Group and Specialty segment services revenue was relatively unchanged forincreased $65 million, or 45.5%, from the 2017 quarter decreasing $7to $208 million for the 2018 quarter and increased $123 million, or 4.8%40.5%, from the 2016 quarter. The Group and Specialty segment service revenue decreased $56 million, or 11.2%, from the 20162017 period to $444$427 million for the 20172018 period primarily due toas a decline in revenue in our group ASO commercial medical business mainly due to membership declines as well as dueresult of the transition to the timing of revenue under our TRICARE contract.T2017 East Region contract on January 1, 2018.
Benefits Expense
The Group and Specialty segment benefit ratio decreased 140increased 200 basis points from 81.0% in the 2016 quarter to 79.6%78.4% in the 2017 quarter primarily reflecting favorable utilizationto 80.4% in the 2018 quarter primarily due to the unfavorable impact of seasonality on our fully-insured commercial medical business and higherclaims, the impact of the unfavorable comparison of the favorable prior-period medical claims reserve development, the impact of lower premiums resulting from the adjustment of our commercial risk adjustment, or CRA, accrual related to the Affordable Care Act, or ACA, compliant business resulting from the release of the Centers for Medicare & Medicaid Services' final 2017 CRA data. Also contributing was a change in membership mix, including the expected migration of healthier groups to ASO level funded products in 2018, which is occurring at an accelerated pace relative to our initial expectations. These factors were partially offset by the impact of the temporary suspensionreinstatement of the health insurance industry fee for calendar year 2017in 2018 which was contemplated in the pricing of our products. The Group and Specialty segment benefit ratio increased 60decreased 30 basis points from 77.3%77.0% in the 20162017 period to 77.9%76.7% in the 20172018 period primarily due to the impact of the temporary suspensionreinstatement of the health insurance industry fee for calendar year 2017 which was contemplated in the pricing of our products,2018, partially offset by lower utilization for the fully-insured commercial medical businesssame unfavorable factors in the 2017 period.year-over-year quarter comparison, excluding the impact of the favorable prior-period reserve development.
The Group and Specialty segmentsegment's benefits expense included $13$11 million in favorable prior-period medical claims reserve development in the 2017 quarter versus favorable prior-period medical claims reserve development of $3 millionnone in the 20162018 quarter. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 8070 basis points in the 2017 quarter and decreased the benefit ratio by 20 basis points in the 2016 quarter. The Group and Specialty segment’ssegment's benefits expense included the beneficial effect of a favorable prior-period medical claims reserve development of $44$34 million in the 20172018 period versus $41$31 million in the 20162017 period. This favorable prior-period medical claims reserve development decreased the Group and Specialty segment benefit ratio by approximately 100 basis points in the 2018 period and 90 basis points in the 2017 period and 80 basis points in the 2016 period.
Operating Costs
The Group and Specialty segment operating cost ratio of 20.9%23.5% for the 2018 quarter increased 190 basis points from 21.6% for the 2017 quarter decreased 220 basis points from 23.1% for the 2016 quarter. For the 20172018 period, the Group and Specialty segment operating cost ratio of 21.3% decreased 18023.6% increased 210 basis points from 23.1%21.5% for the 20162017 period. These decreasesincreases primarily were due to the temporary suspensionreinstatement of the health insurance industry fee for calendar year 2017in 2018, growth in our military services business, which carries a higher operating cost ratio than other products within the segment, as wella result of the transition to the TRICARE T2017 East Region contract, and investments made in the 2018 quarter as a result of the Tax Reform Law as previously described. These items were partially offset by significant operating cost efficiencies partially offsetin the 2018 quarter driven by an increaseproductivity initiatives implemented in employee compensation costs resulting from the continued strong performance.2017. The non-deductible health insurance industry fee impacted the operating cost ratio by 150160 basis points in both the 20162018 quarter and the 2018 period.

Healthcare Services Segment
              
              
For the three months ended September 30, ChangeFor the three months ended June 30, Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Revenues:              
Services:              
Pharmacy solutions$57
 $20
 $37
 185.0 %
Clinical care services$39
 $50
 $(11) (22.0)%45
 46
 (1) (2.2)%
Pharmacy solutions20
 8
 12
 150.0 %
Provider services21
 19
 2
 10.5 %67
 17
 50
 294.1 %
Total services revenues80
 77
 3
 3.9 %169
 83
 86
 103.6 %
Intersegment revenues:              
Pharmacy solutions5,246
 5,562
 (316) (5.7)%5,094
 5,194
 (100) (1.9)%
Provider services392
 418
 (26) (6.2)%541
 397
 144
 36.3 %
Clinical care services273

341

(68)
(19.9)%170

300

(130)
(43.3)%
Total intersegment revenues5,911
 6,321
 (410) (6.5)%5,805
 5,891
 (86) (1.5)%
Total services and intersegment revenues$5,991
 $6,398
 $(407) (6.4)%$5,974
 $5,974
 $
  %
Income before income taxes$240
 $297
 $(57) (19.2)%$206
 $270
 $(64) (23.7)%
Operating cost ratio95.6% 94.9%   0.7 %96.2% 95.0%   1.2 %
For the nine months ended
September 30,
 ChangeFor the six months ended
June 30,
 Change
2017 2016 Dollars Percentage2018 2017 Dollars Percentage
(in millions)  (in millions)  
Revenues:              
Services:              
Pharmacy solutions$96
 $38
 $58
 152.6 %
Clinical care services$135
 $157
 $(22) (14.0)%89
 96
 (7) (7.3)%
Pharmacy solutions58
 22
 36
 163.6 %
Provider services58
 58
 
  %88
 37
 51
 137.8 %
Total services revenues251
 237
 14
 5.9 %273
 171
 102
 59.6 %
Intersegment revenues:  

      

    
Pharmacy solutions15,581
 16,404
 (823) (5.0)%10,089
 10,335
 (246) (2.4)%
Provider services1,207
 1,263
 (56) (4.4)%919
 815
 104
 12.8 %
Clinical care services876
 998
 (122) (12.2)%350
 603
 (253) (42.0)%
Total intersegment revenues17,664
 18,665
 (1,001) (5.4)%11,358
 11,753
 (395) (3.4)%
Total services and intersegment revenues$17,915
 $18,902
 $(987) (5.2)%$11,631
 $11,924
 $(293) (2.5)%
Income before income taxes$754
 $828
 $(74) (8.9)%$379
 $514
 $(135) (26.3)%
Operating cost ratio95.4% 95.2%   0.2 %96.2% 95.2%   1.0 %
Pretax Results
Healthcare Services segment pretax income of $240$206 million for the 20172018 quarter decreased by $57$64 million, or 19.2%23.7%, from $297$270 million in the 20162017 quarter. For the 20172018 period, the Healthcare Services segment pretax income of $754$379 million decreased $74$135 million, or 8.9%26.3%, from $828$514 million in the 20162017 period. These decreases primarily were due to the impact of the optimization process associated with our chronic care management

management programs, and increases in the operating cost ratio for both the 2017 quarter and period, as well as pressuresthe investments made in our provider services business reflecting lower Medicare rates year-over-year in geographies where our provider assets are primarily located for the 2017 period. The reductions in pharmacy solutions intersegment revenues were offset by similar reductions in operating costs associated with2018 quarter as a result of the pharmacy solutions business.Tax Reform Law as previously described.
Script Volume
Humana Pharmacy Solutions script volumes on an adjusted 30-day equivalent basis for Retail, Group and Specialty, and Individual Commercial segment membership increased to approximately 110 million in the 2018 quarter, up 1.9%, versus scripts of approximately 108 million in the 2017 quarter,quarter. For the 2018 period, script volumes increased to approximately 218 million, up 1.2%1.5%, versus scripts of approximately 107215 million in the 2016 quarter. For the 2017 period, script volumes for Retail, Group and Specialty, and Individual Commercial segment membership increased to approximately 323 million, up 2.1%, versus scripts of approximately 316 million in the 2016 period. These increases primarily reflected growth associated with higher individual Medicare Advantage membership, for the 2017 quarter and 2017 period compared to the 2016 quarter and 2016 period, partially offset by the decline in stand-alone PDP and Individual Commercial membership.
Services Revenues
Services revenues increased $3$86 million, or 3.9%103.6%, from the 20162017 quarter to $80$169 million for the 20172018 quarter and increased $14$102 million, or 5.9%59.6%, from the 20162017 period to $251$273 million for the 20172018 period primarily due to service revenue growth from our provider services and pharmacy solutions business.businesses.
Intersegment Revenues
Intersegment revenues decreased $410$86 million, or 6.5%1.5%, from the 20162017 quarter to $5.9$5.8 billion for the 20172018 quarter and decreased $1.0 billion,$395 million, or 5.4%3.4%, from the 20162017 period to $17.7$11.4 billion for the 20172018 period primarily due to the loss of intersegment revenues associated with our exit from the Individual commercial business, a decline in pharmacy solutions business as well asrevenue year-over-year primarily due to lower stand-alone PDP membership, the result of improving the optimization process associated witheffectiveness of our chronic care management programs previously discussed, previously, as well as ongoing pressures inand the impact to our provider services business reflectingof the lower Medicare rates year-over-year in geographies where our provider assets are primarily located. Our pharmacy solutions business revenues were impacted by improvements in net pharmacy costs driven by our pharmacy benefit manager and an increase in the generic dispensing rate. These itemsdeclines were partially offset by higher year-over-year script volume fromMedicare Advantage membership growth in our Medicare Advantage and stand-alone PDP membership, partially offset byboth the impact of lower Individual Commercial membership. Our generic dispensing rate improved to 91.2% and 91.3% during the 20172018 quarter and 2017 period, respectively, compared to 90.4% and 90.3% during the 2016 quarter and 2016 period, respectively. Theas well higher generic dispensing rate reduced revenues (and operating costs) forassociated with our pharmacy solutionsprovider services business as generic drugs are generally priced lower than branded drugs.reflecting our previously disclosed acquisition of MCCI Holdings, LLC.
Operating Costs
The Healthcare Services segment operating cost ratio of 95.6%96.2% for the 2018 quarter increased 120 basis points from 95.0% for the 2017 quarter and increased 70100 basis points from 94.9%95.2% for the 2016 quarter2017 period to 96.2% for the 2018 period primarily due to the timing of the optimization processlag in operating cost reduction associated with improving the effectiveness of our chronic conditions management programs, andas compared to the increase in employee compensation costs resulting from the continued strong performance. As we optimize our chronic care management programs, operating cost reductions may lag the associatedtiming of reduction in revenue, negatively impactingand the long-term sustainability investments in the 2018 quarter and period as a result of the Tax Reform Law. These items were partially offset by significant operating cost ratio. Forefficiencies in the 20172018 quarter and period the Healthcare Services segment operating cost ratio was relatively unchanged from the 2016 period.driven by productivity initiatives implemented in 2017.
Individual Commercial Segment

As announced on February 14, 2017, we are exiting our Individual Commercial medical business commencing January 1, 2018.

Individual Commercial segment pretax income of $26$18 million for the 20172018 quarter increased $24decreased $100 million from the 2016 quarter, primarily due to the exit of certain markets in 2017, and per-member premium increases. For the 2017 period, the Individual Commercial segment pretax income of $207 million increased $442 million from the 2016 period, primarily due to the same factors impacting the quarter in addition to the $208 million increase in the premium deficiency reserve recorded in the second quarter of 2016 related to certain of our 2016 policies.
Individual commercial medical membership decreased 583,400 members, or 80.3%, from September 30, 2016 to September 30, 2017 reflecting the decline in the number of counties we offered on-exchange coverage and the discontinuance of offering off-exchange products.
The benefit ratio for the Individual Commercial segment was 65.6% and 51.6% for the 2017 quarter and decreased $110 million from the 2017 period, respectively, a significant decrease from 82.4% and 90.9% forperiod. The pretax income in the 20162018 quarter and 2016 period respectively. The year-over-year declines primarily resulted fromreflects the impact from planned exits in 2017 in certain markets that carried a higher benefit ratio, and per-member premium increases. The 2017 period was also impacted by the effect of the $208 million increase in the 2016 premium deficiencyfavorable prior-period reserve recorded in the second quarter of 2016 related to certain of our 2016 policies.
The operating cost ratio for the Individual Commercial segment was 21.9% in the 2017 quarter, an increase of 560 basis points from 16.3% in the 2016 quarter. The Individual Commercial segment operating cost ratio of 20.0% for the 2017 period increased 340 basis points from 16.6% in the 2016 period. These increases are primarily due to the loss of scale efficiency from market exits in 2017 partially offset by the temporary suspension of the health insurance industry fee for calendar year 2017.development.
Liquidity
OurHistorically, our primary sources of cash includehave included receipts of premiums, services revenue, and investment and other income, as well as proceeds from the sale or maturity of our investment securities, borrowings, and proceeds from sales of businesses. Our primary uses of cash includehistorically have included disbursements for claims payments, operating costs, interest on borrowings, taxes, purchases of investment securities, acquisitions, capital expenditures, repayments on borrowings, dividends, and share repurchases. Because premiums generally are collected in advance of claim payments by a period of up to several months, our business normally should produce positive cash flows during periods of increasing premiums and enrollment. Conversely, cash flows would be negatively impacted during periods of decreasing premiums and enrollment. From period to period, our cash flows may also be affected by the timing of

working capital items including premiums receivable, benefits payable, and other receivables and payables. Our cash flows are impacted by the timing of payments to and receipts from CMS associated with Medicare Part D subsidies for which we do not assume risk. The use of operating cash flows may be limited by regulatory requirements of state departments of insurance (or comparable state regulators) which require, among other items, that our regulated subsidiaries maintain minimum levels of capital and seek approval before paying dividends from the subsidiaries to the parent. Our use of operating cash flows derived from our non-insurance subsidiaries, such as in our Healthcare Services segment, is generally not restricted by state departments of insurance (or comparable state regulators).
The effect of the commercial risk adjustment, risk corridor, and reinsurance provisions of the Health Care Reform Law impact the timing of our operating cash flows, as we build receivables for each coverage year that are expected to be collected in subsequent coverage years. During the nine months ended September 30, 2017, net collections under the 3Rs associated with prior coverage years were $307 million compared to $319 million during the nine months ended September 30, 2016. The remaining net receivable balance associated with the 3Rs was approximately $173 million at September 30, 2017, including $171 million related to prior coverage years, compared to $456 million at December 31, 2016, neither of which includes any risk corridor receivable. Amounts associated with prior coverage years of $171 million are expected to be collected during the fourth quarter of 2017 and first quarter of 2018. The remaining net receivable balance is primarily related to our Individual Commercial medical business which we are exiting commencing January 1, 2018. Any amounts receivable or payable associated with these risk limiting programs may have an impact on subsidiary liquidity, with any temporary shortfalls funded by the parent company.

For additional information on our liquidity risk, please refer to the section entitled “Risk Factors” in our 20162017 Form 10-K.
Cash and cash equivalents, including amounts classified as held-for-sale, increased to approximately $9.9$8.8 billion at SeptemberJune 30, 20172018 from $3.9$4.0 billion at December 31, 2016.2017. The change in cash and cash equivalents for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 is summarized as follows:
Nine Months EndedSix Months Ended
2017 20162018 2017
(in millions)(in millions)
Net cash provided by operating activities$6,962
 $4,709
$3,561
 $4,099
Net cash used in investing activities(1,776) (534)(287) (1,078)
Net cash provided by financing activities802
 23
1,515
 1,241
Increase in cash and cash equivalents$5,988
 $4,198
$4,789
 $4,262
Cash Flow from Operating Activities
Our operating cash flows for the 2018 period and 2017 period were each significantly impacted by the receipt of the $1 billion Merger break-up fee, net of related expenses and the portion of taxes paid to date, and by the early receipt of the Medicare premium remittance for October 2017remittances of $3.3 billion in June 2018 and $3.1 billion in SeptemberJune 2017 as well as for October 2016 of $3.0 billion in September 2016, because the payment dates of October 1,July 2018 and July 2017 and October 1, 2016 fell on a weekend. Generally, when the first day of a month falls on a weekend or holiday, with the exception of January 1 (New Year's Day), we receive this payment at the end of the previous month. This also resulted in an increase to unearned revenues in our condensed consolidated balance sheet at SeptemberJune 30, 2017.2018. Our operating cash flows for the 2018 period were negatively impacted by approximately $230 million related to reinsuring certain voluntary benefit and financial protection products to a third party in connection with the expected sale of KMG. Our operating cash flows for the 2017 period were also significantly impacted by the receipt of the $1 billion Merger Agreement break-up fee. Excluding the effects of the reinsurance transactions, Merger termination fee and the timing of the Medicare premium remittances, our operating cash flows were positivelyprimarily impacted by higher earnings and the timing of working capital items.
The most significant drivers of changes in our working capital are typically the timing of payments of benefits expense and receipts for premiums. We illustrate these changes with the following summaries of benefits payable and receivables.
The detail of benefits payable was as follows at SeptemberJune 30, 20172018 and December 31, 2016:2017:
 September 30, 2017 December 31, 2016 2017
Period
Change
 2016
Period
Change
 (in millions)
IBNR (1)$3,308
 $3,422
 $(114) $(104)
Reported claims in process (2)698
 654
 44
 22
Premium deficiency reserve (3)
 
 
 30
Other benefits payable (4)953
 487
 466
 125
Total benefits payable$4,959
 $4,563
 $396
 $73
 June 30, 2018 December 31, 2017 2018
Period
Change
 2017
Period
Change
 (in millions)
IBNR (1)$3,430
 $3,154
 $276
 $(117)
Reported claims in process (2)732
 614
 118
 (73)
Other benefits payable (3)916
 900
 16
 465
Total benefits payable (4)$5,078
 $4,668
 $410
 $275

(1)IBNR represents an estimate of benefits payable for claims incurred but not reported (IBNR) at the balance sheet date and includes unprocessed claim inventories. 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 and processed (i.e. a shorter time span results in a lower IBNR). IBNR includes unprocessed claims inventories.
(2)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, as well as amounts owed to our pharmacy benefit administrator which fluctuate due to bi-weekly payments and the month-end cutoff.

(3)Premium deficiency reserve for our Individual Commercial medical business compliant with the Health Care Reform Law associated with the 2016 coverage year.
(4)Other benefits payable primarily include amounts owed to providers under capitated and risk sharing arrangements.
(4)Includes $58 million classified as held-for-sale at June 30, 2018.
The increase in benefits payable from December 31, 2017 to June 30, 2018 primarily was due to an increase in IBNR, primarily as a result of Medicare Advantage membership growth as well as an increase in the amount of processed but unpaid claims, which fluctuate due to month-end cutoff. The increase in benefits payable from December 31, 2016 to SeptemberJune 30, 2017 primarily was due to an increase in the amounts owed to providers under the capitated and risk sharing arrangements. This was partially offset by a decrease in IBNR primarily driven by declines in individual commercial medical membership in the 2017 period, partially offset by an increase in group Medicare Advantage membership. The increase in benefits payable from December 31, 2015 to September 30, 2016 largely was due to an increase in the amounts owed to providers under the capitated and risk sharing arrangements, an increase in the premium deficiency reserve associated with our individual commercial medical products, and an increase in the amount of processed but unpaid claims, which fluctuate due to month-end cutoff. These items were partially offset by a decrease in IBNR primarily driven by declines in group Medicare Advantage and individual commercial medical membership in the 2016 period, partially offset by an increase in individual Medicare Advantage membership.
The detail of total net receivables was as follows at SeptemberJune 30, 20172018 and December 31, 2016:2017:
September 30, 2017 December 31, 2016 2017
Period
Change
 2016
Period
Change
June 30, 2018 December 31, 2017 2018
Period
Change
 2017
Period
Change
(in millions)(in millions)
Medicare$494
 $787
 $(293) $(259)$1,181
 $511
 $670
 $952
Commercial and other441
 579
 (138) (100)238
 273
 (35) 139
Military services76
 32
 44
 (27)132
 166
 (34) 33
Allowance for doubtful accounts(89) (118) 29
 (10)(80) (96) 16
 26
Total net receivables$922
 $1,280
 $(358) $(396)$1,471
 $854
 $617
 $1,150
Reconciliation to cash flow statement:       
Change in receivables held-for-sale    2
 
Change in receivables per cash flow
statement resulting in cash from operations
    $619
 $1,150
The changes in Medicare receivables for both the 20172018 period and the 20162017 period reflect the typical pattern caused by the timing of accruals and related collections associated with the CMS risk-adjustment model. Significant collections occur with the mid-year and final settlements with CMS in the second and third quarter.
Many provisions of the Health Care Reform Law became effective in 2014, including the commercial risk adjustment, risk corridor, and reinsurance provisions as well as the non-deductible health insurance industry fee. As discussed previously, the timing of payments and receipts associated with these provisions impact our operating cash flows as we build receivables for each coverage year that are expected to be collected in subsequent coverage years. During the 2017 period, we received net collections of $307 million for the commercial 3Rs associated with prior coverage years as compared to net collections of $319 million in the 2016 period. The net receivable balance associated with the 3Rs was approximately $173 million at September 30, 2017 and $456 million at December 31, 2016, including certain amounts recorded in receivables in the table above. In 2017, we will not pay the federal government for the annual health insurance industry fee due to the temporary one year suspension as compared to our payment of $916 million in the third quarter of 2016. The Consolidated Appropriations Act, 2016, enacted on December 18, 2015, included a one-time one year suspension in 2017 of the health insurer fee.
Cash Flow from Investing Activities
Net proceeds from investment securities sales in the 2018 period of $339 million primarily reflects action to fund the reinsurance transactions associated with the expected sale of KMG described previously. We reinvested a portion of our operating cash flows in investment securities, primarily investment-grade fixed income securities, totaling $1.4 billion$836 million in the 2017 period and $132period.
On March 1, 2018 we acquired the remaining equity interest in MCCI. The purchase price included, in part, cash consideration of $169 million, as discussed in Note 3 to the 2016 period.condensed consolidated financial statements.

On April 10, 2018, we acquired Family Physicians Group, or FPG, for cash consideration of approximately $185 million.


Our ongoing capital expenditures primarily relate to our information technology initiatives, as well as support of services in our provider services operations including medical and administrative facility improvements necessary for activities such as the provision of care to members, claims processing, billing and collections, wellness solutions, care coordination, regulatory compliance and customer service. Total capital expenditures, excluding acquisitions, were $376$272 million in the 20172018 period and $395$233 million in the 20162017 period.

Cash Flow from Financing Activities
Receipts from CMS associated with Medicare Part D claim subsidies for which we do not assume risk were higher than claims payments by $1.9$1.6 billion during the 20172018 period and higher than claims payments by $404 million$2.1 billion during the 20162017 period. Our net payable for CMS subsidies and brand name prescription drug discounts was $1.1 billion at September 30, 2017 compared to a net receivable of $1.6 billion at September 30, 2016 and $873 million at December 31, 2016. Refer to Note 6 to the condensed consolidated financial statements included in this report.
Under our administrative services only TRICARE South Region contract,contracts, health care cost payments for which we do not assume risk exceeded reimbursements from the federal government by $33 million in the 2018 period. In the 2017 period, reimbursements from the federal government exceeded health care cost payments for which we do not assume risk by $22 million in the 2017 period and by $8 million in the 2016 period.$6 million.
Claims payments associated with cost sharing provisions of the Health Care Reform Law for which we do not assume risk were $41$13 million higher than reimbursements from HHS during the 2018 period. In the 2017 period, and $62receipts from HHS associated with cost sharing provisions of the Health Care Reform Law for which we do not assume risk were $4 million higher than reimbursements from HHS duringclaims payments.
On March 26, 2018 we completed the 2016 period.
Under a share repurchase plan authorized by the Boardfinal settlement of Directors, we repurchased 7.63 million shares for $1.7 billion in the 2017 period, including $1.5 billion under the February 2017our accelerated stock repurchase plan. There were noalong with 0.08 million additional share repurchases under sharethe current stock repurchase plans authorized byauthorization during the Board of Directors in the 20162018 period due to the restrictions of the Merger Agreement.for $24 million. We also acquired common shares in connection with employee stock plans for an aggregate cost of $79$69 million in the 20172018 period and $75$78 million in the 20162017 period.
In March 2017, we issued $600 million of 3.95% senior notes due March 15, 2027 and $400 million of 4.80% senior notes due March 15, 2047. Our net proceeds, reduced for the underwriters' discount and commission and offering expenses paid as of March 31, 2017, were $991 million. We intend to use the net proceeds for general corporate purposes.
Net repaymentsproceeds from the issuance of commercial paper were $153$243 million in the 2017 period and $12018 period. Repayments of commercial paper were $102 million in the 20162017 period. The maximum principal amount outstanding at any one time during the 20172018 period was $500$442 million.
We paid dividends to stockholders of $162$126 million during the 2018 period and $104 million during the 2017 period and $133 million during the 2016 period, as discussed further below.period.
Future Sources and Uses of Liquidity
Dividends
For a detailed discussion of dividends to stockholders, please refer to Note 11 to the condensed consolidated financial statements.
Stock Repurchases
For a detailed discussion of stock repurchases, please refer to Note 11 to the condensed consolidated financial statements.
Debt
For a detailed discussion of our debt, including our senior notes, credit agreement and commercial paper program, please refer to Note 13 to the condensed consolidated financial statements.



Acquisitions and Divestitures
On November 6, 2017,In the third quarter of 2018, we entered into a definitive agreementexpect to sellcomplete the stocksale of our wholly-owned subsidiary KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care insurance policies. We willCGIC. Upon closing, we expect to fund the transaction with approximately $203$200 million of parent company cash contributed into KMG, subject to customary adjustments, in addition to the transfer of approximately $150 million of statutory capital with the sale.
During the 2018 period, we completed the acquisition of MCCI and FPG for total cash consideration of $354 million.
During July 2018 we paid cash consideration of approximately $1.1 billion as part of the Consortium's investment in Kindred, which includes both the Kindred at Home Division and Curo Health Services businesses.

For a detailed discussion of these transactions, please refer to Note 3 to the condensed consolidated financial statements.

Liquidity Requirements
We believe our cash balances, investment securities, operating cash flows, and funds available under our credit agreement and our commercial paper program or from other public or private financing sources, taken together, provide adequate resources to fund ongoing operating and regulatory requirements, acquisitions, future expansion opportunities, and capital expenditures for at least the next twelve months, as well as to refinance or repay debt, and repurchase shares.
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 SeptemberJune 30, 20172018 was BBB+ according to Standard & Poor’s Rating Services, or S&P, and Baa3 according to Moody’s Investors Services, Inc., or Moody’s. A downgrade by S&P to BB+ or by Moody’s to Ba1 triggers an interest rate increase of 25 basis points with respect to $750$250 million of our senior notes. Successive one notch downgrades increase the interest rate an additional 25 basis points, or annual interest expense by $2less than $1 million, up to a maximum 100 basis points, or annual interest expense by $8$3 million.
In addition, we operate as a holding company in a highly regulated industry. Humana Inc., our parent company, is dependent upon dividends and administrative expense reimbursements from our subsidiaries, most of which are subject to regulatory restrictions. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries. Cash, cash equivalents, and short-term investments at the parent company were $2.3$1.8 billion at SeptemberJune 30, 20172018 compared to $2.0 billion$688 million at December 31, 2016.2017. This increase primarily reflects the receipt of $1.4 billion ofwas due to insurance subsidiary dividends in excess of capital contributions from our parent company as well as operating cash derived from our non-insurance subsidiaries during the receipt of the Merger termination fee, net of related expenses, and the net proceeds associated with the issuance of senior notes in March 2017,2018 period. These items were partially offset by the paymentimpact of $1.7 billion for our share repurchase program,capital contributions into a subsidiary to fund Medicare growth, as well as the acquisitions of MCCI and FPG, dividends and capital contribution of $535 million to our long-term care subsidiary, as described below, dividends, capital expenditures and other insignificant items.expenditures. Our use of operating cash derived from our non-insurance subsidiaries, such as our Healthcare Services segment, is generally not restricted by departments of insurance (or comparable state regulator).
OurIn the third quarter of 2018, we expect to complete the sale of our wholly-owned subsidiary KMG to CGIC, a Texas-based insurance company wholly owned by HC2, which is expected to require approximately $200 million of funding from our parent company. Total cash and cash equivalents, including estimated parent company funded a subsidiary capital contribution of approximately $535 million in the first quarter of 2017 for reserve strengthening associated with our closed block of long-term care insurance policies.
The annual health insurance industry fee has been suspended for calendar year 2017, but is scheduledfunding requirements subject to resume in calendar year 2018. In September 2016, we paid the federal government $916 million for our portion of the annual health insurance industry fee attributeddisposal at June 30, 2018, was $779 million. See Note 3 to calendar year 2016 in accordance with the Health Care Reform Law. This fee is not deductible for tax purposes. Each year on January 1, except for 2017, we record a liability for this fee in trade accounts payable and accrued expenses which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost resulted in operating cost expense of approximately $231 million and $687 million for the three and nine months ended September 30, 2016, respectively, resulting from the amortization of the 2016 annual health insurance industry fee.statements.
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, or ordinary dividends, 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. Actual dividends paid may vary due to consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.

Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly at the state level. Based on the most recently filed statutory financial statements as of June 30, 2017,March 31, 2018, our state regulated subsidiaries had aggregate statutory capital and surplus of approximately $7.3$7.8 billion, which exceeded aggregate minimum regulatory requirements of $4.8$5.2 billion. Subsidiary dividends are subject to state regulatory approval, the amount and timing of which could be reduced or delayed. The amount of dividends paid to our parent company was approximately $1.9 billion during the six months ended June 30, 2018 compared to $1.4 billion during the ninesix months ended SeptemberJune 30, 2017 compared2017. Actual dividends paid may vary year over year due to $663 million during the nine months ended September 30, 2016.consideration of excess statutory capital and surplus and expected future surplus requirements related to, for example, premium volume and product mix.



Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Our earnings and financial position are exposed to financial market risk, including those resulting from changes in interest rates.
Interest rate risk also represents a market risk factor affecting our consolidated financial position due to our significant investment portfolio, consisting primarily of fixed maturity securities of investment-grade quality with a weighted average S&P credit rating of AAAA+ at SeptemberJune 30, 2017.2018. Our net unrealized position increaseddecreased $428 million from a net unrealized gain position of $198 million fromat December 31, 2017 to a net unrealized loss position of $28$230 million at December 31, 2016 to a net unrealized gain position of $170 million at SeptemberJune 30, 2017.2018. At SeptemberJune 30, 2017,2018, we had gross unrealized losses of $82$236 million on our investment portfolio primarily due to an increase in market interest rates since the time the securities were purchased. There were no material other-than-temporary impairments during the ninesix months ended SeptemberJune 30, 2017.2018. While we believe that these impairments are temporary and we currently do not have the intent to sell such securities, given the current market conditions and the significant judgments involved, there is a continuing risk that future declines in fair value may occur and material realized losses from sales or other-than-temporary impairments may be recorded in future periods.
Duration is the time-weighted average of the present value of the bond portfolio’s cash flow. Duration is indicative of the relationship between changes in fair value and changes in interest rates, providing a general indication of the sensitivity of the fair values of our fixed maturity securities to changes in interest rates. However, actual fair values may differ significantly from estimates based on duration. The average duration of our investment portfolio, including cash and cash equivalents, was approximately 3.42.2 years as of SeptemberJune 30, 20172018 and approximately 4.44.1 years as of December 31, 2016.2017. The decline in the average duration is reflective of the longer duration securities associated with the expected sale of KMG. Based on the duration, including cash equivalents, a 1% increase in interest rates would generally decrease the fair value of our securities by approximately $700$356 million at SeptemberJune 30, 2017.2018.
Item 4.    Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer, or CEO, our Chief Financial Officer, or CFO, and our Principal Accounting Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the quarter ended SeptemberJune 30, 2017.2018.
Based on our evaluation, our CEO, CFO, and our Principal Accounting Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Part II. Other Information
Item 1.     Legal Proceedings
For a description of the legal proceedings pending against us and certain other pending or threatened litigation, investigations, or other matters, see “Legal Proceedings and Certain Regulatory Matters” in Note 14 to the condensed consolidated financial statements beginning on page 29 of this Form 10-Q.
Item 1A.    Risk Factors
There have been no changes to the risk factors included in our 20162017 Form 10-K, other than as follows:
The divestiture of our subsidiary, KMG America Corporation, is subject to various closing conditions, including various regulatory approvals and customary closing conditions, as well as other uncertainties, and there can be no assurances as to whether and when it may be completed.
On November 6, 2017, we entered into a definitive agreement to sell the stock of our wholly-owned subsidiary, KMG America Corporation, or KMG, to Continental General Insurance Company, or CGIC, a Texas-based insurance company wholly owned by HC2 Holdings, Inc., a diversified holding company. KMG’s subsidiary, Kanawha Insurance Company, or KIC, includes our closed block of non-strategic commercial long-term care insurance policies that serves approximately 30,100 policyholders. Consummation of the divestiture involves certain risks, including, among other things, the timing to consummate the divestiture, the risk that a condition to closing of the divestiture may not be satisfied, the risk that required regulatory approvals for the divestiture are not obtained, are delayed or are subject to conditions that are not anticipated, the risk that we may not recognize all or a portion of the expected tax benefits from the divestiture, and the risk of indemnification exposure under the contractual agreements to effect the divestiture.10-K.
Item 2:Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)N/A
(c)The following table provides information about our purchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the three months ended SeptemberJune 30, 2017:2018:
PeriodTotal Number
of Shares
Purchased (1)(2)
 Average
Price Paid
per Share (3)
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)(2)
 Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)
July 2017
 $
 
 $1,050,000,093
August 2017953,235
 253.02
 953,235
 721,003,128
September 2017844,568
 249.56
 844,568
 510,251,912
Total1,797,803
 $249.97
 1,797,803
  
PeriodTotal Number
of Shares
Purchased (1)(2)
 Average
Price Paid
per Share
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)(2)
 Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)
April 2018
 $
 
 $2,000,000,000
May 2018
 
 
 2,000,000,000
June 201878,423
 299.47
 78,423
 1,976,514,548
Total78,423
 $299.47
 78,423
  
(1)
On FebruaryDecember 14, 2017, we announced thatour Board of Directors authorized the Board had approved a new authorization for share repurchasesrepurchase of up to $2.25$3.0 billion of our common stockshares expiring on December 31, 2020, exclusive of shares repurchased in connection with employee stock plans. Under the current share repurchase authorization, shares may be purchased from time to time at prevailing prices in the open market, by block purchases, through plans expiring on December 31, 2017. Under this new authorization, we entered into a $1.5 billiondesigned to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or in privately-negotiated transactions (including pursuant to accelerated share repurchase program in the first quarter of 2017. On August 28, 2017, we completed the final settlement of our accelerated share repurchase program.agreements with investment bankers), subject to certain regulatory restrictions on volume, pricing, and timing. Our remaining repurchase authorization was approximately $239 million$2 billion as of November 3, 2017.
August 1, 2018.
(2)Includes 0.84 million shares received in August 2017 upon settlement of an accelerated repurchase program for which no cash was paid during the period and excludes 0.37Excludes 0.25 million shares repurchased in connection with employee stock plans.

(3)Excludes the impact of the 0.84 million shares received in August 2017 upon settlement of an accelerated repurchase program which were determined by the average daily volume weighted-average share price of our common stock during the term of the ASR Agreement of $224.81.
Item 3:Defaults Upon Senior Securities
None.
Item 4:Mine Safety Disclosures
Not applicable.
Item 5:Other Information
None.


Item 6:Exhibits
3(i)Restated Certificate of Incorporation of Humana Inc. 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 (incorporated herein by reference to Exhibit 4(i) to Humana Inc.’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-49305) filed February 2, 1994).
3(ii)By-Laws of Humana Inc., as amended on January 4, 2007December 14, 2017 (incorporated herein by reference to Exhibit 33(b) to Humana Inc.’s AnnualCurrent Report on Form 10-K for the year ended8-K, filed December 31, 2006)14, 2017).
12Computation of ratio of earnings to fixed charges.
31.1Principal Executive Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
31.2Principal Financial Officer certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.
32Principal Executive Officer and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following materials from Humana Inc.'s Quarterly Report on Form 10-Q formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172018 and December 31, 2016;2017; (ii) the Condensed Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; (iv) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; and (v) Notes to Condensed Consolidated Financial Statements.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  HUMANA INC.
  (Registrant)
    
Date:November 8, 2017August 1, 2018By:/s/ CYNTHIA H. ZIPPERLE
   Cynthia H. Zipperle
   Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)
    

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