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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5975
HUMANA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-0647538
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
500 WEST MAIN STREET LOUISVILLE, KENTUCKY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 502-580-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.16 2/3 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by 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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 27, 1998 was $3,943,071,262 calculated using the
average price on such date of $25.47. The number of shares outstanding of the
Registrant's Common Stock as of February 27, 1998 was 165,210,259.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part II and Part IV incorporate herein by reference the
Registrant's 1997 Annual Report to Stockholders; Part III incorporates herein
by reference portions of the Registrant's Proxy Statement filed pursuant to
Regulation 14A covering the Annual Meeting of Stockholders scheduled to be
held May 14, 1998.
The Exhibit Index begins on page 16.
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PART I
ITEM 1. BUSINESS
GENERAL
Humana Inc. is a Delaware corporation organized in 1961. Its principal
executive offices are located at 500 West Main Street, Louisville, Kentucky
40202 and its telephone number at that address is (502) 580-1000. As used
herein, the terms "the Company" or "Humana" include Humana Inc. and its
subsidiaries. This Annual Report on Form 10-K contains both historical and
forward-looking information. The forward-looking statements may be
significantly impacted by risks and uncertainties, and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. There can be no assurance that anticipated future results will be
achieved because actual results may differ materially from those projected in
the forward-looking statements. Readers are cautioned that a number of
factors, which are described herein, could adversely affect the Company's
ability to obtain these results. These include the effects of either federal
or state health care reform or other legislation, renewal of the Company's
Medicare risk contracts with the federal government, renewal of the Company's
contract with the federal government to administer the TRICARE program
(formerly the Civilian Health and Medical Program of the Uniformed Services),
renewal of the Company's Medicaid contracts with various state governments and
the Commonwealth of Puerto Rico, and the effects of other general business
conditions, including but not limited to the Company's ability to integrate
its acquisitions, the Company's ability to appropriately address the "Year
2000" computer system issue, government regulation, competition, premium rate
changes, retrospective premium adjustments relating to federal government
contracts, medical cost trends, changes in Commercial and Medicare risk
membership, capital requirements, the ability of health care providers to
assume financial risk, general economic conditions and the retention of key
employees. In addition, past financial performance is not necessarily a
reliable indicator of future performance and investors should not use
historical performance to anticipate results or future period trends.
Since 1983, the Company has offered managed health care products that
integrate medical management with the delivery of health care services through
a network of providers. This network of providers may share financial risk or
have incentives to deliver quality medical services in a cost-effective
manner. These products are marketed primarily through health maintenance
organizations ("HMOs") and preferred provider organizations ("PPOs") that
encourage or require the use of contracting providers. HMOs and PPOs control
health care costs by various means, including pre-admission approval for
hospital inpatient services and pre-authorization of outpatient surgical
procedures. The Company also offers various specialty and administrative
service products including dental, group life and workers' compensation.
The Company's HMO and PPO products are marketed primarily to employer and
other groups ("Commercial"), as well as Medicare- and Medicaid-eligible
individuals. At December 31, 1997, the Company had a total of 3,258,600 fully
insured Commercial customers, with an average group size of 26 members. The
products marketed to Medicare-eligible individuals are either HMO products
("Medicare risk") or indemnity insurance policies that supplement Medicare
benefits ("Medicare supplement"). The Medicare risk product provides managed
care services that include all Medicare benefits and, in certain
circumstances, additional managed care services. At December 31, 1997, the
Company had 480,800 Medicare risk members and 68,800 Medicare supplement
members. The Company maintains annual contracts with various states and a two-
year contract with the Commonwealth of Puerto Rico, expiring March 31, 1999,
to provide health care to Medicaid-eligible individuals. At December 31, 1997,
the Company had 635,200 Medicaid members. The Company also offers
administrative services ("ASO") to employers who self-insure their employee
health plans. At December 31, 1997, the Company provided claims processing,
utilization review and other administrative services to 651,200 ASO members.
In total, the Company's products are licensed in 47 states, the District of
Columbia and Puerto Rico.
On July 1, 1996, the Company began providing managed health care services to
approximately 1.1 million eligible beneficiaries under a contract with the
United States Department of Defense under the TRICARE program. The government
exercised its option to extend the contract for one year effective July 1,
1997. Under
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the TRICARE contract, which is renewable annually for up to three additional
years, the Company provides managed care services to the beneficiaries of
active military personnel and retired military personnel and their
beneficiaries located in the southeastern United States. The Company has
subcontracted with third parties to provide certain administration and
specialty services under the contract. Three health benefit options are
available to TRICARE beneficiaries. In addition to a traditional indemnity
option, participants may enroll in an HMO-like plan with a point-of-service
option or take advantage of reduced co-payments by using a network of
preferred providers.
On October 17, 1997, the Company acquired ChoiceCare Corporation
("ChoiceCare") for approximately $250 million in cash. The purchase was funded
with borrowings under the Company's commercial paper program. ChoiceCare
provides health care services products to approximately 250,000 medical
members in the Greater Cincinnati, Ohio, area.
On September 8, 1997, the Company acquired Physician Corporation of America
("PCA") for total consideration of $411 million in cash, consisting primarily
of $7 per share for PCA's outstanding common stock and the assumption of $121
million in debt. The purchase was funded with borrowings under the Company's
commercial paper program. PCA serves approximately 1.1 million medical members
and provides comprehensive health care services through its HMOs in Florida,
Texas and Puerto Rico. In addition, PCA provides workers' compensation third-
party administrative management services. Prior to November 1996, PCA also was
a direct writer of workers' compensation insurance in Florida.
On February 28, 1997, the Company acquired Health Direct, Inc. ("Health
Direct") from Advocate Health Care for $23 million in cash. This transaction
added approximately 50,000 medical members to the Company's Chicago, Illinois,
membership.
On January 31, 1997, the Company completed the sale of its Washington, D.C.,
health plan to Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Effective April 1, 1997, the Company also completed the sale of its Alabama
operations, exclusive of its small group business and Alabama TRICARE
operations, to PrimeHealth of Alabama, Inc. On October 31, 1997, the Company
also sold The Lexington Hospital in Lexington, Kentucky, to Jewish Hospital
Healthcare Services, Inc. These sale transactions did not have a material
impact on the Company's financial position, results of operations or cash
flows.
COMMERCIAL PRODUCTS
HMOs
An HMO provides prepaid health care services to its members through primary
care and specialty physicians employed by the HMO at facilities owned by the
HMO, and/or through a network of independent primary care and specialty
physicians and other health care providers who contract with the HMO to
furnish such services. Primary care physicians generally include internists,
family practitioners and pediatricians. Generally, access to specialty
physicians and other health care providers must be approved by the member's
primary care physician. These other health care providers include, among
others, hospitals, nursing homes, home health agencies, pharmacies, mental
health and substance abuse centers, diagnostic centers, optometrists,
outpatient surgery centers, dentists, urgent care centers and durable medical
equipment suppliers. Because access to these other health care providers must
be approved by the primary care physician, the HMO product is the most
restrictive form of managed care.
At December 31, 1997, the Company owned and operated 18 HMOs, which
contracted with approximately 73,500 physicians (including approximately
21,500 primary care physicians) and approximately 1,100 hospitals. In
addition, the Company had approximately 7,000 contracts with other providers
to provide services to HMO members. The Company also employed approximately
450 providers in its staff model HMOs at December 31, 1997.
An HMO member, typically through the member's employer, pays a monthly fee
which generally covers, with minimal co-payments, health care services
received from or approved by the member's primary care
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physician. For the year ended December 31, 1997, Commercial HMO premium
revenues totaled approximately $1.8 billion or 23 percent of the Company's
total premium revenues. Approximately $181 million of the Company's Commercial
HMO premium revenues for the year ended December 31, 1997 were derived from
contracts with the United States Office of Personnel Management ("OPM"), under
which the Company provides health care benefits to approximately 113,000
federal civilian employees and their dependents. Pursuant to these contracts,
payments made by OPM may be retrospectively adjusted downward by OPM if an
audit discloses that a comparable product was offered by the Company to a
similar size subscriber group at a lower premium rate than that offered to
OPM. Management believes that any retrospective adjustments as a result of OPM
audits will not have a material impact on the Company's financial position,
results of operations or cash flows.
PPOs
PPO products include many elements of managed health care. PPOs are also
similar to traditional health insurance because they provide a member with the
freedom to choose a physician or other health care provider. In a PPO, the
member is encouraged, through financial incentives, to use participating
health care providers which have contracted with the PPO to provide services
at favorable rates. In the event a member chooses not to use a participating
health care provider, the member may be required to pay a greater portion of
the provider's fees.
At December 31, 1997, approximately 55,000 physicians and approximately 750
hospitals contracted directly with the Company to provide services to PPO
members. The Company also had approximately 5,500 contracts (including certain
contracts which also service the Company's HMOs) with other providers to
provide services to PPO members. In addition, the Company had access to 35
leased provider networks throughout the country.
For the year ended December 31, 1997, Commercial PPO premium revenues
totaled approximately $2.3 billion or 29 percent of the Company's total
premium revenues.
The Company expects that 1998 Commercial premium rates will increase
approximately 4 to 5 percent from 1997 levels. Over the last four years,
changes in the Company's Commercial premium rates have ranged between an
approximate 2 percent decrease for the year ended December 31, 1995, to an
approximate 5 percent increase for the year ended December 31, 1994, with an
average increase of approximately 2 percent.
MEDICARE PRODUCTS
Medicare is a federal program that provides persons age 65 and over and some
disabled persons certain hospital and medical insurance benefits, which
include hospitalization benefits for up to 90 days per incident of illness
plus a lifetime reserve aggregating 60 days. Each Medicare-eligible individual
is entitled to receive inpatient hospital care ("Part A") without the payment
of any premium, but is required to pay a premium to the federal government,
which is adjusted annually, to be eligible for physician care and other
services ("Part B").
Even though participating in both Part A and Part B of the traditional
Medicare program, beneficiaries are still required to pay certain deductible
and coinsurance amounts. They may, if they choose, supplement their Medicare
coverage by purchasing Medicare supplement policies which pay these
deductibles and coinsurance amounts. Many of these policies also cover other
services (such as prescription drugs) which are not included in Medicare
coverage.
Certain managed care companies which operate HMOs contract with the federal
government's Health Care Financing Administration ("HCFA") to provide medical
benefits to Medicare-eligible individuals residing in the geographic areas in
which their HMOs operate in exchange for a fixed monthly payment per member
from HCFA. Individuals who elect to participate in these Medicare risk
programs are relieved of the obligation to pay some or all of the deductible
or coinsurance amounts but are generally required to use exclusively the
services provided by the HMO and are required to pay a Part B premium to the
Medicare program. The enrollee pays the
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HMO a premium only in cases where the HMO provides additional benefits and
where competitive market conditions permit. Where competitive conditions
permit, the Company charges a premium to members (in addition to the payment
from HCFA) for some of its Medicare risk products. At December 31, 1997,
approximately 40,000 members in 16 markets were paying premiums which totaled
approximately $29 million for the year ended December 31, 1997.
Medicare Risk
A Medicare risk product involves a contract between an HMO and HCFA pursuant
to which HCFA makes a fixed monthly payment to the HMO on behalf of each
Medicare-eligible individual who chooses to enroll for coverage in the HMO.
Membership may be terminated by the member upon 30 days' notice. The fixed
monthly payment is determined by formula established in federal law.
As of January 1, 1998, the Company provides Medicare risk services under 16
contracts with HCFA in 11 states. Management believes that additional Medicare
risk growth opportunities exist because only approximately 15 percent of the
country's Medicare-eligible beneficiaries are enrolled in managed care
programs similar to those offered by the Company. The Company intends to
pursue those opportunities in under-penetrated markets which meet the
Company's long-term growth strategies.
At December 31, 1997, HCFA Contracts covered approximately 480,800 Medicare
risk members for which the Company received premium revenues of approximately
$2.4 billion or 31 percent of the Company's total premium revenues for the
year ended December 31, 1997. At December 31, 1997, one such HCFA Contract
covered approximately 249,000 members in Florida and accounted for premium
revenues of approximately $1.5 billion, which represented 62 percent of the
Company's HCFA premium revenues or 19 percent of the Company's total premium
revenues for the year ended December 31, 1997. HCFA Contracts are renewed for
a one-year term each December 31 unless terminated 90 days prior thereto.
Management believes termination of the HCFA Contract covering the members in
Florida would have a material adverse effect on the revenues, profitability
and business prospects of the Company.
The Company's 1998 average rate of statutory increase under the HCFA
Contracts will approximate 2 percent. Over the last five years, annual
increases have ranged from as low as the January 1998 increase of 2 percent to
as high as 9 percent in January 1996, with an average of approximately 5
percent, including the January 1998 increase.
The Balanced Budget Act of 1997 adopted certain changes to the Medicare
program that can be expected to affect the Company's Medicare risk program.
These include provisions that affect the methodology for payment and expand
the options available to Medicare beneficiaries by permitting HCFA to contract
with a variety of types of managed care plans, including provider sponsored
networks. HCFA is expected to publish regulations implementing the Balanced
Budget Act on June 1, 1998. (See "Health Care Reform--National.") Management
is unable to predict the effect of these regulations on the Company's
financial position, results of operations or cash flows. The loss of the
Company's HCFA Contracts or significant changes in the Medicare risk program
as a result of legislative action, including reductions in payments or
increases in benefits without corresponding increases in payments, would have
a material adverse effect on the revenues, profitability and business
prospects of the Company.
Medicare Supplement
The Company's Medicare supplement product is an insurance policy which pays
for hospital deductibles, co-payments and coinsurance for which an individual
enrolled in the traditional Medicare program is responsible.
Under the terms of existing Medicare supplement policies, the Company may
not reduce or cancel the benefits contracted for by policyholders. These
policies are renewable annually by the insured at the Company's prevailing
rates, which may increase subject to approval by appropriate state insurance
regulators.
At December 31, 1997, the Company provided Medicare supplement benefits to
approximately 68,800 members. For the year ended December 31, 1997, Medicare
supplement premium revenues totaled approximately $79 million or 1 percent of
the Company's total premium revenues.
4
MEDICAID PRODUCT
Medicaid is a federal program that is state-operated to provide health care
services to low-income residents. Each state which chooses to do so develops,
through a state specific regulatory agency, a Medicaid managed care initiative
which must be approved by HCFA. HCFA requires that Medicaid managed care plans
meet federal standards and cost no more than the amount that would have been
spent on a comparable fee-for-service basis. States currently use either a
formal proposal process reviewing many bidders or award individual contracts
to qualified bidders which apply for entry to the program. In either case, the
contractual relationship with the state is generally for a one-year period.
Management believes that the risks associated with participation in a state
Medicaid managed care program are similar to the risks associated with the
Medicare risk product discussed previously. In both instances, the Company
receives a fixed monthly payment from a government agency for which it is
required to provide managed health care services to enrolled members. Due to
the increased emphasis on state health care reform and budgetary constraints,
more states are utilizing a managed care product in their Medicaid programs.
The Company also maintains a two-year contract with the Commonwealth of Puerto
Rico, expiring March 31, 1999, to provide health care to Medicaid-eligible
individuals. For the year ended December 31, 1997, premium revenues from the
Company's Medicaid products totaled approximately $224 million or 3 percent of
the Company's total premium revenues. It is anticipated that Medicaid premium
revenues will be approximately 6 percent of the Company's total 1998 premium
revenues. At December 31, 1997, the Company had approximately 635,200 Medicaid
members in four states and the Commonwealth of Puerto Rico.
TRICARE
In 1993, the Company established Humana Military Healthcare Services, Inc.
(a wholly-owned subsidiary of the Company), to enter in contracts to provide
managed care services to the beneficiaries of active military personnel and
retired military personnel and their beneficiaries. In November 1995, the
United States Department of Defense awarded the Company its first TRICARE
contract covering approximately 1.1 million eligible beneficiaries in Florida,
Georgia, South Carolina, Mississippi, Alabama, Tennessee and Eastern
Louisiana.
On July 1, 1996, the Company began providing managed health care services to
these approximate 1.1 million eligible beneficiaries under a potential five-
year contract (a one-year contract originally renewable annually for up to
four additional years). The government exercised its option to extend the
contract for one year effective July 1, 1997. The Company has subcontracted
with third parties to provide certain administration and specialty services
under the contract. Three health benefit options are available to TRICARE
beneficiaries. In addition to a traditional indemnity option, participants may
enroll in an HMO-like plan with a point-of-service option or take advantage of
reduced co-payments by using a network of preferred providers. TRICARE premium
revenues were approximately $764 million or 10 percent of the Company's total
premium revenues for the year ended December 31, 1997.
The Company will actively seek opportunities to provide managed care
services to beneficiaries of federal and state programs, including other
TRICARE contracts.
OTHER RELATED PRODUCTS
The Company offers various specialty and administrative services products
including dental, group life and workers' compensation. Specialty membership
at December 31, 1997 totaled approximately 2.4 million members, including
approximately 884,000 members for which the Company provides only
administrative services. Specialty product premium revenues were approximately
$230 million or 3 percent of the Company's total premiums for the year ended
December 31, 1997.
PROVIDER ARRANGEMENTS
The Company's HMOs contract with individual or groups of primary care
physicians, generally for an actuarially determined, fixed, per-member-per-
month fee called a "capitation" payment. Under these
5
arrangements, physicians are paid a fixed amount to provide services to their
members. These contracts typically obligate primary care physicians to provide
or make referrals to other health care providers for the provision of all
covered managed health care services to HMO members. These services include
services provided by specialty physicians and other providers. The capitation
payment does not vary with the nature or extent of services to the member and
is generally designed to shift a portion of the HMOs' financial risk to the
primary care physician. The degree to which the Company uses capitation
arrangements varies by provider. The Company also employs approximately 450
providers in markets where it operates staff model HMOs.
The Company also contracts with medical specialists and other providers to
which a primary care physician may refer a member. The contracts with
specialists may be capitation arrangements or may provide for payment on a
fee-for-service basis based on negotiated fees. Typically, payments by the
Company to these specialists and other providers reduce the ultimate payment
that otherwise would be made to primary care physicians. The Company's HMOs
also have arrangements under which physicians can earn bonuses when certain
target goals relating to quality and cost effectiveness in the provision of
patient care are met. The Company's contracts with capitated physicians
generally provide for stop-loss coverage so that a physician's financial risk
for any single member is limited to a certain amount on an annual basis.
The focal point for cost control in the Company's HMOs is the primary care
physician, whether employed or under contract, who provides services and
controls utilization of appropriate services by directing or approving
hospitalization and referrals to specialists and other providers. Cost control
is further achieved by directly negotiating provider discounts. Cost control
in the Company's PPOs is achieved primarily by establishing a cost-effective
network of participating health care providers and providing incentives for
members to use such providers. These providers are generally paid on a
negotiated fee-for-service basis. With respect to both HMO and PPO products,
cost control is further achieved through the use of a utilization review
system designed to allow only necessary hospital admissions, lengths of stay
and necessary or appropriate medical procedures. The Company's HMOs and PPOs
generally contract for hospital services under per-diem arrangements for
inpatient hospital services and discounted fee-for-service arrangements for
outpatient services. During the year ended December 31, 1997, approximately 41
percent of the Company's total medical costs were for services provided to its
members in hospitals or related facilities.
The Company has certain risk-sharing contracts whereby the providers assume
a specified level of risk for covered managed care services to its members.
Included in these contracts are full risk capitation arrangements ("global
capitation"), the majority of which were assumed as part of the PCA
acquisition. Under global capitation contracts, providers are paid a monthly
capitation payment per covered member to assume financial risk for the
delivery of all health care services. These payments are based on a specified
percentage of premiums (typically 78 to 88 percent depending on the contract).
At December 31, 1997, approximately 168,400 Commercial members, 40,800
Medicare risk members and 546,800 Medicaid members were covered under these
global capitation contracts.
Under all of its arrangements, the Company remains financially responsible
for the provision of or payment for covered medical services if its
contractors fail to perform their obligations under the contract.
In March 1998, the Company reached an agreement in principle with the
Advocate Health Care System ("Advocate") under which Advocate will assume
operations of 13 of the Company's staff model centers in the Chicago,
Illinois, area and will provide health care services under a long-term
provider agreement with the Company. This agreement encompasses 165 providers
employed by Humana and approximately 164,000 members of the Company.
During 1997, the Company continued its Hospital Inpatient Management System
("HIMS") which allows specially trained physicians to manage the entire range
of medical care while each HMO member is in the hospital, and coordinate the
member's discharge and care after discharge. The Company has also implemented
a Demand Management program which provides members telephone access to
registered nurses 24 hours a day, seven days a week. As of December 31, 1997,
the Demand Management program was available to the majority
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of the Company's fully insured members. The Company continues to implement
several disease management programs in various markets. Under these
arrangements, the Company provides financial incentives for contractors to
provide the full range of care to members with respect to a particular high
risk or chronic disease in a quality, cost-effective manner. These disease
management programs include congestive heart failure, prenatal and premature
infant care, end stage renal disease, diabetes and breast cancer screening.
QUALITY ASSESSMENT AND CUSTOMER SERVICE
Access to high quality health care services is an important element of the
Company's business. All of the Company's contracts require that the provider
participate in the Company's quality assurance program. Physician
participation in the Company's HMOs and PPOs is conditioned upon the physician
meeting the Company's requirements concerning the physician's professional
qualifications. When considering whether to contract with a physician, the
Company performs or contracts for on-going credentialing verifications and
peer review that meet both regulatory and accrediting agency standards.
The Company has a program in place to monitor important aspects of HMO plan-
wide service and quality indicators with oversight by a senior management
committee. Such indicators as credentialing, quality concerns, customer
service, disenrollment and satisfaction are measured against standards.
Another measure of quality is the reporting of Health Plan Employer Data
Information Sets ("HEDIS"), which the Company has been reporting since June
1994. HEDIS is useful to purchasers of managed health care services to measure
individual health plan quality and service. Each HMO has in place a peer
review procedure which is implemented by a quality management committee
("QMC"). This committee is headed by the HMO's medical director and is
composed of physicians and physician group representatives. The QMC performs
an initial evaluation of applicants for credentialing and reviews all
providers on a periodic basis to monitor the appropriateness of members' care.
HEALTH MAINTENANCE ORGANIZATION ACCREDITATION
With the increasing significance of managed care in the health care
industry, several independent organizations have been formed for the purpose
of responding to external demands for accountability over the managed care
industry. The organizations utilized by the Company are the National Committee
for Quality Assurance ("NCQA") and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"). In the states of Kansas and Florida,
accreditation or external review by an accrediting organization is mandatory
and generally required for licensure.
NCQA performs site reviews of standards established for quality assurance,
credentialing, utilization management, medical records, preventive services
and members rights and responsibilities. As of January 31, 1998, thirteen of
Humana's HMOs have achieved various levels of accreditation from NCQA. Humana
Medical Plan, Inc. in its South Florida, Northeast Florida, Tampa Bay and
Central Florida markets, Humana Health Plan, Inc. in its Chicago market,
Humana Health Plan of Texas, Inc. in its San Antonio market (which includes
Houston, Austin and Dallas) and Humana Kansas City, Inc. all received full
accreditation status. Humana Health Plan of Ohio, Inc. has received one-year
accreditation. During 1997, Humana acquired ChoiceCare Health Plans, Inc. and
PCA Health Plans of Florida, Inc.-Central, Northern and Southern regions and
PCA Health Plans of Texas, Inc. These plans had previously achieved full
accreditation from NCQA. The Company is currently preparing for NCQA
accreditation for the remainder of its HMO plans, beginning with the review of
Humana Health Plan, Inc. in Louisville scheduled for May 1998 and Humana
Wisconsin Health Organization in Milwaukee, which is scheduled for May 1999.
JCAHO reviews rights, responsibilities and ethics, continuum of care,
education and communication, leadership, management of information and human
resources, and network performance. JCAHO also evaluates the mechanisms the
organization has established to ensure continuous quality improvement. As of
December 31, 1997, Humana Medical Plan, Inc. in its Fort Walton market
received three-year accreditation from JCAHO.
7
MANAGEMENT INFORMATION SYSTEMS
The Company's managed care health plans use centralized, integrated
information systems developed and/or customized specifically to meet the
Company's needs and to allow for aggregation of data and comparison across
markets. These information systems support marketing, sales, underwriting,
contract administration, billing, financial and other administrative
functions, as well as customer service, appointment scheduling, authorization
and referral management, concurrent review, physician capitation and claims
administration, provider management, quality management and utilization
review. The Company is currently in the process of integrating PCA and
ChoiceCare on to these centralized systems.
Key to the Company's information systems are operational reports, used by
market office and corporate personnel for such items as physician profiling,
utilization review, quality assessment, member satisfaction measurement and
employer reporting. Clinical software is used as well to assess
appropriateness of medical care provided to the Company's members. The
Company's information systems are continually upgraded to support new products
in an integrated manner, as well as to take advantage of the latest advances
in technology.
The Company has conducted an assessment of its computer systems to identify
the systems that could be affected by the "Year 2000" issue, which results
from computer programs having been written to define the applicable year using
two digits rather than four digits. The Company believes that, with
modifications to existing software, the Year 2000 issue will not pose
significant operational problems for its computer system as so modified. The
Company plans to complete the majority of the Year 2000 modifications by
December 31, 1998. At present, the Company anticipates that the incremental
costs incurred in connection with the Year 2000 project will approximate $12
to $15 million.
The costs of the project and the date on which the Company plans to complete
the necessary Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the ability of the Company's
significant suppliers, customers and others with which it conducts business,
including federal and state governmental agencies, to identify and resolve
their own Year 2000 issues and similar uncertainties.
SALES AND MARKETING
Individuals become members of the Company's Commercial HMOs and PPOs through
their employer or other groups which typically offer employees or members a
selection of managed health care products, pay for all or part of the premiums
and make payroll deductions for any premiums payable by the employees. The
Company attempts to become an employer's or group's exclusive source of
managed health care benefits by offering HMO and PPO products that provide
cost-effective quality care consistent with the needs and expectations of the
employees or members.
The Company uses various methods to market its Commercial and Medicare
products, including television, radio, telemarketing and mailings. At December
31, 1997, the Company used approximately 44,600 licensed independent brokers
and agents and approximately 500 licensed employees to sell the Company's
Commercial products. Many of the Company's employer group customers are
represented by insurance brokers and consultants who assist these groups in
the design and purchase of health care products. The Company generally pays
brokers a commission based on premiums, with commissions varying by market and
premium volume.
At December 31, 1997, the Company used approximately 3,500 licensed
independent brokers for referrals and approximately 1,000 employed sales
representatives, who are each paid a salary and/or per member commission, to
market the Company's Medicaid and Medicare products. The Company also used
approximately 600 telemarketing representatives who assisted in the marketing
of Medicaid and Medicare products by making appointments for broker/sales
representatives with prospective members.
8
The following table lists the Company's medical membership at December 31,
1997, by state and product:
MEDICAL MEMBERSHIP
(IN THOUSANDS)
COMMERCIAL
--------------- MEDICARE MEDICARE PERCENT
PPO HMO RISK MEDICAID TRICARE SUPPLEMENT ASO TOTAL OF TOTAL
------- ------- -------- -------- ------- ---------- ----- ------- --------
Florida................. 192.2 387.6 282.6 128.8 422.2 6.7 6.3 1,426.4 23.0%
Texas................... 238.4 311.8 68.6 39.0 -- 8.0 16.7 682.5 11.0%
Illinois................ 213.2 306.8 57.7 16.4 -- 0.2 57.1 651.4 10.5%
Puerto Rico............. 75.8 25.4 -- 431.4 -- -- -- 532.6 8.6%
Wisconsin............... 85.7 117.0 -- 19.6 -- -- 241.6 463.9 7.5%
Kentucky................ 135.8 113.0 12.0 -- -- 32.4 128.1 421.3 6.8%
Georgia................. 85.0 4.2 -- -- 266.8 4.4 1.5 361.9 5.8%
Ohio.................... 82.1 191.8 6.6 -- -- -- 58.4 338.9 5.5%
Missouri/Kansas......... 48.9 114.0 21.7 -- -- 6.7 47.8 239.1 3.8%
Indiana................. 97.5 25.1 1.1 -- -- 1.7 26.2 151.6 2.4%
South Carolina.......... 7.7 -- -- -- 139.1 -- 1.1 147.9 2.4%
Tennessee............... 49.7 -- -- -- 71.7 0.8 6.0 128.2 2.1%
Other................... 346.5 3.4 30.5 -- 212.4 7.9 60.4 661.1 10.6%
------- ------- ----- ----- ------- ---- ----- ------- -----
Total................... 1,658.5 1,600.1 480.8 635.2 1,112.2 68.8 651.2 6,206.8 100.0%
======= ======= ===== ===== ======= ==== ===== ======= =====
RISK MANAGEMENT
Through the use of internally developed underwriting criteria, the Company
determines the risk it is willing to assume and the amount of premium to
charge for its Commercial products. In most instances, employer and other
groups must meet the Company's underwriting standards in order to qualify to
contract with the Company for coverage. Small group reform laws in some states
have imposed regulations which provide for guaranteed issue of certain health
insurance products and prescribe certain limitations on the variation in rates
charged based upon assessment of health conditions.
Underwriting techniques are not employed in connection with Medicare risk
HMO products because HCFA regulations require the Company to accept all
eligible Medicare applicants regardless of their health or prior medical
history. The Company also is not permitted to employ underwriting criteria for
the Medicaid product but rather follows HCFA and state requirements. In
addition, with respect to the TRICARE contract, no underwriting techniques are
employed because the Company must accept all eligible beneficiaries who choose
to participate.
COMPETITION
The managed health care industry is highly competitive and contracts for the
sale of Commercial products are generally bid or renewed annually. The
Company's competitors vary by local market and include Blue Cross/Blue Shield
(including HMOs and PPOs owned by Blue Cross/Blue Shield plans), national
insurance companies and other HMOs and PPOs, including provider sponsored
networks. Many of the Company's competitors have larger membership in local
markets or greater financial resources. The Company's ability to sell its
products and to retain customers is or may be influenced by such factors as
benefits, pricing, contract terms, number and quality of participating
physicians and other managed health care providers, utilization review, claims
processing, administrative efficiency, relationships with agents, quality of
customer service and accreditation results.
9
GOVERNMENT REGULATION
Of the Company's 18 licensed HMO subsidiaries, nine are qualified under the
Federal Health Maintenance Organization Act of 1973, as amended. Ten
subsidiaries are parties to HCFA contracts to provide Medicare risk HMO
products in 11 states.
To obtain federal qualification, an HMO must meet certain requirements,
including conformance with financial criteria, a standard method of rate
setting, a comprehensive benefit package, and prohibition of medical
underwriting of individuals. In certain markets, and for certain products, the
Company operates HMOs that are not federally qualified because this provides
greater flexibility with respect to product design and pricing than is
possible for federally qualified HMOs.
HCFA conducts audits of Medicare risk HMOs at least biannually and may
perform other reviews more frequently to determine compliance with federal
regulations and contractual obligations. These audits include review of the
HMO's administration and management (including management information and data
collection systems), fiscal stability, utilization management and incentive
arrangements, health services delivery, quality assurance, marketing,
enrollment and disenrollment activity, claims processing, and complaint
systems. HCFA regulations require quarterly and annual submission of financial
statements and restrict the number of Medicare risk and Medicaid members to no
more than the HMO's Commercial membership in a specified service area. In
1998, it is possible to seek a federal waiver of this requirement and in 1999
this requirement ceases to exist. The Company has applications for waivers
pending in its Florida, Las Vegas, Nevada, and Phoenix, Arizona, markets, and
intends to seek additional waivers during 1998. HCFA also requires independent
review of medical records and quality of care, review and approval by HCFA of
all advertising, marketing and communication materials, and independent review
of all denied claims and service complaints which are not resolved in favor of
a member.
In addition, HCFA requires certain disclosures to HCFA and to Medicare
beneficiaries concerning the financial arrangements which managed care
organizations have with physicians with whom they contract. These rules also
require certain levels of stop-loss coverage to protect contracted physicians
against major losses relating to patient care, depending on the amount of
financial risk they assume. HCFA also requires the reporting of certain health
care data contained in HEDIS.
The Company's Medicaid products are regulated by the applicable state agency
in the state in which the Company sells a Medicaid product and the
Commonwealth of Puerto Rico, in conformance with federal approval of the
applicable state plan, and are subject to periodic reviews by these agencies.
The reviews are similar in nature to those performed by HCFA.
Laws in each of the states (and the Commonwealth of Puerto Rico) in which
the Company operates its HMOs, PPOs and other health insurance-related
services regulate the Company's operations, including the scope of benefits,
rate formulas, delivery systems, utilization review procedures, quality
assurance, enrollment requirements, claim payments, marketing and advertising.
The HMO, PPO and other health insurance-related products offered by the
Company are sold under licenses issued by the applicable insurance regulators.
The Company's HMOs, PPOs and other health insurance-related services are
required to be in compliance with certain minimum capital requirements. These
requirements must be satisfied by investing in approved investments that
generally cannot be used for other purposes. Under state laws, the Company's
HMOs and health insurance companies are audited by state departments of
insurance for financial and contractual compliance, and its HMOs are audited
for compliance with health services standards by respective state departments
of health. Most states' laws require such audits to be performed at least
triennially.
The Company and its licensed subsidiaries are subject to regulation under
state insurance holding company and Commonwealth of Puerto Rico regulations.
These regulations require, among other things, prior approval and/or notice of
certain material transactions, including dividend payments, intercompany
agreements and the filing of various financial and operational reports.
Management believes that the Company is in substantial compliance with all
governmental laws and regulations affecting the Company's business.
10
HEALTH CARE REFORM
There continue to be diverse legislative and regulatory initiatives at both
the federal and state levels to address aspects of the nation's health care
system.
National
In 1997, Congress passed the Balanced Budget Act ("Act") which revised the
structure of and reimbursement for private health plan options for Medicare
enrollees. The Act seeks to expand the options available to Medicare enrollees
by permitting HCFA to contract with a variety of types of managed care plans,
creating a new Medicare fee-for-service option and establishing a Medicare
Medical Savings Account Demonstration Program. The legislation also encourages
provider sponsored organizations to contract directly with HCFA to provide
coverage for Medicare enrollees. Federal reimbursement was modified so that
the premiums paid by HCFA will be adjusted to take into account, on an
increasing basis, a blend of national and local health care cost factors,
rather than only local costs--starting with a 10% national factor in 1998 and
moving to a 50% national factor by 2003. Congress also provided for gradual
removal of a graduate medical education factor in determining reimbursement.
In addition, effective January 1, 1998, the Company's Medicare reimbursement
has been reduced through the assessment of .4 percent of premium
(approximately $12 to $14 million). This assessment was designed to fund a
national senior education program.
Also in 1997, Congress provided states with funding for expansion of private
health plan coverage for children who currently are uninsured. Approximately
$20 billion over five years will be made available for states to offer such
coverage to uninsured children.
Current legislative proposals under consideration include greater government
oversight over private health insurance. Such proposals include creating
liability for medical decision making and setting minimum quality standards
and service delivery requirements for plan enrollees. In addition, the
President and the President's Advisory Commission on Consumer Protection and
Quality in the Health Care Industry have made recommendations for enhancing
certain consumer health insurance rights.
Congress is also evaluating whether to extend health insurance to certain
uninsured groups, such as early retirees and the unemployed. Such matters
under discussion include permitting individuals over the age of 62 to purchase
coverage under the Medicare program if no other plan is available and
extending coverage under the Consolidated Omnibus Budget Reconciliation Act
("COBRA") to individuals who accept early retirement after the age of 55.
Management believes that continuing concerns over health care accessibility,
costs, and quality will result in additional legislative and regulatory
efforts to reform the health care system.
State
Legislation enacted in the states has included, among other things,
conforming existing state law to the federally enacted Health Insurance
Portability and Affordability Act ("HIPAA"), mental health parity and
maternity length of stay laws. Issues relating to managed care consumer
protection standards, including increased plan information disclosure,
expanded emergency room services coverage, expedited appeals procedure, third
party review of certain medical decisions, health plan liability, access to
specialists and confidentiality of medical records continue to be under
discussion. Further, proposals that place restrictions on the selection and
termination of participating health care providers also are receiving review.
Management believes that managed care and health care in general will
continue to be scrutinized and may lead to additional legislative health care
reform initiatives. Management is unable to predict how existing federal or
state laws and regulations may be changed or interpreted, what additional laws
or regulations affecting the Company's businesses may be enacted or proposed,
when and which of the proposed laws will be adopted or what effect any such
new laws and regulations will have on the revenues, profitability and business
prospects of the Company.
11
OTHER
Captive Insurance Company
The Company insures substantially all professional liability risks through a
wholly-owned subsidiary (the "Subsidiary"). The annual premiums paid to the
Subsidiary are determined by independent actuaries. The Subsidiary reinsures
levels of coverage for losses in excess of its retained limits with unrelated
insurance carriers.
Centralized Management Services
Centralized management services are provided to each health plan from the
Company's headquarters and service centers. These services include management
information systems, product administration, financing, personnel,
development, accounting, legal advice, public relations, marketing, insurance,
purchasing, risk management, actuarial, underwriting and claims processing.
EMPLOYEES
As of December 31, 1997, the Company had approximately 19,500 employees,
including approximately 600 employees covered by collective bargaining
agreements. The Company has not experienced any work stoppages and believes it
has good relations with its employees.
ITEM 2. PROPERTIES
The Company owns its principal executive office, which is located in the
Humana Building, 500 West Main Street, Louisville, Kentucky 40202.
The Company provides medical services in owned or leased medical centers
ranging in size from approximately 1,500 to 80,000 square feet. The Company's
administrative market offices are generally leased, with square footage
ranging from approximately 700 to 89,000. The following chart lists the
location of properties used in the operation of the Company at December 31,
1997:
MEDICAL ADMINISTRATIVE
CENTERS OFFICES
------------ ----------------
OWNED LEASED OWNED LEASED TOTAL
----- ------ ------- ------- -----
Florida..................................... 7 91 3 47 148
Illinois.................................... 8 18 -- 10 36
Texas....................................... 5 4 1 16 26
Puerto Rico................................. -- -- -- 24 24
Kentucky.................................... 8 4 2 2 16
Missouri/Kansas............................. 3 6 -- 6 15
Ohio........................................ -- -- -- 9 9
California.................................. -- -- -- 8 8
Wisconsin................................... -- -- -- 8 8
Other....................................... 1 3 1 42 47
--- --- ------- ------- ---
Total..................................... 32 126 7 172 337
=== === ======= ======= ===
In addition, the Company owns buildings in Louisville, Kentucky, San
Antonio, Texas and Green Bay, Wisconsin, and leases facilities in
Jacksonville, Florida and Madison, Wisconsin, all of which are used for
customer service and claims processing. The Louisville and Green Bay
facilities also perform enrollment processing and other corporate functions.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit styled Mary Forsyth, et al v. Humana Inc., et al,
Case #CV-5-89-249-PMP (L.R.L.), was filed on March 29, 1989, in the United
States District Court for the District of Nevada. On August 18, 1997, the
Company filed a Petition for Writ of Certiorari in the United States Supreme
Court ("Petition") requesting
12
the Supreme Court to reverse part of a ruling by the Court of Appeals for the
Ninth Circuit which had reinstated certain claims that had been dismissed by
the U.S. District Court in Nevada in the case involving claims arising out of
the method of calculation of coinsurance for Nevada insureds prior to 1988.
The Petition requested the Supreme Court to reverse the Ninth Circuit's
decision to reinstate the claim under the Racketeer Influenced and Corrupt
Organizations Act ("RICO") on behalf of a class of insureds who paid
coinsurance at Humana hospitals (the "Co-Payer Class"). The petition is
pending before the Supreme Court. The Ninth Circuit, in a decision issued on
May 23, 1997, in response to the Company's Petition for Reconsideration on
Rehearing En Banc following its original November 4, 1996 decision, ruled that
the damages in the Co-Payer Class's RICO claim, before any trebling, were
correctly limited to the amount of overpayment of the coinsurance, which
totaled approximately $1.6 million plus interest. The Ninth Circuit also
reinstated an antitrust claim that had been dismissed by the District Court.
The Company requested summary judgment in the District Court on that Claim on
October 6, 1997. On September 22, 1997, plaintiffs filed their Fourth Amended
Complaint. On October 1, 1997, the plaintiffs filed a motion in the District
Court for leave to file a Fifth Amended Complaint reasserting an ERISA claim
and adding new RICO and antitrust claims. The Company filed a motion to
dismiss the amended complaint and a motion opposing the plaintiffs' request to
file the amended complaint. The motions are pending before the District Court.
Oral arguments on the plaintiffs' and Company's motions were held on January
30, 1998. The trial which was scheduled to begin on February 23, 1998 on all
of the remaining claims has been postponed.
On April 22, 1993, an alleged stockholder of the Company filed a purported
shareholder derivative action in the Court of Chancery of the State of
Delaware, County of New Castle, styled Lewis v. Austen, et al, Civil Action
No. 12937. The action was purportedly brought on behalf of the Company and
Galen Health Care, Inc. ("Galen") against all of the directors of both
companies at the time Galen was spun off from the Company alleging, among
other things, that the defendants had improperly amended the Company's
existing stock option plans to bifurcate their existing options to allow
employees of each company to receive options in the stock of the other
company. The challenged amendment to the plan was approved by the Company's
stockholders at the 1993 Annual Meeting of Stockholders. There has been little
activity in this case. The defendants filed a motion to dismiss the case in
October 1995, which is still pending. The Company believes that the complaint
is without merit.
Between November 19, 1997 and December 11, 1997, three related, purported
class action complaints entitled (i) Medhat Reiser v. PCA, et al, Civil Action
No. 97-3678 (S.D. Fla.) (Middlebrooks, J.), (ii) Janice Wells and Stewart
Colton v. PCA, et al, Civil Action No. 97-3832 (King, J.), and (iii) David
Applestein v. PCA, et al, Civil Action No. 97-4030 (Nesbitt, J.), were filed
in the United States District Court for the Southern District of Florida by
purported former stockholders of Physician Corporation of America ("PCA")
against PCA and certain of its former directors and officers. By order entered
February 13, 1998, the three actions were consolidated into a single action
entitled In re Physician Corporation of America Securities Litigation, Civil
Action No. 97-3678 (S.D. Fla.) (Middlebrooks, J.). The Reiser, Wells and
Applestein complaints (a consolidated amended complaint has not yet been
filed) contain the same or substantially similar allegations; namely, that PCA
and the individual defendants knowingly or recklessly made false and
misleading statements in press releases and public filings with respect to the
financial and regulatory difficulties of PCA's workers' compensation business.
Count I of all three complaints is premised on alleged violations of Section
10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule
10b-5, and Count II on alleged violations of Section 20(a) of the 1934 Act.
All three complaints seek certification of a class of stockholders who
purchased shares of PCA common stock from May 1996 through March 1997, as well
as money damages plus prejudgment interest in an unspecified amount, and costs
and expenses including attorneys fees. The Company believes that the
allegations in the above complaints are without merit and intends to pursue
the defense of the consolidated action vigorously.
Damages for claims for personal injuries and medical benefit denials are
usual in the Company's business. Personal injury claims are covered by
insurance from the Subsidiary and excess carriers, except punitive damages
generally are not paid where claims are settled and generally are awarded only
where a court determines there has been a willful act or omission to act.
13
Management does not believe that any pending legal actions will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are names and ages of all of the current executive officers
of the Company as of February 27, 1998, their positions, and the date first
elected an officer of the Company:
NAME AGE POSITION FIRST ELECTED OFFICER
---- --- -------- ---------------------
Gregory H. Wolf......... 41 President and Chief Executive Officer 10/95(1)
Victor M. Agruso........ 38 Vice President--Organization Development and 08/97(2)
Corporate Relations
David R. Astar.......... 45 Vice President--Customer Service 09/96(3)
Kenneth J. Fasola....... 38 Vice President--Sales and Marketing 05/96(4)
Arthur P. Hipwell....... 49 Senior Vice President and General Counsel 08/90(5)
Michael B. McCallister.. 45 Senior Vice President--Health System Management 09/89(6)
James E. Murray......... 44 Vice President and Chief Financial Officer 08/90(7)
David R. Nelson......... 43 Vice President and Chief Actuary 09/96(8)
Bruce D. Perkins........ 43 Senior Vice President--National Contracting 09/94(9)
Jerry D. Reeves, M.D.... 53 Senior Vice President and Chief Medical Officer 01/97(10)
Kirk E. Rothrock........ 39 Vice President--Specialty Products and Businesses 05/96(11)
George W. Vieth, Jr..... 42 Vice President--Strategy and Systems Development 12/95(12)
- --------
(1) Mr. Wolf currently serves as President, Chief Executive Officer and
Director of the Company having been elected to this position December
1997. Mr. Wolf previously served as President and Chief Operating Officer
from September 1996 until December 1997 and served as Chief Operating
Officer of the Company since July 1996. Mr. Wolf was initially elected an
officer of the Company at the time of the acquisition of EMPHESYS in
1995. Mr. Wolf had been President and Chief Operating Officer of EMPHESYS
(now a wholly-owned subsidiary of the Company) since November 1994. Mr.
Wolf was named Executive Vice President for Employers Health Insurance
Company ("EHIC") (a wholly-owned subsidiary of EMPHESYS) in 1993 and was
named Senior Vice President for EHIC in 1990 for Marketing, Sales and
Business Development.
(2) Mr. Agruso was elected to the above position in August 1997. Before
joining the Company, Mr. Agruso was Global Director--Footwear Human
Resources at Nike, Inc. in Portland, Oregon in 1997. From the spring of
1995 until the fall of 1996, Mr. Agruso was Vice President--People
Services at Secura Insurance Companies in Appleton, Wisconsin. In 1995
and 1996, he also performed consulting services for various clients.
Prior to that, he was Director of Organization and Human Resource
Development at Hallmark Cards, Inc. in Kansas City, Missouri from 1992
through April 1995.
(3) Mr. Astar currently serves as Vice President--Customer Service and was
elected to this position in September 1996. Prior to that, Mr. Astar was
Vice President of Customer Service of EHIC since 1990.
(4) Mr. Fasola currently serves as Vice President--Sales and Marketing and
was elected an officer of the Company in May 1996. Prior to that, Mr.
Fasola was Vice President and National Sales Manager of EHIC since 1989.
(5) Mr. Hipwell was initially elected an officer of the Company in 1990 and
previously served in this same capacity from July 1992, until the spinoff
of Galen Health Care Inc. ("Galen"), when he became Senior Vice President
and General Counsel of Galen. Mr. Hipwell returned to the Company in
January 1994 and was named Senior Vice President and General Counsel of
the Company in June 1994.
(6) Mr. McCallister currently serves as Senior Vice President--Health System
Management and was elected to this position January 1998. Prior to that,
Mr. McCallister served as Division I President from July 1996 to January
1998. Mr. McCallister joined the Company in June 1974 as a Financial
Specialist and has served in several positions throughout the Company.
14
(7) Mr. Murray currently serves as Vice President and Chief Financial Officer
and was elected to this position January 1997. Prior to that, Mr. Murray
served as Vice President--Finance from August 1990 to January 1997. Mr.
Murray joined the Company as Controller in October 1989.
(8) Mr. Nelson was elected to the above position in September 1996. Prior to
that, Mr. Nelson was Vice President and Chief Actuary of EHIC since 1992.
(9) Mr. Perkins currently serves as Senior Vice President--National
Contracting and was elected to this position January 1998. Prior to that,
Mr. Perkins served as Senior Vice President--Provider Affairs and
Reengineering from August 1996 to January 1998. He served as President of
the South/West Division from May 1996 to August 1996 and Vice President--
Region II from August 1994 to May 1996. Mr. Perkins joined the Company in
May 1978.
(10) Dr. Reeves, a pediatric oncologist, joined the Company in January 1997 in
the above position. Prior to that, Dr. Reeves was Senior Vice President--
Health Care Operations and Chief Medical Officer at Sierra Health
Services, Inc. in Las Vegas, Nevada. Dr. Reeves was employed by Sierra
for eight years.
(11) Mr. Rothrock was elected to the above position in May 1996. Prior to
that, Mr. Rothrock served in a similar capacity as Vice President for
EHIC since 1993 and as an Assistant Vice President since 1991.
(12) Mr. Vieth currently serves as Vice President--Strategy and Systems
Development and was elected to this position in January 1998. Prior to
that, Mr. Vieth served as Vice President--Development and Planning
beginning in December 1995. Mr. Vieth joined the Company in November 1992
as Director of Development and Planning. Before joining the Company, Mr.
Vieth was Vice President and General Counsel of Glenmore Distilleries in
Louisville, Kentucky since 1989.
Executive officers are elected annually by the Company's Board of Directors
and serve until their successors are elected or until resignation or removal.
There are no family relationships among any of the executive officers of the
Company.
PART II
Certain information for Items 5 through 8 of this report, which appears in
the 1997 Annual Report to Stockholders as indicated on the following table, is
incorporated by reference herein in this report and filed as an
exhibit hereto:
ANNUAL REPORT
TO STOCKHOLDERS
PAGE
---------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 47
As of December 31, 1997, there were approximately 9,500
Company stockholders.
ITEM 6. SELECTED FINANCIAL DATA............................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 22-29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements......................... 30-43
Report of independent accountants......................... 44
Quarterly financial information (unaudited)............... 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item other than the information set forth
in Part I under the Section entitled "EXECUTIVE OFFICERS OF THE COMPANY," is
herein incorporated by reference from the Registrant's Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on May 14, 1998, appearing
under the caption "ELECTION OF DIRECTORS OF THE COMPANY FOR 1998" of such
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "EXECUTIVE
COMPENSATION OF THE COMPANY" of such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK" of such Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is herein incorporated by reference
from the Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 14, 1998, appearing under the caption "CERTAIN
TRANSACTIONS WITH MANAGEMENT AND OTHERS" of such Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements, financial statement schedules and exhibits set
forth below are filed as part of this report.
(1) Financial Statements--The response to this portion of Item 14 is
submitted as Item 8 of this report.
(2) Index to Consolidated Financial Statement Schedules:
Consolidated Schedules as of and for the years ended December 31,
1997, 1996 and 1995:
I Parent Company Financial Information
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable.
(3) Exhibits:
3(a) Restated Certificate of Incorporation filed with the Secretary of
State of Delaware on November 9, 1989, as restated to incorporate
the amendment of January 9, 1992, and the correction of March 23,
1992. Exhibit 4(i) to the Company's Post-Effective Amendment to the
Registration Statement on Form S-8 (Reg. No. 33-49305) filed
February 2, 1994, is incorporated by reference herein.
16
3(b) By-laws, as amended filed herewith.
4(a) Form of Amended and Restated Rights Agreement dated February 14,
1996, between Humana Inc. and Mid-America Bank of Louisville and
Trust Company. Exhibit 1.3 to the Registration Statement (File
No. 1-5975) on Form 8-A/A dated February 14, 1996, is
incorporated by reference herein.
(b) There are no instruments defining the rights of holders with
respect to long-term debt in excess of 10 percent of the total
assets of the Company on a consolidated basis. Other long-term
indebtedness of the Company is described in Note 6 of Notes to
Consolidated Financial Statements in the Company's 1997 Annual
Report to Stockholders. The Company agrees to furnish copies of
all such instruments defining the rights of the holders of such
indebtedness to the Commission upon request.
10(a)* 1981 Non-Qualified Stock Option Plan, as amended. Exhibit 10(c)
to the Company's Form SE filed on November 25, 1987, is
incorporated by reference herein.
(b)* Amendment No. 2 to the 1981 Non-Qualified Stock Option Plan, as
amended. Annex A to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(c)* 1989 Stock Option Plan for Employees. Exhibit A to the Company's
Proxy Statement covering the Annual Meeting of Stockholders held
on January 11, 1990, is incorporated by reference herein.
(d)* Amendment No. 1 to the 1989 Stock Option Plan for Employees.
Annex B to the Company's Proxy Statement covering the Annual
Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(e)* Amendment No. 2 to the 1989 Stock Option Plan for Employees.
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, is incorporated by reference
herein.
(f)* 1989 Stock Option Plan for Non-Employee Directors. Exhibit B to
the Company's Proxy Statement covering the Annual Meeting of
Stockholders held on January 11, 1990, is incorporated by
reference herein.
(g)* Amendment No. 1 to the 1989 Stock Option Plan for Non-Employee
Directors. Annex C to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on February 18, 1993, is
incorporated by reference herein.
(h)* Amendment No. 2 to the 1989 Stock Option Plan for Non-Employee
Directors. Exhibit 10(h) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, is incorporated
by reference herein.
(i)* 1996 Stock Incentive Plan for Employees. Annex A to the Company's
Proxy Statement covering the Annual Meeting of Stockholders held
on May 9, 1996, is incorporated by reference herein.
(j)* Executive Management Incentive Compensation Plan--Group A,
Corporate. Exhibit C to the Company's Proxy Statement covering
the Annual Meeting of Stockholders held on May 26, 1994, is
incorporated by reference herein.
(k)* Humana Inc. 1997 Management Incentive Plan for Executive
Management. Annex A to the Company's Proxy Statement covering the
Annual Meeting of Stockholders held on May 8, 1997, is
incorporated by reference herein.
(l)* Humana Inc. 1997 Management Incentive Plan for Employees. Exhibit
10 to the Company's Form 10-Q for the quarter ended March 31,
1997, is incorporated by reference herein.
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
17
10(m)* Restated agreement providing for termination benefits in the
event of a change of control, filed herewith.
(n)* Humana Inc. 1998 Management Incentive Compensation Plan, filed
herewith.
(o)* Employment Agreement--Gregory H. Wolf, dated December 1, 1997,
filed herewith.
(p)* Humana Officers' Target Retirement Plan, as amended, filed
herewith.
(q)* Form Letter Agreement concerning Humana Officers' Target
Retirement Plan dated June 18, 1992, for David A. Jones. Exhibit
10(s) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, is incorporated by reference
herein.
(r)* Humana Thrift Excess Plan as amended. Exhibit 10(s) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, is incorporated by reference herein.
(s)* Humana Supplemental Executive Retirement Plan as amended. Exhibit
10(t) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, is incorporated by reference
herein.
(t)* Letter agreement with Company officers concerning health
insurance availability. Exhibit 10(mm) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994,
is incorporated by reference herein.
(u)* Form of Retention Bonus Agreement between each of Gregory H. Wolf
and certain other executive officers and the Company. Exhibit
10(w) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, is incorporated by reference
herein.
(v) Indemnity Agreement. Appendix B to the Company's Proxy Statement
covering the Annual Meeting of Stockholders held on January 8,
1987, is incorporated by reference herein.
(w) Agreement between the Secretary of the Department of Health and
Human Services and Humana Medical Plan, Inc. Exhibit 10(w) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, is incorporated by reference herein.
(x) The $1.5 Billion Credit Facility between the Company and Chase
Manhattan Bank. Exhibit 10 to the Company's Current Report on
Form 8-K filed on September 23, 1997, is incorporated by
reference herein.
(y) The $1.5 Billion Commercial Paper Private Placement Memorandum
between the Company and Chase Securities, Inc. Exhibit 4a to the
Company's Current Report on Form 8-K filed on September 23, 1997,
is incorporated by reference herein.
(z) The $1.5 Billion Commercial Paper Private Placement Memorandum
between the Company and Merrill Lynch Money Markets, Inc. Exhibit
4b to the Company's Current Report on Form 8-K filed on September
23, 1997, is incorporated by reference herein.
(aa) Assumption of Liabilities and Indemnification Agreement between
the Company and Galen Health Care, Inc. ("Galen"). Exhibit 10(g)
to the Company's Current Report on Form 8-K filed on March 5,
1993, is incorporated by reference herein.
(bb) Agreement between the United States Department of Defense and
Humana Military Healthcare Services, Inc., a wholly-owned
subsidiary of the Company. Exhibit 10(dd) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
is incorporated by reference herein.
- --------
* Exhibits 10(a) through and including 10(u) are compensatory plans or
management contracts.
18
12 Statement re: Computation of Ratio of Earnings to Fixed Charges,
filed herewith.
13 1997 Annual Report to Stockholders, filed herewith. The Annual
Report shall not be deemed to be filed with the Commission except to
the extent that information is specifically incorporated by
reference herein.
21 List of Subsidiaries, filed herewith.
23 Consent of Coopers & Lybrand L.L.P., filed herewith.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
HUMANA INC.
/s/ James E. Murray
By: ------------------------------------
James E. Murray
Chief Financial Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ James E. Murray Chief Financial Officer March 31, 1998
- ------------------------- (Principal Accounting Officer)
James E. Murray
/s/ David A. Jones Chairman of the Board March 31, 1998
- -------------------------
David A. Jones
/s/ David A. Jones, Jr. Vice Chairman of the Board March 31, 1998
- -------------------------
David A. Jones, Jr.
/s/ K. Frank Austen, M.D. Director March 31, 1998
- -------------------------
K. Frank Austen, M.D.
/s/ Michael E. Gellert Director March 31, 1998
- -------------------------
Michael E. Gellert
/s/ John R. Hall Director March 31, 1998
- -------------------------
John R. Hall
/s/ Irwin Lerner Director March 31, 1998
- -------------------------
Irwin Lerner
/s/ W. Ann Reynolds, Ph.D. Director March 31, 1998
- -------------------------
W. Ann Reynolds, Ph.D.
/s/ Gregory H. Wolf Director, President and March 31, 1998
- ------------------------- Chief Executive Officer
Gregory H. Wolf
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Humana Inc.
Our report on our audits of the consolidated financial statements of Humana
Inc. dated February 10, 1998 has been incorporated by reference in this Form
10-K from page 44 of the 1997 Annual Report to Stockholders of Humana Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index in Item 14(a)(2)
of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky
February 10, 1998
21
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-------------
1997 1996
ASSETS ------ ------
Receivables from operating subsidiaries.......................... $ 162 $ 158
Other current assets............................................. 11 42
Property and equipment, net...................................... 167 153
Investments in subsidiaries...................................... 2,251 1,342
Other............................................................ 60 61
------ ------
TOTAL ASSETS................................................. $2,651 $1,756
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.............................................. $ 229 $ 223
Long-term debt................................................... 889 222
Other............................................................ 32 19
------ ------
Total liabilities............................................ 1,150 464
------ ------
Contingencies(b)
Preferred stock, $1 par; authorized 10,000,000 shares; none is-
sued............................................................ -- --
Common stock, $.16 2/3 par; authorized 300,000,000 shares; issued
and outstanding 164,058,225 shares--1997 and 162,681,123
shares--1996.................................................... 27 27
Other stockholders' equity....................................... 1,474 1,265
------ ------
Total stockholders' equity................................... 1,501 1,292
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $2,651 $1,756
====== ======
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) In the normal course of business, the parent company indemnifies certain
of its subsidiaries for health plan obligations its subsidiaries may be
unable to meet.
22
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
YEARS ENDED
DECEMBER 31,
---------------------
1997(b) 1996 1995(c)
------- ---- -------
Revenues:
Management fees charged to operating subsidiaries....... $228 $170 $181
Interest income......................................... 5 3 23
---- ---- ----
233 173 204
---- ---- ----
Expenses:
Selling, general and administrative..................... 201 189 146
Depreciation and amortization........................... 26 21 20
Interest expense........................................ 17 9 14
---- ---- ----
244 219 180
---- ---- ----
Income (loss) before income taxes and equity in income of
subsidiaries............................................ (11) (46) 24
Income tax (expense) benefit............................ 9 18 (9)
---- ---- ----
Income (loss) before equity in income of subsidiaries.... (2) (28) 15
Equity in income of subsidiaries........................ 175 40 175
---- ---- ----
Net income............................................... $173 $ 12 $190
==== ==== ====
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) Includes the operations of Health Direct, Inc., Physician Corporation of
America and ChoiceCare Corporation since their dates of acquisition,
February 28, 1997, September 8, 1997 and October 17, 1997, respectively.
(c) Includes the operations of EMPHESYS Financial Group, Inc. since October
11, 1995, the date of acquisition.
23
HUMANA INC.
SCHEDULE I--PARENT COMPANY FINANCIAL INFORMATION(a)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 1995
----- ----- -----
Net cash provided by operating activities(b)............... $ 191 $ 57 $ 186
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (38) (32) (24)
Purchases of marketable securities........................ (6) (6) (65)
Maturities and sales of marketable securities............. 1 5 303
Parent funding of operating subsidiaries.................. (209) (46) (31)
Acquisitions of health plans.............................. (656) -- (657)
Other..................................................... 17 (8) (25)
----- ----- -----
Net cash used in investing activities.................... (891) (87) (499)
----- ----- -----
Cash flows from financing activities:
Issuance of long-term debt................................ 300 -- 250
Repayment of long-term debt............................... -- (250) --
Net commercial paper borrowings........................... 367 222 --
Other..................................................... 33 58 63
----- ----- -----
Net cash provided by financing activities................ 700 30 313
----- ----- -----
Change in cash and cash equivalents........................ -- -- --
Cash and cash equivalents at beginning of period........... -- -- --
----- ----- -----
Cash and cash equivalents at end of period................. $ -- $ -- $ --
===== ===== =====
- --------
(a) Parent company financial information has been derived from the
consolidated financial statements of the Company and excludes the accounts
of all operating subsidiaries. This information should be read in
conjunction with the consolidated financial statements of the Company.
(b) During the years ended December 31, 1997, 1996 and 1995, the Company
received dividends from its operating subsidiaries totaling $146 million,
$140 million and $145 million, respectively.
24
HUMANA INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ACQUIRED DEDUCTIONS OR END OF
OF PERIOD EXPENSES BALANCES WRITE-OFFS PERIOD
---------- ---------- -------- ------------- ----------
Allowance for loss on
premiums receivable:
Year ended December 31,
1995.................. $20 $ 4 $13 $(1) $36
Year ended December 31,
1996.................. 36 11 -- (9) 38
Year ended December 31,
1997.................. 38 10 9 (9) 48
25