Edgar Filing: HUMANA INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨ 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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

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 Stock

Outstanding at

October 31, 2005

$0.16 2/3 par value

162,788,934 shares

Humana Inc.

FORM 10-Q

SEPTEMBER 30, 2005

INDEX


	Part I: Financial Information	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	37

	Part II: Other Information

Item 1.	Legal Proceedings	38

Item 6.	Exhibits	38

	Signatures and Certifications	39

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2005			December 31, 2004
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	978,936		$	580,079
Investment securities		2,228,424			2,145,645
Receivables, less allowance for doubtful accounts of $33,481 in 2005 and $34,506 in 2004:
Premiums		695,344			554,661
Administrative services fees		15,796			24,954
Securities lending collateral		117,553			77,840
Other		247,083			212,958

Total current assets		4,283,136			3,596,137

Property and equipment, net		457,078			399,506
Other assets:
Long-term investment securities		365,634			348,465
Goodwill		1,220,461			885,572
Other		506,112			427,937

Total other assets		2,092,207			1,661,974

Total assets	$	6,832,421		$	5,657,617

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical and other expenses payable	$	1,817,226		$	1,422,010
Trade accounts payable and accrued expenses		509,438			488,332
Book overdraft		258,433			192,060
Securities lending payable		117,553			77,840
Unearned revenues		533,908			146,326
Current portion of long-term debt		302,366			—

Total current liabilities		3,538,924			2,326,568
Long-term debt		317,210			636,696
Other long-term liabilities		610,317			604,229

Total liabilities		4,466,451			3,567,493

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1 par; 10,000,000 shares authorized; none issued		—			—
Common stock, $0.16 2/3 par; 300,000,000 shares authorized; 178,608,482 shares issued at September 30, 2005 and 176,044,649 shares issued at December 31, 2004		29,768			29,340
Capital in excess of par value		1,083,631			1,017,156
Retained earnings		1,473,699			1,229,823
Accumulated other comprehensive (loss) income		(3,504	)		16,526
Unearned stock compensation		(14,553	)		(1,721	)
Treasury stock, at cost, 15,840,173 shares at September 30, 2005 and 15,778,088 shares at December 31, 2004		(203,071	)		(201,000	)

Total stockholders’ equity		2,365,970			2,090,124

Total liabilities and stockholders’ equity	$	6,832,421		$	5,657,617

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,
	2005		2004		2005		2004
	(in thousands, except per share results)
Revenues:
Premiums	$	3,712,364	$	3,083,554	$	10,449,198	$	9,566,447
Administrative services fees		63,817		59,837		190,454		219,420
Investment and other income		45,280		32,882		115,395		108,833

Total revenues		3,821,461		3,176,273		10,755,047		9,894,700

Operating expenses:
Medical		3,094,397		2,550,911		8,736,639		8,024,167
Selling, general and administrative		611,300		460,171		1,571,793		1,416,695
Depreciation and amortization		34,119		31,238		95,131		84,715

Total operating expenses		3,739,816		3,042,320		10,403,563		9,525,577

Income from operations		81,645		133,953		351,484		369,123
Interest expense		10,141		6,480		28,986		16,524

Income before income taxes		71,504		127,473		322,498		352,599
Provision for income taxes		21,560		43,170		78,622		119,713

Net income	$	49,944	$	84,303	$	243,876	$	232,886


Basic earnings per common share	$	0.31	$	0.53	$	1.51	$	1.45


Diluted earnings per common share	$	0.30	$	0.52	$	1.48	$	1.43

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the nine months ended September 30,
	2005			2004
	(in thousands)
Cash flows from operating activities
Net income	$	243,876		$	232,886
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		95,131			84,715
(Benefit) provision for deferred income taxes		(29,062	)		27,545
Changes in operating assets and liabilities, net of effect of businesses acquired:
Receivables		(129,236	)		106,709
Other assets		(31,287	)		(18,776	)
Medical and other expenses payable		357,841			92,916
Other liabilities		(4,162	)		26,675
Unearned revenues		367,809			(204,426	)
Other, net		1,214			(19,920	)

Net cash provided by operating activities		872,124			328,324

Cash flows from investing activities
Acquisitions, net of cash acquired		(352,816	)		(115,972	)
Purchases of property and equipment		(112,318	)		(72,900	)
Proceeds from sales of property and equipment		2,648			28,972
Purchases of investment securities		(1,694,123	)		(3,614,781	)
Maturities of investment securities		596,276			840,275
Proceeds from sales of investment securities		992,420			2,203,853
Change in securities lending collateral		(39,713	)		4,149

Net cash used in investing activities		(607,626	)		(726,404	)

Cash flows from financing activities
Borrowings under credit agreement		294,000			—
Repayments under credit agreement		(294,000	)		—
Change in securities lending payable		39,713			(4,149	)
Common stock repurchases		(2,071	)		(64,472	)
Change in book overdraft		66,373			(102,948	)
Proceeds from stock option exercises and other		30,344			13,335

Net cash provided by (used in) financing activities		134,359			(158,234	)

Increase (decrease) in cash and cash equivalents		398,857			(556,314	)
Cash and cash equivalents at beginning of period		580,079			931,404

Cash and cash equivalents at end of period	$	978,936		$	375,090

Supplemental cash flow disclosures:
Interest payments	$	33,903		$	22,663
Income tax payments, net	$	125,574		$	44,922

See accompanying notes to condensed consolidated financial statements.

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

(1) Basis of Presentation

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 those normally made in an Annual Report on Form 10-K. For further information, the reader of this Form 10-Q should refer to our Form 10-K for the year ended December 31, 2004, that was filed with the Securities and Exchange Commission, or the SEC, on March 2, 2005. References throughout this document to “we,” “us,” “our,” the “Company,” and “Humana,” mean Humana Inc. and all entities we own.

The preparation of our condensed consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas involving the most significant use of estimates are the estimation of medical expenses payable, the recognition of revenue, the valuation and related impairment recognition of investment securities, and the valuation and related impairment recognition of long-lived assets, including goodwill. Although our estimates are based on knowledge of current events and anticipated future events, actual results may ultimately differ materially from those estimates. Refer to “Critical Accounting Policies and Estimates” in Humana’s 2004 Annual Report on Form 10-K for information on accounting policies that the Company considers critical in preparing its 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.

(2) Significant Accounting Policies

Stock-Based Compensation

We have stock-based employee compensation plans, which are described more fully in Note 11 to the consolidated financial statements in Humana’s 2004 Annual Report on Form 10-K. We account for stock options granted to our employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, or APB No. 25. No employee compensation cost is reflected in net income related to fixed-based stock option awards because these options had an exercise price equal to the market value of the underlying common stock on the date of grant. Generally, if a fixed-based stock option award is subsequently modified, compensation expense, if any, is recorded for the amount that the market price of Humana common stock exceeds the option’s exercise price on the date the option is modified. Compensation expense for performance-based stock options is recognized over the performance period varying based on the market value of the underlying common stock at the end of each period. Compensation expense is recorded for restricted stock grants over their vesting periods based on fair value, which is equal to the market price of Humana common stock on the date of the grant.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

The effect on net income and earnings per common share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to our fixed-based stock option awards using the Black-Scholes pricing model was as follows for the three and nine months ended September 30, 2005 and 2004.


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
	(in thousands, except per share results)
Net income, as reported	$	49,944		$	84,303		$	243,876		$	232,886
Add: Stock-based employee compensation expense included in reported net income, net of related tax		2,082			591			5,081			1,463
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax		(5,219	)		(3,216	)		(14,000	)		(9,334	)

Adjusted net income	$	46,807		$	81,678		$	234,957		$	225,015


Earnings per common share:
Basic, as reported	$	0.31		$	0.53		$	1.51		$	1.45

Basic, pro forma	$	0.29		$	0.51		$	1.45		$	1.40


Diluted, as reported	$	0.30		$	0.52		$	1.48		$	1.43

Diluted, pro forma	$	0.28		$	0.51		$	1.42		$	1.38

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, or Statement 123R, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a significant change because fixed-based stock option awards, a predominate form of stock compensation for us, were not recognized as compensation expense under APB 25. Statement 123R requires that the cost of the award, as determined on the date of grant at fair value, be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of the award will be estimated using option-pricing models. We are required to adopt Statement 123R beginning January 1, 2006 under either a prospective or retrospective transition method. The effect of expensing stock options under a fair value approach using the Black-Scholes pricing model for the three and nine months ended September 30, 2005 and 2004 is disclosed above. We currently are evaluating the provisions of Statement 123R and the expected effect on us including, among other items, selecting an option pricing model. We anticipate using the retrospective transition model which we estimate would lower 2005 results by approximately $0.08 per diluted common share. We believe the impact of adopting Statement 123R would lower 2006 results approximately $0.10 per diluted common share, assuming a similar number and pattern of granting stock option awards as the current year, the use of the Black-Scholes pricing model with expected life and volatility assumptions similar to the current year, a stock price reflective of our current environment and a forfeiture rate as preliminarily calculated.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

(3) Acquisitions

On February 16, 2005, we acquired CarePlus Health Plans of Florida, or CarePlus, as well as its affiliated 10 medical centers and pharmacy company. CarePlus provides Medicare Advantage HMO plans and benefits to Medicare eligible members in Miami-Dade, Broward and Palm Beach counties. This acquisition enhances our Medicare market position in South Florida. We paid approximately $444.9 million in cash including transaction costs. We financed the transaction with $294.0 million of borrowings under our credit agreement and $150.9 million of cash on hand. The purchase price is subject to a balance sheet settlement process with a nine month claims run-out period. The fair value of the acquired tangible assets (liabilities) consisted of the following:


	(in thousands)
Cash and cash equivalents	$	92,116
Premiums receivable and other current assets		6,510
Property and equipment and other assets		21,315
Medical and other expenses payable		(37,375	)
Other current liabilities		(23,986	)
Other liabilities		(3,995	)

Net tangible assets acquired	$	54,585

The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $390.3 million. We allocated the excess purchase price over the fair value of the net tangible assets acquired to other intangible assets of $88.9 million and associated deferred tax liabilities of $33.5 million, and goodwill of $334.9 million. The other intangible assets, which consist primarily of subscriber contracts, have a weighted-average useful life of approximately 10 years. Approximately $46.9 million of the acquired goodwill is deductible for income tax purposes. We used an independent third party valuation specialist firm to assist us in evaluating the fair value of assets acquired.

On April 1, 2004, we acquired Ochsner Health Plan, or Ochsner, from the Ochsner Clinic Foundation for $157.1 million in cash.

The results of operations and financial condition of CarePlus and Ochsner have been included in our condensed consolidated statements of income and condensed consolidated balance sheets since the acquisition date. The pro forma financial information presented below assumes that the acquisitions of CarePlus and Ochsner had occurred as of the beginning of each respective period. The pro forma adjustments include the pro forma effect of amortization of other intangible assets arising from the purchase price allocation and interest expense related to the assumed financing of the cash purchase price and the associated income tax effects of the pro forma adjustments. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the CarePlus and Ochsner acquisitions been consummated at the beginning of the respective periods.


	For the three months ended September 30,				For the nine months ended September 30,
	2005		2004 (1)		2005 (2)		2004 (3)
	(in thousands, except per share results)
Revenues	$	3,821,461	$	3,299,049	$	10,827,598	$	10,441,797
Net income	$	49,944	$	89,974	$	247,187	$	251,487
Earnings per common share:
Basic	$	0.31	$	0.56	$	1.53	$	1.56
Diluted	$	0.30	$	0.56	$	1.50	$	1.55

(1)	This period includes the pro forma impact of CarePlus only for three months.

(2)	This period includes the pro forma impact of CarePlus only for approximately 1.5 months.

(3)	This period includes the pro forma impact of CarePlus for nine months and Ochsner for three months.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

(4) Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill, by operating segment, for the nine months ended September 30, 2005 were as follows:


	Commercial		Government		Total
	(in thousands)
Balance at December 31, 2004	$	698,430	$	187,142	$	885,572
CarePlus acquisition		—		334,889		334,889

Balance at September 30, 2005	$	698,430	$	522,031	$	1,220,461

The following table presents details of our other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheets at September 30, 2005 and December 31, 2004:


	Weighted Average Life at 9/30/05	September 30, 2005						December 31, 2004
	Weighted Average Life at 9/30/05	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
		(in thousands)
Other intangible assets:
Subscriber contracts	9.8 yrs	$	181,256	$	98,357	$	82,899	$	97,256	$	82,343	$	14,913
Provider contracts	9.6 yrs		22,428		13,158		9,270		22,428		11,022		11,406
Licenses and other	18.3 yrs		10,690		2,485		8,205		5,790		1,787		4,003

Total other intangible assets	10.1 yrs	$	214,374	$	114,000	$	100,374	$	125,474	$	95,152	$	30,322

Amortization expense for other intangible assets was approximately $18.8 million for the nine months ended September 30, 2005 and $8.1 million for the nine months ended September 30, 2004. The following table presents our estimate of amortization expense for the remaining three months of 2005, and for each of the five next succeeding fiscal years:


	(in thousands)
For the three month period ending December 31, 2005	$	4,959
For the years ending December 31,:
2006	$	17,290
2007	$	14,074
2008	$	11,474
2009	$	7,652
2010	$	7,155

(5) Comprehensive Income

The following table presents details supporting the computation of comprehensive income for the three and nine months ended September 30, 2005 and 2004:


	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
	(in thousands)
Net income	$	49,944		$	84,303	$	243,876		$	232,886
Net unrealized investment (losses) gains, net of tax		(16,619	)		30,553		(20,030	)		(3,112	)

Comprehensive income, net of tax	$	33,325		$	114,856	$	223,846		$	229,774

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

(6) Earnings Per Common Share

We compute basic earnings per common share on the basis of the weighted average number of unrestricted common shares outstanding. Diluted earnings per common share is computed on the basis of the weighted average number of unrestricted common shares outstanding plus the dilutive effect of outstanding employee stock options and unvested restricted shares using the treasury stock method. There were no adjustments required to be made to net income for purposes of computing basic or diluted earnings per common share.

The following table presents details supporting the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2005 and 2004:


	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share results)
Net income available for common stockholders	$	49,944	$	84,303	$	243,876	$	232,886


Weighted average outstanding shares of common stock used to compute basic earnings per common share		162,048		159,308		161,484		160,697
Dilutive effect of:
Employee stock options		3,852		1,662		3,487		1,824
Restricted stock		137		27		70		43

Shares used to compute diluted earnings per common share		166,037		160,997		165,041		162,564


Basic earnings per common share	$	0.31	$	0.53	$	1.51	$	1.45


Diluted earnings per common share	$	0.30	$	0.52	$	1.48	$	1.43

Number of antidilutive stock options excluded from computation		35		4,105		12		2,833

(7) Income Taxes

The effective income tax rate was 30.2% for the three months ended September 30, 2005 and 24.4% for the nine months ended September 30, 2005 compared to 33.9% for the three months ended September 30, 2004 and 34.0% for the nine months ended September 30, 2004. The lower effective tax rate in 2005 primarily reflects the favorable impact from the resolution of a contingent gain of $22.8 million during the first quarter of 2005 in connection with the expiration of the statute of limitations on an uncertain tax position related to the 2000 tax year.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

(8) Long-term Debt

Long-term debt outstanding was as follows at September 30, 2005 and December 31, 2004:


	September 30, 2005		December 31, 2004
	(in thousands)
Long-term debt:
6.30% senior, unsecured notes due Aug. 1, 2018, net of unamortized discount of $737 at September 30, 2005 and $780 at December 31, 2004	$	299,263	$	299,220
7.25% senior, unsecured notes due Aug. 1, 2006, net of unamortized discount of $123 at September 30, 2005 and $231 at December 31, 2004		299,877		299,769
Fair value of interest rate swap agreements		7,916		17,082
Deferred gain from interest rate swap exchange		8,718		16,338

Total senior notes		615,774		632,409
Credit agreement		—		—
Other long-term borrowings		3,802		4,287

Total debt		619,576		636,696
Less: Current portion of long-term debt		302,366		—

Total long-term debt	$	317,210	$	636,696

Swap Agreements

In order to hedge the risk of changes in the fair value of our $300 million 6.30% senior notes and our $300 million 7.25% senior notes attributable to fluctuations in interest rates, we entered into interest rate swap agreements. Interest rate swap agreements, which are considered derivatives, are contracts that exchange interest payments on a specified principal amount, or notional amount, for a specified period. The interest rate swap agreements, which have the same critical terms as our 6.30% senior notes and our 7.25% senior notes, are designated fair value hedges. Changes in the fair value of the 6.30% or 7.25% senior notes and the swap agreements due to changing interest rates are assumed to offset each other completely, resulting in no impact to earnings from hedge ineffectiveness. Our swap agreements are recognized in our consolidated balance sheet at fair value with an equal and offsetting adjustment to the carrying value of our senior notes. The fair values of our interest rate swap agreements are estimated based on quoted market prices of comparable agreements, and reflect the amounts we would receive (or pay) to terminate the agreements at the reporting date.

Our interest rate swap agreements exchange the fixed interest rate under our 6.30% and 7.25% senior notes for a variable interest rate based on LIBOR. At September 30, 2005, the effective interest rate was 4.95% for the 6.30% senior notes and 5.79% for the 7.25% senior notes, including the amortization of the deferred swap gain. The $300 million swap agreements for the 6.30% senior notes mature on August 1, 2018, and the $300 million swap agreements for the 7.25% senior notes mature on August 1, 2006, and each has the same critical terms as the related senior notes.

At September 30, 2005, the fair value of our swap agreements related to the 6.30% senior notes was in our favor by $14.1 million and is included in other long-term assets and the fair value of our swap agreements related to the 7.25% senior notes was out of our favor by $6.2 million and is included in other current liabilities. Likewise, the carrying value of our senior notes has been increased $7.9 million to reflect their fair value. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.

In June 2003, we recorded a deferred gain and received proceeds of $31.6 million in exchange for new swap agreements discussed above related to our 7.25% senior notes. The corresponding deferred swap gain of $31.6 million is being amortized to reduce interest expense over the remaining term of the 7.25% senior notes. Amortization of the deferred swap gain reduced interest expense $2.6 million for the three months ended September 30, 2005 and $2.5 million for the three months ended September 30, 2004. Amortization of the deferred swap gain reduced interest expense $7.6 million for the nine months ended September 30, 2005 and $7.3 million for the nine months ended September 30, 2004.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

Credit Agreement

The 5-year $600 million unsecured revolving credit agreement expires in September 2009. Under the agreement, at our option, we can borrow on either a competitive advance basis or a revolving credit basis. The revolving credit portion of the agreement bears interest at either a fixed rate or floating rate based on LIBOR plus a spread. The spread, which varies depending on our credit ratings, ranges from 50 to 112.5 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15 basis points, may fluctuate between 12.5 and 37.5 basis points, depending upon our credit ratings. In addition, a utilization fee of 12.5 basis points is payable for any day in which borrowings under the facility exceed 50% of the total $600 million commitment. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option.

The 5-year $600 million credit agreement contains customary restrictive and financial covenants as well as customary events of default, including financial covenants regarding the maintenance of net worth, minimum interest coverage, and maximum leverage ratios. At September 30, 2005, we were in compliance with all applicable financial covenant requirements. The terms of this credit agreement also include standard provisions related to conditions of borrowing, including a customary material adverse effect clause which could limit our ability to borrow. We have not experienced a material adverse effect, and we know of no circumstances or events which would be reasonably likely to result in a material adverse effect. We do not believe the material adverse effect clause poses a material funding risk to Humana in the future. We have other relationships, including financial advisory and banking, with some of the parties to the credit agreement.

On February 16, 2005, we borrowed $294.0 million under the credit agreement to finance the CarePlus acquisition. Since the CarePlus transaction, we have repaid the $294.0 million under the credit agreement. In addition, we have outstanding letters of credit of $35.1 million secured under the credit agreement. No amounts have ever been drawn on these letters of credit. As of September 30, 2005, we had $564.9 million of remaining borrowing capacity under the credit agreement.

Commercial Paper Program

We maintain and may issue short-term debt securities under a commercial paper program when market conditions allow. The program is backed by our credit agreement described above. Aggregate borrowings under both the credit agreement and commercial paper program generally will not exceed $600 million.

At September 30, 2005, we had no commercial paper borrowings outstanding.

Other Borrowings

Other borrowings of $3.8 million at September 30, 2005 represent financing for the renovation of a building, bear interest at 2% per annum, are collateralized by the building, and are payable in various installments through 2014.

Shelf Registration

Our universal shelf registration with the Securities and Exchange Commission allows us to register debt or equity securities, from time to time, with the amount, price and terms to be determined at the time of the sale. We have up to $300 million remaining from a total of $600 million under the universal shelf registration. The universal shelf registration allows us to use the net proceeds from any future sales of our securities for our operations and for other general corporate purposes, including repayment or refinancing of borrowings, working capital, capital expenditures, investments, acquisitions, or the repurchase of our outstanding securities.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

(9) Guarantees and Contingencies

Indemnifications and Guarantees

Our operating lease of an airplane, which expires January 1, 2010, provides for a residual value payment guarantee of no more than $4.8 million at the end of the lease term. At the end of the lease term, we have the right to exercise a purchase option or the airplane can be sold to a third party. If we decide not to exercise our purchase option, we must pay the lessor a maximum amount of $4.8 million. This amount will be reduced by the net sales proceeds in excess of $4.2 million from the sale of the airplane to a third party.

Through indemnity agreements approved by the state regulatory authorities, certain of our regulated subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our parent also has guaranteed the obligations of our TRICARE subsidiary.

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of us, or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial and accordingly, no amounts have been accrued at September 30, 2005.

Government Contracts

Our Medicare business, which accounted for approximately 32% of our total premiums and ASO fees for the nine months ended September 30, 2005, primarily consisted of HMO, PPO and Fee-For-Service products covered under the Medicare Advantage contracts with the federal government. The contracts are renewed for a one-year term each December 31 unless notice of termination is received at least 90 days prior thereto. No termination notices have been received in 2005 in connection with our existing contracts.

Our TRICARE business, which accounted for approximately 18% of our total premiums and ASO fees for the nine months ended September 30, 2005, primarily consisted of the South Region contract. The 5-year South Region contract is subject to annual renewals at the Government’s option and expires March 31, 2009. This contract also is generally subject to frequent change from events and circumstances such as the escalated conflict in the Middle East. These changes may include a reduction or increase in the number of persons enrolled or eligible to enroll, in the revenue we receive or in our administrative or health care costs. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business.

Our Medicaid business, which accounted for approximately 4% of our total premiums and ASO fees for the nine months ended September 30, 2005, consisted of contracts in Puerto Rico, Florida and Illinois. Our contracts with the Puerto Rico Health Insurance Administration, which accounted for approximately 3% of our total premium and ASO fees for the nine months ended September 30, 2005, were scheduled to expire on June 30, 2005. We currently are negotiating the terms of an amendment to the contracts that will extend the contracts until June 30, 2006. We have finalized rates for the 2005-2006 contract year and are in the process of finalizing the amendments to the contracts. The government of Puerto Rico has indicated that it must consider the impact of the new Medicare legislation on the Medicaid contracts in order to complete the arrangements for 2006. At this time we are unable to predict the ultimate impact that any government policy decisions might have on our Medicaid contracts in Puerto Rico.

Our other Medicaid contract is in Florida, and is an annual contract. Due to continual decreases in the reimbursement from the state of Illinois, we exited the Illinois Medicaid market effective July 31, 2005. The Illinois and Florida Medicaid contracts accounted for approximately 1% of our total premiums and ASO fees for the nine months ended September 30, 2005, and therefore were not material to our results of operations, financial position, or cash flows.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

Other than as described herein, the loss of any of the contracts above or significant changes in these programs as a result of legislative action, including reductions in premium payments to us, or increases in member benefits without corresponding increases in premium payments to us, may have a material adverse effect on our financial position, results of operations, and cash flows.

Legal Proceedings

Managed Care Industry Purported Class Action Litigation

From 1999 to 2005, we were involved in several purported class action lawsuits that were part of a wave of generally similar actions targeting the health care payer industry and particularly managed care companies. These included a lawsuit against us and originally nine of our competitors that purported to be brought on behalf of physicians who treated our members from January 1, 1990, forward. These cases were consolidated in the United States District Court for the Southern District of Florida, and styled In re Managed Care Litigation.

On October 17, 2005, we and representatives of over 700,000 physicians and several state medical societies reached an agreement (“Settlement Agreement”) to settle the lawsuit by payment of $40 million for the physicians and an amount up to $18 million for the plaintiffs’ attorneys, subject to approval by the Court. The Settlement Agreement recognizes that we have undertaken certain initiatives to facilitate relationships with and payments to physicians and provides for additional initiatives over its four-year term. The Court preliminarily approved the Settlement Agreement on October 19, 2005, and set a Settlement Hearing for March 6, 2006.

Four other defendants, Aetna Inc., Cigna Corporation, Health Net, Inc. and The Prudential Insurance Company of America previously entered into settlement agreements which have been approved by the Court. Wellpoint, Inc. (formerly WellPoint Health Networks, Inc. and Anthem, Inc.) announced a settlement agreement on July 11, 2005.

In connection with the settlement and other related litigation costs, we recorded pretax administrative expense of $71.9 million ($44.8 million after taxes, or $0.27 per diluted common share) in the third quarter of 2005.

Other Litigation and Proceedings

In July 2000, the Office of the Florida Attorney General initiated an investigation, apparently relating to some of the same matters that are involved in the managed care industry purported class action litigation described above. On September 21, 2001, the Texas Attorney General initiated a similar investigation. No actions have been filed against us by either state.

In addition, our business practices are subject to review by various state insurance and health care regulatory authorities and federal regulatory authorities. There has been increased scrutiny by these regulators of the managed health care companies’ business practices, including allegations of anticompetitive and unfair business activities, claims payment practices, commission payment practices, and utilization management practices. We have been and continue to be subject to such reviews. Some of these have resulted in fines and could require changes in some of our practices and could also result in additional fines or other sanctions.

We also are involved in other lawsuits that arise in the ordinary course of our business operations, including claims of medical malpractice, bad faith, nonacceptance or termination of providers, improper rate setting, failure to disclose network discounts and various other provider arrangements, as well as challenges to subrogation practices. We also are subject to claims relating to performance of contractual obligations to providers, members, and others, including failure to properly pay claims and challenges to the use of certain software products in processing claims. Pending state and federal legislative activity may increase our exposure for any of these types of claims.

In addition, some courts have issued rulings which make it easier to hold plans liable for medical negligence on the part of network providers on the theory that providers are agents of the plans and that the plans are therefore vicariously liable for the injuries to members by providers.

Personal injury claims and claims for extracontractual damages arising from medical benefit denials are covered by insurance from our wholly owned captive insurance subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance in certain states in which insurance coverage for punitive damages is not permitted. In addition, insurance coverage for all or certain forms of liability has become increasingly costly and may become unavailable or prohibitively expensive in the future.

The outcome of current suits or likelihood or outcome of future suits or governmental investigations, cannot be accurately predicted with certainty. In addition, the potential for increased liability for medical negligence arising from claims adjudication, along with the increased litigation that has accompanied the negative publicity and public

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

perception of our industry, adds to this uncertainty. Therefore, such legal actions and government audits and investigations could have a material adverse effect on our financial position, results of operations, and cash flows.

(10) Segment Information

We manage our business with two segments: Government and Commercial. The Government segment consists of members enrolled in government-sponsored programs, and includes three lines of business: Medicare Advantage, Medicaid, and TRICARE. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes three lines of business: fully insured medical, administrative services only, or ASO, and specialty. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unaudited

Our segment results for the three and nine months ended September 30, 2005 and 2004 are as follows:


	Government Segment
	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
	(in thousands)
Revenues:
Premiums:
Medicare Advantage	$	1,296,743	$	814,612	$	3,372,326	$	2,295,534
TRICARE		659,019		386,439		1,832,526		1,651,844
Medicaid		139,961		131,318		409,105		377,895

Total premiums		2,095,723		1,332,369		5,613,957		4,325,273
Administrative services fees		8,821		18,513		34,084		95,632
Investment and other income		9,341		5,656		20,405		20,032

Total revenues		2,113,885		1,356,538		5,668,446		4,440,937


Operating expenses:
Medical		1,729,902		1,086,677		4,700,028		3,624,743
Selling, general and administrative		276,799		168,466		654,795		542,655
Depreciation and amortization		15,449		11,436		39,476		32,448

Total operating expenses		2,022,150		1,266,579		5,394,299		4,199,846


Income from operations		91,735		89,959		274,147		241,091

Interest expense		2,178		1,192		8,274		3,196


Income before income taxes	$	89,557	$	88,767	$	265,873	$	237,895


	Commercial Segment
	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005		2004
	(in thousands)
Revenues:
Premiums:
Fully insured
PPO	$	905,475		$	945,906	$	2,719,961	$	2,831,450
HMO		614,496			717,457		1,829,682		2,149,792

Total fully insured		1,519,971			1,663,363		4,549,643		4,981,242
Specialty		96,670			87,822		285,598		259,932

Total premiums		1,616,641			1,751,185		4,835,241		5,241,174
Administrative services fees		54,996			41,324		156,370		123,788
Investment and other income		35,939			27,226		94,990		88,801

Total revenues		1,707,576			1,819,735		5,086,601		5,453,763

Operating expenses:
Medical		1,364,495			1,464,234		4,036,611		4,399,424
Selling, general and administrative		334,501			291,705		916,998		874,040
Depreciation and amortization		18,670			19,802		55,655		52,267

Total operating expenses		1,717,666			1,775,741		5,009,264		5,325,731

(Loss) income from operations		(10,090	)		43,994		77,337		128,032
Interest expense		7,963			5,288		20,712		13,328

(Loss) income before income taxes	$	(18,053	)	$	38,706	$	56,625	$	114,704

Humana Inc.

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, in our press releases, investor presentations, and in oral statements made by or with the approval of one of our executive officers, the words or phrases like “expects,” “anticipates,” “intends,” “likely will result,” “estimates,” “projects” or variations of such words and similar expressions are intended to identify such forward–looking statements. These forward–looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, information set forth in the “Cautionary Statements” section of this document. In light of these risks, uncertainties and assumptions, the forward–looking events discussed in this document might not occur. There may also be other risks that we are unable to predict at this time. Any of these risks and uncertainties may cause actual results to differ materially from the results discussed in the forward–looking statements.

Overview

Headquartered in Louisville, Kentucky, Humana Inc. is one of the nation’s largest publicly traded health benefits companies, based on our 2004 revenues of $13.1 billion. We offer coordinated health insurance coverage and related services through a variety of traditional and Internet-based plans for employer groups, government-sponsored programs, and individuals. As of September 30, 2005, we had approximately 7.0 million members in our medical insurance programs, as well as approximately 1.9 million members in our specialty products programs.

We manage our business with two segments: Government and Commercial. The Government segment consists of members enrolled in government-sponsored programs, and includes three lines of business: Medicare Advantage, TRICARE, and Medicaid. The Commercial segment consists of members enrolled in products marketed to employer groups and individuals, and includes three lines of business: fully insured medical, administrative services only, or ASO, and specialty. We identified our segments in accordance with the aggregation provisions of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information which is consistent with information used by our Chief Executive Officer in managing our business. The segment information aggregates products with similar economic characteristics. These characteristics include the nature of customer groups and pricing, benefits and underwriting requirements.

The results of each segment are measured by income before income taxes. We allocate all selling, general and administrative expenses, investment and other income, interest expense, and goodwill, but no other assets or liabilities, to our segments. Members served by our two segments often utilize the same medical provider networks, enabling us to obtain more favorable contract terms with providers. Our segments also share overhead costs and assets. As a result, the profitability of each segment is interdependent. We draw revenues from group, individual, Medicare, Medicaid and military business lines. We believe that it is difficult to time market cycles and external influences on various parts of our businesses. By remaining committed to varied lines of business with a long-term view, we may benefit through short-term market cycles. We believe our diversification across segments and products allows us to increase our chances of success.

Our results are impacted by many factors, but most notably are influenced by our ability to establish and maintain a competitive and efficient cost structure and to accurately and consistently establish competitive premium, ASO fee, and plan benefit levels that are commensurate with our medical and administrative costs. Medical costs are subject to a high rate of inflation due to many forces, including new technologies and medical procedures, increasing capacity and supply of medical services, new prescription drugs and therapies, an aging population, the tort liability system, and government regulations.

In our Government segment, the passage of the Medicare Modernization Act, or MMA, in December 2003 demonstrated the federal government’s commitment to providing health benefits and options to seniors and has started the resurgence of Medicare as a business line that should bring us accelerating growth in 2005 and 2006. The MMA established new product opportunities in the form of private fee-for-service (PFFS) plans and local PPOs. Our current Medicare presence today includes 503,100 members in 12 HMO markets, 33 local PPO markets, and 35 states in which we have a private fee-for-service offering. Medicare Private Fee-For-Service plans generally offer

additional benefits compared to traditional Medicare in exchange for a monthly premium paid by the member. These plans typically include a prescription drug benefit with no provider network restrictions. Local Medicare PPO plans typically offer an even higher level of benefits to members, including a prescription drug benefit and a lower level of member cost-sharing on many benefits while seeking medical services from in-network providers. On December 31, 2005, we anticipate having approximately 540,000 to 550,000 Medicare Advantage members.

We also have positioned ourselves to participate in Medicare Regional PPO plans and the Medicare Prescription Drug Plan, or PDP, as established by the MMA, beginning January 1, 2006. As a long-time successful participant in the Medicare program, we believe that we possess (1) business competencies and management experience with senior product design, (2) a robust and scalable multi-channel distribution system, (3) an established and competitive network including a national retail pharmacy network, and (4) an established brand awareness with seniors; all of which will enable us to compete for market share in this expanding business line over the next several years. Accordingly, we anticipate significant increases in Medicare membership, revenues, and earnings for 2006.

In our TRICARE business, after being awarded the South Region contract in 2003, we transitioned our TRICARE business during 2004 to one of three newly-created regions under the government’s revised TRICARE program. We started the second option year under the South Region contract on April 1, 2005.

Our strategy to drive Commercial segment profitability focuses on providing solutions for employers to the rising cost of health care through the use of a variety of innovative and consumer-choice product designs. These products are supported by electronic informational capabilities, including education, tools, and technologies provided primarily through the Internet. To that end, we have developed an innovative suite of products styled as “Smart” products. We believe that these Smart products offer the best solution for many employers to the problem of quickly rising health care costs for their employees. Membership in our Smart products and other consumer-choice health plans exceeded 350,000 members at September 30, 2005, increasing approximately 43% since December 31, 2004. We believe that growth in these products, which are offered both on a fully-insured and ASO basis and competitively priced to produce higher margins, is a key component, among other items, for further improvement in the results of our Commercial segment. Additionally, we have increased the diversification of our commercial membership base, not only through our consumer-choice products, but also by (1) expanding our ASO membership in the mid-market group segment to take advantage of our network discounts and (2) launching our HumanaOne individual product to address an increasing migration of insureds from small group. While we expect our consumer-choice products to become a driver of growth in the years ahead as health care inflation persists, we also are enhancing the traditional products which comprise the bulk of our commercial portfolio today by applying our consumer-choice innovation.

Other important factors which impact our Commercial segment profitability are both the competitive pricing environment and market conditions. With respect to pricing, there is a tradeoff between sustaining or increasing underwriting margins versus increasing or decreasing enrollment. We have experienced a decline in our membership in the 2 to 300 life group size as a result of pricing actions by some competitors who we perceive as desiring to gain market share in certain markets. With respect to market conditions, we are impacted by economies of scale on administrative overhead. As a result of a decline in preference for tightly-managed HMO products, medical costs have become increasingly comparable among the larger competitors. Product design and consumer involvement have become more important drivers of medical services consumption, and administrative expense efficiency is becoming a more significant driver of commercial margin sustainability. Consequently, we continually evaluate our administrative expense structure and realize administrative expense savings through productivity gains. Additionally, because our Commercial segment shares overhead costs with our Government segment, an increase or decrease in the size of our Government operations impacts our Commercial segment profitability.

Other highlights since December 31, 2004, our most recent year end, include the following:

•

In the Government segment, the Centers for Medicare and Medicaid Services, or CMS, approved all the 2006 Medicare contracts we applied for, giving us a wide array of products to sell and increasing the number of states where we sell them.

•

We completed the acquisition of CarePlus Health Plans of Florida, increasing our Medicare presence in South Florida. This transaction is more fully-described below and in Note 3 to the condensed consolidated financial statements.

•

Membership in Medicare Advantage products grew by 125,900 members from December 31, 2004, including 50,400 members from the acquisition of CarePlus and 75,500 members in our existing products.

•

In the Commercial segment, fully-insured membership declined 279,100 members, or 12.2%, since December 31, 2004 due to continued competitive pricing pressures. This decline was partially offset by an increase of 151,900 ASO members.

•

We reached an agreement with representatives of more than 700,000 physicians to settle a nationwide class action suit. This transaction is more fully-described below and under “Legal Proceedings” in Note 9 to the condensed consolidated financial statements.

•

Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of Hurricane Katrina in August 2005. This is more fully-described below.

•

The resolution of a contingent tax gain during the first quarter of 2005 contributed to the lower effective tax rate of 24.4% during the first nine months of 2005 compared to 34.0% during the first nine months of 2004.

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 quarter to quarter, and the primary factors that accounted for those changes, as well as how certain critical accounting principles and estimates impact our financial statements.

Settlement of Class Action Litigation

On October 17, 2005, we reached an agreement with representatives of more than 700,000 physicians to settle a nationwide class action suit. In connection with the settlement and other related litigation costs, we recorded pretax administrative expenses of $71.9 million ($44.8 million after taxes, or $0.27 per diluted common share) in the third quarter of 2005. Of the $71.9 million, $33.4 million is included in the Government segment results and the remaining $38.5 million is included in the Commercial segment results. The settlement is more fully-described under “Legal Proceedings” in Note 9 to the condensed consolidated financial statements.

Hurricane Katrina

Certain of our operations, primarily the Louisiana market, were negatively affected by the impact of Hurricane Katrina in August 2005. Expenses related to Hurricane Katrina primarily stem from our efforts, in cooperation with Departments of Insurance in the affected states, to help our members by offering participating-provider benefits at non-participating providers, paying claims for members who are unable at this time to meet their premium obligations and similar measures. In connection with Hurricane Katrina, we recorded pretax medical and administrative expenses of $6.7 million ($4.2 million after taxes, or $0.03 per diluted common share) during the third quarter of 2005. Of the $6.7 million, $1.5 million is included in the Government segment results and the remaining $5.2 million is included in the Commercial segment results. We expect additional costs during the fourth quarter of 2005 of approximately $0.07 per diluted common share.

Recent Acquisitions

On February 16, 2005, we acquired CarePlus Health Plans of Florida, or CarePlus, as well as its affiliated 10 medical centers and pharmacy company for approximately $444.9 million in cash including transaction costs, adding approximately 50,400 Medicare eligible beneficiaries in Miami-Dade, Broward and Palm Beach counties. This acquisition enhances our Medicare market position in South Florida. This transaction is more fully described in Note 3 to the condensed consolidated financial statements.

On April 1, 2004, we acquired Ochsner Health Plan, or Ochsner, from the Ochsner Clinic Foundation for $157.1 million in cash. Ochsner, a Louisiana health plan, added approximately 152,600 commercial medical members, primarily in fully insured large group accounts, and approximately 33,100 members in the Medicare Advantage program.

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, or Statement 123R, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. This requirement represents a significant change because fixed-based stock option awards, a predominate form of stock compensation for us, were not recognized as compensation expense under APB 25. Statement 123R requires that the cost of the award, as determined on the date of grant at fair value, be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of the award will be estimated using option-pricing models. We are required to adopt Statement 123R beginning January 1, 2006 under either a prospective or retrospective transition method. The effect of expensing stock options under a fair value approach using the Black-Scholes pricing model for the three and nine months ended September 30, 2005 and 2004 is disclosed in Note 2 of the condensed consolidated financial statements. We currently are evaluating the provisions of Statement 123R and the expected effect on us including, among other items, selecting an option pricing model. We anticipate using the retrospective transition model which we estimate would lower 2005 results by approximately $0.08 per diluted common share.

We believe the impact of adopting Statement 123R would lower 2006 results approximately $0.10 per diluted common share, assuming a similar number and pattern of granting stock option awards as the current year, the use of the Black-Scholes pricing model with expected life and volatility assumptions similar to the current year, a stock price reflective of our current environment and a forfeiture rate as preliminarily calculated.

Comparison of Results of Operations

The following discussion primarily deals with our results of operations for the three months ended September 30, 2005, or the 2005 quarter, the three months ended September 30, 2004, or the 2004 quarter, the nine months ended September 30, 2005, or the 2005 period, and the nine months ended September 30, 2004, or the 2004 period.

The following table presents certain financial data for our two segments:


	For the three months ended September 30,						Change
	2005			2004			Dollars			Percentage
	(in thousands, except ratios)
Premium revenues:
Medicare Advantage	$	1,296,743		$	814,612		$	482,131		59.2	%
TRICARE		659,019			386,439			272,580		70.5	%
Medicaid		139,961			131,318			8,643		6.6	%

Total Government		2,095,723			1,332,369			763,354		57.3	%

Fully insured		1,519,971			1,663,363			(143,392	)	(8.6	)%
Specialty		96,670			87,822			8,848		10.1	%

Total Commercial		1,616,641			1,751,185			(134,544	)	(7.7	)%

Total	$	3,712,364		$	3,083,554		$	628,810		20.4	%

Administrative services fees:
Government	$	8,821		$	18,513		$	(9,692	)	(52.4	)%
Commercial		54,996			41,324			13,672		33.1	%

Total	$	63,817		$	59,837		$	3,980		6.7	%

Income (loss) before income taxes:
Government	$	89,557		$	88,767		$	790		0.9	%
Commercial		(18,053	)		38,706			(56,759	)	(146.6	)%

Total	$	71,504		$	127,473		$	(55,969	)	(43.9	)%

Medical expense ratios (a):
Government		82.5	%		81.6	%				0.9
Commercial		84.4	%		83.6	%				0.8

Total		83.4	%		82.7	%				0.7

SG&A expense ratios (b):
Government		13.2	%		12.5	%				0.7
Commercial		20.0	%		16.3	%				3.7

Total		16.2	%		14.6	%				1.6

(a)

Represents total medical expenses as a percentage of premium revenues. Also known as MER.

(b)

Represents total selling, general, and administrative expenses as a percentage of premium revenues and administrative services fees. Also known as the SG&A expense ratio.


	For the nine months ended September 30,						Change
	2005			2004			Dollars			Percentage
	(in thousands, except ratios)
Premium revenues:
Medicare Advantage	$	3,372,326		$	2,295,534		$	1,076,792		46.9	%
TRICARE		1,832,526			1,651,844			180,682		10.9	%
Medicaid		409,105			377,895			31,210		8.3	%

Total Government		5,613,957			4,325,273			1,288,684		29.8	%

Fully insured		4,549,643			4,981,242			(431,599	)	(8.7	)%
Specialty		285,598			259,932			25,666		9.9	%

Total Commercial		4,835,241			5,241,174			(405,933	)	(7.7	)%

Total	$	10,449,198		$	9,566,447		$	882,751		9.2	%

Administrative services fees:
Government	$	34,084		$	95,632		$	(61,548	)	(64.4	)%
Commercial		156,370			123,788			32,582		26.3	%

Total	$	190,454		$	219,420		$	(28,966	)	(13.2	)%

Income before income taxes:
Government	$	265,873		$	237,895		$	27,978		11.8	%
Commercial		56,625			114,704			(58,079	)	(50.6	)%

Total	$	322,498		$	352,599		$	(30,101	)	(8.5	)%

Medical expense ratios (a):
Government		83.7	%		83.8	%				(0.1	)
Commercial		83.5	%		83.9	%				(0.4	)

Total		83.6	%		83.9	%				(0.3	)

SG&A expense ratios (b):
Government		11.6	%		12.3	%				(0.7	)
Commercial		18.4	%		16.3	%				2.1

Total		14.8	%		14.5	%				0.3

(a)

Represents total medical expenses as a percentage of premium revenues. Also known as MER.

(b)

Represents total selling, general, and administrative expenses as a percentage of premium revenues and administrative services fees. Also known as the SG&A expense ratio.

Medical membership was as follows at September 30, 2005 and 2004:


			Change
	2005	2004	Members		Percentage
Government segment medical members:
Medicare Advantage	503,100	371,300	131,800		35.5	%
TRICARE	1,747,100	1,138,600	608,500		53.4	%
TRICARE ASO	1,127,300	674,700	452,600		67.1	%
Medicaid	459,400	475,800	(16,400	)	(3.4	)%

Total Government	3,836,900	2,660,400	1,176,500		44.2	%

Commercial segment medical members:
Fully insured	2,007,400	2,296,400	(289,000	)	(12.6	)%
ASO	1,170,500	1,018,800	151,700		14.9	%

Total Commercial	3,177,900	3,315,200	(137,300	)	(4.1	)%

Total medical membership	7,014,800	5,975,600	1,039,200		17.4	%

Summary

Net income was $49.9 million, or $0.30 per diluted common share in the 2005 quarter compared to $84.3 million, or $0.52 per diluted common share in the 2004 quarter. Net income was $243.9 million, or $1.48 per diluted common share in the 2005 period compared to $232.9 million, or $1.43 per diluted common share in the 2004 period. The 2005 quarter and period included expenses resulting from the physician class action settlement ($44.8 million after taxes, or $0.27 per diluted common share) and costs associated with Hurricane Katrina ($4.2 million after taxes, or $0.03 per diluted common share). The 2005 period also included the beneficial effect of an effective tax rate of approximately 24.4% compared to 34.0% in the 2004 period, primarily due to the resolution of a contingent gain during the first quarter of 2005 in connection with the expiration of the statute of limitations on an uncertain tax position related to the 2000 tax year.

Our Government segment results included $34.9 million and our Commercial segment results included $43.7 million of pretax expenses associated with the physician class action settlement and costs associated with Hurricane Katrina. Excluding these items, improved earnings in the Government segment more than offset a decline in the Commercial segment. Enrollment growth in our Medicare Advantage products drove the improved earnings in the Government segment.

Premium Revenues and Medical Membership

Premium revenues increased 20.4% to $3.71 billion for the 2005 quarter, compared to $3.08 billion for the 2004 quarter. For the 2005 period, premium revenues were $10.45 billion, an increase of 9.2% compared to $9.57 billion for the 2004 period. Higher premium revenues resulted primarily from enrollment growth in our Medicare Advantage products partially offset by a decrease in fully-insured commercial membership.

Government segment premium revenues increased $763.4 million, or 57.3% to $2.10 billion for the 2005 quarter, compared to $1.33 billion for the 2004 quarter. For the 2005 period, Government segment premium revenues were $5.61 billion, an increase of $1.28 billion, or 29.8% compared to $4.33 billion for the 2004 period. This increase primarily was attributable to our Medicare Advantage operations and the effects of transitioning to the TRICARE South contract during the 2004 quarter. Medicare Advantage membership was 503,100 at September 30, 2005, compared to 371,300 at September 30, 2004, an increase of 131,800 members, or 35.5%. This increase was due to expanded participation in various Medicare Advantage programs and geographic markets, and the CarePlus acquisition. The February 16, 2005 CarePlus acquisition added 50,400 members. The April 1, 2004 Ochsner acquisition also contributed $97.2 million to the increase in Medicare premium revenues for the 2005 period. Per member premiums for our Medicare Advantage business increased approximately 20% for the 2005 quarter and increased approximately 13% for the 2005 period. These per member premium increases reflect a shift in our Medicare membership mix to higher reimbursement markets, due primarily to the CarePlus acquisition, and reflect the effects of the risk adjustment settlement process with CMS. For the full year 2005, we expect premium increases per member in the range of 12% to 14%. Medicare Advantage geographic expansions during 2005 are anticipated to contribute to continued enrollment growth, with projected membership in the range of 540,000 to 550,000 by December 31, 2005. TRICARE premium revenues increased 70.5% for the 2005 quarter and 10.9% for the 2005 period, reflecting the transition to the new South Region contract during the 2004 quarter. Medicaid membership declined by approximately 20,000 members on August 1, 2005 as we did not renew our participation in the Medicaid program for the State of Illinois. The Illinois Medicaid business was not material to our results of operations, financial position, or cash flows.

Commercial segment premium revenues decreased 7.7% to $1.62 billion for the 2005 quarter, compared to $1.75 billion for the 2004 quarter. For the 2005 period, commercial segment premium revenues were $4.84 billion, a decrease of 7.7% compared to $5.24 billion for the 2004 period. Lower premium revenues primarily resulted from a reduction of fully-insured membership partially offset by increases in per member premiums. Our fully insured membership decreased 12.6%, or 289,000 members, to 2,007,400 at September 30, 2005 compared to 2,296,400 at September 30, 2004. The decrease is primarily due to the relinquishment of an 89,000-member unprofitable account on January 1, 2005 and continued attrition due to the ongoing competitive environment within the small to mid-market fully-insured group accounts, partially offset by membership gains in the individual and consumer-choice product lines. For the full year 2005, we expect fully insured commercial per member premiums to increase in the 7% to 9% range for our commercial group accounts.

Administrative Services Fees

Our consolidated administrative services fees for the 2005 quarter were $63.8 million, an increase of $4.0 million, or 6.7%, from $59.8 million for the 2004 quarter. For the 2005 period, administrative services fees were $190.5 million, a decrease of 13.2% compared to $219.4 million for the 2004 period.

Administrative services fees for the Government segment decreased $9.7 million, or 52.4%, from $18.5 million for the 2004 quarter to $8.8 million for the 2005 quarter, and decreased $61.5 million, or 64.4%, from $95.6 million to $34.1 million when comparing the 2005 period to the 2004 period. This decline resulted from the transition to the new South Region contract which carved out certain government programs including the administration of pharmacy and medical benefits to senior members over the age of 65. We transitioned services under these separate programs to other providers during 2004.

For the Commercial segment, administrative services fees increased $13.7 million, or 33.1%, from $41.3 million for the 2004 quarter to $55.0 million for the 2005 quarter, and increased $32.6 million, or 26.3%, from $123.8 million to $156.4 million when comparing the 2005 period to the 2004 period. This increase resulted from increased membership and higher rates. ASO membership of 1,170,500 at September 30, 2005 increased 14.9% compared to 1,018,800 at September 30, 2004.

Investment and Other Income

Investment and other income totaled $45.3 million for the 2005 quarter, an increase of $12.4 million from $32.9 million for the 2004 quarter. For the 2005 period, investment and other income totaled $115.4 million, an increase of $6.6 million from $108.8 million for the 2004 period. The increase for the quarter was primarily attributable to increased investment income from higher capital gains, interest rates and average invested balances. The increase for the period primarily was attributed to an increase in other income. Higher revenues from our ancillary TRICARE contracts contributed to an increase in other income.

Medical Expense

Total medical expenses as a percentage of premium revenues, or medical expense ratio (MER), for the 2005 quarter was 83.4%, increasing 70 basis points from 82.7% for the 2004 quarter. The MER was 83.6% for the 2005 period, decreasing 30 basis points from 83.9% for the 2004 period.

The Government segment’s MER for the 2005 quarter was 82.5%, increasing 90 basis points from the 2004 quarter of 81.6%, and a decrease of 10 basis points from 83.8% to 83.7% was experienced comparing the 2005 period to the 2004 period. The increase in the 2005 quarter was primarily driven by an unusually low MER in the 2004 quarter resulting from the TRICARE contract transition timing. The decrease in the 2005 period MER primarily was attributable to the increase in Medicare revenues as a percentage of the total revenues. Medicare medical cost trends are expected to increase in the range of 9% to 11% for 2005.

The Commercial segment’s MER for the 2005 quarter was 84.4%, increasing 80 basis points from the 2004 quarter of 83.6%, and a decrease of 40 basis points from 83.9% to 83.5% was experienced comparing the 2005 period to the 2004 period. Higher medical expenses from Hurricane Katrina increased the 2005 quarter MER 30 basis points and the 2005 period MER 10 basis points. After considering the effect of Hurricane Katrina, the increase in the 2005 quarter reflects the impact of the competitive pricing environment. The decrease in MER for the 2005 period reflects the absence of the unprofitable 89,000-member large group account that lapsed on January 1, 2005. For the full year 2005, we expect our fully insured commercial medical cost trends to rise in the range of 7% to 9% for our group accounts.

SG&A Expense

Total selling, general and administrative, or SG&A, expenses as a percentage of premium revenues and administrative services fees, or SG&A expense ratio, for the 2005 quarter was 16.2%, increasing 160 basis points from the 2004 quarter of 14.6%. For the 2005 period, the SG&A expense ratio was 14.8%, increasing 30 basis points when compared to the 2004 period of 14.5%. Expenses related to the litigation settlement and Hurricane Katrina increased the SG&A expense ratio 200 basis points for the 2005 quarter and 70 basis points for the 2005 period. After considering the effect of the litigation and hurricane expenses, the SG&A expense ratio improvements resulted as the increase in premium revenues outpaced administrative expense trends despite increased spending on new Medicare opportunities. We anticipate our consolidated SG&A expense ratio to be approximately 15% for the full year of 2005, including the impact of our estimated spending for our 2006 Medicare expansion initiatives, and 50 basis points related to litigation and hurricane expenses.

The Government segment SG&A expense ratio increased 70 basis points from 12.5% to 13.2% for the 2005 quarter versus the 2004 quarter. For the 2005 period, the Government segment SG&A expense ratio was 11.6%, decreasing 70 basis points from the 2004 period of 12.3%. Expenses related to the litigation settlement and Hurricane Katrina increased the SG&A expense ratio 170 basis points for the 2005 quarter and 60 basis points for the 2005 period. After considering the effect of the litigation and hurricane expenses, the decrease in the

Government segment SG&A expense ratio was attributable to the transition to the TRICARE South Region contract partially offset by increased spending associated with the 2006 Medicare expansion.

The Commercial segment SG&A expense ratio increased 370 basis points from 16.3% to 20.0% for the 2005 quarter versus the 2004 quarter. For the 2005 period, the Commercial segment SG&A expense ratio was 18.4%, increasing 210 basis points from the 2004 period of 16.3%. Expenses related to the litigation settlement and Hurricane Katrina increased the SG&A expense ratio 230 basis points for the 2005 quarter and 80 basis points for the 2005 period. After considering the effect of the litigation and hurricane expenses, this increase resulted from a mix shift to a greater percentage of ASO members as well as a higher proportion of fixed overhead cost relative to revenues due to a reduction in membership.

Depreciation and amortization for the 2005 quarter totaled $34.1 million compared to $31.2 million for the 2004 quarter, an increase of $2.9 million, or 9.2%. For the 2005 period, depreciation and amortization totaled $95.1 million compared to $84.7 million for the 2004 period, an increase of $10.4 million, or 12.3%. Amortization of other intangible assets increased $4.7 million for the 2005 quarter and $10.8 million for the 2005 period primarily as a result of intangible assets recorded in connection with the CarePlus acquisition.

Interest Expense

Interest expense was $10.1 million for the 2005 quarter, compared to $6.5 million for the 2004 quarter, an increase of $3.6 million. For the 2005 period, interest expense was $29.0 million, increasing $12.5 million compared to $16.5 million for the 2004 period. This increase primarily resulted from higher interest rates and higher average outstanding debt. The borrowing of $294 million under our credit agreement to finance the February 16, 2005 CarePlus acquisition increased interest expense $1.2 million during the 2005 quarter and $4.9 million during the 2005 period. The average interest rate during the 2005 period of 5.0% increased 130 basis points compared to 3.7% during the 2004 period.

Income Taxes

On an interim basis, the provision for income taxes is provided for at the anticipated effective tax rate for the year. Our effective tax rate for the 2005 quarter was approximately 30.2%, compared to 33.9% for the 2004 quarter. For the 2005 period, the effective tax rate was 24.4%, compared to 34.0% for the 2004 period. The lower effective tax rate for the 2005 quarter primarily was attributable to a higher proportion of tax-exempt investment income to total pretax income due to the litigation and hurricane expenses recorded in the 2005 quarter. The effective tax rate for the 2005 period reflects the favorable impact from the resolution of a contingent gain of $22.8 million during the first quarter of 2005 in connection with the expiration of the statute of limitations on an uncertain tax position related to the 2000 tax year. We expect our effective tax rate will be in the range of 34% to 36% for the fourth quarter of 2005 and in the range of 27% to 28% for the year.

Membership

The following table presents our medical and specialty membership at September 30, 2005, June 30, 2005, March 31, 2005, and at the end of each quarter in 2004:


	2005			2004
	Sept. 30	June 30	March 31	Dec. 31	Sept. 30	June 30	March 31
Medical Membership:
Government segment:
Medicare Advantage	503,100	474,300	449,900	377,200	371,300	367,900	333,200
TRICARE	1,747,100	1,733,600	1,723,400	1,789,400	1,138,600	1,856,900	1,860,100
TRICARE ASO	1,127,300	1,142,800	1,148,400	1,082,400	674,700	786,000	1,057,900
Medicaid	459,400	477,900	477,200	478,600	475,800	466,400	468,200

Total Government	3,836,900	3,828,600	3,798,900	3,727,600	2,660,400	3,477,200	3,719,400

Commercial segment:
Fully insured	2,007,400	2,021,300	2,039,300	2,286,500	2,296,400	2,407,700	2,298,600
ASO	1,170,500	1,178,400	1,180,100	1,018,600	1,018,800	996,700	997,000

Total Commercial	3,177,900	3,199,700	3,219,400	3,305,100	3,315,200	3,404,400	3,295,600

Total medical members	7,014,800	7,028,300	7,018,300	7,032,700	5,975,600	6,881,600	7,015,000

Specialty Membership:
Commercial segment	1,855,500	1,836,100	1,824,100	1,708,200	1,714,300	1,691,400	1,703,200

Liquidity

Our primary sources of cash include receipts of premiums, administrative services fees, investment income, and proceeds from the sale or maturity of our investment securities and from borrowings. Our primary uses of cash include disbursements for claims payments, administrative expenses, interest expense, taxes, purchases of investment securities, capital expenditures, and payments on borrowings. Because premiums generally are collected in advance of claim payments by a period of up to several months in many instances, our business should normally produce strong cash flows during a period of increasing enrollment. Conversely, cash flows would be negatively impacted during a period of shrinking enrollment.

Cash and cash equivalents increased to $978.9 million at September 30, 2005 from $580.1 million at December 31, 2004. The change in cash and cash equivalents for the nine months ended September 30, 2005 and 2004 is summarized as follows:


	2005			2004
	(in thousands)
Net cash provided by operating activities	$	872,124		$	328,324
Net cash used in investing activities		(607,626	)		(726,404	)
Net cash provided by (used in) financing activities		134,359			(158,234	)


Increase (decrease) in cash and cash equivalents	$	398,857		$	(556,314	)

Cash Flow from Operating Activities

The comparison of our operating cash flows for the 2005 and 2004 periods were significantly impacted by the timing of the monthly Medicare Advantage premium remittance. We received ten monthly Medicare Advantage premium receipts during the 2005 period compared to only eight premium receipts received during the 2004 period because the January 1, 2004 premium receipt of $211.9 million was received in December 2003 and the October 1, 2005 premium receipt of $384.8 million was received in September 2005.

Other than the impact from the timing of the Medicare Advantage premium receipts, higher earnings contributed to increased operating cash flows during the 2005 period compared to the 2004 period. Comparisons of our operating cash flows also are impacted by changes in our working capital. The most significant drivers of changes in our working capital are typically the timing of receipts for premiums and administrative services fees and payments of medical expenses. We illustrate these changes with the following summary of receivables and medical and other expenses payable.

The detail of total net receivables was as follows at September 30, 2005 and December 31, 2004:


	September 30, 2005			December 31, 2004			Change
	(in thousands)
TRICARE:
Base receivable	$	479,493		$	396,355		$	83,138
Bid price adjustments (BPAs)		—			25,601			(25,601	)
Change orders		17,680			6,021			11,659

TRICARE subtotal		497,173			427,977			69,196

Medicare Advantage		61,905			213			61,692
Commercial and other		185,543			185,931			(388	)
Allowance for doubtful accounts		(33,481	)		(34,506	)		1,025

Total net receivables	$	711,140		$	579,615			131,525

Reconciliation to cash flow statement:
Receivables from acquisition								(2,289	)

Change in receivables in cash flow statement							$	129,236

The delivery of health care services under the TRICARE South region contract results in (1) a lag between the time the service is provided and the claim is paid by us, generally three months, and (2) a lag between the time the claim is paid by us and ultimately reimbursed by the federal government, generally 15 calendar days. Thus, the claims reimbursement component of TRICARE base receivables is generally collected over a three to four month period.

The $83.1 million increase in TRICARE base receivables primarily resulted from an increase in claims inventory at our third party claims processing vendor during the last week of September 2005. This also resulted in a corresponding increase in the IBNR component of TRICARE’s claims payable as discussed below.

The $61.7 million increase in Medicare Advantage receivables resulted from estimating revenues associated with CMS’s risk adjustment model. CMS has implemented a risk adjustment model which apportions premiums paid to all health plans, including Humana, according to health severity. This model pays more for enrollees with predictably higher costs. Under this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used to calculate the risk adjusted premium payment to us. We collect, capture and submit the necessary diagnosis data to CMS weekly. We estimate risk adjustment revenues based upon the diagnosis data we submitted to CMS. This also resulted in a corresponding increase in the capitation payable to physicians under risk sharing arrangements discussed below.

The detail of medical and other expenses payable was as follows at September 30, 2005 and December 31, 2004:


	September 30, 2005		December 31, 2004		Change
	(in thousands)
IBNR (1)	$	1,359,285	$	1,164,518	$	194,767
Reported claims in process (2)		54,907		97,801		(42,894	)
Other medical expenses payable (3)		403,034		159,691		243,343

Total medical and other expenses payable	$	1,817,226	$	1,422,010		395,216

Reconciliation to cash flow statement:
Medical and other expenses payable from acquisition						(37,375	)

Change in medical and other expenses payable in cash flow statement					$	357,841

(1)

IBNR represents an estimate of medical expenses payable for claims incurred but not reported (IBNR) at the balance sheet date. The level of IBNR is primarily impacted by membership levels, medical claim trends and the receipt cycle time, which represents the length of time between when a claim is initially incurred and when the claim form is received (i.e. a shorter time span results in a lower IBNR).

(2)	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.

(3)	Other medical expenses payable includes capitation, risk share, and pharmacy payables. The balance due to our pharmacy benefit administrator fluctuates due to bi-weekly payments and the month-end cutoff.

Medical and other expenses payable primarily increased during the 2005 period due to (1) medical claims inflation, (2) an increase in the TRICARE payable from an increase in claims inventory at our third party claims processing vendor during the last week of September 2005 as discussed above, and (3) an increase in the capitation payable to physicians under risk sharing arrangements.

Cash Flow from Investing Activities

During 2005, we paid $444.9 million to acquire CarePlus, net of $92.1 million of cash acquired.

Our ongoing capital expenditures primarily relate to our technology initiatives and administrative facilities necessary for activities such as claims processing, billing and collections, medical utilization review, and customer service. Total capital expenditures, excluding acquisitions, were $112.3 million for the 2005 period and $72.9 million for the 2004 period. The increased spending resulted from our 2006 Medicare expansion initiatives. Excluding acquisitions, we expect our total capital expenditures in 2005 to range between $155 million and $165 million, increasing from the full year 2004 spending of $114.1 million due to our 2006 Medicare expansion initiative.

During the 2004 period, proceeds from the sale of the Jacksonville service center building increased investing cash flows $14.8 million.

Cash Flow from Financing Activities

During the 2005 period, we borrowed $294 million under our 5-year $600 million credit agreement to finance the CarePlus acquisition. Since the CarePlus acquisition, we have repaid the $294 million under the credit agreement. The remainder of the cash provided by financing activities in the 2005 and 2004 periods resulted primarily from the change in the book overdraft, the change in the securities lending payable, and proceeds from stock option exercises.

Long-term Debt

Long-term debt outstanding was as follows at September 30, 2005 and December 31, 2004:


	September 30, 2005		December 31, 2004
	(in thousands)
Long-term debt:
6.30% senior, unsecured notes due Aug. 1, 2018, net of unamortized discount of $737 at September 30, 2005 and $780 at December 31, 2004	$	299,263	$	299,220
7.25% senior, unsecured notes due Aug. 1, 2006, net of unamortized discount of $123 at September 30, 2005 and $231 at December 31, 2004		299,877		299,769
Fair value of interest rate swap agreements		7,916		17,082
Deferred gain from interest rate swap exchange		8,718		16,338

Total senior notes		615,774		632,409
Credit agreement		—		—
Other long-term borrowings		3,802		4,287

Total debt		619,576		636,696
Less: Current portion of long-term debt		302,366		—

Total long-term debt	$	317,210	$	636,696

Swap Agreements

At September 30, 2005, the fair value of our swap agreements related to the 6.30% senior notes was in our favor by $14.1 million and is included in other long-term assets and the fair value of our swap agreements related to the 7.25% senior notes was out of our favor by $6.2 million and is included in other long-term liabilities. Likewise, the carrying value of our senior notes has been increased $7.9 million to reflect their fair value. The counterparties to our swap agreements are major financial institutions with which we also have other financial relationships.

Credit Agreement

spread. The spread, which varies depending on our credit ratings, ranges from 50 to 112.5 basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 15 basis points, may fluctuate between 12.5 and 37.5 basis points, depending upon our credit ratings. In addition, a utilization fee of 12.5 basis points is payable for any day in which borrowings under the facility exceed 50% of the total $600 million commitment. The competitive advance portion of any borrowings will bear interest at market rates prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option.

Commercial Paper Program

At September 30, 2005, we had no commercial paper borrowings outstanding.

Other Borrowings

Shelf Registration

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, require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus. In most states, prior notification is provided before paying a dividend even if approval is not required.

As of September 30, 2005, we maintained aggregate statutory capital and surplus of $1,136.4 million in our state regulated health insurance subsidiaries. Each of these subsidiaries was in compliance with applicable statutory requirements which aggregated $802.2 million. Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level. Given our anticipated Medicare growth in premium revenues in 2006, we expect additional required capital ranging from $450 million to $650 million in 2006. In addition, most states rely on risk-based capital requirements, or RBC, to define the required levels of equity. RBC is a model developed by the National Association of Insurance Commissioners to monitor an entity’s solvency. This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below

these recommended levels. If RBC were adopted by all states at September 30, 2005, we would be required to fund $15.2 million in our two Puerto Rico subsidiaries to meet all requirements. After this funding, we would have $288.1 million of aggregate capital and surplus above any of the levels that require corrective action under RBC.

Cautionary Statements

This document includes both historical and forward-looking statements. The forward-looking statements are made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events, trends and uncertainties. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below. In making these statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or results. Our business is highly complicated, regulated and competitive with many different factors affecting results.

If the premiums we charge are insufficient to cover the cost of health care services delivered to our members, or if our estimates of medical claim reserves based upon our estimates of future medical claims are inadequate, our profitability could decline.

We use a significant portion of our revenues to pay the costs of health care services delivered to our members. These costs include claims payments, capitation payments, allocations of some centralized expenses and various other costs incurred to provide health insurance coverage to our members. These costs also include estimates of future payments to hospitals and others for medical care provided to our members. Generally, premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in excess of our medical cost projections generally are not recovered in the contract year through higher premiums. We estimate the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical inflation, historical developments, including claim inventory levels and claim receipt patterns, and other relevant factors. We also record medical claims reserves for future payments. We continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves. However, increases in the use or cost of services by our members, competition, government regulations and many other factors may and often do cause actual health care costs to exceed what was estimated and reflected in premiums.

These factors may include:

•

increased use of medical facilities and services, including prescription drugs;

•

increased cost of such services;

•

the Company’s membership mix;

•

variances in actual versus estimated levels of cost associated with new products, benefits or lines of business, product changes or benefit level changes;

•

membership in markets lacking adequate provider networks;

•

changes in the demographic characteristics of an account or market;

•

termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements;

•

changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals;

•

possible changes in our pharmacy rebate program with drug manufacturers;

•

catastrophes, including acts of terrorism, epidemics, or severe weather, including the recent hurricanes;

•

the introduction of new or costly treatments, including new technologies;

•

medical cost inflation; and

•

government mandated benefits or other regulatory changes.

Failure to adequately price our products or estimate sufficient medical claim reserves may result in a material adverse effect on our financial position, results of operations and cash flows.

If we do not design and price our products properly and competitively, our membership and profitability could decline.

We are in a highly competitive industry. Many of our competitors are more established in the health care industry in terms of a larger market share and greater financial resources than we do in some markets. In addition, other companies may enter our markets in the future, including emerging competitors in the Medicare Advantage program and in consumer-choice health plans, such as high deductible health plans with Health Savings Accounts (“HSAs”). We believe that barriers to entry in many markets are not substantial, so the addition of new competitors can occur relatively easily, and customers enjoy significant flexibility in moving between competitors. Contracts for the sale of commercial products are generally bid upon or renewed annually. While health plans compete on the basis of many factors, including service and the quality and depth of provider networks, we expect that price will continue to be a significant basis of competition. In addition to the challenge of controlling health care costs, we face intense competitive pressure to contain premium prices. Factors such as business consolidations, strategic alliances, legislative reform and marketing practices create pressure to contain premium price increases, despite being faced with increasing medical costs. The commercial pricing environment, particularly in the 2 to 300 member groups, is extremely competitive, and several of our competitors, including public and not-for-profit companies, are pricing aggressively to gain market share.

Premium increases, introduction of new product designs, and our relationship with our providers in various markets, among other issues, could also affect our membership levels. Other actions that could affect membership levels include the possible exit of or entrance to Medicare Advantage or Commercial markets.

If we do not compete effectively in our markets, if we set rates too high or too low in highly competitive markets to keep or increase our market share, if membership does not increase as we expect, or if it declines, or if we lose accounts with favorable medical cost experience while retaining or increasing membership in accounts with unfavorable medical cost experience, our business and results of operations could be materially adversely affected.

If we fail to effectively implement our operational and strategic initiatives, our business could be materially adversely affected.

Our future performance depends in large part upon our management team’s ability to execute our strategy to position the Company for the future. This strategy includes opportunities created with the new Medicare Advantage products. In December 2003, the Medicare Modernization Act, or MMA, was signed into law. We believe MMA offers new opportunities in our Medicare programs, including our HMO, PPO, Prescription Drug Coverage (PDP) and Private Fee-For-Service products. We have made additional investments in the Medicare Advantage program to enhance our ability to participate in these expanded programs. We have announced plans to double the size of our Medicare geographic reach through expanded Medicare Advantage product offerings. We intend to offer both the stand-alone Medicare Prescription Drug Coverage (PDP) and Medicare Advantage Health Plan with Prescription Drug Coverage (MA-PD) in addition to our current product offerings. Our current Medicare presence today includes 503,100 members in 12 HMO markets, 33 local PPO markets, and 35 states in which we have a private fee-for-service offering. Enrollment in the new Part D prescription drug plans will begin on November 15, 2005, with the plans becoming effective January 1, 2006. We have been approved to offer the Medicare prescription drug plan in 46 states and the District of Columbia.

Additionally, our strategy includes the growth of our Commercial segment business, with emphasis on our ASO and individual products, introduction of new products and benefit designs, including our Smart, consumer-choice products such as Health Savings Accounts (HSAs) as well as the adoption of new technologies and the integration of acquired businesses and contracts. We believe that by combining our abilities in product design, clinical programs and consumer engagement, we can achieve cost savings for our customers and our company.

There can be no assurance that we will be able to successfully implement our operational and strategic initiatives that are intended to position the Company for future growth or that the products we design will be accepted. Failure to implement this strategy may result in a material adverse effect on our financial position, results of operations and cash flows.

If we fail to properly maintain the integrity of our data, or to strategically implement new information systems, or to protect our proprietary rights to our systems, our business could be materially adversely affected.

Our business depends significantly on effective information systems and the integrity and timeliness of the data we use to run our business. Our business strategy involves providing members and providers with easy to use

products that leverage our information to meet their needs. Our ability to adequately price our products and services, provide effective and efficient service to our customers, and to timely and accurately report our financial results depends significantly on the integrity of the data in our information systems. As a result of our past and on-going acquisition activities, we have acquired additional systems. We have been taking steps to reduce the number of systems we operate, have upgraded and expanded our information systems capabilities, and are gradually migrating existing business to fewer systems. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain effectively our information systems and data integrity, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, have regulatory problems, have increases in operating expenses, lose existing customers, have difficulty in attracting new customers, or suffer other adverse consequences. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences.

We depend on independent third parties for significant portions of our systems-related support, equipment, facilities, and certain data, including data center operations, data network, voice communication services and pharmacy data processing. This dependence makes our operations vulnerable to such third parties’ failure to perform adequately under the contract, due to internal or external factors. We are in the process of changing vendors in our pharmacy benefits program. A change in service providers could result in a decline in service quality and effectiveness or less favorable contract terms which could adversely affect our operating results.

We rely on our agreements with customers, confidentiality agreements with employees, and our trade secrets and copyrights to protect our proprietary rights. These legal protections and precautions may not prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry. We expect software products to be increasingly subject to third-party infringement claims as the number of products and competitors in this area grows.

There can be no assurance that our process of improving existing systems, developing new systems to support our operations, integrating new systems, protecting our proprietary information, and improving service levels will not be delayed or that additional systems issues will not arise in the future. Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, results of operations and cash flows.

We are involved in various legal actions, which, if resolved unfavorably to us, could result in substantial monetary damages.

We are a party to a variety of legal actions that affect our business, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, and tort claims.

In addition, because of the nature of the health care business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of products and services. These include and could include in the future:

•

claims relating to the methodologies for calculating premiums;

•

claims relating to the denial of health care benefit payments;

•

claims relating to the denial or rescission of insurance coverage;

•

challenges to the use of some software products used in administering claims;

•

medical malpractice actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers’ alleged malpractice;

•

allegations of anti-competitive and unfair business activities;

•

provider disputes over compensation and termination of provider contracts;

•

disputes related to self-funded business, including actions alleging claim administration errors;

•

claims related to the failure to disclose some business practices; and

•

claims relating to customer audits and contract performance.

In some cases, substantial non-economic or punitive damages as well as treble damages under the federal False Claims Act, RICO and other statutes may be sought. While we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be enough to cover the damages awarded. Additionally, the cost of business insurance coverage has increased significantly. As a result, we have increased the amount of risk that we self-insure, particularly with respect to matters incidental to our business. We believe that we are adequately insured for claims in excess of our self-insurance. However, some types of damages, like punitive damages, may not be covered by insurance, particularly in those jurisdictions in which coverage of punitive damages is prohibited. Insurance coverage for all or some forms of liability may become unavailable or prohibitively expensive in the future.

A description of material legal actions in which we are currently involved is included under “Legal Proceedings” in Note 9 to the condensed consolidated financial statements. We cannot predict the outcome of these suits with certainty, and we are incurring expenses in the defense of these matters. Therefore, these legal actions could have a material adverse effect on our financial position, results of operations and cash flows.

As a government contractor, we are exposed to additional risks that could adversely affect our business or our willingness to participate in government health care programs.

A significant portion of our revenues relates to federal and state government health care coverage programs, including the TRICARE, Medicare Advantage, and Medicaid programs. These programs involve various risks, including:

•

at September 30, 2005, under our contracts with the Centers for Medicare and Medicaid Services, or CMS, we provided health insurance coverage to approximately 290,900 members in Florida. These contracts accounted for approximately 20% of our total premiums and ASO fees for the nine months ended September 30, 2005. The loss of these and other CMS contracts or significant changes in the Medicare Advantage program as a result of legislative or administrative action, including reductions in payments to us or increases in benefits to members without corresponding increases in payments, may have a material adverse effect on our financial condition, results of operations and cash flows;

•

at September 30, 2005, our TRICARE business, which accounted for approximately 18% of our total premiums and ASO fees during the nine months ended September 30, 2005, primarily consisted of the South Region contract. The South Region contract is a five-year contract, subject to annual renewals at the Government’s option that covers approximately 2.9 million beneficiaries. This contract also is generally subject to frequent change from events and circumstances such as the escalated conflict in the Middle East. These changes may include a reduction or increase in the number of persons enrolled or eligible to enroll, in the revenue we receive or in our administrative or health care costs. In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business. The loss of our current TRICARE contract would have a material adverse effect on our financial position, results of operations and cash flows;

•

at September 30, 2005, under our contract with the Puerto Rico Health Insurance Administration, we provided health insurance coverage to approximately 396,100 Medicaid members in Puerto Rico. This contract, accounted for approximately 3% of our total premiums and ASO fees for the nine months ended September 30, 2005. We currently have Medicaid contracts with the Puerto Rico Health Insurance Administration that were scheduled to expire on June 30, 2005. We currently are negotiating the terms of a contract amendment that will extend the contract until June 30, 2006. The government of Puerto Rico has indicated that it must consider the impact of the new Medicare legislation on the Medicaid contract in order to complete the arrangements for 2006. The loss of this contract or significant changes in the Puerto Rico Medicaid program as a result of legislative or administrative action, including reductions in payments to us or increases in benefits to members without corresponding increases in payments, may have a material adverse effect on our financial condition, results of operations and cash flows;

•

the possibility of temporary or permanent suspension from participating in government health care programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal conduct in the performance of a health care program or if there is an adverse decision against us under the federal False Claims Act;

•

CMS has implemented a risk adjustment model which apportions premiums paid to Medicare health plans according to health severity. A risk adjustment model thus pays more for enrollees with predictably higher costs. Under the new risk adjustment methodology, Humana and all Medicare health plans must collect, capture and submit the necessary diagnosis code information to CMS at least twice a year. The CMS risk

adjustment model uses the diagnosis data from inpatient and ambulatory treatment settings to calculate the risk adjusted premium payment to Medicare health plans. The risk adjustment model is being phased in. The portion of the risk adjusted payment was increased from 10% in 2003 to 30% in 2004. The portion of risk adjusted payment for 2005 is 50%, increasing to 75% in 2006 and 100% beginning in 2007. As a result of the CMS payment methodology described above, the amount and timing of our CMS monthly premium payments per member may change materially, either favorably or unfavorably;

•

changes to these government programs in the future may also affect our ability or willingness to participate in these programs;

•

higher comparative medical costs;

•

government regulatory and reporting requirements; and

•

higher marketing and advertising costs per member as a result of marketing to individuals as opposed to groups.

Our industry is currently subject to substantial government regulation, which, along with possible increased governmental regulation or legislative reform, increases our costs of doing business and could adversely affect our profitability.

The health care industry in general, and health insurance, particularly health maintenance organizations, or HMOs, and preferred provider organizations, or PPOs, are subject to substantial federal and state government regulation, including:

•

regulation relating to minimum net worth;

•

licensing requirements;

•

privacy issues;

•

approval of policy language and benefits;

•

mandated benefits and processes;

•

provider compensation arrangements;

•

approval of entry, withdrawal or re-entry into a state or market;

•

premium rates; and

•

periodic examinations by state and federal agencies.

State regulations require our licensed, operating subsidiaries to maintain minimum net worth requirements and restrict some investment activities. Additionally, those regulations may restrict the ability of our subsidiaries to make dividend payments, loans, loan repayments or other payments to us.

In recent years, significant federal and state legislation affecting our business has been enacted. State and federal governmental authorities are continually considering changes to laws and regulations applicable to us and are currently considering regulations relating to:

•

rules tightening time periods in which claims must be paid;

•

medical malpractice reform;

•

health insurance access and affordability;

•

e-connectivity;

•

disclosure of provider fee schedules and other data about payments to providers, sometimes called transparency;

•

product flexibility and use of innovative technology;

•

disclosure of provider quality information;

•

health plan liability to members who fail to receive appropriate care;

•

disclosure and composition of physician networks;

•

formation of regional/national association health plans for small employers; and

•

mental health parity.

All of these proposals could apply to us.

There can be no assurance that we will be able to continue to obtain or maintain required governmental approvals or licenses or that legislative or regulatory change will not have a material adverse effect on our business. Delays in obtaining or failure to obtain or maintain required approvals could adversely affect entry into new markets, our revenues or the number of our members, increase costs or adversely affect our ability to bring new products to market as forecasted.

The National Association of Insurance Commissioners, or NAIC, has adopted risk-based capital requirements, also known as RBC, which is subject to state-by-state adoption and to the extent implemented, sets minimum capitalization requirements for insurance and HMO companies. The NAIC recommendations for life insurance companies were adopted in all states and the prescribed calculation for HMOs has been adopted in most states in which we operate. The HMO rules may increase the minimum capital required for some of our subsidiaries.

The use of individually identifiable data by our business is regulated at federal and state levels. These laws and rules are changed frequently by legislation or administrative interpretation. Various state laws address the use and maintenance of individually identifiable health data. Most are derived from the privacy provisions in the federal Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA includes administrative provisions directed at simplifying electronic data interchange through standardizing transactions, establishing uniform health care provider, payer, and employer identifiers and seeking protections for confidentiality and security of patient data.

Regulations issued in February 2003 set standards for the security of electronic health information. Violations of these rules will subject us to significant penalties. Compliance with HIPAA regulations requires significant systems enhancements, training and administrative effort. The final rules do not provide for complete federal preemption of state laws, but rather preempt all inconsistent state laws unless the state law is more stringent. HIPAA could also expose us to additional liability for violations by our business associates.

Another area receiving increased focus is the time in which various laws require the payment of health care claims. Many states already have legislation in place covering payment of claims within a specific number of days. However, due to provider groups advocating for laws or regulations establishing even stricter standards, procedures and penalties, we expect additional regulatory scrutiny and supplemental legislation with respect to claims payment practices. The provider-sponsored bills are characterized by stiff penalties for late payment, including high interest rates payable to providers and costly fines levied by state insurance departments and attorneys general. This legislation and possible future regulation and oversight could expose our Company to additional liability and penalties.

We are also subject to various governmental audits and investigations. These can include audits and investigations by state attorneys general, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, the Defense Contract Audit Agency, and state Departments of Insurance and Departments of Health. Several Attorneys General are currently investigating the practices of insurance brokers, including those of certain of the companies in the health care industry. All of these activities could result in the loss of licensure or the right to participate in various programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our industry or our reputation in various markets and make it more difficult for us to sell our products and services.

Our ability to manage administrative costs could hamper profitability

The level of our administrative expenses can affect our profitability. While we attempt to effectively manage such expenses, increases in staff-related expenses, investment in new products, greater emphasis on small group and individual health insurance products, acquisitions, and implementation of regulatory requirements, among others, may occur from time to time.

There can be no assurance that we will be able to successfully contain our administrative expenses in line with our membership which may result in a material adverse effect on our financial position, results of operations and cash flows.

If we fail to develop and maintain satisfactory relationships with the providers of care to our members, our business could be adversely affected.

We contract with physicians, hospitals and other providers to deliver health care to our members. Our products encourage or require our customers to use these contracted providers. These providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner.

In any particular market, providers could refuse to contract with us, demand to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions and negotiating power. In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, may, in some cases, compete directly with us. If these providers refuse to contract with us, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be adversely affected.

In some situations, we have contracts with individual or groups of primary care physicians for an actuarially determined, fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members (i.e. capitation). The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us. In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members. The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers to demand payment from us, even though we have made our regular fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers. Any of these events could have an adverse effect on the provision of services to our members and our operations.

If we fail to manage prescription drug costs successfully, our financial results could suffer.

In general, prescription drug costs have been rapidly rising over the past few years. These increases are due to the introduction of new drugs costing significantly more than existing drugs, direct to consumer advertising by the pharmaceutical industry that creates consumer demand for particular brand-name drugs, and members seeking medications to address lifestyle changes. In order to control prescription drug costs, we have implemented multi-tiered copayment benefit designs for prescription drugs, including our four-tiered copayment benefit design, Rx4 and an Rx allowance program organized by evidence based impact. We cannot assure that these efforts will be successful in controlling costs. Failure to control these costs could have a material adverse effect on our financial position, results of operations and cash flows.

Our ability to obtain funds from our subsidiaries is restricted.

Because we operate as a holding company, we are dependent upon dividends and administrative expense reimbursements from our subsidiaries to fund the obligations of Humana Inc., the parent company. These subsidiaries generally are regulated by states’ Departments of Insurance. We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries. The levels of capitalization required depends primarily upon the volume of premium generated. A significant increase in premium volume will require additional capitalization from Humana Inc. We anticipate additional required capital ranging from $450 million to $650 million in 2006. In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends from these subsidiaries that exceed specified amounts, or, in some states, any amount. In addition, we normally notify the state Departments of Insurance prior to making payments that do not require approval.

Debt ratings are an important factor in our competitive position.

Claims paying ability, financial strength, and debt ratings by recognized rating organizations have become an increasingly important factor in establishing the competitive position of insurance companies. Ratings information is broadly disseminated and generally used throughout the industry. We believe our claims paying ability and financial strength ratings are an important factor in marketing our products to certain of our customers, and our debt ratings impact both the cost and availability of future borrowings. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect

each rating agency’s opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to policyholders, but are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such. Downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations.

Increased litigation and negative publicity could increase our cost of doing business.

The health benefits industry continues to receive significant negative publicity reflecting the public perception of the industry. This publicity and perception have been accompanied by increased litigation, including some large jury awards, legislative activity, regulation and governmental review of industry practices. These factors may adversely affect our ability to market our products or services, may require us to change our products or services, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines. Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

No material changes have occurred in our exposures to market risk since the date of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

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 September 30, 2005.

Based on our evaluation, our CEO, CFO and principal accounting officer concluded that our disclosure controls and procedures are effective, with reasonable assurance, in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission reports.

As permitted by the SEC, our evaluation did not include the disclosure controls and procedures of the acquired operations of CarePlus Health Plans of Florida (CarePlus), which is included in the Company’s consolidated financial statements as of September 30, 2005 and for the period from February 17, 2005 through September 30, 2005. Consolidated operations of CarePlus constituted approximately $653.9 million, or 10% of the Company’s total assets as of September 30, 2005, and approximately $353.1 million, or 3% of the Company’s revenues for the period from February 17, 2005 through September 30, 2005.

Changes to certain financial processes, information technology systems, and other components of internal control over financial reporting in regards to the February 2005 acquisition of CarePlus may occur and will be evaluated by management as such integration activities are implemented. Other than the acquisition described above, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is 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 litigation and legal proceedings pending against us, see “Legal Proceedings” in Note 9 to the condensed financial statements beginning on page 14 of this Form 10-Q.

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds
	None.

Item 3:	Defaults Upon Senior Securities
	None.

Item 4:	Submission of Matters to a Vote of Security Holders
	None.

Item 5:	Other Information
	None.

Item 6:	Exhibits

	10.1	Form of CMS Coordinated Care Plan Agreement

	10.2	Form of CMS Private Fee for Service Agreement

	10.3	Addendum to Agreement Providing for the Operation of a Medicare Voluntary Prescription Drug Plan

	10.4	Addendum to Agreement Providing for the Operation of an Employer/Union-only Group Medicare Advantage Prescription Drug Plan

	10.5	Addendum to Agreement Providing for the Operation of an Employer/Union-only Group Medicare Advantage-Only Plan

	10.6	Addendum to Agreement Providing for the Operation of a Medicare Advantage Regional Coordinated Care Plan

	12	Computation of ratio of earnings to fixed charges.

	31.1	CEO certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.

	31.2	CFO certification pursuant to Section 302 of Sarbanes–Oxley Act of 2002.

	32	CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 7, 2005	By:	/S/ STEVEN E. MCCULLEY
			Steven E. McCulley Vice President and Controller (Principal Accounting Officer)

Date:	November 7, 2005	By:	/S/ ARTHUR P. HIPWELL
			Arthur P. Hipwell Senior Vice President and General Counsel

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents