Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2009

¨ TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15	(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

Commission	file	number	1-5975

# HUMANA	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	of	incorporation)

500	West	Main	Street Louisville,	Kentucky

(Address	of	principal	executive	offices)

(I.R.S.	Employer	Identification	Number)

(Zip	Code)

Registrant's	telephone	number,	including	area	code:	(502)	580-1000

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Title	of	each	class

Name	of	exchange	on	which	registered

New	York	Stock	Exchange

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		þ				No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.				Yes		¨				No		þ

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90 days.				Yes		þ				No		¨

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be submitted	and	posted	pursuant	to	Rule	405	of	Regulation	S-T	(§232.405	of	this	chapter)	during	the	preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was required	to	submit	and	post	such	files).				Yes		þ				No		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		¨

Indicate	by	checkmark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer,	or	a	smaller	reporting	company.	See	the definitions	of	"large	accelerated	filer,"	"accelerated	filer"	and	"smaller	reporting	company"	in	Rule	12b-2	of	the	Exchange	Act.	(Check	one):

Large	accelerated	filer		þ				Accelerated	filer		¨				Non-accelerated	filer		¨				Smaller	reporting	company		¨

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

The	aggregate	market	value	of	voting	stock	held	by	non-affiliates	of	the	Registrant	as	of	June	30,	2009	was	$5,356,684,733	calculated	using	the	average	price	on such	date	of	$31.85.

The	number	of	shares	outstanding	of	the	Registrant's	Common	Stock	as	of	January	31,	2010	was	170,225,097.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Parts	II	and	III	incorporate	herein	by	reference	portions	of	the	Registrant's	Proxy	Statement	to	be	filed	pursuant	to	Regulation	14A	with	respect	to	the	Annual Meeting	of	Stockholders	scheduled	to	be	held	April	20,	2010.

# INDEX	TO	ANNUAL	REPORT	ON	FORM	10-K

|  | HUMANA	INC.<br>INDEX	TO	ANNUAL	REPORT	ON	FORM	10-K<br>For	the	Year	Ended	December	31,	2009<br>Part	I | Page |
| :--- | :--- | :--- |
| Item\t1. | Business | 3 |
| Item\t1A. | Risk\tFactors | 16 |
| Item\t1B. | Unresolved\tStaff\tComments | 29 |
| Item\t2. | Properties | 30 |
| Item\t3. | Legal\tProceedings | 30 |
| Item\t4. | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 30 |
|  | Part\tII |  |
| Item\t5. | Market\tfor\tthe\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 31 |
| Item\t6. | Selected\tFinancial\tData | 33 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 34 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 66 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 68 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 109 |
| Item\t9A. | Controls\tand\tProcedures | 109 |
| Item\t9B. | Other\tInformation | 111 |
|  | Part\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 111 |
| Item\t11. | Executive\tCompensation | 114 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 114 |
| Item\t13. |  |  |
|  | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 114 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 114 |
|  | Part\tIV |  |
| Item\t15. | Exhibits,\tFinancial\tStatement\tSchedules | 115 |
|  | Signatures\tand\tCertifications | 126 |

# Forward-Looking	Statements

Some	of	the	statements	under	"Business,"	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,"	and	elsewhere	in	this report	may	contain	forward-looking	statements	which	reflect	our	current	views	with	respect	to	future	events	and	financial	performance.	These	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,	or	the	Exchange	Act.	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	the	information	discussed	under	the	section	entitled	"Risk	Factors"	in	this	report.	In	making	these	statements, we	are	not	undertaking	to	address	or	update	them	in	future	filings	or	communications	regarding	our	business	or	results.	Our	business	is	highly	complicated,	regulated and	competitive	with	many	different	factors	affecting	results.

# PART	I

# ITEM	1. BUSINESS

# General

Headquartered	in	Louisville,	Kentucky,	Humana	Inc.	and	its	subsidiaries,	referred	to	throughout	this	document	as	"we,"	"us,"	"our,"	the	"Company"	or "Humana,"	is	one	of	the	nation's	largest	publicly	traded	health	and	supplemental	benefits	companies,	based	on	our	2009	revenues	of	approximately	$31.0	billion.	We	are a	full-service	benefits	solutions	company,	offering	a	wide	array	of	health	and	supplemental	benefit	products	for	employer	groups,	government	benefit	programs,	and individuals.	As	of	December	31,	2009,	we	had	approximately	10.3	million	members	in	our	medical	benefit	plans,	as	well	as	approximately	7.2	million	members	in	our specialty	products.	During	2009,	73%	of	our	premiums	and	administrative	services	fees	were	derived	from	contracts	with	the	federal	government,	including	17%	related to	our	Medicare	Advantage	contracts	in	Florida	with	the	Centers	for	Medicare	and	Medicaid	Services,	or	CMS,	and	12%	related	to	our	military	services	contracts.	Under our	Medicare	Advantage	CMS	contracts	in	Florida,	we	provide	health	insurance	coverage	to	approximately	377,900	members	as	of	December	31,	2009.

Humana	Inc.	was	organized	as	a	Delaware	corporation	in	1964.	Our	principal	executive	offices	are	located	at	500	West	Main	Street,	Louisville,	Kentucky	40202, the	telephone	number	at	that	address	is	(502)	580-1000,	and	our	website	address	is	www.humana.com.	We	have	made	available	free	of	charge	through	the	Investor Relations	section	of	our	web	site	our	annual	reports	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	proxy	statements,	and,	if	applicable, amendments	to	those	reports	filed	or	furnished	pursuant	to	Section	13(a)	of	the	Exchange	Act,	as	soon	as	reasonably	practicable	after	we	electronically	file	such	material with,	or	furnish	it	to,	the	Securities	and	Exchange	Commission.

This	Annual	Report	on	Form	10-K	contains	both	historical	and	forward-looking	information.	See	Item	1A.—Risk	Factors	for	a	description	of	a	number	of	factors that	may	adversely	affect	our	results	or	business.

# Business	Segments

We	manage	our	business	with	two	segments:	Government	and	Commercial.	The	Government	segment	consists	of	beneficiaries	of	government	benefit	programs, and	includes	three	lines	of	business:	Medicare,	Military,	and	Medicaid.	The	Commercial	segment	consists	of	members	enrolled	in	our	medical	and	specialty	products marketed	to	employer	groups	and	individuals.	When	identifying	our	segments,	we	aggregated	products

with	similar	economic	characteristics.	These	characteristics	include	the	nature	of	customer	groups	as	well	as	pricing,	benefits,	and	underwriting	requirements.	These segment	groupings	are	consistent	with	information	used	by	our	Chief	Executive	Officer.

The	results	of	each	segment	are	measured	by	income	before	income	taxes.	We	allocate	all	selling,	general	and	administrative	expenses,	investment	and	other revenue,	interest	expense,	and	goodwill,	but	no	other	assets	or	liabilities,	to	our	segments.	Members	served	by	our	two	segments	often	utilize	the	same	provider networks,	in	some	instances	enabling	us	to	obtain	more	favorable	contract	terms	with	providers.	Our	segments	also	share	indirect	overhead	costs	and	assets.	As	a	result, the	profitability	of	each	segment	is	interdependent.

# Our	Products

As	more	fully	described	in	the	products	discussion	that	follows,	we	provide	health	insurance	benefits	under	health	maintenance	organization,	or	HMO,	Private Fee-For-Service,	or	PFFS,	and	preferred	provider	organization,	or	PPO,	plans.	In	addition,	we	provide	other	benefits	with	our	specialty	products	including	dental,	vision, and	other	supplementary	benefits.	The	following	table	presents	our	segment	membership	at	December	31,	2009,	and	premiums	and	administrative	services	only,	or ASO,	fees	by	product	for	the	year	ended	December	31,	2009:

|  | Medical<br>Membership | Specialty<br>Membership | Premiums | ASO	Fees | Total<br>Premiums	and<br>ASO	Fees | Total<br>Premiums<br>and	ASO<br>Fees |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tthousands) |  |  |  |
| Government: |  |  |  |  |  |  |
| Medicare\tAdvantage: |  |  |  |  |  |  |
| HMO | 591,900 | — | $7,633,764 | $— | $7,633,764 | 25.1% |
| PFFS | 564,200 | — | 5,630,690 | — | 5,630,690 | 18.5% |
| PPO | 352,400 | — | 3,148,847 | — | 3,148,847 | 10.4% |
| Total\tMedicare\tAdvantage | 1,508,500 | — | 16,413,301 | — | 16,413,301 | 54.0% |
| Medicare\tstand-alone\tPDP | 1,927,900 | — | 2,327,418 | — | 2,327,418 | 7.6% |
| Total\tMedicare | 3,436,400 | — | 18,740,719 | — | 18,740,719 | 61.6% |
| Medicaid\tinsured | 401,700 | — | 646,195 | — | 646,195 | 2.1% |
| Military\tservices\tinsured | 1,756,000 | — | 3,426,739 | — | 3,426,739 | 11.3% |
| Military\tservices\tASO | 1,278,400 | — | — | 108,442 | 108,442 | 0.3% |
| Total\tmilitary\tservices | 3,034,400 | — | 3,426,739 | 108,442 | 3,535,181 | 11.6% |
| Total\tGovernment | 6,872,500 | — | 22,813,653 | 108,442 | 22,922,095 | 75.3% |
| Commercial: |  |  |  |  |  |  |
| Fully-insured: |  |  |  |  |  |  |
| PPO | 1,053,200 | — | 3,188,598 | — | 3,188,598 | 10.5% |
| HMO | 786,300 | — | 2,996,560 | — | 2,996,560 | 9.9% |
| Total\tfully-insured | 1,839,500 | — | 6,185,158 | — | 6,185,158 | 20.4% |
| ASO | 1,571,300 | — | — | 373,376 | 373,376 | 1.2% |
| Specialty | — | 7,200,100 | 927,940 | 14,317 | 942,257 | 3.1% |
| Total\tCommercial | 3,410,800 | 7,200,100 | 7,113,098 | 387,693 | 7,500,791 | 24.7% |
| Total | 10,283,300 | 7,200,100 | $29,926,751 | $496,135 | $30,422,886 | 100.0% |

# Our	Products	Marketed	to	Government	Segment	Members	and	Beneficiaries

# Medicare

We	have	participated	in	the	Medicare	program	for	private	health	plans	for	over	20	years	and	have	established	a	national	presence,	offering	at	least	one	type	of Medicare	plan	in	all	50	states.	The	resulting	growing	membership	base	provides	us	with	greater	ability	to	expand	our	network	of	PPO	and	HMO	providers.	We	employ strategies	including	health	assessments	and	clinical	guidance	programs	such	as	lifestyle	and	fitness	programs	for	seniors	to	guide	Medicare	beneficiaries	in	making	cost- effective	decisions	with	respect	to	their	health	care,	including	cost	savings	that	occur	from	making	positive	behavior	changes	that	result	in	living	healthier.

Medicare	is	a	federal	program	that	provides	persons	age	65	and	over	and	some	disabled	persons	under	the	age	of	65	certain	hospital	and	medical	insurance benefits.	Hospitalization	benefits	are	provided	under	Part	A,	without	the	payment	of	any	premium,	for	up	to	90	days	per	incident	of	illness	plus	a	lifetime	reserve aggregating	60	days.	Eligible	beneficiaries	are	required	to	pay	an	annually	adjusted	premium	to	the	federal	government	to	be	eligible	for	physician	care	and	other services	under	Part	B.	Beneficiaries	eligible	for	Part	A	and	Part	B	coverage	under	traditional	Medicare	are	still	required	to	pay	out-of-pocket	deductibles	and coinsurance.	Prescription	drug	benefits	are	provided	under	Part	D.	CMS,	an	agency	of	the	United	States	Department	of	Health	and	Human	Services,	administers	the Medicare	program.

# Medicare	Advantage	Products

We	contract	with	CMS	under	the	Medicare	Advantage	program	to	provide	a	comprehensive	array	of	health	insurance	benefits,	including	wellness	programs,	to Medicare	eligible	persons	under	HMO,	PPO,	and	PFFS	plans	in	exchange	for	contractual	payments	received	from	CMS,	usually	a	fixed	payment	per	member	per	month. With	each	of	these	products,	the	beneficiary	receives	benefits	in	excess	of	original	Medicare,	typically	including	reduced	cost	sharing,	enhanced	prescription	drug benefits,	care	coordination,	data	analysis	techniques	to	help	identify	member	needs,	complex	case	management,	tools	to	guide	members	in	their	health	care	decisions, disease	management	programs,	wellness	and	prevention	programs	and,	in	some	instances,	a	reduced	monthly	Part	B	premium.	Since	2006,	Medicare	beneficiaries	have had	more	health	plan	options,	including	a	prescription	drug	benefit	option.	Most	Medicare	Advantage	plans	offer	the	prescription	drug	benefit	under	Part	D	as	part	of	the basic	plan,	subject	to	cost	sharing	and	other	limitations.	Accordingly,	all	of	the	provisions	of	the	Medicare	Part	D	program	described	in	connection	with	our	stand-alone prescription	drug	plans	in	the	following	section	also	are	applicable	to	most	of	our	Medicare	Advantage	plans.	Medicare	Advantage	plans	may	charge	beneficiaries monthly	premiums	and	other	copayments	for	Medicare-covered	services	or	for	certain	extra	benefits.

Our	Medicare	HMO	and	PPO	plans,	which	cover	Medicare-eligible	individuals	residing	in	certain	counties,	may	eliminate	or	reduce	coinsurance	or	the	level	of deductibles	on	many	other	medical	services	while	seeking	care	from	participating	in-network	providers	or	in	emergency	situations.	Except	in	emergency	situations, HMO	plans	provide	no	out-of-network	benefits.	PPO	plans	carry	an	out-of	network	benefit	that	is	subject	to	higher	member	cost-sharing.	In	most	cases,	these beneficiaries	are	required	to	pay	a	monthly	premium	to	the	HMO	or	PPO	plan	in	addition	to	the	monthly	Part	B	premium	they	are	required	to	pay	the	Medicare	program.

Our	Medicare	PFFS	plans	generally	have	no	preferred	network.	Individuals	in	these	plans	pay	us	a	monthly	premium	to	receive	typical	Medicare	Advantage benefits	along	with	the	freedom	to	choose	any	health	care	provider	that	accepts	individuals	at	rates	equivalent	to	traditional	Medicare	payment	rates.

CMS	uses	monthly	rates	per	person	for	each	county	to	determine	the	fixed	monthly	payments	per	member	to	pay	to	health	benefit	plans.	These	rates	are	adjusted under	CMS's	risk-adjustment	model	which	uses	health	status	indicators,	or	risk	scores,	to	improve	the	adequacy	of	payment.	The	risk-adjustment	model,	which	CMS implemented	pursuant	to	the	Balanced	Budget	Act	of	1997	(BBA)	and	the	Benefits	and	Improvement	Protection	Act	of	2000	(BIPA),	generally	pays	more	for	members with	predictably	higher	costs	and	uses	principal	hospital

inpatient	diagnoses	as	well	as	diagnosis	data	from	ambulatory	treatment	settings	(hospital	outpatient	department	and	physician	visits).	CMS	transitioned	to	this	risk- based	payment	model	while	the	old	payment	model	based	on	demographic	data	including	gender,	age,	and	disability	status	was	phased	out.	The	phase-in	of	risk	adjusted payment	was	completed	in	2007.	Under	the	risk-adjustment	methodology,	all	health	benefit	organizations	must	collect	and	submit	the	necessary	diagnosis	code information	to	CMS	within	prescribed	deadlines.

Commensurate	with	the	phase-in	of	the	risk-adjustment	methodology,	payments	to	Medicare	Advantage	plans	were	increased	by	a	"budget	neutrality"	factor.	The budget	neutrality	factor	was	implemented	to	prevent	overall	health	plan	payments	from	being	reduced	during	the	transition	from	the	previous	payment	model,	based upon	average	original	Medicare	fee-for-service	spending,	to	the	risk-adjustment	payment	model.	The	budget	neutrality	adjustment	began	phasing	out	in	2007	and	will	be fully	eliminated	by	2011.

At	December	31,	2009,	we	provided	health	insurance	coverage	under	CMS	contracts	to	approximately	1,508,500	Medicare	Advantage	members	for	which	we received	premium	revenues	of	approximately	$16.4	billion,	or	54.0%,	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009.	Under	our	Medicare Advantage	contracts	with	CMS	in	Florida,	we	provided	health	insurance	coverage	to	approximately	377,900	members.	These	contracts	accounted	for	premium	revenues of	approximately	$5.2	billion,	which	represented	approximately	31.8%	of	our	Medicare	Advantage	premium	revenues,	or	17.1%	of	our	total	premiums	and	ASO	fees	for the	year	ended	December	31,	2009.

Our	HMO,	PFFS,	and	PPO	products	covered	under	Medicare	Advantage	contracts	with	CMS	are	renewed	generally	for	a	one-year	term	each	December	31	unless CMS	notifies	us	of	its	decision	not	to	renew	by	August	1	of	the	year	in	which	the	contract	would	end,	or	we	notify	CMS	of	our	decision	not	to	renew	by	the	first Monday	in	June	of	the	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana	and	CMS	relating	to	our	Medicare	Advantage	business	have	been renewed	for	2010.

# Medicare	Stand-Alone	Prescription	Drug	Products

We	offer	stand-alone	prescription	drug	plans,	or	PDPs,	under	Medicare	Part	D.	Generally,	Medicare-eligible	individuals	enroll	in	one	of	our	plan	choices	between November	15	and	December	31	for	coverage	that	begins	January	1.	Our	stand-alone	PDP	offerings	consist	of	plans	offering	basic	coverage	with	benefits	mandated	by Congress,	as	well	as	plans	providing	enhanced	coverage	with	varying	degrees	of	out-of-pocket	costs	for	premiums,	deductibles	and	co-insurance.	Our	revenues	from CMS	and	the	beneficiary	are	determined	from	our	bids	submitted	annually	to	CMS.	These	revenues	also	reflect	the	health	status	of	the	beneficiary	and	risk	sharing provisions	as	more	fully	described	beginning	on	page	60.	Our	stand-alone	PDP	contracts	with	CMS	are	renewed	generally	for	a	one-year	term	each	December	31	unless CMS	notifies	us	of	its	decision	not	to	renew	by	August	1	of	the	year	in	which	the	contract	would	end,	or	we	notify	CMS	of	our	decision	not	to	renew	by	the	first Monday	in	June	of	the	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana	and	CMS	relating	to	our	Medicare	stand-alone	PDP	business	have been	renewed	for	2010.

Medicare	stand-alone	PDP	premium	revenues	were	approximately	$2.3	billion,	or	7.6%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31, 2009.

# Medicaid	Product

Medicaid	is	a	federal	program	that	is	state-operated	to	facilitate	the	delivery	of	health	care	services	primarily	to	low-income	residents.	Each	electing	state develops,	through	a	state-specific	regulatory	agency,	a	Medicaid	managed	care	initiative	that	must	be	approved	by	CMS.	CMS	requires	that	Medicaid	managed	care plans	meet	federal	standards	and	cost	no	more	than	the	amount	that	would	have	been	spent	on	a	comparable	fee-for-service	basis.	States	currently	either	use	a	formal proposal	process	in	which	they	review	many	bidders	before	selecting	one	or	award	individual	contracts	to	qualified	bidders	who	apply	for	entry	to	the	program.	In	either case,	the	contractual	relationship	with	a	state	generally	is	for	a	one-year	period.	Under	these	contracts,	we

receive	a	fixed	monthly	payment	from	a	government	agency	for	which	we	are	required	to	provide	health	insurance	coverage	to	enrolled	members.	Due	to	the	increased emphasis	on	state	health	care	reform	and	budgetary	constraints,	more	states	are	utilizing	a	managed	care	product	in	their	Medicaid	programs.

Our	Medicaid	business,	which	accounted	for	premium	revenues	of	approximately	$646.2	million,	or	2.1%,	of	our	total	premiums	and	ASO	fees	for	the	year	ended December	31,	2009,	consists	of	contracts	in	Puerto	Rico	and	Florida,	with	the	vast	majority	in	Puerto	Rico.

# Military	Services

Under	our	TRICARE	South	Region	contract	with	the	United	States	Department	of	Defense,	or	DoD,	we	provide	health	insurance	coverage	to	the	dependents	of active	duty	military	personnel	and	to	retired	military	personnel	and	their	dependents.	Currently,	three	health	benefit	options	are	available	to	TRICARE	beneficiaries.	In addition	to	a	traditional	indemnity	option,	participants	may	enroll	in	a	HMO-like	plan	with	a	point-of-service	option	or	take	advantage	of	reduced	copayments	by	using	a network	of	preferred	providers,	similar	to	a	PPO.

We	have	participated	in	the	TRICARE	program	since	1996	under	contracts	with	the	Department	of	Defense.	Our	current	TRICARE	South	Region	contract,	which we	were	awarded	in	2003,	covers	approximately	3.0	million	eligible	beneficiaries	as	of	December	31,	2009	in	Florida,	Georgia,	South	Carolina,	Mississippi,	Alabama, Tennessee,	Louisiana,	Arkansas,	Texas	and	Oklahoma.	The	South	Region	is	one	of	the	three	regions	in	the	United	States	as	defined	by	the	Department	of	Defense.	Of these	eligible	beneficiaries,	1.3	million	were	TRICARE	ASO	members	representing	active	duty	beneficiaries,	seniors	over	the	age	of	65	and	beneficiaries	in	Puerto	Rico for	which	the	Department	of	Defense	retains	all	of	the	risk	of	financing	the	cost	of	their	health	benefit.	We	have	subcontracted	with	third	parties	to	provide	selected administration	and	specialty	services	under	the	contract.	The	original	5-year	South	Region	contract	expired	March	31,	2009.	Through	an	Amendment	of Solicitation/Modification	of	Contract	to	the	TRICARE	South	Region	contract,	an	additional	one-year	option	period,	the	sixth	option	period,	which	runs	from	April	1, 2009	through	March	31,	2010,	was	exercised	by	the	government.	The	Amendment	also	provides	for	two	additional	six-month	option	periods:	the	seventh	option	period runs	from	April	1,	2010	through	September	30,	2010	and	the	eighth	option	period	runs	from	October	1,	2010	through	March	31,	2011.	Exercise	of	each	of	the	seventh and	eighth	option	periods	is	at	the	government's	option.	On	December	16,	2009,	we	were	notified	by	Department	of	Defense	TRICARE	Management	Activity,	or	TMA, that	it	intends	to	exercise	its	options	to	extend	the	TRICARE	South	Region	contract	for	Option	Period	VII	and	Option	Period	VIII.	The	exercise	of	these	option	periods would	effectively	extend	the	TRICARE	South	Region	contract	through	March	31,	2011.	The	contract's	transition	provisions	require	the	continuation	of	certain	activities, primarily	claims	processing,	during	a	wind-down	period	lasting	approximately	six	months	following	the	expiration	date.	Claims	incurred	on	or	prior	to	the	expiration date	would	continue	to	be	processed	during	the	wind-down	period	under	the	terms	existing	prior	to	the	expiration	date.

The	TRICARE	South	Region	contract	contains	provisions	that	require	us	to	negotiate	a	target	health	care	cost	amount	annually	with	the	federal	government.	Any variance	from	the	target	health	care	cost	is	shared	with	the	federal	government.	Accordingly,	events	and	circumstances	not	contemplated	in	the	negotiated	target	health care	cost	amount	may	have	a	material	adverse	effect	on	us.	These	changes	may	include	an	increase	or	reduction	in	the	number	of	persons	enrolled	or	eligible	to	enroll due	to	the	federal	government's	decision	to	increase	or	decrease	U.S.	military	deployments.

In	July	2009,	we	were	notified	by	the	Department	of	Defense	that	we	were	not	awarded	the	third	generation	TRICARE	program	contract	for	the	South	Region which	had	been	subject	to	competing	bids.	We	filed	a	protest	with	the	Government	Accountability	Office,	or	GAO,	in	connection	with	the	award	to	another	contractor citing	discrepancies	between	the	award	criteria	and	procedures	prescribed	in	the	request	for	proposals	issued	by	the	DoD	and	those	that	appear	to	have	been	used	by	the DoD	in	making	its	contractor	selection.	In	October	2009,	we	learned	that	the	GAO	had	upheld	our	protest,	determining	that	the	TMA	evaluation	of	our	proposal	had unreasonably	failed	to	fully	recognize	and	reasonably	account	for	the	likely	cost	savings	associated	with	our

record	of	obtaining	network	provider	discounts	from	our	established	network	in	the	South	Region.	On	December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO of	its	intent	to	implement	corrective	action	consistent	with	the	discussion	contained	within	the	GAO's	decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able to	determine	what	actions	TMA	will	take	in	response	to	recommendations	by	the	GAO,	nor	can	we	determine	whether	or	not	the	protest	decision	by	the	GAO	will	have any	effect	upon	the	ultimate	disposition	of	the	contract	award.

For	the	year	ended	December	31,	2009,	military	services	premium	revenues	were	approximately	$3.4	billion,	or	11.3%	of	our	total	premiums	and	ASO	fees,	and military	services	ASO	fees	totaled	$108.4	million,	or	0.3%	of	our	total	premiums	and	ASO	fees.	The	TRICARE	South	Region	contract	represents	approximately	97%	of total	military	services	premiums	and	ASO	fees.

# International	Operations

In	August	2006,	we	established	our	subsidiary	Humana	Europe	in	the	United	Kingdom	to	provide	commissioning	support	to	Primary	Care	Trusts,	or	PCTs,	in England.	Under	the	contracts	we	are	awarded,	we	work	in	partnership	with	local	PCTs,	health	care	providers,	and	patients	to	strengthen	health-service	delivery	and	to implement	strategies	at	a	local	level	to	help	the	National	Health	Service	enhance	patient	experience,	improve	clinical	outcomes,	and	reduce	costs.	For	the	year	ended December	31,	2009,	revenues	under	these	contracts	were	approximately	$9.0	million,	or	less	than	0.1%	of	our	total	premium	and	ASO	fees.

# Our	Products	Marketed	to	Commercial	Segment	Employers	and	Members

We	offer	medical	and	specialty	benefits	to	employer	groups	and	individuals	in	the	commercial	market.	Our	commercial	medical	products	offered	as	HMO,	PPO or	ASO,	more	fully	described	in	the	following	sections,	include	offerings	designed	to	provide	additional	options	to	the	consumer.	For	example,	our	"Smart"	products give	more	cost	control	and	predictability	to	employers	and	more	choice	and	control	over	healthcare	decision-making	to	employees.	Online	tools	and	resources	deliver information,	convenience,	and	easy	access	for	members	enrolled	in	our	Smart	products.	Our	other	consumer	offerings	include	products	with	a	high	deductible	offering	in conjunction	with	a	spending	account.

Our	commercial	HMO	products	provide	prepaid	health	insurance	coverage	to	our	members	through	a	network	of	independent	primary	care	physicians,	specialty physicians,	and	other	health	care	providers	who	contract	with	the	HMO	to	furnish	such	services.	Primary	care	physicians	generally	include	internists,	family practitioners,	and	pediatricians.	Generally,	the	member's	primary	care	physician	must	approve	access	to	certain	specialty	physicians	and	other	health	care	providers. These	other	health	care	providers	include	hospitals,	nursing	homes,	home	health	agencies,	pharmacies,	mental	health	and	substance	abuse	centers,	diagnostic	centers, optometrists,	outpatient	surgery	centers,	dentists,	urgent	care	centers,	and	durable	medical	equipment	suppliers.	Because	the	primary	care	physician	generally	must approve	access	to	many	of	these	other	health	care	providers,	the	HMO	product	is	considered	the	most	restrictive	form	of	a	health	benefit	plan.

An	HMO	member,	typically	through	the	member's	employer,	pays	a	monthly	fee,	which	generally	covers,	together	with	some	copayments,	health	care	services received	from,	or	approved	by,	the	member's	primary	care	physician.	We	participate	in	the	Federal	Employee	Health	Benefits	Program,	or	FEHBP,	primarily	with	our HMO	offering	in	certain	markets.	FEHBP	is	the	government's	health	insurance	program	for	Federal	employees,	retirees,	former	employees,	family	members,	and spouses.	For	the	year	ended	December	31,	2009,	commercial	HMO	premium	revenues	totaled	approximately	$3.0	billion,	or	9.9%	of	our	total	premiums	and	ASO	fees.

Our	commercial	PPO	products,	which	are	marketed	primarily	to	employer	groups	and	individuals,	include	some	types	of	wellness	and	utilization	management programs.	However,	they	typically	include	more	cost-sharing

with	the	member	through	copayments	and	annual	deductibles.	PPOs	also	are	similar	to	traditional	health	insurance	because	they	provide	a	member	with	more	freedom	to choose	a	physician	or	other	health	care	provider.	In	a	PPO,	the	member	is	encouraged,	through	financial	incentives,	to	use	participating	health	care	providers,	which have	contracted	with	the	PPO	to	provide	services	at	favorable	rates.	In	the	event	a	member	chooses	not	to	use	a	participating	health	care	provider,	the	member	may	be required	to	pay	a	greater	portion	of	the	provider's	fees.

As	part	of	our	PPO	products,	we	offer	HumanaOne,	a	major	medical	product	marketed	directly	to	individuals.	We	offer	this	product	in	select	markets	where	we can	generally	underwrite	risk	and	utilize	our	existing	networks	and	distribution	channels.	This	individual	product	includes	provisions	mandated	by	law	to	guarantee renewal	of	coverage	for	as	long	as	the	individual	chooses.

For	the	year	ended	December	31,	2009,	employer	and	individual	commercial	PPO	premium	revenues	totaled	approximately	$3.2	billion,	or	10.5%	of	our	total premiums	and	ASO	fees.

We	also	offer	ASO	products	to	employers	who	self-insure	their	employee	health	plans.	We	receive	fees	to	provide	administrative	services	which	generally include	the	processing	of	claims,	offering	access	to	our	provider	networks	and	clinical	programs,	and	responding	to	customer	service	inquiries	from	members	of	self- funded	employers.	These	products	may	include	all	of	the	same	benefit	and	product	design	characteristics	of	our	fully-insured	PPO	or	HMO	products	described previously.	Under	ASO	contracts,	self-funded	employers	retain	the	risk	of	financing	substantially	all	of	the	cost	of	health	benefits.	However,	most	ASO	customers purchase	stop	loss	insurance	coverage	from	us	to	cover	catastrophic	claims	or	to	limit	aggregate	annual	costs.	For	the	year	ended	December	31,	2009,	commercial	ASO fees	totaled	$373.4	million,	or	1.2%	of	our	total	premiums	and	ASO	fees.

# Specialty

We	also	offer	various	specialty	products,	including	dental,	vision,	and	other	supplemental	products	as	well	as	disease	management	services	under	Corphealth,	Inc. (d/b/a	LifeSynch)	and	mail-order	pharmacy	benefit	administration	services	for	our	members	under	Humana	Pharmacy,	Inc.	(d/b/a	RightSourceRx ).	During	2007,	we made	investments	which	significantly	expanded	our	specialty	product	offerings	with	the	acquisitions	of	CompBenefits	Corporation	and	KMG	America	Corporation. These	acquisitions	significantly	increased	our	dental	membership	and	added	new	product	offerings,	including	vision	and	other	supplemental	health	and	life	products.	The supplemental	health	plans	cover,	for	example,	some	of	the	costs	associated	with	cancer	and	critical	illness.	Other	supplemental	health	products	also	include	a	closed block	of	approximately	36,000	long-term	care	policies	acquired	in	connection	with	the	KMG	acquisition.	No	new	policies	have	been	written	since	2005	under	this closed	block.	At	December	31,	2009,	we	had	approximately	7.2	million	specialty	members,	including	3.8	million	dental	members	and	2.5	million	vision	members.	For the	year	ended	December	31,	2009,	specialty	product	premiums	and	ASO	fees	were	approximately	$942.3	million,	or	3.1%	of	our	total	premiums	and	ASO	fees. SM

# Membership

The	following	table	summarizes	our	total	medical	membership	at	December	31,	2009,	by	market	and	product:

|  | Government | Government | Government | Government | Commercial | Commercial | Commercial |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Medicare |  |  |  |  |  |  |  |
|  | Medicare | stand-alone |  | Military |  |  |  |  | Percent\tof |
|  | Advantage | PDP | Medicaid | services | PPO | HMO | ASO | Total | Total |
|  |  |  |  | (in\tthousands) | (in\tthousands) |  |  |  |  |
| Florida | 377.9 | 82.0 | 51.8 | — | 104.4 | 160.0 | 81.3 | 857.4 | 8.3% |
| Kentucky | 59.3 | 41.1 | — | — | 116.3 | 41.7 | 525.8 | 784.2 | 7.6% |
| Texas | 96.2 | 172.5 | — | — | 165.6 | 152.0 | 125.9 | 712.2 | 6.9% |
| Puerto\tRico | 14.8 | 0.3 | 349.9 | — | 39.0 | 15.6 | 36.1 | 455.7 | 4.4% |
| Illinois | 72.1 | 54.0 | — | — | 137.1 | 70.0 | 94.8 | 428.0 | 4.2% |
| Ohio | 51.2 | 64.0 | — | — | 12.7 | 89.0 | 170.4 | 387.3 | 3.8% |
| Wisconsin | 50.5 | 40.4 | — | — | 63.6 | 52.9 | 170.8 | 378.2 | 3.7% |
| Louisiana | 79.6 | 28.3 | — | — | 39.6 | 30.4 | 133.8 | 311.7 | 3.0% |
| Tennessee | 68.7 | 54.3 | — | — | 62.8 | 18.7 | 65.5 | 270.0 | 2.6% |
| Missouri/Kansas | 63.3 | 105.6 | — | — | 63.1 | 13.1 | 7.0 | 252.1 | 2.5% |
| Georgia | 41.9 | 51.6 | — | — | 8.3 | 91.2 | 36.2 | 229.2 | 2.2% |
| Indiana | 31.8 | 61.0 | — | — | 32.0 | 2.9 | 50.5 | 178.2 | 1.7% |
| Michigan | 34.8 | 62.5 | — | — | 40.0 | — | 5.9 | 143.2 | 1.4% |
| North\tCarolina | 63.5 | 69.6 | — | — | 8.0 | — | — | 141.1 | 1.4% |
| Arizona | 31.4 | 25.6 | — | — | 30.5 | 25.1 | 12.2 | 124.8 | 1.2% |
| Virginia | 51.5 | 63.5 | — | — | 3.3 | — | — | 118.3 | 1.2% |
| Colorado | 19.5 | 22.6 | — | — | 40.2 | 23.7 | — | 106.0 | 1.0% |
| California | 7.3 | 95.8 | — | — | 1.2 | — | — | 104.3 | 1.0% |
| Military\tservices | — | — | — | 1,756.0 | — | — | — | 1,756.0 | 17.1% |
| Military\tservices\tASO | — | — | — | 1,278.4 | — | — | — | 1,278.4 | 12.5% |
| Others | 293.2 | 833.2 | — | — | 85.5 | — | 55.1 | 1,267.0 | 12.3% |
| Totals | 1,508.5 | 1,927.9 | 401.7 | 3,034.4 | 1,053.2 | 786.3 | 1,571.3 | 10,283.3 | 100.0% |

# Provider	Arrangements

We	provide	our	members	with	access	to	health	care	services	through	our	networks	of	health	care	providers	with	whom	we	have	contracted,	including	hospitals and	other	independent	facilities	such	as	outpatient	surgery	centers,	primary	care	physicians,	specialist	physicians,	dentists	and	providers	of	ancillary	health	care	services and	facilities.	These	ancillary	services	and	facilities	include	ambulance	services,	medical	equipment	services,	home	health	agencies,	mental	health	providers, rehabilitation	facilities,	nursing	homes,	optical	services,	and	pharmacies.	Our	membership	base	and	the	ability	to	influence	where	our	members	seek	care	generally enable	us	to	obtain	contractual	discounts	with	providers.

We	use	a	variety	of	techniques	to	provide	access	to	effective	and	efficient	use	of	health	care	services	for	our	members.	These	techniques	include	the	coordination of	care	for	our	members,	product	and	benefit	designs,	hospital	inpatient	management	systems	and	enrolling	members	into	various	disease	management	programs.	The focal	point	for	health	care	services	in	many	of	our	HMO	networks	is	the	primary	care	physician	who,	under	contract	with	us,	provides	services	to	our	members,	and	may control	utilization	of	appropriate	services	by	directing	or	approving	hospitalization	and	referrals	to	specialists	and	other	providers.	Some	physicians	may	have arrangements	under	which	they	can	earn	bonuses	when	certain	target	goals	relating	to	the	provision	of	quality	patient	care	are	met.	Our	hospitalist	programs	use specially-trained	physicians	to	effectively	manage	the	entire	range	of	an	HMO	member's	medical	care	during	a	hospital	admission	and	to	effectively	coordinate	the member's	discharge	and	post-discharge	care.	We	have	available	a	variety	of	disease	management	programs	related	to	specific	medical	conditions	such	as	congestive heart	failure,	coronary	artery	disease,	prenatal	and	premature	infant	care,	asthma	related	illness,	end	stage	renal	disease,	diabetes,	cancer,	and	certain	other	conditions.

We	typically	contract	with	hospitals	on	either	(1)	a	per	diem	rate,	which	is	an	all-inclusive	rate	per	day,	(2)	a	case	rate	or	diagnosis-related	groups	(DRG),	which is	an	all-inclusive	rate	per	admission,	or	(3)	a	discounted	charge	for	inpatient	hospital	services.	Outpatient	hospital	services	generally	are	contracted	at	a	flat	rate	by	type of	service,	ambulatory	payment	classifications,	or	APCs,	or	at	a	discounted	charge.	APCs	are	similar	to	flat	rates	except	multiple	services	and	procedures	may	be aggregated	into	one	fixed	payment.	These	contracts	are	often	multi-year	agreements,	with	rates	that	are	adjusted	for	inflation	annually	based	on	the	consumer	price	index or	other	nationally	recognized	inflation	indexes.	Outpatient	surgery	centers	and	other	ancillary	providers	typically	are	contracted	at	flat	rates	per	service	provided	or	are reimbursed	based	upon	a	nationally	recognized	fee	schedule	such	as	the	Medicare	allowable	fee	schedule.

Our	contracts	with	physicians	typically	are	renewed	automatically	each	year,	unless	either	party	gives	written	notice,	generally	ranging	from	90	to	120	days,	to	the other	party	of	its	intent	to	terminate	the	arrangement.	Most	of	the	physicians	in	our	PPO	networks	and	some	of	our	physicians	in	our	HMO	networks	are	reimbursed based	upon	a	fixed	fee	schedule,	which	typically	provides	for	reimbursement	based	upon	a	percentage	of	the	standard	Medicare	allowable	fee	schedule.

# Capitation

For	approximately	2.4%	of	our	medical	membership	at	December	31,	2009,	we	contract	with	hospitals	and	physicians	to	accept	financial	risk	for	a	defined	set	of HMO	membership.	In	transferring	this	risk,	we	prepay	these	providers	a	monthly	fixed-fee	per	member,	known	as	a	capitation	(per	capita)	payment,	to	coordinate substantially	all	of	the	medical	care	for	their	capitated	HMO	membership,	including	some	health	benefit	administrative	functions	and	claims	processing.	For	these capitated	HMO	arrangements,	we	generally	agree	to	reimbursement	rates	that	target	a	benefit	ratio.	The	benefit	ratio	measures	underwriting	profitability	and	is	computed by	taking	total	benefit	expenses	as	a	percentage	of	premium	revenues.	Providers	participating	in	hospital-based	capitated	HMO	arrangements	generally	receive	a monthly	payment	for	all	of	the	services	within	their	system	for	their	HMO	membership.	Providers	participating	in	physician-based	capitated	HMO	arrangements generally	have	subcontracted	directly	with	hospitals	and	specialist	physicians,	and	are	responsible	for	reimbursing	such	hospitals	and	physicians	for	services	rendered	to their	HMO	membership.

For	approximately	5.7%	of	our	medical	membership	at	December	31,	2009,	we	contract	with	physicians	under	risk-sharing	arrangements	whereby	physicians have	assumed	some	level	of	risk	for	all	or	a	portion	of	the	medical	costs	of	their	HMO	membership.	Although	these	arrangements	do	include	physician	capitation payments	for	services	rendered,	we	share	hospital	and	other	benefit	expenses	and	process	substantially	all	of	the	claims	under	these	arrangements.

Physicians	under	capitation	arrangements	typically	have	stop	loss	coverage	so	that	a	physician's	financial	risk	for	any	single	member	is	limited	to	a	maximum amount	on	an	annual	basis.	We	monitor	the	financial	performance	and	solvency	of	our	capitated	providers.	However,	we	remain	financially	responsible	for	health	care services	to	our	members	in	the	event	our	providers	fail	to	provide	such	services.

Medical	membership	under	these	various	arrangements	was	as	follows	at	December	31,	2009	and	2008:

|  | Government	Segment | Government	Segment | Government	Segment | Government	Segment | Government	Segment | Government	Segment | Commercial	Segment | Commercial	Segment | Commercial	Segment |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Medical\tMembership: | Medicare\nAdvantage | Medicare\nstand-\nalone\nPDP | Military\nservices | Military\nServices\nASO | Medicaid | Total\nSegment | Fully-\nInsured | ASO | Total\nSegment | Total\nMedical |
| December\t31,\t2009 |  |  |  |  |  |  |  |  |  |  |
| Capitated\tHMO\thospital\tsystem\tbased | 31,000 | — | — | — | — | 31,000 | 22,200 | — | 22,200 | 53,200 |
| Capitated\tHMO\tphysician\tgroup\tbased | 50,200 | — | — | — | 117,600 | 167,800 | 26,300 | — | 26,300 | 194,100 |
| Risk-sharing | 285,100 | — | — | — | 279,200 | 564,300 | 22,400 | — | 22,400 | 586,700 |
| Other | 1,142,200 | 1,927,900 | 1,756,000 | 1,278,400 | 4,900 | 6,109,400 | 1,768,600 | 1,571,300 | 3,339,900 | 9,449,300 |
| Total | 1,508,500 | 1,927,900 | 1,756,000 | 1,278,400 | 401,700 | 6,872,500 | 1,839,500 | 1,571,300 | 3,410,800 | 10,283,300 |
| December\t31,\t2008 |  |  |  |  |  |  |  |  |  |  |
| Capitated\tHMO\thospital\tsystem\tbased | 25,600 | — | — | — | — | 25,600 | 24,000 | — | 24,000 | 49,600 |
| Capitated\tHMO\tphysician\tgroup\tbased | 48,400 | — | — | — | 146,500 | 194,900 | 27,500 | — | 27,500 | 222,400 |
| Risk-sharing | 274,100 | — | — | — | 235,600 | 509,700 | 25,000 | — | 25,000 | 534,700 |
| Other | 1,087,800 | 3,066,600 | 1,736,400 | 1,228,300 | 89,000 | 7,208,100 | 1,902,300 | 1,642,000 | 3,544,300 | 10,752,400 |
| Total | 1,435,900 | 3,066,600 | 1,736,400 | 1,228,300 | 471,100 | 7,938,300 | 1,978,800 | 1,642,000 | 3,620,800 | 11,559,100 |
| Medical\tMembership\tDistribution: |  |  |  |  |  |  |  |  |  |  |
| December\t31,\t2009 |  |  |  |  |  |  |  |  |  |  |
| Capitated\tHMO\thospital\tsystem\tbased | 2.1% | — | — | — | — | 0.5% | 1.2% | — | 0.6% | 0.5% |
| Capitated\tHMO\tphysician\tgroup\tbased | 3.3% | — | — | — | 29.3% | 2.4% | 1.5% | — | 0.8% | 1.9% |
| Risk-sharing | 18.9% | — | — | — | 69.5% | 8.2% | 1.2% | — | 0.7% | 5.7% |
| All\tother\tmembership | 75.7% | 100.0% | 100.0% | 100.0% | 1.2% | 88.9% | 96.1% | 100.0% | 97.9% | 91.9% |
| Total | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| December\t31,\t2008 |  |  |  |  |  |  |  |  |  |  |
| Capitated\tHMO\thospital\tsystem\tbased | 1.8% | — | — | — | — | 0.3% | 1.2% | — | 0.7% | 0.4% |
| Capitated\tHMO\tphysician\tgroup\tbased | 3.4% | — | — | — | 31.1% | 2.5% | 1.4% | — | 0.8% | 1.9% |
| Risk-sharing | 19.1% | — | — | — | 50.0% | 6.4% | 1.3% | — | 0.7% | 4.7% |
| All\tother\tmembership | 75.7% | 100.0% | 100.0% | 100.0% | 18.9% | 90.8% | 96.1% | 100.0% | 97.8% | 93.0% |
| Total | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |

Capitation	expense	as	a	percentage	of	total	benefit	expense	was	as	follows	for	the	years	ended	December	31,	2009,	2008,	and	2007:

|  | 2009 | 2009 | 2008 | 2008 | 2007 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tthousands) |  |  |  |
| Benefit\tExpenses: |  |  |  |  |  |  |
| Capitated\tHMO\texpense | $560,914 | 2.3% | $510,606 | 2.2% | $366,075 | 1.8% |
| Other\tbenefit\texpense | 24,214,088 | 97.7% | 23,197,627 | 97.8% | 19,904,456 | 98.2% |
| Consolidated\tbenefit\texpense | $24,775,002 | 100.0% | $23,708,233 | 100.0% | $20,270,531 | 100.0% |

# Accreditation	Assessment

Our	accreditation	assessment	program	consists	of	several	internal	programs,	including	those	that	credential	providers	and	those	designed	to	meet	the	audit standards	of	federal	and	state	agencies,	as	well	as	external	accreditation	standards.	We	also	offer	quality	and	outcome	measurement	and	improvement	programs	such	as the	Health	Care	Effectiveness	Data	and	Information	Sets,	or	HEDIS,	which	is	used	by	employers,	government	purchasers	and	the	National	Committee	for	Quality Assurance,	or	NCQA,	to	evaluate	health	plans	based	on	various	criteria,	including	effectiveness	of	care	and	member	satisfaction.

Physicians	participating	in	our	networks	must	satisfy	specific	criteria,	including	licensing,	patient	access,	office	standards,	after-hours	coverage,	and	other	factors. Most	participating	hospitals	also	meet	accreditation	criteria	established	by	CMS	and/or	the	Joint	Commission	on	Accreditation	of	Healthcare	Organizations.

Recredentialing	of	participating	providers	occurs	every	two	to	three	years,	depending	on	applicable	state	laws.	Recredentialing	of	participating	physicians includes	verification	of	their	medical	licenses;	review	of	their	malpractice	liability	claims	histories;	review	of	their	board	certifications,	if	applicable;	and	review	of applicable	quality	information.	Committees,	composed	of	a	peer	group	of	physicians,	review	the	applications	of	physicians	being	considered	for	credentialing	and recredentialing.

We	request	accreditation	for	certain	of	our	health	plans	from	NCQA,	the	Accreditation	Association	for	Ambulatory	Health	Care,	and	the	Utilization	Review Accreditation	Commission,	or	URAC.	URAC	performs	reviews	for	utilization	management	standards	and	for	health	plan	and	health	network	standards	in	quality management,	credentialing,	rights	and	responsibilities,	and	network	management.	Accreditation	or	external	review	by	an	approved	organization	is	mandatory	in	the states	of	Florida	and	Kansas	for	licensure	as	an	HMO.	Certain	commercial	businesses,	like	those	impacted	by	a	third-party	labor	agreement	or	those	where	a	request	is made	by	the	employer,	may	require	or	prefer	accredited	health	plans.

NCQA	performs	reviews	of	our	compliance	with	standards	for	quality	improvement,	credentialing,	utilization	management,	member	connections,	and	member rights	and	responsibilities.	We	have	achieved	and	maintained	NCQA	accreditation	in	all	of	our	commercial	HMO/POS	markets	except	Puerto	Rico,	in	all	of	our Medicare	HMO	markets	with	the	exception	of	Illinois	which	will	be	surveyed	in	2010,	and	for	nearly	all	our	PPO	markets.

# Sales	and	Marketing

We	use	various	methods	to	market	our	Medicare,	Medicaid,	and	commercial	products,	including	television,	radio,	the	Internet,	telemarketing,	and	direct	mailings.

At	December	31,	2009,	we	employed	approximately	1,700	sales	representatives,	as	well	as	approximately	900	telemarketing	representatives	who	assisted	in	the marketing	of	Medicare	products	by	making	appointments	for	sales	representatives	with	prospective	members.	We	also	market	our	Medicare	products	via	a	strategic alliance	with	Wal-Mart	Stores,	Inc.,	or	Wal-Mart.	This	alliance	includes	stationing	Humana	representatives	in	certain	Wal-Mart	stores,	SAM'S	CLUB	locations,	and Neighborhood	Markets	across	the	country	providing	an	opportunity	to	enroll	Medicare	eligible	individuals	in	person.	In	addition,	we	market	our	Medicare	products paid	to	employed	sales	representatives	and	independent	brokers	and	agents	are	based	on	a	per	unit	commission	structure	approved	by	CMS. ®

Individuals	become	members	of	our	commercial	HMOs	and	PPOs	through	their	employers	or	other	groups	which	typically	offer	employees	or	members	a selection	of	health	insurance	products,	pay	for	all	or	part	of	the	premiums,	and	make	payroll	deductions	for	any	premiums	payable	by	the	employees.	We	attempt	to become	an	employer's	or	group's	exclusive	source	of	health	insurance	benefits	by	offering	a	variety	of	HMO,	PPO,	and

specialty	products	that	provide	cost-effective	quality	health	care	coverage	consistent	with	the	needs	and	expectations	of	their	employees	or	members.	We	also	offer commercial	health	insurance	and	specialty	products	directly	to	individuals.

At	December	31,	2009,	we	used	licensed	independent	brokers	and	agents	and	approximately	1,200	licensed	employees	to	sell	our	commercial	products.	Many	of our	employer	group	customers	are	represented	by	insurance	brokers	and	consultants	who	assist	these	groups	in	the	design	and	purchase	of	health	care	products.	We generally	pay	brokers	a	commission	based	on	premiums,	with	commissions	varying	by	market	and	premium	volume.	In	addition	to	a	commission	based	directly	on premium	volume	for	sales	to	particular	customers,	we	also	have	programs	that	pay	brokers	and	agents	based	on	other	metrics	including	certain	other	incentives	for	our commercial	brokers.	These	include	commission	bonuses	based	on	sales	that	attain	certain	levels	or	involve	particular	products.	We	also	pay	additional	commissions based	on	aggregate	volumes	of	sales	involving	multiple	customers.

# Underwriting

Through	the	use	of	internally	developed	underwriting	criteria,	we	determine	the	risk	we	are	willing	to	assume	and	the	amount	of	premium	to	charge	for	our commercial	products.	In	most	instances,	employer	and	other	groups	must	meet	our	underwriting	standards	in	order	to	qualify	to	contract	with	us	for	coverage.	Small group	laws	in	some	states	have	imposed	regulations	which	provide	for	guaranteed	issue	of	certain	health	insurance	products	and	prescribe	certain	limitations	on	the variation	in	rates	charged	based	upon	assessment	of	health	conditions.

Underwriting	techniques	are	not	employed	in	connection	with	our	Medicare,	military	services,	or	Medicaid	products	because	government	regulations	require	us	to accept	all	eligible	applicants	regardless	of	their	health	or	prior	medical	history.

# Competition

The	health	benefits	industry	is	highly	competitive.	Our	competitors	vary	by	local	market	and	include	other	managed	care	companies,	national	insurance companies,	and	other	HMOs	and	PPOs,	including	HMOs	and	PPOs	owned	by	Blue	Cross/Blue	Shield	plans.	Many	of	our	competitors	have	larger	memberships	and/or greater	financial	resources	than	our	health	plans	in	the	markets	in	which	we	compete.	Our	ability	to	sell	our	products	and	to	retain	customers	may	be	influenced	by	such factors	as	those	described	in	the	section	entitled	"Risk	Factors"	in	this	report.

# Government	Regulation

Diverse	legislative	and	regulatory	initiatives	at	both	the	federal	and	state	levels	continue	to	affect	aspects	of	the	nation's	health	care	system.

Our	management	works	proactively	to	ensure	compliance	with	all	governmental	laws	and	regulations	affecting	our	business.	We	are	unable	to	predict	how existing	federal	or	state	laws	and	regulations	may	be	changed	or	interpreted,	what	additional	laws	or	regulations	affecting	our	businesses	may	be	enacted	or	proposed, when	and	which	of	the	proposed	laws	will	be	adopted	or	what	effect	any	such	new	laws	and	regulations	will	have	on	our	results	of	operations,	financial	position,	or	cash flows.

For	a	description	of	all	of	the	material	current	activities	in	the	federal	and	state	legislative	areas,	see	the	section	entitled	"Risk	Factors"	in	this	report.

# Other

# Captive	Insurance	Company

We	bear	general	business	risks	associated	with	operating	our	Company	such	as	professional	and	general	liability,	employee	workers'	compensation,	and	officer and	director	errors	and	omissions	risks.	Professional	and	general	liability	risks	may	include,	for	example,	medical	malpractice	claims	and	disputes	with	members regarding	benefit	coverage.	We	retain	certain	of	these	risks	through	our	wholly-owned,	captive	insurance	subsidiary.	We	reduce	exposure	to	these	risks	by	insuring levels	of	coverage	for	losses	in	excess	of	our	retained	limits	with	a	number	of	third-party	insurance	companies.	We	remain	liable	in	the	event	these	insurance	companies are	unable	to	pay	their	portion	of	the	losses.

# Centralized	Management	Services

We	provide	centralized	management	services	to	each	of	our	health	plans	and	both	of	our	business	segments	from	our	headquarters	and	service	centers.	These services	include	management	information	systems,	product	development	and	administration,	finance,	human	resources,	accounting,	law,	public	relations,	marketing, insurance,	purchasing,	risk	management,	internal	audit,	actuarial,	underwriting,	claims	processing,	and	customer	service.

# Employees

As	of	December	31,	2009,	we	had	approximately	28,100	employees,	including	31	employees	covered	by	collective	bargaining	agreements.	We	believe	we	have good	relations	with	our	employees	and	have	not	experienced	any	work	stoppages.

# ITEM	1A. RISK	FACTORS

If	we	do	not	design	and	price	our	products	properly	and	competitively,	if	the	premiums	we	charge	are	insufficient	to	cover	the	cost	of	health	care	services delivered	to	our	members,	or	if	our	estimates	of	benefit	expenses	are	inadequate,	our	profitability	may	be	materially	adversely	affected.	We	estimate	the	costs	of	our benefit	expense	payments,	and	design	and	price	our	products	accordingly,	using	actuarial	methods	and	assumptions	based	upon,	among	other	relevant	factors, claim	payment	patterns,	medical	cost	inflation,	and	historical	developments	such	as	claim	inventory	levels	and	claim	receipt	patterns.	These	estimates,	however involve	extensive	judgment,	and	have	considerable	inherent	variability	because	they	are	extremely	sensitive	to	changes	in	payment	patterns	and	medical	cost	trends.

We	use	a	substantial	portion	of	our	revenues	to	pay	the	costs	of	health	care	services	delivered	to	our	members.	These	costs	include	claims	payments,	capitation payments	to	providers	(predetermined	amounts	paid	to	cover	services),	and	various	other	costs	incurred	to	provide	health	insurance	coverage	to	our	members.	These costs	also	include	estimates	of	future	payments	to	hospitals	and	others	for	medical	care	provided	to	our	members.	Generally,	premiums	in	the	health	care	business	are fixed	for	one-year	periods.	Accordingly,	costs	we	incur	in	excess	of	our	benefit	cost	projections	generally	are	not	recovered	in	the	contract	year	through	higher premiums.	We	estimate	the	costs	of	our	future	benefit	claims	and	other	expenses	using	actuarial	methods	and	assumptions	based	upon	claim	payment	patterns,	medical inflation,	historical	developments,	including	claim	inventory	levels	and	claim	receipt	patterns,	and	other	relevant	factors.	We	also	record	benefits	payable	for	future payments.	We	continually	review	estimates	of	future	payments	relating	to	benefit	claims	costs	for	services	incurred	in	the	current	and	prior	periods	and	make	necessary adjustments	to	our	reserves.	However,	these	estimates	involve	extensive	judgment,	and	have	considerable	inherent	variability	that	is	sensitive	to	payment	patterns	and medical	cost	trends.	Many	factors	may	and	often	do	cause	actual	health	care	costs	to	exceed	what	was	estimated	and	used	to	set	our	premiums.	These	factors	may include:

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

•increased	cost	of	such	services;

•our	membership	mix;

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

•changes	in	the	demographic	characteristics	of	an	account	or	market;

•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	volume	rebates	received	from	drug	manufacturers;

•catastrophes,	including	acts	of	terrorism,	public	health	epidemics,	or	severe	weather	(e.g.	hurricanes	and	earthquakes);

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

•	 medical	cost	inflation;	and

•government	mandated	benefits	or	other	regulatory	changes,	including	any	that	result	from	CMS	Medicare	Advantage	and	Medicare	Part	D	risk	adjustment regulatory	changes.

In	addition,	we	also	estimate	costs	associated	with	long-duration	insurance	policies	including	life	insurance,	annuities,	health,	and	long-term	care	policies	sold	to individuals	for	which	some	of	the	premium	received	in	the	earlier	years	is	intended	to	pay	anticipated	benefits	to	be	incurred	in	future	years.	These	future	policy	benefit reserves	are	recognized	on	a	net	level	premium	method	based	on	interest	rates,	mortality,	morbidity,	withdrawal	and	maintenance	expense	assumptions	from	published actuarial	tables,	as	modified	based	upon	actual	experience.	The	basis	for	the	liability	for	future	policy	benefits	is	established	at	the	time	each	contract	is	acquired	and would

only	change	if	our	experience	deteriorates	to	the	point	the	level	of	the	liability	is	not	adequate	to	provide	for	future	policy	benefits.	Future	policy	benefits	payable include	$571.9	million	at	December	31,	2009	associated	with	a	closed	block	of	long-term	care	policies	acquired	in	connection	with	the	November	30,	2007	KMG acquisition.	Long-term	care	policies	provide	for	long-duration	coverage	and,	therefore,	our	actual	claims	experience	will	emerge	many	years	after	assumptions	have	been established.	The	risk	of	a	deviation	of	the	actual	morbidity	and	mortality	rates	from	those	assumed	in	our	reserves	are	particularly	significant	to	our	closed	block	of	long- term	care	policies.	We	monitor	the	loss	experience	of	these	long-term	care	policies,	and,	when	necessary,	apply	for	premium	rate	increases	through	a	regulatory	filing and	approval	process	in	the	jurisdictions	in	which	such	products	were	sold.	We	filed	and	received	approval	for	certain	state	premium	rate	increases	in	2009	and	continue to	expect	to	file	for	premium	rate	increases	for	additional	states	in	2010.	However,	to	the	extent	premium	rate	increases	or	loss	experience	vary	from	our	acquisition	date assumptions,	future	adjustments	to	reserves	could	be	required.

Failure	to	adequately	price	our	products	or	estimate	sufficient	benefits	payable	or	future	policy	benefits	payable	may	result	in	a	material	adverse	effect	on	our results	of	operations,	financial	position,	and	cash	flows.

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

Premium	increases,	introduction	of	new	product	designs,	and	our	relationships	with	our	providers	in	various	markets,	among	other	issues,	could	also	affect	our membership	levels.	Other	actions	that	could	affect	membership	levels	include	our	possible	exit	from	or	entrance	into	Medicare	or	Commercial	markets,	or	the termination	of	a	large	contract,	including	the	possible	termination	of	our	TRICARE	contract.

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

# If	we	fail	to	effectively	implement	our	operational	and	strategic	initiatives,	including	our	Medicare	initiatives,	our	business	may	be	materially	adversely affected,	which	is	of	particular	importance	given	the	concentration	of	our	revenues	in	the	Medicare	business.

Our	future	performance	depends	in	large	part	upon	our	management	team's	ability	to	execute	our	strategy	to	position	us	for	the	future.	This	strategy	includes opportunities	created	by	the	expansion	of	our	Medicare	programs,	including	our	HMO	and	PPO,	as	well	as	our	stand-alone	PDP	products.	We	have	made	substantial investments	in	the	Medicare	program	to	enhance	our	ability	to	participate	in	these	programs.	The	expansion	of	our	provider	networks	and	our	success	in	attracting members	to	our	network-based	products	positions	us	well	for	changes	in	the	Medicare	program	that	will	effectively	eliminate	the	non-network	PFFS	plan	option	in 2011,	although	there	can	be	no	assurances	that	our	PFFS	members	will	choose	to	move	to	our	network-based	products.	We	are	continuing	to	implement	various operational	and	strategic	initiatives,	including	further	developing	our

networks	and	building	network-based	plan	offerings	to	address	the	adequate	network	requirement.	We	anticipate	these	initiatives,	together	with	certain	counties' exemption	from	the	network	requirement,	to	result	in	more	than	95%	of	our	PFFS	members	having	the	choice	of	remaining	in	a	Humana	plan	in	2011.	Over	the	last	few years	we	have	increased	the	size	of	our	Medicare	geographic	reach	through	expanded	Medicare	product	offerings.	We	are	offering	both	the	stand-alone	Medicare prescription	drug	coverage	and	Medicare	Advantage	health	plan	with	prescription	drug	coverage	in	addition	to	our	other	product	offerings.	We	offer	the	Medicare prescription	drug	plan	in	50	states	as	well	as	Puerto	Rico	and	the	District	of	Columbia.

The	growth	of	our	Medicare	business	is	an	important	part	of	our	business	strategy.	Any	failure	to	achieve	this	growth	may	have	a	material	adverse	effect	on	our results	of	operations,	financial	position,	or	cash	flows.	In	addition,	the	expansion	of	our	Medicare	business	in	relation	to	our	other	businesses	may	intensify	the	risks	to us	inherent	in	the	Medicare	business.	There	is	significant	concentration	of	our	revenues	in	the	Medicare	business,	with	approximately	62%	of	our	total	premiums	and ASO	fees	in	2009	generated	from	our	Medicare	business.	These	expansion	efforts	may	result	in	less	diversification	of	our	revenue	stream	and	increased	risks	associated with	operating	in	a	highly	regulated	industry,	as	discussed	further	below.

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	products	and	other	consumer	offerings	such	as	HSAs,	and	our	specialty	products	such	as	dental,	vision	and	other supplemental	products,	as	well	as	the	adoption	of	new	technologies	and	the	integration	of	acquired	businesses	and	contracts.

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

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

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

We	depend	on	independent	third	parties	for	significant	portions	of	our	systems-related	support,	equipment,	facilities,	and	certain	data,	including	data	center operations,	data	network,	voice	communication	services	and	pharmacy	data	processing.	This	dependence	makes	our	operations	vulnerable	to	such	third	parties'	failure	to perform	adequately	under	the	contract,	due	to	internal	or	external	factors.	A	change	in	service	providers	could	result	in	a	decline	in	service	quality	and	effectiveness	or less	favorable	contract	terms	which	may	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,	including	litigation	involving	end	users	of	software	products.	We	expect	software	products	to	be	increasingly	subject	to third-party	infringement	claims	as	the	number	of	products	and	competitors	in	this	area	grows.

Our	business	plans	also	include	becoming	a	quality	e-business	organization	by	enhancing	interactions	with	customers,	brokers,	agents,	providers	and	other stakeholders	through	web-enabled	technology.	Our	strategy	includes	sales	and	distribution	of	health	benefit	products	through	the	Internet,	and	implementation	of advanced	self-service	capabilities,	for	internal	and	external	stakeholders.

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

# We	are	involved	in	various	legal	actions,	which,	if	resolved	unfavorably	to	us,	could	result	in	substantial	monetary	damages.	Increased	litigation	and	negative publicity	could	increase	our	cost	of	doing	business.

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,	securities	laws	claims,	and	tort	claims.

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

•claims	relating	to	the	methodologies	for	calculating	premiums;

•claims	relating	to	the	denial	of	health	care	benefit	payments;

•claims	relating	to	the	denial	or	rescission	of	insurance	coverage;

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

•claims	relating	to	our	administration	of	our	Medicare	Part	D	offerings;

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

•allegations	of	anti-competitive	and	unfair	business	activities;

•provider	disputes	over	compensation	and	termination	of	provider	contracts;

•disputes	related	to	ASO	business,	including	actions	alleging	claim	administration	errors;

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

•claims	relating	to	customer	audits	and	contract	performance;	and

•claims	relating	to	dispensing	of	drugs	associated	with	our	in-house	mail-order	pharmacy.

In	some	cases,	substantial	non-economic	or	punitive	damages	as	well	as	treble	damages	under	the	federal	False	Claims	Act,	Racketeer	Influenced	and	Corrupt Organizations	Act	and	other	statutes	may	be	sought.

While	we	currently	have	insurance	coverage	for	some	of	these	potential	liabilities,	other	potential	liabilities	may	not	be	covered	by	insurance,	insurers	may dispute	coverage	or	the	amount	of	our	insurance	may	not	be

enough	to	cover	the	damages	awarded.	Additionally,	the	cost	of	business	insurance	coverage	has	increased	significantly.	As	a	result,	we	have	increased	the	amount	of risk	that	we	self-insure,	particularly	with	respect	to	matters	incidental	to	our	business.	In	addition,	some	types	of	damages,	like	punitive	damages,	may	not	be	covered	by insurance.	In	some	jurisdictions,	coverage	of	punitive	damages	is	prohibited.	Insurance	coverage	for	all	or	some	forms	of	liability	may	become	unavailable	or prohibitively	expensive	in	the	future.

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	results	of	operations,	financial	position,	and	cash	flows.

See	"Legal	Proceedings"	in	Note	16	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.	We	cannot predict	the	outcome	of	these	suits	with	certainty.

Our	business	activities	are	subject	to	substantial	government	regulation.	New	laws	or	regulations,	or	changes	in	existing	laws	or	regulations	or	their	manner of	application,	could	increase	our	cost	of	doing	business	and	may	adversely	affect	our	business,	profitability	and	financial	condition.	In	addition,	as	a	government contractor,	we	are	exposed	to	additional	risks	that	may	adversely	affect	our	business	or	our	willingness	to	participate	in	government	health	care	programs.

A	significant	portion	of	our	revenues	relates	to	federal	and	state	government	health	care	coverage	programs,	including	the	Medicare,	Military,	and	Medicaid programs.	Our	Government	segment	accounted	for	approximately	75%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009.	These	programs involve	various	risks,	as	described	further	below.

•	 At	December	31,	2009,	under	our	contracts	with	CMS	we	provided	health	insurance	coverage	to	approximately	377,900	Medicare	Advantage	members	in Florida.	These	contracts	accounted	for	approximately	17%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009.	The	loss	of	these	and other	CMS	contracts	or	significant	changes	in	the	Medicare	program	as	a	result	of	legislative	or	regulatory	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	results	of operations,	financial	position,	and	cash	flows.

•	 At	December	31,	2009,	our	military	services	business,	which	accounted	for	approximately	12%	of	our	total	premiums	and	ASO	fees	for	the	year	ended December	31,	2009,	primarily	consisted	of	the	TRICARE	South	Region	contract	which	covers	approximately	3.0	million	beneficiaries.	The	original	5-year South	Region	contract	expired	March	31,	2009.	Through	an	Amendment	of	Solicitation/Modification	of	Contract	to	the	TRICARE	South	Region	contract,	an additional	one-year	option	period,	the	sixth	option	period,	which	runs	from	April	1,	2009	through	March	31,	2010,	was	exercised	by	the	government.	The Amendment	also	provides	for	two	additional	six-month	option	periods:	the	seventh	option	period	runs	from	April	1,	2010	through	September	30,	2010	and the	eighth	option	period	runs	from	October	1,	2010	through	March	31,	2011.	Exercise	of	each	of	the	seventh	and	eighth	option	periods	is	at	the	government's option.	On	December	16,	2009,	we	were	notified	by	TMA	that	it	intends	to	exercise	its	options	to	extend	the	TRICARE	South	Region	contract	for	Option Period	VII	and	Option	Period	VIII.	The	exercise	of	these	option	periods	would	effectively	extend	the	TRICARE	South	Region	contract	through	March	31, 2011.	As	required	under	the	current	contract,	the	target	underwritten	health	care	cost	and	underwriting	fee	amounts	for	each	option	period	are	negotiated. Any	variance	from	the	target	health	care	cost	is	shared	with	the	federal	government.	Accordingly,	events	and	circumstances	not	contemplated	in	the negotiated	target	health	care	cost	amount	may	have	a	material	adverse	effect	on	us.	These	changes	may	include	an	increase	or	reduction	in	the	number	of persons	enrolled	or	eligible	to

enroll	due	to	the	federal	government's	decision	to	increase	or	decrease	U.S.	military	deployments.	In	the	event	government	reimbursements	were	to	decline from	projected	amounts,	our	failure	to	reduce	the	health	care	costs	associated	with	these	programs	may	have	a	material	adverse	effect	on	our	results	of operations,	financial	position,	and	cash	flows.

In	July	2009,	we	were	notified	by	the	DoD	that	we	were	not	awarded	the	third	generation	TRICARE	program	contract	for	the	South	Region	which	had	been subject	to	competing	bids.	We	filed	a	protest	with	the	GAO	in	connection	with	the	award	to	another	contractor	citing	discrepancies	between	the	award	criteria and	procedures	prescribed	in	the	request	for	proposals	issued	by	the	DoD	and	those	that	appear	to	have	been	used	by	the	DoD	in	making	its	contractor selection.	In	October	2009,	we	learned	that	the	GAO	had	upheld	our	protest,	determining	that	the	TMA	evaluation	of	our	proposal	had	unreasonably	failed	to fully	recognize	and	reasonably	account	for	the	likely	cost	savings	associated	with	our	record	of	obtaining	network	provider	discounts	from	our	established network	in	the	South	Region.	On	December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO	of	its	intent	to	implement	corrective	action	consistent with	the	discussion	contained	within	the	GAO's	decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able	to	determine	what	actions	TMA	will	take	in response	to	recommendations	by	the	GAO,	nor	can	we	determine	whether	or	not	the	protest	decision	by	the	GAO	will	have	any	effect	upon	the	ultimate disposition	of	the	contract	award.	For	2009,	premiums	and	ASO	fees	associated	with	the	TRICARE	South	Region	contract	were	$3.4	billion,	or	11.2%	of	our total	premiums	and	ASO	fees.	We	are	continuing	to	evaluate	issues	associated	with	our	military	services	businesses	such	as	potential	impairment	of	certain assets	primarily	consisting	of	goodwill,	which	had	a	carrying	value	of	$49.8	million	at	December	31,	2009,	potential	exit	costs,	possible	asset	sales,	and	a strategic	assessment	of	ancillary	businesses.	Goodwill	was	not	impaired	at	December	31,	2009.

•	 At	December	31,	2009,	under	our	contracts	with	the	Puerto	Rico	Health	Insurance	Administration,	or	PRHIA,	we	provided	health	insurance	coverage	to approximately	349,900	Medicaid	members	in	Puerto	Rico.	These	contracts	accounted	for	approximately	2%	of	our	total	premiums	and	ASO	fees	for	the	year ended	December	31,	2009.

Our	Medicaid	contracts	with	the	PRHIA	for	the	East	and	Southeast	regions	were	extended	through	December	31,	2009	with	no	change	in	terms.	The	PRHIA has	confirmed	its	intention	to	extend	the	current	contracts	until	June	30,	2010,	with	no	changes	in	terms	and	is	in	the	process	of	executing	such	extensions. The	loss	of	these	contracts	or	significant	changes	in	the	Puerto	Rico	Medicaid	program	as	a	result	of	legislative	action,	including	reductions	in	premium payments	to	us,	or	increases	in	member	benefits	without	corresponding	increases	in	premium	payments	to	us,	may	have	a	material	adverse	effect	on	our results	of	operations,	financial	position,	and	cash	flows.

•There	is	a	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	utilizes	a	risk-adjustment	model	which	apportions	premiums	paid	to	Medicare	Advantage	plans	according	to	health	severity.	A	risk-adjustment	model pays	more	for	enrollees	with	predictably	higher	costs.	Under	the	risk-adjustment	methodology,	all	Medicare	Advantage	plans	must	collect	and	submit	the necessary	diagnosis	code	information	from	hospital	inpatient,	hospital	outpatient,	and	physician	providers	to	CMS	within	prescribed	deadlines.	The	CMS risk-adjustment	model	uses	this	diagnosis	data	to	calculate	the	risk	adjusted	premium	payment	to	Medicare	Advantage	plans.

CMS	is	continuing	to	perform	audits	of	selected	Medicare	Advantage	plans	of	various	companies	to	validate	the	provider	coding	practices	and	resulting economics	under	the	actuarial	risk-adjustment	model	used	to	calculate	the	individual	member	capitation	paid	to	Medicare	Advantage	plans.	Several	Humana contracts	have	been	selected	by	CMS	for	audit	and	we	expect	that	CMS	will	continue	conducting	audits	for	the	2007	contract	year	and	beyond.	We	are unable	to	estimate	the	financial	impact	of	any	audits	that	may	be	conducted	related	to	2007	revenue	and	beyond	and	whether	any	findings

would	cause	a	change	to	our	method	of	estimating	future	premium	revenue	in	bid	submissions	made	to	CMS	for	future	contract	years,	or	compromise premium	rate	assumptions	made	in	our	bids	for	prior	contract	years.	At	this	time,	we	do	not	know	whether	CMS	will	require	payment	adjustments	to	be	made using	an	audit	methodology	without	comparison	to	original	Medicare	coding,	and	using	its	method	of	extrapolating	findings	to	the	entire	contract.	However, if	CMS	requires	payment	adjustments	to	be	made	using	an	audit	methodology	without	comparison	to	original	Medicare	coding,	and	using	a	method	of extrapolating	findings	to	the	entire	contract,	and	if	we	are	unable	to	obtain	any	relief	preventing	the	payment	adjustments	from	being	implemented,	we believe	that	such	adjustments	would	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

•The	President	of	the	United	States	and	members	of	the	U.S.	Congress	have	proposed	significant	reforms	to	the	U.S.	health	care	system.	In	November	2009, the	U.S.	House	of	Representatives	passed	the	Affordable	Health	Care	for	America	Act	and	in	December	2009	the	U.S.	Senate	passed	The	Patient	Protection and	Affordable	Care	Act,	which	we	refer	to	collectively	as	the	"Acts".	While	there	are	significant	differences	between	the	two	Acts,	they	include,	for example,	limiting	Medicare	Advantage	payment	rates,	mandatory	issuance	of	insurance	coverage,	requirements	that	would	limit	the	ability	of	health	plans and	insurers	to	vary	premiums	based	on	assessments	of	underlying	risk,	stipulating	annual	rebates	to	enrollees	if	the	amount	of	premium	revenues	expended on	medical	costs	falls	below	prescribed	ratios	for	group	and	individual	health	insurance	coverage,	and	imposing	new	non-deductible	taxes	on	health	insurers increasing	in	the	aggregate	from	$2	billion	to	$10	billion	annually	over	ten	years.	In	addition,	certain	members	of	Congress	have	proposed	a	single-payer health	care	system,	a	government	health	insurance	option	to	compete	with	private	plans,	and	other	expanded	public	health	care	measures.	Various	health insurance	reform	proposals	are	also	emerging	at	the	state	level.

Because	of	the	unsettled	nature	of	these	initiatives	and	the	numerous	steps	required	to	implement	them,	we	cannot	predict	what	health	insurance	initiatives,	if any,	will	be	implemented	at	the	federal	or	state	level,	or	the	effect	any	future	legislation	or	regulation	will	have	on	our	business.	However,	legislative changes,	if	enacted,	may	have	a	material	adverse	affect	on	our	results	of	operations,	including	lowering	our	Medicare	payment	rates	and	increasing	our expenses	associated	with	the	non-deductible	excise	tax,	financial	position,	including	goodwill	recoverability,	and	cash	flows.

•	 Our	CMS	contracts	which	cover	members'	prescription	drugs	under	Medicare	Part	D	contain	provisions	for	risk	sharing	and	payments	for	prescription	drug costs	for	which	we	are	not	at	risk.	These	provisions,	certain	of	which	are	described	below,	affect	our	ultimate	payments	from	CMS.

The	premiums	from	CMS	are	subject	to	risk	corridor	provisions	which	compare	costs	targeted	in	our	annual	bids	to	actual	prescription	drug	costs,	limited	to actual	costs	that	would	have	been	incurred	under	the	standard	coverage	as	defined	by	CMS.	Variances	exceeding	certain	thresholds	may	result	in	CMS making	additional	payments	to	us	or	require	us	to	refund	to	CMS	a	portion	of	the	premiums	we	received	(known	as	a	"risk	corridor").	We	estimate	and recognize	an	adjustment	to	premium	revenues	related	to	the	risk	corridor	payment	settlement	based	upon	pharmacy	claims	experience.	The	estimate	of	the settlement	associated	with	these	risk	corridor	provisions	requires	us	to	consider	factors	that	may	not	be	certain,	including	member	eligibility	differences	with CMS.	Beginning	in	2008,	the	risk	corridor	thresholds	increased	which	means	we	bear	more	risk.	Our	estimate	of	the	settlement	associated	with	the	Medicare Part	D	risk	corridor	provisions	was	a	net	payable	of	$144.6	million	at	December	31,	2009.

Reinsurance	and	low-income	cost	subsidies	represent	payments	from	CMS	in	connection	with	the	Medicare	Part	D	program	for	which	we	assume	no	risk. Reinsurance	subsidies	represent	payments	for	CMS's	portion	of	claims	costs	which	exceed	the	member's	out-of-pocket	threshold,	or	the	catastrophic coverage	level.	Low-income	cost	subsidies	represent	payments	from	CMS	for	all	or	a	portion	of	the	deductible,	the	coinsurance	and	co-payment	amounts above	the	out-of-pocket	threshold	for	low-income	beneficiaries.	Monthly	prospective	payments	from	CMS	for	reinsurance	and	low-income	cost	subsidies	are based	on	assumptions	submitted	with	our	annual	bid.	A	reconciliation	and	settlement	of	CMS's	prospective	subsidies	against	actual	prescription	drug	costs we	paid	is	made	after	the	end	of	the	year.

Settlement	of	the	reinsurance	and	low-income	cost	subsidies	as	well	as	the	risk	corridor	payment	is	based	on	a	reconciliation	made	approximately	9	months after	the	close	of	each	calendar	year.	This	reconciliation	process	requires	us	to	submit	claims	data	necessary	for	CMS	to	administer	the	program.	Our	claims data	may	not	pass	CMS's	claims	edit	processes	due	to	various	reasons,	including	discrepancies	in	eligibility	or	classification	of	low-income	members.	To	the extent	our	data	does	not	pass	CMS's	claim	edit	processes,	we	may	bear	the	risk	for	all	or	a	portion	of	the	claim	which	otherwise	may	have	been	subject	to the	risk	corridor	provision	or	payment	as	a	low-income	or	reinsurance	claim.	In	addition,	in	the	event	the	settlement	represents	an	amount	CMS	owes	us, there	is	a	negative	impact	on	our	cash	flows	and	financial	condition	as	a	result	of	financing	CMS's	share	of	the	risk.	The	opposite	is	true	in	the	event	the settlement	represents	an	amount	we	owe	CMS.

In	addition,	the	health	care	industry	in	general	and	health	insurance,	particularly	HMOs	and	PPOs,	are	subject	to	substantial	federal	and	state	government regulation:

# Medicare	Improvements	for	Patients	and	Providers	Act	of	2008

The	enactment	of	the	Medicare	Improvements	for	Patients	and	Providers	Act	of	2008,	or	MIPPA,	in	July	2008	could	affect	our	Medicare	operations.	Principally, beginning	in	2011	sponsors	of	Medicare	Advantage	PFFS	plans	will	be	required	to	contract	with	providers	to	establish	adequate	networks,	except	in	geographic	areas that	CMS	determines	have	fewer	than	two	network-based	Medicare	Advantage	plans.	Additionally,	MIPPA	prohibits	several	different	kinds	of	marketing	activities	by Medicare	plan	sponsors	and	their	brokers,	and	will	phase	out	indirect	medical	education,	or	IME,	costs	beginning	in	2010.	We	are	continuing	to	implement	various operational	and	strategic	initiatives	that	are	intended	to	answer	the	challenges	presented	by	MIPPA.	In	addition,	most	of	our	PFFS	enrollees	reside	in	geographies	where we	have	developed	a	provider	network	and	offer	a	networked	plan.	We	will	continue	to	develop	our	networks	and	build	network-based	plan	offerings	to	address	the adequate	network	requirement.	We	anticipate	these	initiatives,	together	with	certain	counties'	exemption	from	the	network	requirement,	to	result	in	more	than	95%	of our	PFFS	members	having	the	choice	of	remaining	in	a	Humana	plan	in	2011.	Nonetheless,	there	can	be	no	assurance	that	we	will	be	able	to	successfully	implement those	initiatives.	Failure	to	implement	this	strategy	may	result	in	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

# Health	Insurance	Portability	and	Accountability	Act	(HIPAA)

The	use	of	individually	identifiable	health	data	by	our	business	is	regulated	at	federal	and	state	levels.	These	laws	and	rules	are	changed	frequently	by	legislation or	administrative	interpretation.	Various	state	laws	address	the	use	and	maintenance	of	individually	identifiable	health	data.	Most	are	derived	from	the	privacy	provisions in	the	federal	Gramm-Leach-Bliley	Act	and	the	Health	Insurance	Portability	and	Accountability	Act,	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.	The	rules	do	not	provide	for	complete	federal	preemption	of	state	laws,	but	rather	preempt	all	inconsistent state	laws	unless	the	state	law	is	more	stringent.

These	regulations	set	standards	for	the	security	of	electronic	health	information.	Violations	of	these	rules	could	subject	us	to	significant	criminal	and	civil penalties,	including	significant	monetary	penalties.	Compliance	with	HIPAA	regulations	requires	significant	systems	enhancements,	training	and	administrative	effort. HIPAA	can	also	expose	us	to	additional	liability	for	violations	by	our	business	associates	(e.g.,	entities	that	provide	services	to	health	plans).

On	February	17,	2009,	the	American	Recovery	and	Reinvestment	Act	of	2009,	or	ARRA,	was	enacted	into	law.	In	addition	to	including	a	temporary	subsidy	for health	care	continuation	coverage	issued	pursuant	to	the	Consolidated	Omnibus	Budget	Reconciliation	Act,	or	COBRA,	the	ARRA	also	expands	and	strengthens	the privacy	and	security	provisions	of	HIPAA	and	imposes	additional	limits	on	the	use	and	disclosure	of	protected	health	information,	or	PHI.	Among	other	things,	ARRA requires	us	and	other	covered	entities	to	report	any	unauthorized	release	or	use	of	or	access	to	PHI	to	any	impacted	individuals	and	to	the	U.S.	Department	of	Health 23

and	Human	Services	in	those	instances	where	the	unauthorized	activity	poses	a	significant	risk	of	financial,	reputational	or	other	harm	to	the	individuals,	and	to	notify the	media	in	any	states	where	500	or	more	people	are	impacted	by	any	unauthorized	release	or	use	of	or	access	to	PHI.	ARRA	also	requires	business	associates	to	comply with	certain	HIPAA	provisions.	ARRA	also	establishes	higher	civil	and	criminal	penalties	for	covered	entities	and	business	associates	who	fail	to	comply	with	HIPAA's provisions	and	requires	the	U.S.	Department	of	Health	and	Human	Services	to	issue	regulations	implementing	its	privacy	and	security	enhancements.	We	will	continue to	assess	the	impact	of	these	regulations	on	us	as	they	are	issued.

# State	Regulation

Laws	in	each	of	the	states	(and	Puerto	Rico)	in	which	we	operate	our	HMOs,	PPOs	and	other	health	insurance-related	services	regulate	our	operations	including: licensing	requirements,	policy	language	describing	benefits,	mandated	benefits	and	processes,	entry,	withdrawal	or	re-entry	into	a	state	or	market,	rate	formulas,	delivery systems,	utilization	review	procedures,	quality	assurance,	complaint	systems,	enrollment	requirements,	claim	payments,	marketing,	and	advertising.	The	HMO,	PPO, and	other	health	insurance-related	products	we	offer	are	sold	under	licenses	issued	by	the	applicable	insurance	regulators.

Our	licensed	subsidiaries	are	also	subject	to	regulation	under	state	insurance	holding	company	and	Puerto	Rico	regulations.	These	regulations	generally	require, among	other	things,	prior	approval	and/or	notice	of	new	products,	rates,	benefit	changes,	and	certain	material	transactions,	including	dividend	payments,	purchases	or sales	of	assets,	intercompany	agreements,	and	the	filing	of	various	financial	and	operational	reports.

Certain	of	our	subsidiaries	operate	in	states	that	regulate	the	payment	of	dividends,	loans,	or	other	cash	transfers	to	Humana	Inc.,	our	parent	company,	and	require minimum	levels	of	equity	as	well	as	limit	investments	to	approved	securities.	The	amount	of	dividends	that	may	be	paid	to	Humana	Inc.	by	these	subsidiaries,	without prior	approval	by	state	regulatory	authorities,	is	limited	based	on	the	entity's	level	of	statutory	income	and	statutory	capital	and	surplus.	In	most	states,	prior	notification is	provided	before	paying	a	dividend	even	if	approval	is	not	required.

Although	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.	Based	on	the	statutory	financial	statements	as	of	December	31,	2009,	we	maintained	aggregate	statutory	capital	and	surplus	of	$3.6	billion in	our	state	regulated	subsidiaries,	$1.2	billion	above	the	aggregate	$2.4	billion	in	applicable	statutory	requirements	which	would	trigger	any	regulatory	action	by	the respective	states.

# Other	Investigations

We	are	also	subject	to	various	governmental	audits	and	investigations.	Under	state	laws,	our	HMOs	and	health	insurance	companies	are	audited	by	state departments	of	insurance	for	financial	and	contractual	compliance.	Our	HMOs	are	audited	for	compliance	with	health	services	by	state	departments	of	health.	Audits	and investigations	are	also	conducted	by	state	attorneys	general,	CMS,	the	Office	of	the	Inspector	General	of	Health	and	Human	Services,	the	Office	of	Personnel Management,	the	Department	of	Justice,	the	Department	of	Labor,	and	the	Defense	Contract	Audit	Agency.	All	of	these	activities	could	result	in	the	loss	of	licensure	or the	right	to	participate	in	various	programs,	including	a	limitation	on	our	ability	to	market	or	sell	products,	the	imposition	of	fines,	penalties	and	other	civil	and	criminal sanctions,	or	changes	in	our	business	practices.	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.

# Any	failure	to	manage	administrative	costs	could	hamper	profitability.

The	level	of	our	administrative	expenses	impacts	our	profitability.	While	we	proactively	attempt	to	effectively	manage	such	expenses,	increases	or	decreases	in staff-related	expenses,	additional	investment	in	new

products	(including	our	opportunities	in	the	Medicare	programs),	greater	emphasis	on	small	group	and	individual	health	insurance	products,	acquisitions,	and implementation	of	regulatory	requirements	may	occur	from	time	to	time.

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

# Any	failure	by	us	to	manage	acquisitions	and	other	significant	transactions	successfully	may	have	a	material	adverse	effect	on	our	results	of	operations, financial	position,	and	cash	flows.

As	part	of	our	business	strategy,	we	frequently	engage	in	discussions	with	third	parties	regarding	possible	investments,	acquisitions,	strategic	alliances,	joint ventures,	and	outsourcing	transactions	and	often	enter	into	agreements	relating	to	such	transactions	in	order	to	further	our	business	objectives.	In	order	to	pursue	this strategy	successfully,	we	must	identify	suitable	candidates	for	and	successfully	complete	transactions,	some	of	which	may	be	large	and	complex,	and	manage	post- closing	issues	such	as	the	integration	of	acquired	companies	or	employees.	Integration	and	other	risks	can	be	more	pronounced	for	larger	and	more	complicated transactions,	or	if	multiple	transactions	are	pursued	simultaneously.	In	2008,	we	acquired	UnitedHealth	Group's	Las	Vegas,	Nevada	individual	SecureHorizons	Medicare Advantage	HMO	business,	OSF	Health	Plans,	Inc.,	Metcare	Health	Plans,	Inc.,	and	PHP	Companies,	Inc.	(d/b/a	Cariten	Healthcare),	and	in	late	2007,	we	acquired KMG	America	Corporation	and	CompBenefits	Corporation.	The	failure	to	successfully	integrate	these	entities	and	businesses	or	failure	to	produce	results	consistent	with the	financial	model	used	in	the	analysis	of	the	acquisition	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.	If	we	fail	to identify	and	complete	successfully	transactions	that	further	our	strategic	objectives,	we	may	be	required	to	expend	resources	to	develop	products	and	technology internally.	We	may	also	be	at	a	competitive	disadvantage	or	we	may	be	adversely	affected	by	negative	market	perceptions,	any	of	which	may	have	a	material	adverse effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

# If	we	fail	to	develop	and	maintain	satisfactory	relationships	with	the	providers	of	care	to	our	members,	our	business	may	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	specialty	groups,	physician/hospital	organizations	or	multi-specialty	physician	groups,	may	have	significant	market	positions and	negotiating	power.	In	addition,	physician	or	practice	management	companies,	which	aggregate	physician	practices	for	administrative	efficiency	and	marketing leverage,	may	compete	directly	with	us.	If	these	providers	refuse	to	contract	with	us,	use	their	market	position	to	negotiate	favorable	contracts	or	place	us	at	a competitive	disadvantage,	our	ability	to	market	products	or	to	be	profitable	in	those	areas	may	be	adversely	affected.

In	some	situations,	we	have	contracts	with	individual	or	groups	of	primary	care	physicians	for	an	actuarially	determined,	fixed,	per-member-per-month	fee	under which	physicians	are	paid	an	amount	to	provide	all	required	medical	services	to	our	members.	This	type	of	contract	is	referred	to	as	a	"capitation"	contract.	The	inability of	providers	to	properly	manage	costs	under	these	capitation	arrangements	can	result	in	the	financial	instability	of	these	providers	and	the	termination	of	their relationship	with	us.	In	addition,	payment	or	other	disputes	between	a

primary	care	provider	and	specialists	with	whom	the	primary	care	provider	contracts	can	result	in	a	disruption	in	the	provision	of	services	to	our	members	or	a	reduction in	the	services	available	to	our	members.	The	financial	instability	or	failure	of	a	primary	care	provider	to	pay	other	providers	for	services	rendered	could	lead	those	other providers	to	demand	payment	from	us	even	though	we	have	made	our	regular	fixed	payments	to	the	primary	provider.	There	can	be	no	assurance	that	providers	with whom	we	contract	will	properly	manage	the	costs	of	services,	maintain	financial	solvency	or	avoid	disputes	with	other	providers.	Any	of	these	events	may	have	a material	adverse	effect	on	the	provision	of	services	to	our	members	and	our	results	of	operations,	financial	position,	and	cash	flows.

# Our	pharmacy	business	is	highly	competitive	and	subjects	us	to	regulations	in	addition	to	those	we	face	with	our	core	health	benefits	businesses.

Our	pharmacy	business,	opened	in	2006,	competes	with	locally	owned	drugstores,	retail	drugstore	chains,	supermarkets,	discount	retailers,	membership	clubs,	and Internet	companies	as	well	as	other	mail-order	and	long-term	care	pharmacies.	Our	pharmacy	business	also	subjects	us	to	extensive	federal,	state	and	local	regulation. The	practice	of	pharmacy	is	generally	regulated	at	the	state	level	by	state	boards	of	pharmacy.	Many	of	the	states	where	we	deliver	pharmaceuticals,	including	controlled substances,	have	laws	and	regulations	that	require	out-of-state	mail-order	pharmacies	to	register	with	that	state's	board	of	pharmacy.	In	addition,	some	states	have proposed	laws	to	regulate	online	pharmacies,	and	we	may	be	subject	to	this	legislation	if	it	is	passed.	Federal	agencies	further	regulate	our	pharmacy	operations. Pharmacies	must	register	with	the	U.S.	Drug	Enforcement	Administration	and	individual	state	controlled	substance	authorities	in	order	to	dispense	controlled	substances. In	addition,	the	FDA	inspects	facilities	in	connection	with	procedures	to	effect	recalls	of	prescription	drugs.	The	Federal	Trade	Commission	also	has	requirements	for mail-order	sellers	of	goods.	The	U.S.	Postal	Service,	or	USPS,	has	statutory	authority	to	restrict	the	transmission	of	drugs	and	medicines	through	the	mail	to	a	degree	that may	have	an	adverse	effect	on	our	mail-order	operations.	The	USPS	historically	has	exercised	this	statutory	authority	only	with	respect	to	controlled	substances.	If	the USPS	restricts	our	ability	to	deliver	drugs	through	the	mail,	alternative	means	of	delivery	are	available	to	us.	However,	alternative	means	of	delivery	could	be significantly	more	expensive.	The	Department	of	Transportation	has	regulatory	authority	to	impose	restrictions	on	drugs	inserted	in	the	stream	of	commerce.	These regulations	generally	do	not	apply	to	the	USPS	and	its	operations.	In	addition,	we	are	subject	to	CMS	rules	regarding	the	administration	of	our	PDP	plans	and intercompany	pricing	between	our	PDP	plans	and	our	pharmacy	business.

We	are	also	subject	to	risks	inherent	in	the	packaging	and	distribution	of	pharmaceuticals	and	other	health	care	products,	and	the	application	of	state	laws	related to	the	operation	of	internet	and	mail-services	pharmacies.	The	failure	to	adhere	to	these	laws	and	regulations	may	expose	our	pharmacy	subsidiary	to	civil	and	criminal penalties.

# Changes	in	the	prescription	drug	industry	pricing	benchmarks	may	adversely	affect	our	financial	performance.

Contracts	in	the	prescription	drug	industry	generally	use	certain	published	benchmarks	to	establish	pricing	for	prescription	drugs.	These	benchmarks	include average	wholesale	price,	which	is	referred	to	as	"AWP,"	average	selling	price,	which	is	referred	to	as	"ASP,"	and	wholesale	acquisition	cost.	Recent	events	have	raised uncertainties	as	to	whether	payors,	pharmacy	providers,	pharmacy	benefit	managers,	or	PBMs,	and	others	in	the	prescription	drug	industry	will	continue	to	utilize	AWP as	it	has	previously	been	calculated,	or	whether	other	pricing	benchmarks	will	be	adopted	for	establishing	prices	within	the	industry.	Legislation	may	lead	to	changes	in the	pricing	for	Medicare	and	Medicaid	programs.	The	DOJ	is	currently	conducting,	and	the	U.S.	House	of	Representatives	Commerce	Committee	has	conducted,	an investigation	into	the	use	of	AWP	for	federal	program	payment,	and	whether	the	use	of	AWP	has	inflated	drug	expenditures	by	the	Medicare	and	Medicaid	programs. Federal	and	state	proposals	have	sought	to	change	the	basis	for	calculating	payment	of	certain	drugs	by	the	Medicare	and	Medicaid	programs.	Adoption	of	ASP	in	lieu	of AWP	as	the	measure	for	determining	payment	by	Medicare	or	Medicaid	programs	for	the	drugs	sold	in	our	mail-order	pharmacy	business	may	reduce	the	revenues	and gross	margins	of	this	business	which	may	result	in	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

# If	we	do	not	continue	to	earn	and	retain	purchase	discounts	and	volume	rebates	from	pharmaceutical	manufacturers	at	current	levels,	our	gross	margins	may

# decline.

We	have	contractual	relationships	with	pharmaceutical	manufacturers	or	wholesalers	that	provide	us	with	purchase	discounts	and	volume	rebates	on	certain prescription	drugs	dispensed	through	our	mail-order	and	specialty	pharmacies.	These	discounts	and	volume	rebates	are	generally	passed	on	to	clients	in	the	form	of steeper	price	discounts.	Changes	in	existing	federal	or	state	laws	or	regulations	or	in	their	interpretation	by	courts	and	agencies	or	the	adoption	of	new	laws	or	regulations relating	to	patent	term	extensions,	and	purchase	discount	and	volume	rebate	arrangements	with	pharmaceutical	manufacturers,	may	reduce	the	discounts	or	volume rebates	we	receive	and	materially	adversely	impact	our	results	of	operations,	financial	position,	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.,	our	parent	company.	These	subsidiaries	generally	are	regulated	by	states'	Departments	of	Insurance.	We	are	also	required	by	law	to maintain	specific	prescribed	minimum	amounts	of	capital	in	these	subsidiaries.	The	levels	of	capitalization	required	depend	primarily	upon	the	volume	of	premium generated.	A	significant	increase	in	premium	volume	will	require	additional	capitalization	from	our	parent	company.	In	most	states,	we	are	required	to	seek	prior approval	by	these	state	regulatory	authorities	before	we	transfer	money	or	pay	dividends	from	these	subsidiaries	that	exceed	specified	amounts,	or,	in	some	states,	any amount.	In	addition,	we	normally	notify	the	state	Departments	of	Insurance	prior	to	making	payments	that	do	not	require	approval.	In	the	event	that	we	are	unable	to provide	sufficient	capital	to	fund	the	obligations	of	Humana	Inc.,	our	results	of	operations,	financial	position,	and	cash	flows	may	be	materially	adversely	affected.

# Downgrades	in	our	debt	ratings,	should	they	occur,	may	adversely	affect	our	business,	results	of	operations,	and	financial	condition.

Claims	paying	ability,	financial	strength,	and	debt	ratings	by	recognized	rating	organizations	are	an	increasingly	important	factor	in	establishing	the	competitive position	of	insurance	companies.	Ratings	information	is	broadly	disseminated	and	generally	used	throughout	the	industry.	We	believe	our	claims	paying	ability	and financial	strength	ratings	are	an	important	factor	in	marketing	our	products	to	certain	of	our	customers.	Our	7.20%	and	8.15%	senior	notes	are	subject	to	an	interest	rate adjustment	if	the	debt	ratings	assigned	to	the	notes	are	downgraded	(or	subsequently	upgraded)	and	contain	a	change	of	control	provision	that	may	require	us	to	purchase the	notes	under	certain	circumstances.	In	addition,	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.

Historically,	rating	agencies	take	action	to	lower	ratings	due	to,	among	other	things,	perceived	concerns	about	liquidity	or	solvency,	the	competitive	environment in	the	insurance	industry,	the	inherent	uncertainty	in	determining	reserves	for	future	claims,	the	outcome	of	pending	litigation	and	regulatory	investigations,	and	possible changes	in	the	methodology	or	criteria	applied	by	the	rating	agencies.	In	addition,	rating	agencies	have	come	under	recent	regulatory	and	public	scrutiny	over	the	ratings assigned	to	various	fixed-income	products.	As	a	result,	rating	agencies	may	(i)	become	more	conservative	in	their	methodology	and	criteria,	(ii)	increase	the	frequency or	scope	of	their	credit	reviews,	(iii)	request	additional	information	from	the	companies	that	they	rate,	or	(iv)	adjust	upward	the	capital	and	other	requirements	employed in	the	rating	agency	models	for	maintenance	of	certain	ratings	levels.

We	believe	that	some	of	our	customers	place	importance	on	our	credit	ratings,	and	we	may	lose	customers	and	compete	less	successfully	if	our	ratings	were	to	be downgraded.	In	addition,	our	credit	ratings	affect	our	ability	to	obtain	investment	capital	on	favorable	terms.	If	our	credit	ratings	were	to	be	lowered,	our	cost	of borrowing	likely	would	increase,	our	sales	and	earnings	could	decrease	and	our	results	of	operations,	financial	position,	and	cash	flows	may	be	materially	adversely affected.

# Changes	in	economic	conditions	may	adversely	affect	our	results	of	operations,	financial	position,	and	cash	flows.

The	U.S.	economy	continues	to	experience	a	period	of	recession	and	increased	unemployment.	We	have	closely	monitored	the	impact	that	this	volatile	economy is	having	on	our	Commercial	segment	operations.	Workforce	reductions	have	caused	corresponding	membership	losses	in	our	fully-insured	group	business.	Continued weakness	in	the	U.S.	economy,	and	any	resulting	increases	in	unemployment,	may	materially	adversely	affect	our	Commercial	medical	membership,	results	of operations,	financial	position,	and	cash	flows.

Additionally,	the	continued	weakness	of	the	U.S.	economy	may	adversely	affect	the	budget	of	individual	states	and	of	the	federal	government.	That	could	result	in attempts	to	reduce	payments	in	our	federal	and	state	government	health	care	coverage	programs,	including	the	Medicare,	military	services,	and	Medicaid	programs,	and could	result	in	an	increase	in	taxes	and	assessments	on	our	activities.	Although	we	could	attempt	to	mitigate	or	cover	our	exposure	from	such	increased	costs	through, among	other	things,	increases	in	premiums,	there	can	be	no	assurance	that	we	will	be	able	to	mitigate	or	cover	all	of	such	costs	which	may	have	a	material	adverse	effect on	our	results	of	operations,	financial	position,	and	cash	flows.

In	addition,	general	inflationary	pressures	may	affect	the	costs	of	medical	and	other	care,	increasing	the	costs	of	claims	expenses	submitted	to	us.

# The	securities	and	credit	markets	may	experience	volatility	and	disruption,	which	may	adversely	affect	our	business.

Volatility	or	disruption	in	the	securities	and	credit	markets	could	impact	our	investment	portfolio.	We	evaluate	our	investment	securities	for	impairment	on	a quarterly	basis.	This	review	is	subjective	and	requires	a	high	degree	of	judgment.	For	the	purpose	of	determining	gross	realized	gains	and	losses,	the	cost	of	investment securities	sold	is	based	upon	specific	identification.	For	debt	securities	held,	we	recognize	an	impairment	loss	in	income	when	the	fair	value	of	the	debt	security	is	less than	the	carrying	value	and	we	have	the	intent	to	sell	the	debt	security	or	it	is	more	likely	than	not	that	we	will	be	required	to	sell	the	debt	security	before	recovery	of	our amortized	cost	basis,	or	if	a	credit	loss	has	occurred.	When	we	do	not	intend	to	sell	a	security	in	an	unrealized	loss	position,	potential	other-than-temporary	impairments are	considered	using	variety	of	factors,	including	the	length	of	time	and	extent	to	which	the	fair	value	has	been	less	than	cost;	adverse	conditions	specifically	related	to the	industry,	geographic	area	or	financial	condition	of	the	issuer	or	underlying	collateral	of	a	security;	payment	structure	of	the	security;	changes	in	credit	rating	of	the security	by	the	rating	agencies;	the	volatility	of	the	fair	value	changes;	and	changes	in	fair	value	of	the	security	after	the	balance	sheet	date.	For	debt	securities,	we	take into	account	expectations	of	relevant	market	and	economic	data.	We	continuously	review	our	investment	portfolios	and	there	is	a	continuing	risk	that	further	declines	in fair	value	may	occur	and	additional	material	realized	losses	from	sales	or	other-than-	temporary	impairments	may	be	recorded	in	future	periods.

We	believe	our	cash	balances,	investment	securities,	operating	cash	flows,	and	funds	available	under	our	credit	agreement	or	from	other	public	or	private financing	sources,	taken	together,	provide	adequate	resources	to	fund	ongoing	operating	and	regulatory	requirements,	future	expansion	opportunities,	and	capital expenditures	in	the	foreseeable	future,	and	to	refinance	or	repay	debt.	However,	continuing	adverse	securities	and	credit	market	conditions	may	significantly	affect	the availability	of	credit.	While	there	is	no	assurance	in	the	current	economic	environment,	we	have	no	reason	to	believe	the	lenders	participating	in	our	credit	agreement will	not	be	willing	and	able	to	provide	financing	in	accordance	with	the	terms	of	the	agreement.

Our	access	to	additional	credit	will	depend	on	a	variety	of	factors	such	as	market	conditions,	the	general	availability	of	credit,	both	to	the	overall	market	and	our industry,	our	credit	ratings	and	debt	capacity,	as	well	as	the	possibility	that	customers	or	lenders	could	develop	a	negative	perception	of	our	long	or	short-term	financial prospects.	Similarly,	our	access	to	funds	could	be	limited	if	regulatory	authorities	or	rating	agencies	were	to	take	negative	actions	against	us.	If	a	combination	of	these factors	were	to	occur,	we	may	not	be	able	to	successfully	obtain	additional	financing	on	favorable	terms	or	at	all.

# Given	the	current	economic	climate,	our	stock	and	the	stocks	of	other	companies	in	the	insurance	industry	may	be	increasingly	subject	to	stock	price	and trading	volume	volatility.

Over	the	past	two	years,	the	stock	markets	have	experienced	significant	price	and	trading	volume	volatility.	Company-specific	issues	and	market	developments generally	in	the	insurance	industry	and	in	the	regulatory	environment	may	have	caused	this	volatility.	Our	stock	price	has	fluctuated	and	may	continue	to	materially fluctuate	in	response	to	a	number	of	events	and	factors,	including:

•the	potential	for	health	care	reform;

•general	economic	conditions;

•quarterly	variations	in	operating	results;

•natural	disasters,	terrorist	attacks	and	epidemics;

•changes	in	financial	estimates	and	recommendations	by	securities	analysts;

•operating	and	stock	price	performance	of	other	companies	that	investors	may	deem	comparable;

•press	releases	or	negative	publicity	relating	to	our	competitors	or	us	or	relating	to	trends	in	our	markets;

•regulatory	changes	and	adverse	outcomes	from	litigation	and	government	or	regulatory	investigations;

•sales	of	stock	by	insiders;

•changes	in	our	credit	ratings;

•limitations	on	premium	levels	or	the	ability	to	raise	premiums	on	existing	policies;

•increases	in	minimum	capital,	reserves,	and	other	financial	strength	requirements;	and

•limitations	on	our	ability	to	repurchase	our	common	stock.

These	factors	could	materially	reduce	our	stock	price.	In	addition,	broad	market	and	industry	fluctuations	may	adversely	affect	the	trading	price	of	our	common stock,	regardless	of	our	actual	operating	performance.

# ITEM	1B. UNRESOLVED	STAFF	COMMENTS

None.

# ITEM	2. PROPERTIES

Our	principal	executive	office	is	located	in	the	Humana	Building,	500	West	Main	Street,	Louisville,	Kentucky	40202.	In	addition	to	this	property,	our	other principal	operating	facilities	are	located	in	Louisville,	Kentucky;	Green	Bay,	Wisconsin;	Tampa	Bay,	Florida;	Cincinnati,	Ohio;	and	San	Juan,	Puerto	Rico,	all	of	which are	used	for	customer	service,	enrollment,	and	claims	processing.	Our	Louisville	and	Green	Bay	facilities	also	house	other	corporate	functions.

We	own	or	lease	these	principal	operating	facilities	in	addition	to	other	administrative	market	offices	and	medical	centers.	We	no	longer	operate	most	of	these medical	centers	but,	rather	lease	or	sublease	them	to	their	provider	operators.	The	following	table	lists	the	location	of	properties	we	owned	or	leased,	including	our principal	operating	facilities,	at	December	31,	2009:

|  | Medical	Centers | Medical	Centers | Offices | Offices |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Owned | Leased | Owned | Leased | Total |
| Florida | 11 | 58 | — | 64 | 133 |
| Texas | — | — | 2 | 34 | 36 |
| Tennessee | — | — | — | 24 | 24 |
| Kentucky | — | — | 9 | 9 | 18 |
| Georgia | — | — | — | 14 | 14 |
| Ohio | — | — | — | 13 | 13 |
| South\tCarolina | — | — | 8 | 5 | 13 |
| Puerto\tRico | — | — | — | 12 | 12 |
| Louisiana | — | — | — | 10 | 10 |
| Illinois | 1 | — | — | 8 | 9 |
| Wisconsin | — | — | 1 | 8 | 9 |
| Others | — | — | — | 107 | 107 |
| Total | 12 | 58 | 20 | 308 | 398 |

# ITEM	3. LEGAL	PROCEEDINGS

We	are	party	to	a	variety	of	legal	actions	in	the	ordinary	course	of	business,	including	employment	litigation,	claims	of	medical	malpractice,	bad	faith, nonacceptance	or	termination	of	providers,	anticompetitive	practices,	improper	rate	setting,	failure	to	disclose	network	discounts	and	various	other	provider arrangements,	general	contractual	matters,	intellectual	property	matters,	and	challenges	to	subrogation	practices.	See	"Legal	Proceedings"	in	Note	16	to	the	consolidated financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data.	We	cannot	predict	the	outcome	of	these	suits	with	certainty.

# ITEM	4. SUBMISSION	OF	MATTERS	TO	A	VOTE	OF	SECURITY	HOLDERS

Not	applicable.

# PART	II

# ITEM	5. MARKET	FOR	THE	REGISTRANT'S	COMMON	EQUITY,	RELATED	STOCKHOLDER	MATTERS	AND	ISSUER	PURCHASES	OF EQUITY	SECURITIES

# a) Market	Information

Our	common	stock	trades	on	the	New	York	Stock	Exchange	under	the	symbol	HUM.	The	following	table	shows	the	range	of	high	and	low	closing	sales	prices	as reported	on	the	New	York	Stock	Exchange	Composite	Price	for	each	quarter	in	the	years	ended	December	31,	2009	and	2008:

|  | High | Low |
| :--- | :--- | :--- |
| Year\tEnded\tDecember\t31,\t2009 |  |  |
| First\tquarter | $45.80 | $ 18.77 |
| Second\tquarter | $32.62 | $ 25.46 |
| Third\tquarter | $40.67 | $ 28.28 |
| Fourth\tquarter | $45.75 | $ 35.91 |
| Year\tEnded\tDecember\t31,\t2008 |  |  |
| First\tquarter | $86.98 | $ 40.88 |
| Second\tquarter | $51.11 | $ 39.77 |
| Third\tquarter | $50.03 | $ 37.27 |
| Fourth\tquarter | $41.26 | $ 24.56 |

# Unregistered	Sales	of	Equity	Securities	and	Use	of	Proceeds

We	maintain	the	Humana	Retirement	and	Savings	Plan	and	the	Humana	Puerto	Rico	1165(e)	Retirement	Plan	(which	we	refer	to	collectively	as	the	Plans),	each	a qualified,	combined	retirement	plan	and	401(k)	plan,	for	the	benefit	of	our	employees,	through	which	participants	can	elect,	among	other	investment	choices,	to	purchase our	common	stock	at	market	prices.	Although	none	of	the	shares	purchased	by	the	Plans	are	purchased	from	us,	but	are	purchased	by	a	third	party	administrator	on	the open	market,	it	is	the	position	of	the	SEC	that,	because	we	sponsor	the	Plans,	all	of	the	securities	offered	pursuant	to	the	Plans	must	be	registered	under	the	Securities	Act of	1933.	Based	upon	this	interpretation,	we	recently	determined	that	the	number	of	shares	of	our	common	stock	purchased	by	participants	under	the	Humana	Retirement and	Savings	Plan	may	have	exceeded	the	number	of	shares	registered	under	the	registration	statement	covering	the	Plan,	and	shares	purchased	under	the	Humana	Puerto Rico	1165(e)	Retirement	Plan	may	not	have	been	registered.	Since	these	purchases	were	made	by	a	third	party	administrator	on	the	open	market,	and	not	from	us,	we did	not	receive	any	proceeds	from	the	sale	of	the	shares	pursuant	to	the	Plans.	We	have	filed	registration	statements	on	Form	S-8	to	register	future	sales	of	our	common stock	to	participants	in	the	Plans.	We	are	in	the	process	of	determining	any	action	we	intend	to	take	in	light	of	this	situation.	These	shares	have	always	been	treated	as outstanding	for	financial	reporting	purposes,	and	we	do	not	expect	that	the	overall	effect	of	this	issuance	of	unregistered	shares,	including	the	exercise	of	any	applicable rescission	rights	by	participants	in	the	Plans,	will	have	a	material	impact	on	our	results	of	operations,	financial	position,	and	cash	flows.	We	may	also	be	subject	to monetary	fines	or	other	regulatory	sanctions	as	provided	under	applicable	securities	laws.

# b) Holders	of	our	Capital	Stock

As	of	January	31,	2010,	there	were	approximately	4,700	holders	of	record	of	our	common	stock	and	approximately	78,800	beneficial	holders	of	our	common

# stock.

# c) Dividends

Since	February	1993,	we	have	not	declared	or	paid	any	cash	dividends	on	our	common	stock.	We	do	not	presently	intend	to	pay	dividends,	and	we	currently	plan to	retain	our	earnings	for	future	operations	and	growth	of	our	businesses.

# d) Equity	Compensation	Plan

The	information	required	by	this	part	of	Item	5	is	incorporated	herein	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled to	be	held	on	April	20,	2010	appearing	under	the	caption	"Equity	Compensation	Plan	Information"	of	such	Proxy	Statement.

# e) Stock	Performance

The	following	graph	compares	the	performance	of	our	common	stock	to	the	Standard	&	Poor's	Composite	500	Index	("S&P	500")	and	the	Morgan	Stanley Health	Care	Payer	Index	("Peer	Group")	for	the	five	years	ended	December	31,	2009.	The	graph	assumes	an	investment	of	$100	in	each	of	our	common	stock,	the	S&P 500,	and	the	Peer	Group	on	December	31,	2004.

|  | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| HUM | $100 | $183 | $186 | $254 | $126 | $148 |
| S&amp;P\t500 | $100 | $103 | $117 | $121 | $75 | $92 |
| Peer\tGroup | $100 | $137 | $146 | $170 | $77 | $118 |

f) Issuer	Purchases	of	Equity	Securities

On	February	22,	2008,	the	Board	of	Directors	authorized	the	repurchase	of	up	to	$150	million	of	our	common	shares	exclusive	of	shares	repurchased	in connection	with	employee	stock	plans.	During	the	year	ended	December	31,	2008,	we	repurchased	2.1	million	shares	in	open	market	transactions	for	$92.8	million	at	an average	price	of	$44.19.	On	July	28,	2008	(announced	August	4,	2008),	the	Board	of	Directors	increased	the	authorized	amount	to	$250	million,	excluding	the	$92.8 million	used	prior	to	that	time	in	connection	with	the	initial	February	2008	authorization.	No	shares	were	repurchased	in	2008	or	2009	under	the	July	2008	authorization. The	July	authorization	was	set	to	expire	on	December	31,	2009.	On	December	10,	2009	(announced	December	11,	2009),	the	Board	of	Directors	renewed	its	$250 million	authorization	through	December	31,	2011.	Under	this	authorized	share	repurchase	program,	shares	may	be	purchased	from	time	to	time	at	prevailing	prices	in the	open	market,	by	block	purchases,	or	in	privately-negotiated	transactions,	subject	to	certain	restrictions	on	volume,	pricing	and	timing.	We	have	not	yet	repurchased any	shares	under	the	December	2009	authorization.

In	connection	with	employee	stock	plans,	we	acquired	0.6	million	common	shares	for	$22.8	million	and	0.2	million	common	shares	for	$13.3	million	during	the years	ended	December	31,	2009	and	2008,	respectively.

# SELECTED	FINANCIAL	DATA

|  | 2009 | 2008	(a) | 2007	(b) | 2006	(c) | 2005	(d) |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands,\texcept\tper\tcommon\tshare\tresults,\tmembership\tand\tratios) | (in\tthousands,\texcept\tper\tcommon\tshare\tresults,\tmembership\tand\tratios) | (in\tthousands,\texcept\tper\tcommon\tshare\tresults,\tmembership\tand\tratios) |  |
| Summary\tof\tOperations: |  |  |  |  |  |
| Revenues: |  |  |  |  |  |
| Premiums | $29,926,751 | $28,064,844 | $24,434,347 | $20,729,182 | $ 14,001,591 |
| Administrative\tservices\tfees | 496,135 | 451,879 | 391,515 | 341,211 | 259,437 |
| Investment\tincome | 296,317 | 220,215 | 314,239 | 291,880 | 142,976 |
| Other\trevenue | 241,211 | 209,434 | 149,888 | 54,264 | 14,123 |
| Total\trevenues | \t 30,960,414 | \t 28,946,372 | \t 25,289,989 | 21,416,537 | 14,418,127 |
| Operating\texpenses: |  |  |  |  |  |
| Benefits | \t 24,775,002 | \t 23,708,233 | \t 20,270,531 | 17,421,204 | 11,651,470 |
| Selling,\tgeneral\tand\tadministrative | 4,227,535 | 3,944,652 | 3,476,468 | 3,021,509 | 2,195,604 |
| Depreciation\tand\tamortization | 250,274 | 220,350 | 184,812 | 148,598 | 128,858 |
| Total\toperating\texpenses | \t 29,252,811 | \t 27,873,235 | \t 23,931,811 | 20,591,311 | 13,975,932 |
| Income\tfrom\toperations | 1,707,603 | 1,073,137 | 1,358,178 | 825,226 | 442,195 |
| Interest\texpense | 105,843 | 80,289 | 68,878 | 63,141 | 39,315 |
| Income\tbefore\tincome\ttaxes | 1,601,760 | 992,848 | 1,289,300 | 762,085 | 402,880 |
| Provision\tfor\tincome\ttaxes | 562,085 | 345,694 | 455,616 | 274,662 | 106,150 |
| Net\tincome | $1,039,675 | $647,154 | $833,684 | $487,423 | $296,730 |
| Basic\tearnings\tper\tcommon\tshare | $6.21 | $3.87 | $5.00 | $2.97 | $1.83 |
| Diluted\tearnings\tper\tcommon\tshare | $6.15 | $3.83 | $4.91 | $2.90 | $1.79 |
| Financial\tPosition: |  |  |  |  |  |
| Cash\tand\tinvestments | $9,110,738 | $7,185,865 | $6,690,820 | $5,347,454 | $3,477,955 |
| Total\tassets | \t 14,153,494 | \t 13,041,760 | \t 12,879,074 | 10,098,486 | 6,846,851 |
| Benefits\tpayable | 3,222,574 | 3,205,579 | 2,696,833 | 2,410,407 | 1,849,142 |
| Debt | 1,678,166 | 1,937,032 | 1,687,823 | 1,269,100 | 815,044 |
| Stockholders'\tequity | 5,776,003 | 4,457,190 | 4,028,937 | 3,053,886 | 2,508,874 |
| Key\tFinancial\tIndicators: |  |  |  |  |  |
| Benefit\tratio | 82.8% | 84.5% | 83.0% | 84.0% | 83.2% |
| SG&amp;A\texpense\tratio | 13.8% | 13.7% | 13.9% | 14.3% | 15.4% |
| Medical\tMembership\tby\tSegment: |  |  |  |  |  |
| Government: |  |  |  |  |  |
| Medicare\tAdvantage | 1,508,500 | 1,435,900 | 1,143,000 | 1,002,600 | 557,800 |
| Medicare\tstand-alone\tPDP | 1,927,900 | 3,066,600 | 3,442,000 | 3,536,600 | — |
| Total\tMedicare | 3,436,400 | 4,502,500 | 4,585,000 | 4,539,200 | 557,800 |
| Military\tservices\tinsured | 1,756,000 | 1,736,400 | 1,719,100 | 1,716,400 | 1,750,900 |
| Military\tservices\tASO | 1,278,400 | 1,228,300 | 1,146,800 | 1,163,600 | 1,138,200 |
| Total\tmilitary\tservices | 3,034,400 | 2,964,700 | 2,865,900 | 2,880,000 | 2,889,100 |
| Medicaid\tinsured | 401,700 | 385,400 | 384,400 | 390,700 | 457,900 |
| Medicaid\tASO | — | 85,700 | 180,600 | 178,400 | — |
| Total\tMedicaid | 401,700 | 471,100 | 565,000 | 569,100 | 457,900 |
| Total\tGovernment | 6,872,500 | 7,938,300 | 8,015,900 | 7,988,300 | 3,904,800 |
| Commercial: |  |  |  |  |  |
| Fully-insured | 1,839,500 | 1,978,800 | 1,808,600 | 1,754,200 | 1,999,800 |
| ASO | 1,571,300 | 1,642,000 | 1,643,000 | 1,529,600 | 1,171,000 |
| Total\tCommercial | 3,410,800 | 3,620,800 | 3,451,600 | 3,283,800 | 3,170,800 |
| Total\tmedical\tmembership | \t 10,283,300 | \t 11,559,100 | \t 11,467,500 | 11,272,100 | 7,075,600 |
| Specialty\tMembership: |  |  |  |  |  |
| Dental | 3,832,900 | 3,633,400 | 3,639,800 | 1,452,000 | 1,456,500 |
| Vision | 2,459,600 | 2,233,000 | 2,272,800 | — | — |
| Other\tsupplemental\tbenefits | 907,600 | 846,800 | 731,200 | 450,800 | 445,600 |
| Total\tspecialty\tmembership | 7,200,100 | 6,713,200 | 6,643,800 | 1,902,800 | 1,902,100 |

(a) Includes	the	acquired	operations	of	United	Health	Group's	Las	Vegas,	Nevada	individual	SecureHorizons	Medicare	Advantage	HMO	business	from	April	30,	2008,	the	acquired	operations	of	OSF	Health	Plans, Inc.	from	May	22,	2008,	the	acquired	operations	of	Metcare	Health	Plans,	Inc.	from	August	29,	2008,	and	the	acquired	operations	of	PHP	Companies,	Inc.	(d/b/a	Cariten	Healthcare)	from	October	31,	2008.

(b) Includes	the	acquired	operations	of	DefenseWeb	Technologies,	Inc.	from	March	1,	2007,	the	acquired	operations	of	CompBenefits	Corporation	from	October	1,	2007,	and	the	acquired	operations	of	KMG America	Corporation	from	November	30,	2007.	Also	includes	the	benefit	of	$68.9	million	($43.0	million	after	tax,	or	$0.25	per	diluted	share)	related	to	our	2006	Medicare	Part	D	reconciliation	with	CMS	and	the settlement	of	some	TRICARE	contractual	provisions	related	to	prior	years.

(c) Includes	the	acquired	operations	of	CHA	Service	Company	from	May	1,	2006.

(d) Includes	the	acquired	operations	of	CarePlus	Health	Plans	of	Florida	from	February	16,	2005,	and	the	acquired	operations	of	Corphealth,	Inc.	from	December	20,	2005.	Also	includes	expenses	of	$71.9	million ($44.8	million	after	tax,	or	$0.27	per	diluted	common	share)	for	a	class	action	litigation	settlement,	as	well	as	expenses	of	$27.0	million	($16.9	million	after	tax,	or	$0.10	per	diluted	common	share)	related	to Hurricane	Katrina.	These	expenses	were	partially	offset	by	the	realization	of	a	tax	gain	contingency	of	$22.8	million,	or	$0.14	per	diluted	share.

# ITEM	7. MANAGEMENT'S	DISCUSSION	AND	ANALYSIS	OF	FINANCIAL	CONDITION	AND	RESULTS	OF	OPERATIONS

# Overview

Headquartered	in	Louisville,	Kentucky,	Humana	is	one	of	the	nation's	largest	publicly	traded	health	and	supplemental	benefits	companies,	based	on	our	2009 revenues	of	approximately	$31.0	billion.	We	are	a	full-service	benefits	solutions	company,	offering	a	wide	array	of	health	and	supplemental	benefit	products	for employer	groups,	government	benefit	programs,	and	individuals.	As	of	December	31,	2009,	we	had	approximately	10.3	million	members	in	our	medical	benefit	plans,	as well	as	approximately	7.2	million	members	in	our	specialty	products.

We	manage	our	business	with	two	segments:	Government	and	Commercial.	The	Government	segment	consists	of	beneficiaries	of	government	benefit	programs, and	includes	three	lines	of	business:	Medicare,	Military,	and	Medicaid.	The	Commercial	segment	consists	of	members	enrolled	in	our	medical	and	specialty	products marketed	to	employer	groups	and	individuals.	When	identifying	our	segments,	we	aggregated	products	with	similar	economic	characteristics.	These	characteristics include	the	nature	of	customer	groups	as	well	as	pricing,	benefits,	and	underwriting	requirements.	These	segment	groupings	are	consistent	with	information	used	by	our Chief	Executive	Officer.

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

Our	industry	relies	on	two	key	statistics	to	measure	performance.	The	benefit	ratio,	which	is	computed	by	taking	total	benefit	expenses	as	a	percentage	of premium	revenues,	represents	a	statistic	used	to	measure	underwriting	profitability.	The	selling,	general,	and	administrative	expense	ratio,	or	SG&A	expense	ratio, which	is	computed	by	taking	total	selling,	general	and	administrative	expenses	as	a	percentage	of	premium	revenues,	administrative	services	fees	and	other	revenues, represents	a	statistic	used	to	measure	administrative	spending	efficiency.

# Proposed	Health	Insurance	Initiatives

The	President	of	the	United	States	and	members	of	the	U.S.	Congress	have	proposed	significant	reforms	to	the	U.S.	health	care	system.	In	November	2009,	the U.S.	House	of	Representatives	passed	the	Affordable	Health	Care	for	America	Act	and	in	December	2009	the	U.S.	Senate	passed	The	Patient	Protection	and	Affordable Care	Act,	which	we	refer	to	collectively	as	the	"Acts".	While	there	are	significant	differences	between	the	two	Acts,	they	include,	for	example,	limiting	Medicare Advantage	payment	rates,	mandatory	issuance	of	insurance	coverage,	requirements	that	would	limit	the	ability	of	health	plans	and	insurers	to	vary	premiums	based	on assessments	of	underlying	risk,	stipulating	annual	rebates	to	enrollees	if	the	amount	of	premium	revenues	expended	on	medical	costs	falls	below	prescribed	ratios	for group	and	individual	health	insurance	coverage,	and	imposing	new	non-deductible	taxes	on	health	insurers	increasing	in	the	aggregate	from	$2	billion	to	$10	billion annually	over	ten	years.	In	addition,	certain	members	of	Congress	have	proposed	a	single-payer	health	care	system,	a	government	health	insurance	option	to	compete with	private	plans,	and	other	expanded	public	health	care	measures.	Various	health	insurance	reform	proposals	are	also	emerging	at	the	state	level.	Because	of	the

unsettled	nature	of	these	initiatives	and	the	numerous	steps	required	to	implement	them,	we	cannot	predict	what	health	insurance	initiatives,	if	any,	will	be	implemented at	the	federal	or	state	level,	or	the	effect	any	future	legislation	or	regulation	will	have	on	our	business.	However,	legislative	changes,	if	enacted,	may	have	a	material adverse	affect	on	our	results	of	operations,	including	lowering	our	Medicare	payment	rates	and	increasing	our	expenses	associated	with	the	non-deductible	excise	tax, financial	position,	including	goodwill	recoverability,	and	cash	flows.

# Government	Segment

Our	strategy	and	commitment	to	the	Medicare	programs	has	led	to	significant	growth.	Medicare	Advantage	membership	increased	to	1,508,500	members	at December	31,	2009,	up	72,600	members,	or	5.1%	from	1,435,900	members	at	December	31,	2008,	primarily	due	to	sales	of	preferred	provider	organization,	or	PPO products.	Average	Medicare	Advantage	membership	increased	11.5%	in	2009	compared	to	2008,	including	the	impact	from	the	2008	acquisitions	of	Cariten,	Metcare, OSF,	and	SecureHorizons,	discussed	below.	Likewise,	Medicare	Advantage	premium	revenues	have	increased	19.1%	to	$16.4	billion	for	2009	from	$13.8	billion	for 2008.	Recently	the	mix	of	sales	has	shifted	increasingly	to	our	network-based	PPO	offerings,	which	is	particularly	important	given	the	enactment	of	the	Medicare Improvements	for	Patients	and	Providers	Act	of	2008,	or	the	Act,	discussed	more	fully	below.	Medicare	Advantage	members	enrolled	in	network-based	products	was approximately	63%	at	December	31,	2009	compared	to	51%	at	December	31,	2008,	with	our	PPO	membership	increasing	94.6%	from	December	31,	2008	to December	31,	2009.	Medicare	Advantage	members	enrolled	in	network-based	products	increased	to	approximately	71%	in	January	2010.	We	expect	Medicare Advantage	membership	to	increase	by	240,000	to	260,000	members,	or	approximately	16%	to	17%,	in	2010.

Due	to	the	enactment	of	the	Act	in	July	2008,	beginning	in	2011,	sponsors	of	Medicare	Advantage	Private	Fee-For-Service,	or	PFFS,	plans	will	be	required	to contract	with	providers	to	establish	adequate	networks,	except	in	geographic	areas	that	CMS	determines	have	fewer	than	two	network-based	Medicare	Advantage	plans. We	have	564,200	PFFS	members,	or	approximately	37%	of	our	total	Medicare	Advantage	membership	at	December	31,	2009,	down	from	49%	at	December	31,	2008. Approximately	87%	of	our	PFFS	members	at	December	31,	2009	resided	in	geographies	where	we	have	developed	a	provider	network	and	offer	a	networked	plan.	We are	continuing	to	implement	various	operational	and	strategic	initiatives,	including	further	developing	our	networks	and	building	network-based	plan	offerings	to address	the	adequate	network	requirement.	We	anticipate	these	initiatives,	together	with	certain	counties'	exemption	from	the	network	requirement,	to	result	in	more than	95%	of	our	PFFS	members	having	the	choice	of	remaining	in	a	Humana	plan	in	2011.

Final	2010	Medicare	Advantage	rates	were	announced	by	CMS	on	April	6,	2009,	with	an	effective	rate	decrease	for	the	industry	of	4%	to	5%.	Based	on information	available	at	the	time	we	filed	our	2010	bids	in	June	2009,	we	believe	we	have	effectively	designed	Medicare	Advantage	products	that	address	the	lower	rates while	continuing	to	remain	competitive	compared	to	both	the	combination	of	original	Medicare	with	a	supplement	policy	as	well	as	other	Medicare	Advantage competitors	within	our	industry.	In	addition,	we	will	continue	to	pursue	our	cost-reduction	and	outcome-enhancing	strategies,	including	care	coordination	and	disease management,	to	mitigate	the	adverse	effects	of	this	rate	reduction	on	our	Medicare	Advantage	members.	Nonetheless,	there	can	be	no	assurance	that	we	will	be	able	to successfully	execute	operational	and	strategic	initiatives	with	respect	to	changes	in	the	Medicare	Advantage	program.	Failure	to	execute	these	strategies	may	result	in	a material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

We	also	offer	Medicare	stand-alone	prescription	drug	plans,	or	PDPs,	under	the	Medicare	Part	D	program.	These	plans	provide	varying	degrees	of	coverage.	In order	to	offer	these	plans	in	a	given	year,	in	June	of	the	preceding	year	we	must	submit	bids	to	CMS	for	approval.	During	2008,	we	experienced	prescription	drug	claim expenses	for	our	Medicare	stand-alone	PDPs	that	were	higher	than	we	had	originally	assumed	in	the	bid	that	we	submitted	to	CMS	in	June	2007.	These	higher	claim levels	for	our	Medicare	stand-alone	PDPs	reflected	a	combination	of	several	variances	between	our	actuarial	bid	assumptions	versus	our	experience.	These	variances resulted	from,	among	other	things,	differences	between	the	actuarial	utilization	assumptions	(which	are	our	attempts	to	predict	members'	future	utilization	of	drugs)	in the	bids	for	one	of	our	plans	versus	our	actual	claims

experience	in	2008,	as	well	as	an	increase	in	the	percentage	of	higher	cost	members.	These	issues	were	addressed	for	2009	based	on	enhancements	made	to	our	bid development	and	review	processes.	Our	Medicare	stand-alone	PDP	membership	declined	to	1,927,900	members	at	December	31,	2009,	down	1,138,700	members,	or 37.1%,	from	December	31,	2008,	resulting	primarily	from	our	competitive	positioning	as	we	realigned	stand-alone	PDP	premium	and	benefit	designs	to	correspond	with our	historical	prescription	drug	claims	experience.	These	actions	also	resulted	in	a	substantial	decline	in	our	stand-alone	PDP	benefit	ratio	for	2009	compared	to	2008. We	expect	Medicare	stand-alone	PDP	membership	to	decrease	by	50,000	to	100,000	members,	or	approximately	3%	to	5%,	in	2010	as	we	continue	to	price	and	design benefits	to	correspond	with	our	historical	experience.

Our	quarterly	Government	segment	earnings	and	operating	cash	flows	are	impacted	by	the	Medicare	Part	D	benefit	design	and	changes	in	the	composition	of	our membership.	The	Medicare	Part	D	benefit	design	results	in	coverage	that	varies	as	a	member's	cumulative	out-of-pocket	costs	pass	through	successive	stages	of	a member's	plan	period	which	begins	annually	on	January	1	for	renewals.	These	plan	designs	generally	result	in	us	sharing	a	greater	portion	of	the	responsibility	for	total prescription	drug	costs	in	the	early	stages	and	less	in	the	latter	stages.	As	a	result,	the	Government	segment's	benefit	ratio	generally	improves	as	the	year	progresses.	In addition,	the	number	of	low-income	senior	members	as	well	as	year-over-year	changes	in	the	mix	of	membership	in	our	stand-alone	PDP	products	affect	the	quarterly benefit	ratio	pattern.

Our	military	services	business	primarily	consists	of	the	TRICARE	South	Region	contract	which	covers	benefits	for	healthcare	services	provided	to	beneficiaries through	March	31,	2010.	On	December	16,	2009,	we	were	notified	by	Department	of	Defense	TRICARE	Management	Activity,	or	TMA,	that	it	intends	to	exercise	its options	to	extend	the	TRICARE	South	Region	contract	for	Option	Period	VII	and	Option	Period	VIII.	The	exercise	of	these	option	periods	would	effectively	extend	the TRICARE	South	Region	contract	through	March	31,	2011.	In	July	2009,	we	were	notified	by	the	Department	of	Defense	that	we	were	not	awarded	the	third	generation TRICARE	program	contract	for	the	South	Region	which	had	been	subject	to	competing	bids.	We	filed	a	protest	with	the	Government	Accountability	Office,	or	GAO,	in connection	with	the	award	to	another	contractor	citing	discrepancies	between	the	award	criteria	and	procedures	prescribed	in	the	request	for	proposals	issued	by	the	DoD and	those	that	appear	to	have	been	used	by	the	DoD	in	making	its	contractor	selection.	In	October	2009,	we	learned	that	the	GAO	had	upheld	our	protest,	determining that	the	TMA	evaluation	of	our	proposal	had	unreasonably	failed	to	fully	recognize	and	reasonably	account	for	the	likely	cost	savings	associated	with	our	record	of obtaining	network	provider	discounts	from	our	established	network	in	the	South	Region.	On	December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO	of	its intent	to	implement	corrective	action	consistent	with	the	discussion	contained	within	the	GAO's	decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able	to determine	what	actions	TMA	will	take	in	response	to	recommendations	by	the	GAO,	nor	can	we	determine	whether	or	not	the	protest	decision	by	the	GAO	will	have	any effect	upon	the	ultimate	disposition	of	the	contract	award.	For	2009,	premiums	and	ASO	fees	associated	with	the	TRICARE	South	Region	contract	were	$3.4	billion,	or 11.2%	of	our	total	premiums	and	ASO	fees.	We	are	continuing	to	evaluate	issues	associated	with	our	military	services	businesses	such	as	potential	impairment	of	certain assets	primarily	consisting	of	goodwill,	which	had	a	carrying	value	of	$49.8	million	at	December	31,	2009,	potential	exit	costs,	possible	asset	sales,	and	a	strategic assessment	of	ancillary	businesses.	Goodwill	was	not	impaired	at	December	31,	2009.

# Commercial	Segment

Commercial	segment	pretax	earnings,	impacted	by	the	economic	recession	and	the	highly	competitive	environment	partially	offset	by	higher	investment	income, decreased	by	$103.5	million,	or	49.8%,	for	2009	compared	to	2008.	Commercial	segment	medical	membership	at	December	31,	2009	of	3,410,800	decreased	210,000 members,	or	5.8%	from	December	31,	2008.	The	decline	in	membership	primarily	was	a	result	of	the	impact	of	the	economic	recession,	including	the	loss	of	two	larger ASO	accounts.	The	economic	recession	has	led	to	increased	in-group	member	attrition	as	employers	reduce	their	workforce	levels	primarily	through	reductions	of	less experienced	workers.	As	a	result,	we	experienced	higher	utilization	of	benefits,	mainly	in	our	fully-insured	group	accounts,	primarily	due	to	the	shift	in	the	mix	of members	to	an	older	workforce	having	more	health	care	needs,	as	well	as	members	utilizing	more	benefits	ahead	of	actual	or	perceived	layoffs,	members

seeking	to	maximize	their	benefits	once	their	deductibles	are	met,	and	increased	COBRA	participation.	The	membership	declines	were	partially	offset	by	enrollment gains	in	our	individual	product,	a	strategic	area	of	commercial	growth.	Individual	membership	at	December	31,	2009	increased	13.0%	from	December	31,	2008.	This increase	in	individual	membership,	together	with	administrative	costs	associated	with	increased	business	for	our	mail-order	pharmacy,	led	to	a	higher	Commercial segment	SG&A	expense	ratio.	We	expect	Commercial	segment	medical	membership	to	decline	by	160,000	to	180,000	members	in	2010.

# Financial	Position

At	December	31,	2009,	cash,	cash	equivalents	and	our	investment	securities	totaled	$9.1	billion,	or	64.4%	of	total	assets,	with	17.7%	of	the	$9.1	billion	invested in	cash	and	cash	equivalents.	Investment	securities	consist	of	debt	securities	of	investment-grade	quality	with	an	average	credit	rating	by	S&P	of	AA+	at	December	31, 2009	and	an	average	duration	of	approximately	4.5	years.	Including	cash	and	cash	equivalents,	the	average	duration	of	our	investment	portfolio	was	approximately	3.8 years.	We	had	$5.5	million	of	mortgage-backed	securities	associated	with	Alt-A	or	subprime	loans	at	December	31,	2009	and	no	collateralized	debt	obligations.

Our	net	unrealized	position	improved	$301.3	million	from	a	net	unrealized	loss	position	of	$229.9	million	at	December	31,	2008	to	a	net	unrealized	gain	position of	$71.4	million	at	December	31,	2009.	Gross	unrealized	losses	were	$78.4	million	at	December	31,	2009	compared	to	$313.0	million	at	December	31,	2008.	Gross unrealized	gains	were	$149.8	million	at	December	31,	2009	compared	to	$83.2	million	at	December	31,	2008.	All	issuers	of	securities	we	own	trading	at	an	unrealized loss	remain	current	on	all	contractual	payments.	We	believe	these	unrealized	losses	primarily	were	caused	by	an	increase	in	market	interest	rates	and	tighter	liquidity conditions	in	the	current	markets	than	when	the	securities	were	purchased.	As	of	December	31,	2009,	we	do	not	intend	to	sell	the	securities	with	an	unrealized	loss position	in	accumulated	other	comprehensive	income	and	it	is	not	likely	that	we	will	be	required	to	sell	these	securities	before	recovery	of	their	amortized	costs	basis, and	as	a	result,	we	believe	that	the	securities	with	an	unrealized	loss	are	not	other-than-temporarily	impaired	as	of	December	31,	2009.

During	2008,	we	recognized	other-than-temporary	impairments	of	$103.1	million	of	which	$68.7	million	resulted	from	investments	in	Lehman	Brothers	Holdings Inc.,	or	Lehman,	or	its	subsidiaries.	Lehman	and	certain	of	its	subsidiaries	filed	for	bankruptcy	protection	in	2008.	The	other	impairments	primarily	relate	to	declines	in values	of	securities,	primarily	associated	with	the	financial	services	industry.	Of	the	$103.1	million,	$48.5	million	was	allocated	to	the	Government	segment	and	$54.6 million	was	allocated	to	the	Commercial	segment.	There	were	no	material	other-than-temporary	impairments	in	2009.

We	continuously	review	our	investment	portfolios.	There	is	a	continuing	risk	that	further	declines	in	fair	value	may	occur	and	additional	material	realized	losses from	sales	or	other-than-temporary	impairments	may	be	recorded	in	future	periods.

In	addition,	in	the	fall	of	2008	we	terminated	all	fixed	to	variable	interest-rate	swap	agreements	outstanding	associated	with	our	senior	notes	based	on	recent changes	in	the	credit	market	environment.	In	exchange	for	terminating	these	interest-rate	swap	agreements,	we	received	cash	of	$93.0	million	representing	the	fair	value of	the	swap	assets.	This	transaction	also	fixed	the	interest	rate	on	our	senior	notes	to	a	weighted-average	rate	of	6.08%.	We	may	re-enter	into	swap	agreements	in	the future	depending	on	market	conditions	and	other	factors.

We	believe	our	cash	balances,	investment	securities,	operating	cash	flows,	and	funds	available	under	our	credit	agreement	or	from	other	public	or	private financing	sources,	taken	together,	provide	adequate	resources	to	fund	ongoing	operating	and	regulatory	requirements,	future	expansion	opportunities,	and	capital expenditures	in	the	foreseeable	future,	as	well	as	to	refinance	or	repay	debt.	Our	long-term	debt,	consisting	primarily	of	senior	notes,	of	$1,678.2	million	represented 22.5%	of	total	capitalization	at	December	31,	2009,	declining	from	30.3%	at	December	31,	2008.	The	earliest	maturity	of	our	senior	notes	is	in	June	2016.	We	have available	a	5-year,	$1.0	billion	unsecured	revolving	credit	agreement	which	expires	in	July	2011.	As	of	December	31,	2009,	there	were	no	borrowings	outstanding	under this	credit	agreement.

Certain	of	our	subsidiaries	operate	in	states	that	regulate	the	payment	of	dividends,	loans,	or	other	cash	transfers	to	Humana	Inc.,	our	parent	company,	and	require minimum	levels	of	equity	as	well	as	limit	investments	to	approved	securities.	The	amount	of	dividends	that	may	be	paid	to	Humana	Inc.	by	these	subsidiaries,	without prior	approval	by	state	regulatory	authorities,	is	limited	based	on	the	entity's	level	of	statutory	income	and	statutory	capital	and	surplus.	In	most	states,	prior	notification is	provided	before	paying	a	dividend	even	if	approval	is	not	required.	In	2009,	our	subsidiaries	paid	dividends	of	$774.1	million	to	the	parent	compared	to	$296.0 million	in	2008.	In	addition,	the	parent	made	capital	contributions	to	our	subsidiaries	of	$132.3	million	in	2009	compared	to	$242.8	million	in	2008.

Based	on	the	statutory	financial	statements	as	of	December	31,	2009,	we	maintained	aggregate	statutory	capital	and	surplus	of	$3.6	billion	in	our	state	regulated subsidiaries,	$1.2	billion	above	the	aggregate	$2.4	billion	in	applicable	statutory	requirements	which	would	trigger	any	regulatory	action	by	the	respective	states.

# Other	Highlights

•Earnings	increased	60.6%	to	$6.15	per	diluted	common	share	in	2009	from	$3.83	per	diluted	common	share	in	2008,	primarily	reflecting	substantially	lower stand-alone	PDP	claims	expenses.

•	 Cash	flows	from	operations	increased	$439.3	million	to	$1,421.6	million	for	the	year	ended	December	31,	2009	compared	to	$982.3	million	for	the	year ended	December	31,	2008.	The	increase	primarily	resulted	from	increased	earnings	associated	with	lower	stand-alone	PDP	prescription	drug	claims.

We	intend	for	the	discussion	of	our	financial	condition	and	results	of	operations	that	follows	to	assist	in	the	understanding	of	our	financial	statements	and	related changes	in	certain	key	items	in	those	financial	statements	from	year	to	year,	including	the	primary	factors	that	accounted	for	those	changes.

# Recent	Acquisitions

On	October	31,	2008	we	acquired	PHP	Companies,	Inc.	(d/b/a	Cariten	Healthcare),	or	Cariten,	for	cash	consideration	of	approximately	$256.1	million.	The Cariten	acquisition	increased	our	presence	in	eastern	Tennessee,	adding	approximately	49,700	commercial	fully-insured	members,	21,600	commercial	ASO	members, and	46,900	Medicare	HMO	members.	This	acquisition	also	added	approximately	85,700	Medicaid	ASO	members	under	a	contract	which	expired	on	December	31,	2008 and	was	not	renewed.

On	August	29,	2008,	we	acquired	Metcare	Health	Plans,	Inc.,	or	Metcare,	for	cash	consideration	of	approximately	$14.9	million.	The	acquisition	expanded	our Medicare	HMO	membership	in	central	Florida,	adding	approximately	7,300	members.

On	May	22,	2008,	we	acquired	OSF	Health	Plans,	Inc.,	or	OSF,	a	managed	care	company	serving	both	Medicare	and	commercial	members	in	central	Illinois,	for cash	consideration	of	approximately	$87.3	million.	This	acquisition	expanded	our	presence	in	Illinois,	broadening	our	ability	to	serve	multi-location	employers	with	a wider	range	of	products,	including	our	specialty	offerings.	The	acquisition	added	approximately	33,400	commercial	fully-insured	members,	29,700	commercial	ASO members,	and	14,000	Medicare	HMO	and	PPO	members.

On	April	30,	2008,	we	acquired	UnitedHealth	Group's	Las	Vegas,	Nevada	individual	SecureHorizons	Medicare	Advantage	HMO	business,	or	SecureHorizons, for	cash	consideration	of	approximately	$185.3	million,	plus	subsidiary	capital	and	surplus	requirements	of	$40	million.	The	acquisition	expanded	our	presence	in	the Las	Vegas	market,	adding	approximately	26,700	Medicare	HMO	members.

On	November	30,	2007,	we	acquired	KMG	America	Corporation,	or	KMG,	for	cash	consideration	of	$155.2	million	plus	the	assumption	of	$36.1	million	of	long- term	debt.	KMG	provides	long-duration	insurance	benefits

including	supplemental	health	and	life	products.	This	acquisition	added	approximately	95,900	members,	primarily	commercial	ASO.	On	October	1,	2007,	we	acquired CompBenefits	Corporation,	or	CompBenefits,	for	cash	consideration	of	$369.6	million.	CompBenefits	provides	dental	and	vision	insurance	benefits	and	added approximately	4.4	million	specialty	members.	These	acquisitions	expanded	our	commercial	product	offerings	allowing	for	significant	cross-selling	opportunities	with our	medical	insurance	products.

On	March	1,	2007,	we	acquired	DefenseWeb	Technologies,	Inc.,	or	DefenseWeb,	a	company	responsible	for	delivering	customized	software	solutions	for	the Department	of	Defense,	for	cash	consideration	of	$27.5	million.

Certain	of	these	transactions	are	more	fully	described	in	Note	3	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and Supplementary	Data.

# Comparison	of	Results	of	Operations	for	2009	and	2008

Certain	financial	data	for	our	two	segments	was	as	follows	for	the	years	ended	December	31,	2009	and	2008:

|  | 2009 | 2008 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tthousands) |  |  |
| Premium\trevenues: |  |  |  |  |
| Medicare\tAdvantage | $16,413,301 | $13,777,999 | $2,635,302 | 19.1% |
| Medicare\tstand-alone\tPDP | 2,327,418 | 3,380,400 | (1,052,982) | (31.1)% |
| Total\tMedicare | \t 18,740,719 | \t 17,158,399 | 1,582,320 | 9.2% |
| Military\tservices | 3,426,739 | 3,218,270 | 208,469 | 6.5% |
| Medicaid | 646,195 | 591,535 | 54,660 | 9.2% |
| Total\tGovernment | \t 22,813,653 | \t 20,968,204 | 1,845,449 | 8.8% |
| Fully-insured | 6,185,158 | 6,169,403 | 15,755 | 0.3% |
| Specialty | 927,940 | 927,237 | 703 | 0.1% |
| Total\tCommercial | 7,113,098 | 7,096,640 | 16,458 | 0.2% |
| Total | $29,926,751 | $28,064,844 | $1,861,907 | 6.6% |
| Administrative\tservices\tfees: |  |  |  |  |
| Government | $108,442 | $85,868 | $22,574 | 26.3% |
| Commercial | 387,693 | 366,011 | 21,682 | 5.9% |
| Total | $496,135 | $451,879 | $44,256 | 9.8% |
| Income\tbefore\tincome\ttaxes: |  |  |  |  |
| Government | $1,497,606 | $785,240 | $712,366 | 90.7% |
| Commercial | 104,154 | 207,608 | (103,454) | (49.8)% |
| Total | $1,601,760 | $992,848 | $608,912 | 61.3% |
| Benefit\tratios(a): |  |  |  |  |
| Government | 83.5% | 85.9% |  | (2.4)% |
| Commercial | 80.6% | 80.3% |  | 0.3% |
| Total | 82.8% | 84.5% |  | (1.7)% |
| SG&amp;A\texpense\tratios(b): |  |  |  |  |
| Government | 10.3% | 10.6% |  | (0.3)% |
| Commercial | 24.1% | 22.4% |  | 1.7% |
| Total | 13.8% | 13.7% |  | 0.1% |

(a) Represents	total	benefit	expenses	as	a	percentage	of	premium	revenues.	Also	known	as	the	benefit	ratio.

(b) Represents	total	selling,	general,	and	administrative	expenses	(SG&A)	as	a	percentage	of	premium	revenues,	administrative	services	fees,	and	other	revenues.

Also	known	as	the	SG&A	expense	ratio.

Ending	membership	was	as	follows	at	December	31,	2009	and	2008:

|  | 2009 | 2008 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Medical\tMembership: |  |  |  |  |
| Government\tsegment: |  |  |  |  |
| Medicare\tAdvantage | 1,508,500 | 1,435,900 | 72,600 | 5.1% |
| Medicare\tstand-alone\tPDP | 1,927,900 | 3,066,600 | (1,138,700) | (37.1)% |
| Total\tMedicare | 3,436,400 | 4,502,500 | (1,066,100) | (23.7)% |
| Military\tservices | 1,756,000 | 1,736,400 | 19,600 | 1.1% |
| Military\tservices\tASO | 1,278,400 | 1,228,300 | 50,100 | 4.1% |
| Total\tmilitary\tservices | 3,034,400 | 2,964,700 | 69,700 | 2.4% |
| Medicaid | 401,700 | 385,400 | 16,300 | 4.2% |
| Medicaid\tASO | — | 85,700 | (85,700) | (100.0)% |
| Total\tMedicaid | 401,700 | 471,100 | (69,400) | (14.7)% |
| Total\tGovernment | 6,872,500 | 7,938,300 | (1,065,800) | (13.4)% |
| Commercial\tsegment: |  |  |  |  |
| Fully-insured | 1,839,500 | 1,978,800 | (139,300) | (7.0)% |
| ASO | 1,571,300 | 1,642,000 | (70,700) | (4.3)% |
| Total\tCommercial | 3,410,800 | 3,620,800 | (210,000) | (5.8)% |
| Total\tmedical\tmembership | 10,283,300 | 11,559,100 | (1,275,800) | (11.0)% |
| Specialty\tMembership: |  |  |  |  |
| Commercial\tsegment(a) | 7,200,100 | 6,713,200 | 486,900 | 7.3% |

(a) The	Commercial	segment	provides	a	full	range	of	insured	specialty	products	including	dental,	vision,	and	other	supplemental	products.	Members	included	in	these products	may	not	be	unique	to	each	product	since	members	have	the	ability	to	enroll	in	multiple	products.

These	tables	of	financial	data	should	be	reviewed	in	connection	with	the	discussion	that	follows.

# Summary

Net	income	was	$1,039.7	million,	or	$6.15	per	diluted	common	share,	in	2009	compared	to	$647.2	million,	or	$3.83	per	diluted	common	share,	in	2008.	The year-over-year	increase	primarily	reflects	higher	operating	earnings	in	our	Government	segment	as	a	result	of	significantly	lower	prescription	drug	claims	expenses associated	with	our	Medicare	stand-alone	PDP	products.

# Premium	Revenues	and	Medical	Membership

Premium	revenues	increased	$1.8	billion,	or	6.6%,	to	$29.9	billion	for	2009,	compared	to	$28.1	billion	for	2008	primarily	due	to	higher	premium	revenues	in	the Government	segment.	Premium	revenues	reflect	changes	in	membership	and	increases	in	average	per	member	premiums.	Items	impacting	average	per	member premiums	include	changes	in	premium	rates	as	well	as	changes	in	the	geographic	mix	of	membership,	the	mix	of	product	offerings,	and	the	mix	of	benefit	plans	selected by	our	membership.

Government	segment	premium	revenues	increased	$1.8	billion,	or	8.8%,	to	$22.8	billion	for	2009	compared	to	$21.0	billion	for	2008	primarily	attributable	to higher	average	Medicare	Advantage	membership	and	an	increase	in	per	member	premiums	partially	offset	by	a	decrease	in	our	Medicare	stand-alone	PDP	membership.

Average	membership	is	calculated	by	summing	the	ending	membership	for	each	month	in	a	period	and	dividing	the	result	by	the	number	of	months	in	a	period.	Average Medicare	Advantage	membership	increased	11.5%	in	2009	compared	to	2008,	including	the	impact	from	the	2008	acquisitions	of	Cariten,	Metcare,	OSF,	and SecureHorizons,	discussed	previously.	Sales	of	our	PPO	products	drove	the	majority	of	the	72,600	increase	in	Medicare	Advantage	members	since	December	31,	2008. Medicare	Advantage	per	member	premiums	increased	6.8%	during	2009	compared	to	2008	reflecting	the	effect	of	introducing	member	premiums	for	most	of	our Medicare	Advantage	products.	Medicare	stand-alone	PDP	premium	revenues	decreased	$1.1	billion,	or	31.1%,	during	2009	compared	to	2008	primarily	due	to	a 1,138,700,	or	37.1%,	decrease	in	PDP	membership	since	December	31,	2008,	principally	resulting	from	our	competitive	positioning	as	we	realigned	stand-alone	PDP premium	and	benefit	designs	to	correspond	with	our	historical	prescription	drug	claims	experience.

Commercial	segment	premium	revenues	increased	$16.5	million,	or	0.2%,	to	$7.1	billion	for	2009	primarily	due	to	the	acquisitions	of	OSF	and	Cariten	in	the second	and	fourth	quarters	of	2008,	respectively,	and	an	increase	in	per	member	premiums,	substantially	offset	by	a	decline	in	fully-insured	membership.	Per	member premiums	for	fully-insured	group	accounts	increased	5.0%	during	2009	compared	to	2008.	Fully-insured	membership	decreased	7.0%,	or	139,300	members,	to 1,839,500	at	December	31,	2009	compared	to	1,978,800	at	December	31,	2008	primarily	due	to	the	impact	of	the	economic	recession	which	has	led	to	increased	in- group	member	attrition	as	employers	reduce	their	workforce	levels.

# Administrative	Services	Fees

Our	administrative	services	fees	were	$496.1	million	for	2009,	an	increase	of	$44.2	million,	or	9.8%,	from	$451.9	million	for	2008,	primarily	due	to	an	increase in	per	member	fees,	partially	offset	by	a	decline	in	Commercial	ASO	membership,	primarily	isolated	to	the	loss	of	two	larger	ASO	accounts.

# Investment	Income

Investment	income	totaled	$296.3	million	for	2009,	an	increase	of	$76.1	million	from	$220.2	million	for	2008	primarily	reflecting	net	realized	losses	in	2008	of $79.4	million	compared	to	net	realized	gains	of	$19.5	million	in	2009.	Net	realized	losses	in	2008	primarily	resulted	from	other-than-temporary	impairments	in	our investment	and	securities	lending	portfolios	of	$103.1	million.	Excluding	the	change	associated	with	net	realized	gains/losses,	investment	income	decreased	primarily due	to	lower	interest	rates,	partially	offset	by	higher	average	invested	balances	as	a	result	of	the	reinvestment	of	operating	cash	flow.

# Other	Revenue

Other	revenue	totaled	$241.2	million	for	2009,	an	increase	of	$31.8	million	from	$209.4	million	for	2008.	The	increase	primarily	was	attributable	to	increased revenue	from	growth	related	to	RightSourceRx ,	our	mail-order	pharmacy. SM

# Benefit	Expenses

Consolidated	benefit	expense	was	$24.8	billion	for	2009,	an	increase	of	$1.1	billion,	or	4.5%,	from	$23.7	billion	for	2008.	The	increase	primarily	was	driven	by an	increase	in	Government	segment	benefit	expense,	as	described	below.

The	consolidated	benefit	ratio	for	2009	was	82.8%,	a	170	basis	point	decrease	from	84.5%	for	2008.	The	decrease	primarily	was	attributable	to	a	decrease	in	the Government	segment	benefit	ratio	as	described	below.

The	Government	segment's	benefit	expenses	increased	$1.0	billion,	or	5.7%,	during	2009	compared	to	2008	primarily	due	to	an	increase	in	the	average	number	of Medicare	Advantage	members	and	the	impact	from	the	acquisitions	of	Cariten,	Metcare,	OSF,	and	SecureHorizons.	The	Government	segment's	benefit	ratio	for	2009

was	83.5%,	a	240	basis	point	decrease	from	2008	of	85.9%,	primarily	driven	by	a	320	basis	point	decline	in	the	Medicare	benefit	ratio.	The	decline	in	the	Medicare benefit	ratio	primarily	resulted	from	a	substantial	decline	in	Medicare	stand-alone	PDP	benefit	expenses	as	a	result	of	our	competitive	positioning	as	we	realigned	stand- alone	PDP	premium	and	benefit	designs	to	correspond	with	our	historical	prescription	drug	claims	experience.

The	Commercial	segment's	benefit	expenses	increased	$36.3	million,	or	0.6%,	during	2009	compared	to	2008	primarily	due	to	the	OSF	and	Cariten	acquisitions	in the	second	and	fourth	quarters	of	2008,	respectively.	The	benefit	ratio	for	the	Commercial	segment	of	80.6%	for	2009	increased	30	basis	points	from	the	2008	benefit ratio	of	80.3%,	primarily	reflecting	higher	utilization	associated	with	the	general	economy	and	the	highly	competitive	environment,	as	well	as	the	impact	of	the	H1N1 virus,	partially	offset	by	an	increase	in	per	member	premiums.	We	experienced	higher	utilization	of	benefits	in	our	fully-insured	group	accounts	as	in-group	attrition, primarily	as	a	result	of	reductions	of	less	experienced	workers,	has	led	to	a	shift	in	the	mix	of	members	to	an	older	workforce	having	more	health	care	needs,	as	well	as members	utilizing	more	benefits	ahead	of	actual	or	perceived	layoffs,	members	seeking	to	maximize	their	benefits	once	their	deductibles	are	met,	and	increased	COBRA participation.

# SG&A	Expense

Consolidated	SG&A	expenses	increased	$282.9	million,	or	7.2%,	during	2009	compared	to	2008.	The	increase	primarily	resulted	from	an	increase	in	the	average number	of	our	employees	due	to	the	Medicare	growth	and	higher	average	individual	product	membership.	The	average	number	of	our	employees	increased	1,600	to 28,500	for	2009	from	26,900	for	2008,	or	5.9%.

The	consolidated	SG&A	expense	ratio	for	2009	was	13.8%,	increasing	10	basis	points	from	13.7%	for	2008	primarily	due	to	an	increase	in	the	Commercial segment	SG&A	expense	ratio	as	discussed	below.	The	consolidated	SG&A	expense	ratio	is	expected	to	decrease	to	a	range	of	13.0%	to	13.5%	for	2010	from	efforts	to realign	our	cost	structure.

Our	Government	and	Commercial	segments	incur	both	direct	and	shared	indirect	overhead	SG&A	expenses.	We	allocate	the	indirect	overhead	expenses	shared	by the	two	segments	primarily	as	a	function	of	revenues.	As	a	result,	the	profitability	of	each	segment	is	interdependent.

SG&A	expenses	in	the	Government	segment	increased	$137.0	million,	or	6.2%,	during	2009	compared	to	2008.	The	Government	segment	SG&A	expense	ratio decreased	30	basis	points	from	10.6%	for	2008	to	10.3%	for	2009.	The	decrease	primarily	resulted	from	efficiency	gains	associated	with	servicing	higher	average Medicare	Advantage	membership.	For	example,	during	2009	we	transitioned	the	recently	acquired	OSF	and	Metcare	members	into	our	primary	Medicare	service platform	and	eliminated	the	cost	of	having	duplicate	platforms.

Commercial	segment	SG&A	expenses	increased	$145.9	million,	or	8.5%,	during	2009	compared	to	2008.	The	Commercial	segment	SG&A	expense	ratio increased	170	basis	points	from	22.4%	for	2008	to	24.1%	for	2009.	The	increase	primarily	was	due	to	administrative	costs	associated	with	increased	business	for	our mail-order	pharmacy	and	higher	average	individual	product	membership.	Average	individual	product	membership	increased	17.6%	during	2009	compared	to	2008. Individual	accounts	bear	a	higher	SG&A	expense	ratio	due	to	higher	distribution	costs	as	compared	to	larger	accounts.

# Depreciation	and	Amortization

Depreciation	and	amortization	for	2009	totaled	$250.3	million	compared	to	$220.4	million	for	2008,	an	increase	of	$29.9	million,	or	13.6%,	primarily	reflecting depreciation	expense	associated	with	capital	expenditures	since	December	31,	2008.

# Interest	Expense

Interest	expense	was	$105.8	million	for	2009,	compared	to	$80.3	million	for	2008,	an	increase	of	$25.5	million,	primarily	due	to	higher	interest	rates	and	higher average	outstanding	debt.	In	the	second	quarter	of	2008,	we	issued	$500	million	of	7.20%	senior	notes	due	June	15,	2018	and	$250	million	of	8.15%	senior	notes	due June	15,	2038,	the	proceeds	of	which	were	used	for	the	repayment	of	the	outstanding	balance	under	our	credit	agreement.	The	weighted	average	effective	interest	rate	for all	of	our	long-term	debt	was	5.97%	for	2009	and	4.73%	for	2008.

# Income	Taxes

Our	effective	tax	rate	for	2009	of	35.1%	compared	to	the	effective	tax	rate	of	34.8%	for	2008.	The	increase	was	due	to	a	lower	proportion	of	tax	exempt investment	income	to	pretax	income	substantially	offset	by	the	reduction	of	the	$16.8	million	liability	for	unrecognized	tax	benefits	in	the	first	quarter	of	2009	as	a	result of	audit	settlements.	See	Note	10	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data	for	a	complete reconciliation	of	the	federal	statutory	rate	to	the	effective	tax	rate.	We	expect	the	2010	effective	tax	rate	to	be	approximately	36.0%.

|  | 2008 | 2007 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tthousands) |  |  |
| Premium\trevenues: |  |  |  |  |
| Medicare\tAdvantage | $13,777,999 | $11,173,417 | $2,604,582 | 23.3% |
| Medicare\tstand-alone\tPDP | 3,380,400 | 3,668,425 | (288,025) | (7.9)% |
| Total\tMedicare | \t 17,158,399 | \t 14,841,842 | \t 2,316,557 | 15.6% |
| Military\tservices | 3,218,270 | 2,839,790 | 378,480 | 13.3% |
| Medicaid | 591,535 | 555,594 | 35,941 | 6.5% |
| Total\tGovernment | \t 20,968,204 | \t 18,237,226 | \t 2,730,978 | 15.0% |
| Fully-insured | 6,169,403 | 5,663,000 | 506,403 | 8.9% |
| Specialty | 927,237 | 534,121 | 393,116 | 73.6% |
| Total\tCommercial | 7,096,640 | 6,197,121 | 899,519 | 14.5% |
| Total | $28,064,844 | $24,434,347 | $3,630,497 | 14.9% |
| Administrative\tservices\tfees: |  |  |  |  |
| Government | $85,868 | $73,659 | $12,209 | 16.6% |
| Commercial | 366,011 | 317,856 | 48,155 | 15.1% |
| Total | $451,879 | $391,515 | $60,364 | 15.4% |
| Income\tbefore\tincome\ttaxes: |  |  |  |  |
| Government | $785,240 | $1,027,531 | $(242,291) | (23.6)% |
| Commercial | 207,608 | 261,769 | (54,161) | (20.7)% |
| Total | $992,848 | $1,289,300 | $(296,452) | (23.0)% |
| Benefit\tratios(a): |  |  |  |  |
| Government | 85.9% | 83.8% |  | 2.1% |
| Commercial | 80.3% | 80.5% |  | (0.2)% |
| Total | 84.5% | 83.0% |  | 1.5% |
| SG&amp;A\texpense\tratios(b): |  |  |  |  |
| Government | 10.6% | 11.2% |  | (0.6)% |
| Commercial | 22.4% | 21.5% |  | 0.9% |
| Total | 13.7% | 13.9% |  | (0.2)% |

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

|  | 2008 | 2007 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Medical\tMembership: |  |  |  |  |
| Government\tsegment: |  |  |  |  |
| Medicare\tAdvantage | 1,435,900 | 1,143,000 | 292,900 | 25.6% |
| Medicare\tstand-alone\tPDP | 3,066,600 | 3,442,000 | (375,400) | (10.9)% |
| Total\tMedicare | 4,502,500 | 4,585,000 | (82,500) | (1.8)% |
| Military\tservices | 1,736,400 | 1,719,100 | 17,300 | 1.0% |
| Military\tservices\tASO | 1,228,300 | 1,146,800 | 81,500 | 7.1% |
| Total\tmilitary\tservices | 2,964,700 | 2,865,900 | 98,800 | 3.4% |
| Medicaid | 385,400 | 384,400 | 1,000 | 0.3% |
| Medicaid\tASO | 85,700 | 180,600 | (94,900) | (52.5)% |
| Total\tMedicaid | 471,100 | 565,000 | (93,900) | (16.6)% |
| Total\tGovernment | 7,938,300 | 8,015,900 | (77,600) | (1.0)% |
| Commercial\tsegment: |  |  |  |  |
| Fully-insured | 1,978,800 | 1,808,600 | 170,200 | 9.4% |
| ASO | 1,642,000 | 1,643,000 | (1,000) | (0.1)% |
| Total\tCommercial | 3,620,800 | 3,451,600 | 169,200 | 4.9% |
| Total\tmedical\tmembership | 11,559,100 | 11,467,500 | 91,600 | 0.8% |
| Specialty\tMembership: |  |  |  |  |
| Commercial\tsegment(a) | 6,713,200 | 6,643,800 | 69,400 | 1.0% |

Net	income	was	$647.2	million,	or	$3.83	per	diluted	common	share,	in	2008	compared	to	$833.7	million,	or	$4.91	per	diluted	common	share,	in	2007.	The	year- over-year	decline	primarily	reflects	lower	operating	earnings	in	our	Government	segment	as	a	result	of	higher	expenses	associated	with	our	Medicare	stand-alone	PDP products	and	lower	net	investment	income	primarily	due	to	other-than-temporary	impairments	in	our	investment	portfolios	of	$65.3	million,	or	$0.39	per	diluted common	share.

Premium	revenues	increased	$3.7	billion,	or	14.9%,	to	$28.1	billion	for	2008,	compared	to	$24.4	billion	for	2007	primarily	due	to	higher	premium	revenues	in both	the	Government	and	Commercial	segments.	Premium	revenues	reflect	changes	in	membership	and	increases	in	average	per	member	premiums.	Items	impacting average	per	member	premiums	include	changes	in	premium	rates	as	well	as	changes	in	the	geographic	mix	of	membership,	the	mix	of	product	offerings,	and	the	mix	of benefit	plans	selected	by	our	membership.

Government	segment	premium	revenues	increased	$2.8	billion,	or	15.0%,	to	$21.0	billion	for	2008	compared	to	$18.2	billion	for	2007	primarily	attributable	to higher	average	Medicare	Advantage	membership	and

an	increase	in	per	member	premiums	partially	offset	by	a	decrease	in	our	Medicare	stand-alone	PDP	membership.	Average	Medicare	Advantage	membership	increased 18.7%	in	2008	compared	to	2007.	Sales	of	our	PPO	and	PFFS	products	drove	the	majority	of	the	292,900	increase	in	Medicare	Advantage	members	since	December	31, 2007.	The	Cariten,	OSF,	SecureHorizons,	and	Metcare	acquisitions	also	added	94,900	Medicare	HMO	and	PPO	members.	Medicare	Advantage	per	member	premiums increased	3.9%	during	2008	compared	to	2007.	Medicare	stand-alone	PDP	premium	revenues	decreased	7.9%	during	the	2008	period	compared	to	the	2007	period, primarily	due	to	a	375,400,	or	10.9%,	decrease	in	PDP	membership	since	December	31,	2007.

Commercial	segment	premium	revenues	increased	$0.9	billion,	or	14.5%,	to	$7.1	billion	for	2008	primarily	due	to	our	specialty	product	offerings,	including dental,	vision,	and	other	supplemental	health	and	life	products,	as	a	result	of	the	CompBenefits	and	KMG	acquisitions	in	the	fourth	quarter	of	2007,	as	well	as	strategic line-of-business	organic	growth.	Our	fully-insured	membership	increased	9.4%,	or	170,200	members,	to	1,978,800	at	December	31,	2008	compared	to	1,808,600	at December	31,	2007.	Excluding	83,100	fully-insured	members	added	with	the	acquisitions	of	Cariten	and	OSF,	the	increase	primarily	was	due	to	membership	gains	in Smart	products	and	other	consumer	offerings,	individual,	and	small	group	product	lines.

Our	administrative	services	fees	were	$451.9	million	for	2008,	an	increase	of	$60.4	million,	or	15.4%,	from	$391.5	million	for	2007,	primarily	due	to	higher rates,	a	shift	in	the	mix	of	Commercial	segment	membership	towards	higher	rate	groups,	and	the	impact	from	acquisitions.

Investment	income	totaled	$220.2	million	for	2008,	a	decrease	of	$94.0	million	from	$314.2	million	for	2007,	primarily	reflecting	other-than-temporary impairments	in	our	investment	and	securities	lending	portfolios	of	$103.1	million	recorded	during	2008.	Of	the	$103.1	million,	$48.5	million	was	allocated	to	the Government	segment	and	$54.6	million	was	allocated	to	the	Commercial	segment.	Excluding	these	realized	losses,	investment	income	increased	primarily	due	to	higher average	invested	balances	and	net	realized	capital	gains,	partially	offset	by	lower	interest	rates.	Higher	average	invested	balances	primarily	resulted	from	the reinvestment	of	operating	cash	flow	and	the	acquired	investment	portfolio	related	to	the	KMG	acquisition.

Other	revenue	totaled	$209.4	million	for	2008,	an	increase	of	$59.5	million	from	$149.9	million	for	2007.	The	increase	primarily	was	attributable	to	increased revenue	from	growth	related	to	RightSourceRx ,	our	mail-order	pharmacy. SM

Consolidated	benefit	expense	was	$23.7	billion	for	2008,	an	increase	of	$3.4	billion,	or	17.0%,	from	$20.3	billion	for	2007.	The	increase	primarily	was	driven	by an	increase	in	Government	segment	benefit	expense.

The	consolidated	benefit	ratio	for	2008	was	84.5%,	a	150	basis	point	increase	from	83.0%	for	2007.	The	increase	primarily	was	attributable	to	a	higher Government	segment	benefit	ratio.

The	Government	segment's	benefit	expenses	increased	$2.7	billion,	or	17.9%,	during	2008	compared	to	2007	primarily	due	to	an	increase	in	the	average	number of	Medicare	Advantage	members.	The	Government	segment's	benefit	ratio	for	2008	was	85.9%,	a	210	basis	point	increase	from	2007	of	83.8%	primarily	due	to	a	higher Medicare	stand-alone	PDP	benefit	ratio	from	higher	prescription	drug	utilization	and	an	increase	in	the	percentage	of	higher	cost	members	in	our	Medicare	stand-alone prescription	drug	plans.

The	Commercial	segment's	benefit	expense	increased	$709.4	million,	or	14.2%,	from	2008	to	2007.	This	increase	primarily	resulted	from	the	CompBenefits	and KMG	acquisitions	in	the	fourth	quarter	of	2007,	an	increase	in	fully-insured	membership	and	an	increase	in	average	per	member	claim	costs	primarily	from	the	effects of	health	care	inflation.	The	benefit	ratio	for	the	Commercial	segment	of	80.3%	for	2008	decreased	20	basis	points	from	the	2007	benefit	ratio	of	80.5%	primarily reflecting	an	increase	in	average	members	in	our	specialty	products	from	the	acquisition	of	CompBenefits	in	the	fourth	quarter	of	2007	and	organic	growth	in	our individual	line	of	business.	Individual	and	specialty,	primarily	dental	and	vision,	accounts	generally	carry	a	lower	benefit	ratio	and	a	higher	SG&A	expense	ratio compared	to	larger	accounts	due	to	higher	distribution	costs.	See	related	SG&A	expense	ratio	discussion	in	the	following	section.

Consolidated	SG&A	expenses	increased	$468.2	million,	or	13.5%,	during	2008	compared	to	2007.	The	increases	primarily	resulted	from	an	increase	in	the number	of	employees	due	to	the	Medicare	growth,	and	the	CompBenefits	and	KMG	acquisitions.	The	number	of	employees	increased	by	3,900	to	28,900	at December	31,	2008	from	25,000	at	December	31,	2007,	or	15.6%.

The	consolidated	SG&A	expense	ratio	for	2008	was	13.7%,	decreasing	20	basis	points	from	13.9%	for	2007	primarily	due	to	improving	administrative	cost efficiency	associated	with	servicing	higher	average	Medicare	Advantage	and	Commercial	medical	membership,	partially	offset	by	growth	in	certain	of	our	businesses which	carry	a	higher	administrative	expense	load	such	as	mail-order	pharmacy,	specialty	products,	and	individual	medical	products.

Our	Government	and	Commercial	segments	bear	both	direct	and	shared	indirect	overhead	SG&A	expenses.	We	allocate	the	indirect	overhead	expenses	shared	by the	two	segments	primarily	as	a	function	of	revenues.	As	a	result,	the	profitability	of	each	segment	is	interdependent.

SG&A	expenses	in	the	Government	segment	increased	$180.9	million,	or	8.9%,	during	2008	compared	to	2007.	The	Government	segment	SG&A	expense	ratio decreased	60	basis	points	from	11.2%	for	2007	to	10.6%	for	2008.	The	decrease	primarily	resulted	from	efficiency	gains	associated	with	servicing	higher	average Medicare	Advantage	membership.

The	Commercial	segment	SG&A	expenses	increased	$287.3	million,	or	20.0%,	during	2008	compared	to	2007.	The	Commercial	segment	SG&A	expense	ratio increased	90	basis	points	from	21.5%	for	2007	to	22.4%	for	2008.	The	increases	primarily	were	due	to	an	increase	in	specialty	business,	including	the	acquisition	of CompBenefits	and	KMG	in	the	fourth	quarter	of	2007,	together	with	higher	average	individual	product	membership	and	increased	mail-order	pharmacy	business. Average	individual	product	membership	increased	40.5%	during	2008	compared	to	2007.	Specialty	and	individual	accounts	bear	a	higher	SG&A	expense	ratio	due	to higher	distribution	costs	as	compared	to	larger	accounts.

Depreciation	and	amortization	for	2008	totaled	$220.4	million	compared	to	$184.8	million	for	2007,	an	increase	of	$35.6	million,	or	19.3%,	reflecting	higher intangible	amortization	expense	due	to	acquisitions	and	increased	capital	expenditures.

Interest	expense	was	$80.3	million	for	2008,	compared	to	$68.9	million	for	2007,	an	increase	of	$11.4	million,	primarily	due	to	higher	average	outstanding	debt, partially	offset	by	lower	rates.

Our	effective	tax	rate	for	2008	of	34.8%	compared	to	the	effective	tax	rate	of	35.3%	for	2007.	The	decrease	primarily	was	due	to	a	lower	combined	state	income tax	rate	and	a	greater	proportion	of	tax-exempt	investment	income	to	total	pretax	income	in	2008.	See	Note	10	to	the	consolidated	financial	statements	included	in Item	8.—	Financial	Statements	and	Supplementary	Data	for	a	complete	reconciliation	of	the	federal	statutory	rate	to	the	effective	tax	rate.

# Liquidity

Our	primary	sources	of	cash	include	receipts	of	premiums,	ASO	fees,	and	investment	income,	as	well	as	proceeds	from	the	sale	or	maturity	of	our	investment securities	and	from	borrowings.	Our	primary	uses	of	cash	include	disbursements	for	claims	payments,	SG&A	expenses,	interest	on	borrowings,	taxes,	purchases	of investment	securities,	acquisitions,	capital	expenditures,	and	repayments	on	borrowings.	Because	premiums	generally	are	collected	in	advance	of	claim	payments	by	a period	of	up	to	several	months,	our	business	normally	should	produce	positive	cash	flows	during	periods	of	increasing	premiums	and	enrollment.	Conversely,	cash	flows would	be	negatively	impacted	during	periods	of	decreasing	premiums	and	enrollment.	The	use	of	operating	cash	flows	may	be	limited	by	regulatory	requirements	which require,	among	other	items,	that	our	regulated	subsidiaries	maintain	minimum	levels	of	capital.

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Net\tcash\tprovided\tby\toperating\tactivities | $1,421,582 | $982,310 | $1,224,262 |
| Net\tcash\tused\tin\tinvesting\tactivities | (1,859,261) | (498,324) | (1,845,391) |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities | 80,844 | (554,016) | 921,278 |
| (Decrease)\tincrease\tin\tcash\tand\tcash\tequivalents | $(356,835) | $(70,030) | $300,149 |

# Cash	Flow	from	Operating	Activities

The	change	in	operating	cash	flows	over	the	three	year	period	primarily	results	from	the	corresponding	change	in	earnings.	Our	2008	operating	cash	flows	and earnings	were	impacted	by	significantly	higher	prescription	drug	claim	payments	for	our	Medicare	stand-alone	PDPs	as	discussed	previously.

Comparisons	of	our	operating	cash	flows	also	are	impacted	by	other	changes	in	our	working	capital.	The	most	significant	drivers	of	changes	in	our	working capital	are	typically	the	timing	of	receipts	for	premiums	and	ASO	fees	and	payments	of	benefit	expenses.	We	illustrate	these	changes	with	the	following	summaries	of receivables	and	benefits	payable.

|  | 2009 | 2008 | 2007 | 2009 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tthousands) |  |  |
| Military\tservices: |  |  |  |  |  |
| Base\treceivable | $451,248 | $436,009 | $404,570 | $15,239 | $31,439 |
| Change\torders | 2,024 | 6,190 | 5,168 | (4,166) | 1,022 |
| Military\tservices\tsubtotal | \t 453,272 | \t 442,199 | \t 409,738 | \t 11,073 | 32,461 |
| Medicare | \t 238,056 | \t 232,608 | \t 137,345 | 5,448 | 95,263 |
| Commercial\tand\tother | \t 183,124 | \t 164,035 | \t 126,718 | \t 19,089 | 37,317 |
| Allowance\tfor\tdoubtful\taccounts | (50,832) | (49,160) | (68,260) | (1,672) | 19,100 |
| Total\tnet\treceivables | $823,620 | $789,682 | $605,541 | \t 33,938 | \t 184,141 |
| Reconciliation\tto\tcash\tflow\tstatement: |  |  |  |  |  |
| Provision\tfor\tdoubtful\taccounts |  |  |  | \t 19,054 | 5,398 |
| Receivables\tfrom\tacquisition |  |  |  | 6,974 | (36,646) |
| Change\tin\treceivables\tper\tcash\tflow\tstatement\tresulting\tin\tcash\tfrom\toperations |  |  |  | $59,966 | $152,893 |

Military	services	base	receivables	consist	of	estimated	claims	owed	from	the	federal	government	for	health	care	services	provided	to	beneficiaries	and underwriting	fees.	The	claim	reimbursement	component	of	military	services	base	receivables	is	generally	collected	over	a	three	to	four	month	period.	The	timing	of	claim reimbursements	resulted	in	the	$15.2	million	and	$31.4	million	increase	in	base	receivables	for	2009	as	compared	to	2008	and	2008	as	compared	to	2007,	respectively, and	the	$47.9	million	decrease	in	base	receivables	for	2007	as	compared	to	2006.

Medicare	receivables	increased	$5.4	million	in	2009	as	compared	to	2008	and	$95.3	million	for	2008	as	compared	to	2007,	and	decreased	$6.5	million	for	2007	as compared	to	2006.	Medicare	receivables	are	impacted	by	the	timing	of	accruals	and	related	collections	associated	with	the	CMS	risk-adjustment	model.

|  | 2009 | 2008 | 2007 | 2009 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tthousands) |  |  |
| IBNR(1) | $1,902,700 | $1,851,047 | $1,695,088 | $51,653 | $155,959 |
| Military\tservices\tbenefits\tpayable(2) | 279,195 | 306,797 | 341,372 | (27,602) | (34,575) |
| Reported\tclaims\tin\tprocess(3) | 357,718 | 486,514 | 253,054 | (128,796) | 233,460 |
| Other\tbenefits\tpayable(4) | 682,961 | 561,221 | 407,319 | 121,740 | 153,902 |
| Total\tbenefits\tpayable | $3,222,574 | $3,205,579 | $2,696,833 | 16,995 | 508,746 |
| Reconciliation\tto\tcash\tflow\tstatement:\nBenefits\tpayable\tfrom\tacquisition |  |  |  | — | (96,021) |
| Change\tin\tbenefits\tpayable\tin\tcash\tflow\tstatement\tresulting\tin\tcash\tfrom\noperations |  |  |  | $16,995 | $412,725 |

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

(2) Military	services	benefits	payable	primarily	results	from	the	timing	of	the	cost	of	providing	health	care	services	to	beneficiaries	and	the	payment	to	the	provider. A	corresponding	receivable	for	reimbursement	by	the	federal	government	is	included	in	the	base	receivable	in	the	previous	receivables	table.

(3) Reported	claims	in	process	represents	the	estimated	valuation	of	processed	claims	that	are	in	the	post	claim	adjudication	process,	which	consists	of	administrative functions	such	as	audit	and	check	batching	and	handling,	as	well	as	amounts	owed	to	our	pharmacy	benefit	administrator	which	fluctuate	due	to	bi-weekly payments	and	the	month-end	cutoff.

(4) Other	benefits	payable	include	amounts	owed	to	providers	under	capitated	and	risk	sharing	arrangements.

The	increase	in	benefits	payable	in	2009	primarily	was	due	to	an	increase	in	amounts	owed	to	providers	under	capitated	and	risk	sharing	arrangements	as	well	as an	increase	in	IBNR,	both	primarily	as	a	result	of	Medicare	Advantage	membership	growth,	partially	offset	by	a	decrease	in	the	amount	of	processed	but	unpaid	claims, including	pharmacy	claims,	which	fluctuate	due	to	month-end	cutoff.	The	increase	in	benefits	payable	in	2008	and	2007	primarily	was	due	to	the	increase	in	IBNR	from growth	in	Medicare	Advantage	members	and,	to	a	lesser	extent,	benefit	claims	inflation,	an	increase	in	the	amount	of	processed	but	unpaid	claims,	including	pharmacy claims,	which	fluctuate	due	to	month-end	cutoff,	and	an	increase	in	amounts	owed	to	providers	under	capitated	and	risk	sharing	arrangements	from	Medicare	Advantage membership	growth.

In	addition	to	the	timing	of	receipts	for	premiums	and	ASO	fees	and	payments	of	benefit	expenses,	other	working	capital	items	impacting	operating	cash	flows over	the	past	three	years	primarily	resulted	from	changes	in	the	timing	of	collections	of	pharmacy	rebates	as	well	as	the	Medicare	Part	D	risk	corridor	provisions	of	our contracts	with	CMS.

# Cash	Flow	from	Investing	Activities

We	reinvested	a	portion	of	our	operating	cash	flows	in	investment	securities,	primarily	fixed	income	securities,	totaling	$1,975.2	million	in	2009,	$685.5	million in	2008,	and	$430.1	million	in	2007.	Our	ongoing	capital	expenditures	primarily	relate	to	our	information	technology	initiatives	and	administrative	facilities	necessary for	activities	such	as	claims	processing,	billing	and	collections,	medical	utilization	review,	and	customer	service.	Total	capital	expenditures,	excluding	acquisitions,	were $185.5	million	in	2009,	$261.6	million	in	2008,	and	$239.2	million	in	2007.	Increased	capital	spending	in	2008	included	expenditures	associated	with	constructing	a new	data	center	building	and	mail-order	pharmacy	warehouse	and	capital	spending	in	2007	included	the	purchase	of	three	medical	centers	which	were	previously	leased in	South	Florida.	Excluding	acquisitions,	we	expect	total	capital	expenditures	in	2010	of	approximately	$200	million.	Cash	consideration	paid	for	acquisitions,	net	of cash	acquired,	of	$422.9	million	in	2008	and	$493.5	million	in	2007	primarily	related	to	the	SecureHorizons,	OSF,	and	Cariten	acquisitions	in	2008	and	the CompBenefits	and	KMG	acquisitions	in	2007.

# Cash	Flow	from	Financing	Activities

In	2009,	net	borrowings	under	our	credit	agreement	decreased	$250.0	million	primarily	from	the	repayment	of	amounts	borrowed	to	fund	the	acquisition	of Cariten.	During	2008,	the	net	repayment	of	$550	million	under	our	credit	agreement	primarily	related	to	amounts	repaid	from	the	issuance	of	$750	million	in	senior notes	offset	by	the	$250	million	financing	of	the	Cariten	acquisition.	Net	borrowings	of	$350	million	under	our	credit	agreement	during	2007	primarily	related	to	the financing	of	the	CompBenefits	and	KMG	acquisitions.

In	June	2008,	we	issued	$500	million	of	7.20%	senior	notes	due	June	15,	2018	and	$250	million	of	8.15%	senior	notes	due	June	15,	2038.	Our	net	proceeds, reduced	for	the	original	issue	discount	and	cost	of	the	offering,	were	$742.6	million.	We	used	the	net	proceeds	from	the	offering	for	the	repayment	of	the	outstanding balance	under	our	credit	agreement.

Receipts	from	CMS	associated	with	Medicare	Part	D	claim	subsidies	for	which	we	do	not	assume	risk	were	$493.5	million	higher	than	claims	payments	during 2009,	$188.7	million	higher	than	claim	payments	during	2008,	and	$185.1	million	less	than	claims	payments	during	2007.	See	Note	2	to	the	consolidated	financial statements	included	in	Item	8.-Financial	Statements	and	Supplementary	Data	for	further	description.

In	exchange	for	terminating	interest-rate	swap	agreements	in	2008,	we	received	cash	of	$93.0	million.

The	remainder	of	the	cash	used	in	or	provided	by	financing	activities	in	2009,	2008,	and	2007	primarily	resulted	from	the	change	in	the	securities	lending	payable, common	stock	repurchases,	proceeds	from	stock	option	exercises,	and	the	excess	tax	benefit	from	stock	compensation.	The	decrease	in	securities	lending	since	2007 resulted	from	lower	margins	earned	under	the	program.	During	2009,	there	were	no	repurchases	of	common	shares	under	the	stock	repurchase	plan	authorized	by	the Board	of	Directors.	During	2008,	we	repurchased	2.1	million	common	shares	for	$92.8	million	under	the	stock	repurchase	plan	authorized	by	the	Board	of	Directors. We	also	acquired	common	shares	in	connection	with	employee	stock	plans	for	an	aggregate	cost	of	$22.8	million	in	2009,	$13.3	million	in	2008,	and	$27.4	million	in 2007.

# Future	Sources	and	Uses	of	Liquidity

# Stock	Repurchase	Plan

# Senior	Notes

During	2008,	we	issued	$500	million	of	7.20%	senior	notes	due	June	15,	2018	and	$250	million	of	8.15%	senior	notes	due	June	15,	2038.	The	7.20%	and	8.15% senior	notes	are	subject	to	an	interest	rate	adjustment	if	the	debt	ratings	assigned	to	the	notes	are	downgraded	(or	subsequently	upgraded)	and	contain	a	change	of	control provision	that	may	require	us	to	purchase	the	notes	under	certain	circumstances.	We	also	previously	issued	$300	million	of	6.30%	senior	notes	due	August	1,	2018	and $500	million	of	6.45%	senior	notes	due	June	1,	2016.	All	four	series	of	our	senior	notes,	which	are	unsecured,	may	be	redeemed	at	our	option	at	any	time	at	100%	of the	principal	amount	plus	accrued	interest	and	a	specified	make-whole	amount.	Concurrent	with	the	senior	notes	issuances,	we	entered	into	interest-rate	swap	agreements to	exchange	the	fixed	interest	rate	under	these	senior	notes	for	a	variable	interest	rate	based	on	LIBOR.	During	2008,	we	terminated	all	of	our	swap	agreements.	We	may re-enter	into	swap	agreements	in	the	future	depending	on	market	conditions	and	other	factors.	Our	senior	notes	and	related	swap	agreements	are	more	fully	discussed	in Notes	11	and	12	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data.

# Credit	Agreement

Our	5-year	$1.0	billion	unsecured	revolving	credit	agreement	expires	in	July	2011.	Under	the	credit	agreement,	at	our	option,	we	can	borrow	on	either	a	revolving credit	basis	or	a	competitive	advance	basis.	The	revolving	credit	portion	bears	interest	at	either	a	fixed	rate	or	floating	rate	based	on	LIBOR	plus	a	spread.	The

spread,	currently	50	basis	points,	varies	depending	on	our	credit	ratings	ranging	from	27	to	80	basis	points.	We	also	pay	an	annual	facility	fee	regardless	of	utilization. This	facility	fee,	currently	12.5	basis	points,	may	fluctuate	between	8	and	20	basis	points,	depending	upon	our	credit	ratings.	In	addition,	a	utilization	fee	of	10	basis points	is	payable	for	each	day	in	which	borrowings	under	the	facility	exceed	50%	of	the	total	$1.0	billion	commitment.	The	competitive	advance	portion	of	any borrowings	will	bear	interest	at	market	rates	prevailing	at	the	time	of	borrowing	on	either	a	fixed	rate	or	a	floating	rate	based	on	LIBOR,	at	our	option.

The	terms	of	the	credit	agreement	include	standard	provisions	related	to	conditions	of	borrowing,	including	a	customary	material	adverse	event	clause	which could	limit	our	ability	to	borrow	additional	funds.	In	addition,	the	credit	agreement	contains	customary	restrictive	and	financial	covenants	as	well	as	customary	events	of default,	including	financial	covenants	regarding	the	maintenance	of	a	minimum	level	of	net	worth	of	$3,387.9	million	at	December	31,	2009	and	a	maximum	leverage ratio	of	3.0:1.	We	are	in	compliance	with	the	financial	covenants,	with	actual	net	worth	of	$5,776.0	million	and	a	leverage	ratio	of	0.8:1,	as	measured	in	accordance	with the	credit	agreement	as	of	December	31,	2009.

At	December	31,	2009,	we	had	no	borrowings	outstanding	under	the	credit	agreement.	We	have	outstanding	letters	of	credit	of	$3.5	million	secured	under	the credit	agreement.	No	amounts	have	ever	been	drawn	on	these	letters	of	credit.	Accordingly,	as	of	December	31,	2009,	we	had	$996.5	million	of	remaining	borrowing capacity	under	the	credit	agreement,	none	of	which	would	be	restricted	by	our	financial	covenant	compliance	requirement.	We	have	other	customary,	arms-length relationships,	including	financial	advisory	and	banking,	with	some	parties	to	the	credit	agreement.

# Other	Long-Term	Borrowings

Other	long-term	borrowings	of	$37.5	million	at	December	31,	2009	represent	junior	subordinated	debt	assumed	in	the	2007	KMG	acquisition	of	$36.1	million and	financing	for	the	renovation	of	a	building	of	$1.4	million.	The	junior	subordinated	debt,	which	is	due	in	2037,	may	be	called	by	us	in	2012	and	bears	a	fixed	annual interest	rate	of	8.02%	payable	quarterly	until	2012,	and	then	payable	at	a	floating	rate	based	on	LIBOR	plus	310	basis	points.	The	debt	associated	with	the	building renovation	bears	interest	at	2.00%,	is	collateralized	by	the	building,	and	is	payable	in	various	installments	through	2014.

# Liquidity	Requirements

We	believe	our	cash	balances,	investment	securities,	operating	cash	flows,	and	funds	available	under	our	credit	agreement	or	from	other	public	or	private financing	sources,	taken	together,	provide	adequate	resources	to	fund	ongoing	operating	and	regulatory	requirements,	future	expansion	opportunities,	and	capital expenditures	in	the	foreseeable	future,	and	to	refinance	or	repay	debt.	See	the	section	entitled	"Risk	Factors"	in	this	report.

Adverse	changes	in	our	credit	rating	may	increase	the	rate	of	interest	we	pay	and	may	impact	the	amount	of	credit	available	to	us	in	the	future.	Our	investment- grade	credit	rating	at	December	31,	2009	was	BBB-	according	to	Standard	&	Poor's	Rating	Services,	or	S&P,	and	Baa3	according	to	Moody's	Investors	Services,	Inc., or	Moody's.	A	downgrade	by	S&P	to	BB+	or	by	Moody's	to	Ba1	triggers	an	interest	rate	increase	of	25	basis	points	with	respect	to	$750	million	of	our	senior	notes. Successive	one	notch	downgrades	increase	the	interest	rate	an	additional	25	basis	points,	or	annual	interest	expense	by	$1.9	million,	up	to	a	maximum	100	basis	points, or	annual	interest	expense	by	$7.5	million.

In	addition,	we	operate	as	a	holding	company	in	a	highly	regulated	industry.	The	parent	company	is	dependent	upon	dividends	and	administrative	expense reimbursements	from	our	subsidiaries,	most	of	which	are	subject	to	regulatory	restrictions.	Cash,	cash	equivalents	and	short-term	investments	at	the	parent	company increased	$415.1	million	to	$665.6	million	at	December	31,	2009	compared	to	$250.5	million	at	December	31,	2008.	We	continue	to	maintain	significant	levels	of aggregate	excess	statutory	capital	and	surplus	in	our	state-regulated	operating	subsidiaries.	During	2009,	our	subsidiaries	paid	dividends	of	$774.1	million	to	the	parent compared	to	$296.0	million	in	2008	and	$377.0	million	in	2007.	In	addition,	the	parent	made	capital	contributions	to	our	subsidiaries	of	$132.3	million	in	2009 compared	to	$242.8	million	in	2008	and	$307.3	million	in	2007.

# Regulatory	Requirements

Certain	of	our	subsidiaries	operate	in	states	that	regulate	the	payment	of	dividends,	loans,	or	other	cash	transfers	to	Humana	Inc.,	the	parent	company,	and	require minimum	levels	of	equity	as	well	as	limit	investments	to	approved	securities.	The	amount	of	dividends	that	may	be	paid	to	Humana	Inc.	by	these	subsidiaries,	without prior	approval	by	state	regulatory	authorities,	is	limited	based	on	the	entity's	level	of	statutory	income	and	statutory	capital	and	surplus.	In	most	states,	prior	notification is	provided	before	paying	a	dividend	even	if	approval	is	not	required.

# Contractual	Obligations

We	are	contractually	obligated	to	make	payments	for	years	subsequent	to	December	31,	2009	as	follows:

|  |  | Less	than |  |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | 1\tYear | 1-3\tYears | 3-5\tYears | 5\tYears |
|  |  |  | (in\tthousands) |  |  |
| Debt | $1,587,528 | $540 | $614 | $291 | $1,586,083 |
| Interest(1) | 1,311,551 | 111,734 | 222,109 | 220,073 | 757,635 |
| Operating\tleases(2) | 598,913 | 133,634 | 218,684 | 136,415 | 110,180 |
| Purchase\tobligations(3) | 139,369 | 65,879 | 57,808 | 15,682 | — |
| Future\tpolicy\tbenefits\tpayable\tand\tother\tlong-term\tliabilities(4) | 1,484,989 | 45,656 | 219,446 | 133,645 | 1,086,242 |
| Total | $5,122,350 | $357,443 | $718,661 | $506,106 | $3,540,140 |

(1) Interest	includes	the	estimated	contractual	interest	payments	under	our	debt	agreements.

(2) We	lease	facilities,	computer	hardware,	and	other	equipment	under	long-term	operating	leases	that	are	noncancelable	and	expire	on	various	dates	through	2019. We	sublease	facilities	or	partial	facilities	to	third	party	tenants	for	space	not	used	in	our	operations	which	partially	mitigates	our	operating	lease	commitments.	An operating	lease	is	a	type	of	off-balance	sheet	arrangement.	Assuming	we	acquired	the	asset,	rather	than	leased	such	asset,	we	would	have	recognized	a	liability	for the	financing	of	these	assets.	See	also	Note	16	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data.

(3) Purchase	obligations	include	agreements	to	purchase	services,	primarily	information	technology	related	services,	or	to	make	improvements	to	real	estate,	in	each case	that	are	enforceable	and	legally	binding	on	us	and	that	specify	all	significant	terms,	including:	fixed	or	minimum	levels	of	service	to	be	purchased;	fixed, minimum	or	variable	price	provisions;	and	the	appropriate	timing	of	the	transaction.	Purchase	obligations	exclude	agreements	that	are	cancelable	without	penalty.

(4) Includes	future	policy	benefits	payable	ceded	to	third	parties	through	100%	coinsurance	agreements	as	more	fully	described	in	Note	18	to	the	consolidated financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data.	We	expect	the	assuming	reinsurance	carriers	to	fund	these	obligations and	reflected	these	amounts	as	reinsurance	recoverables	included	in	other	long-term	assets	on	our	consolidated	balance	sheet.	Amounts	payable	in	less	than	one year	are	included	in	trade	accounts	payable	and	accrued	expenses	in	the	consolidated	balance	sheet.

# Off-Balance	Sheet	Arrangements

As	part	of	our	ongoing	business,	we	do	not	participate	or	knowingly	seek	to	participate	in	transactions	that	generate	relationships	with	unconsolidated	entities	or financial	partnerships,	such	as	entities	often	referred	to	as	structured	finance	or	special	purpose	entities	(SPEs),	which	would	have	been	established	for	the	purpose	of facilitating	off-balance	sheet	arrangements	or	other	contractually	narrow	or	limited	purposes.	As	of	December	31,	2009,	we	are	not	involved	in	any	SPE	transactions.

# Guarantees	and	Indemnifications

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

In	the	ordinary	course	of	business,	we	enter	into	contractual	arrangements	under	which	we	may	agree	to	indemnify	a	third	party	to	such	arrangement	from	any losses	incurred	relating	to	the	services	they	perform	on	behalf	of	us,	or	for	losses	arising	from	certain	events	as	defined	within	the	particular	contract,	which	may	include, for	example,	litigation	or	claims	relating	to	past	performance.	Such	indemnification	obligations	may	not	be	subject	to	maximum	loss	clauses.	Historically,	payments made	related	to	these	indemnifications	have	been	immaterial.

# Related	Parties

No	related	party	transactions	had	a	material	effect	on	our	results	of	operations,	financial	position,	or	cash	flows.	Certain	related	party	transactions	not	having	a material	effect	are	discussed	in	our	Proxy	Statement	for	the	meeting	to	be	held	April	20,	2010—see	"Certain	Transactions	with	Management	and	Others."

# Government	Contracts

Our	Medicare	business,	which	accounted	for	approximately	62%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009,	primarily	consisted of	products	covered	under	the	Medicare	Advantage	and	Medicare	Part	D	Prescription	Drug	Plan	contracts	with	the	federal	government.	These	contracts	are	renewed generally	for	a	one-year	term	each	December	31	unless	CMS	notifies	us	of	its	decision	not	to	renew	by	August	1	of	the	calendar	year	in	which	the	contract	would	end,	or we	notify	CMS	of	our	decision	not	to	renew	by	the	first	Monday	in	June	of	the	calendar	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana and	CMS	relating	to	our	Medicare	business	have	been	renewed	for	2010.

CMS	is	continuing	to	perform	audits	of	selected	Medicare	Advantage	plans	of	various	companies	to	validate	the	provider	coding	practices	and	resulting economics	under	the	actuarial	risk-adjustment	model	used	to	calculate	the	individual	member	capitation	paid	to	Medicare	Advantage	plans.	Several	Humana	contracts have	been	selected	by	CMS	for	audit	and	we	expect	that	CMS	will	continue	conducting	audits	for	the	2007	contract	year	and	beyond.

We	generally	rely	on	providers	to	appropriately	document	all	medical	data	including	risk-adjustment	data	in	their	medical	records	and	appropriately	code	their claim	submissions,	which	we	generally	send	to	CMS	as	the	basis	for	our	payment	received	from	CMS	under	the	actuarial	risk-adjustment	model.	The	CMS	audits involve	a	review	of	a	sample	of	provider	medical	records	for	the	contracts	being	audited.	Rates	paid	to	Medicare	Advantage	plans	are	established	under	a	bid	model,	the actuarial	process	whereby	our	premium	is	based	on	a	comparison	of	our	beneficiaries'	risk	scores,	derived	from	medical	diagnoses,	to	those	enrolled	in	the government's	original	Medicare	program.	As	a	result,	we	believe	that	an	actuarially	sound	adjustment	of	payments	from	these	audits	would	need	to	take	into	account	the level	of	coding	accuracy	and	provider	medical

record	documentation	completeness	under	the	government's	original	Medicare	program,	since	the	risk	adjustment	system,	bids,	benefit	structures	and	payment	rates were	premised	on	that	data.	This	would	help	to	ensure	that	the	audit	methodology	applied	to	Medicare	Advantage	plans	accurately	calculates	the	economic	impact	of	the audit	findings.	Additionally,	our	payment	received	from	CMS,	as	well	as	benefits	offered	and	premiums	charged	to	members,	is	based	on	bids	that	did	not,	by	CMS design,	include	any	assumption	of	retroactive	audit	payment	adjustments.	We	believe	that	applying	a	retroactive	audit	adjustment	after	CMS	acceptance	of	bids	would improperly	alter	this	process	of	establishing	member	benefits	and	premiums.

CMS	has	not	formally	announced	its	audit	payment	adjustment	methodology,	nor	has	CMS	formally	indicated	whether	the	audit	payment	adjustment methodology	will	be	based	on	a	comparison	to	original	Medicare	coding	accuracy.	CMS	has	further	indicated	that	it	may	make	retroactive	contract-level	payment adjustments.	Any	such	payment	adjustments	could	occur	as	early	as	2010,	and	could	be	effected	prior	to	our,	or	other	Medicare	Advantage	plans,	having	the	opportunity to	appeal	audit	findings	or	the	underlying	payment	adjustment	methodology.	We	continue	to	work	with	CMS	and	our	industry	group	to	submit	comments	to	CMS regarding	its	proposed	audit	and	appeals	process,	which	CMS	has	published	in	a	proposed	rule	and	has	referenced	in	informal	guidance	documents.	We	are	unable	to estimate	the	financial	impact	of	any	audits	that	may	be	conducted	related	to	2007	revenue	and	beyond	or	whether	any	findings	would	cause	a	change	to	our	method	of estimating	future	premium	revenue	in	bid	submissions	made	to	CMS	for	future	contract	years,	or	compromise	premium	rate	assumptions	made	in	our	bids	for	prior contract	years.	At	this	time,	we	do	not	know	whether	CMS	will	require	payment	adjustments	to	be	made	using	an	audit	methodology	without	comparison	to	original Medicare	coding,	and	using	its	method	of	extrapolating	findings	to	the	entire	contract.	However,	if	CMS	requires	payment	adjustments	to	be	made	using	an	audit methodology	without	comparison	to	original	Medicare	coding,	and	using	a	method	of	extrapolating	findings	to	the	entire	contract,	and	if	we	are	unable	to	obtain	any relief	preventing	the	payment	adjustments	from	being	implemented,	we	believe	that	such	adjustments	would	have	a	material	adverse	effect	on	our	results	of	operations, financial	position,	and	cash	flows.

Our	Medicaid	business,	which	accounted	for	approximately	2%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009,	consists	of	contracts in	Puerto	Rico	and	Florida,	with	the	vast	majority	in	Puerto	Rico.	Our	Medicaid	contracts	with	the	Puerto	Rico	Health	Insurance	Administration,	or	PRHIA,	for	the	East and	Southeast	regions	were	extended	through	December	31,	2009	with	no	change	in	terms.	The	PRHIA	has	confirmed	its	intention	to	extend	the	current	contracts	until June	30,	2010,	with	no	changes	in	terms,	and	is	in	the	process	of	executing	such	extensions.

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	results	of	operations,	financial position,	and	cash	flows.

Our	military	services	business,	which	accounted	for	approximately	12%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009,	primarily consists	of	the	TRICARE	South	Region	contract.	The	original	5-year	South	Region	contract	expired	March	31,	2009.	Through	an	Amendment	of Solicitation/Modification	of	Contract	to	the	TRICARE	South	Region	contract,	an	additional	one-year	option	period,	the	sixth	option	period,	which	runs	from	April	1, 2009	through	March	31,	2010,	was	exercised	by	the	government.	The	Amendment	also	provides	for	two	additional	six-month	option	periods:	the	seventh	option	period runs	from	April	1,	2010	through	September	30,	2010	and	the	eighth	option	period	runs	from	October	1,	2010	through	March	31,	2011.	Exercise	of	each	of	the	seventh and	eighth	option	periods	is	at	the	government's	option.	On	December	16,	2009,	we	were	notified	by	TMA	that	it	intends	to	exercise	its	options	to	extend	the	TRICARE South	Region	contract	for	Option	Period	VII	and	Option	Period	VIII.	The	exercise	of	these	option	periods	would	effectively	extend	the	TRICARE	South	Region	contract through	March	31,	2011.	The	contract's	transition	provisions	require	the	continuation	of	certain	activities,	primarily	claims	processing,	during	a	wind-down	period lasting	approximately	six	months	following	the	expiration	date.	Claims	incurred	on	or	prior	to	the	expiration	date	would	continue	to	be	processed	during	the	wind-down period	under	the	terms	existing	prior	to	the	expiration	date.

As	required	under	the	current	contract,	the	target	underwritten	health	care	cost	and	underwriting	fee	amounts	for	each	option	period	are	negotiated.	Any	variance from	the	target	health	care	cost	is	shared	with	the	federal	government.	Accordingly,	events	and	circumstances	not	contemplated	in	the	negotiated	target	health	care	cost amount	may	have	a	material	adverse	effect	on	us.	These	changes	may	include	an	increase	or	reduction	in	the	number	of	persons	enrolled	or	eligible	to	enroll	due	to	the federal	government's	decision	to	increase	or	decrease	U.S.	military	deployments.	In	the	event	government	reimbursements	were	to	decline	from	projected	amounts,	our failure	to	reduce	the	health	care	costs	associated	with	these	programs	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

In	July	2009,	we	were	notified	by	the	Department	of	Defense	that	we	were	not	awarded	the	third	generation	TRICARE	program	contract	for	the	South	Region which	had	been	subject	to	competing	bids.	We	filed	a	protest	with	the	GAO	in	connection	with	the	award	to	another	contractor	citing	discrepancies	between	the	award criteria	and	procedures	prescribed	in	the	request	for	proposals	issued	by	the	DoD	and	those	that	appear	to	have	been	used	by	the	DoD	in	making	its	contractor	selection. In	October	2009,	we	learned	that	the	GAO	had	upheld	our	protest,	determining	that	the	TMA	evaluation	of	our	proposal	had	unreasonably	failed	to	fully	recognize	and reasonably	account	for	the	likely	cost	savings	associated	with	our	record	of	obtaining	network	provider	discounts	from	our	established	network	in	the	South	Region.	On December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO	of	its	intent	to	implement	corrective	action	consistent	with	the	discussion	contained	within	the	GAO's decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able	to	determine	what	actions	TMA	will	take	in	response	to	recommendations	by	the	GAO,	nor	can	we determine	whether	or	not	the	protest	decision	by	the	GAO	will	have	any	effect	upon	the	ultimate	disposition	of	the	contract	award.

# Critical	Accounting	Policies	and	Estimates

The	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	is	based	upon	our	consolidated	financial	statements	and	accompanying	notes, which	have	been	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	The	preparation	of	these	financial	statements and	accompanying	notes	requires	us	to	make	estimates	and	assumptions	that	affect	the	amounts	reported	in	the	consolidated	financial	statements	and	accompanying notes.	We	continuously	evaluate	our	estimates	and	those	critical	accounting	policies	related	primarily	to	benefit	expenses	and	revenue	recognition	as	well	as	accounting for	impairments	related	to	our	investment	securities,	goodwill,	and	long-lived	assets.	These	estimates	are	based	on	knowledge	of	current	events	and	anticipated	future events	and,	accordingly,	actual	results	ultimately	may	differ	from	those	estimates.	We	believe	the	following	critical	accounting	policies	involve	the	most	significant judgments	and	estimates	used	in	the	preparation	of	our	consolidated	financial	statements.

# Benefit	Expense	Recognition

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

|  | December	31,<br>2009 | Percentage<br>of	Total | December	31,<br>2008 | Percentage<br>of	Total |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tthousands) |  |  |
| IBNR | $1,902,700 | 59.0% | $1,851,047 | 57.7% |
| Reported\tclaims\tin\tprocess | 357,718 | 11.1% | 486,514 | 15.2% |
| Other\tbenefits\tpayable | 682,961 | 21.2% | 561,221 | 17.5% |
| Benefits\tpayable,\texcluding\tmilitary\tservices | \t 2,943,379 | 91.3% | \t 2,898,782 | 90.4% |
| Military\tservices\tbenefits\tpayable | 279,195 | 8.7% | 306,797 | 9.6% |
| Total\tbenefits\tpayable | $3,222,574 | 100.0% | $3,205,579 | 100.0% |

Military	services	benefits	payable	primarily	consists	of	our	estimate	of	incurred	healthcare	services	provided	to	beneficiaries	which	are	in	turn	reimbursed	by	the federal	government	as	more	fully	described	in	Note	2	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data.	This amount	is	generally	offset	by	a	corresponding	receivable	due	from	the	federal	government,	as	more	fully-described	on	page	48.

Estimating	IBNR	is	complex	and	involves	a	significant	amount	of	judgment.	Changes	in	this	estimate	can	materially	affect,	either	favorably	or	unfavorably,	our results	of	operations	and	overall	financial	position.	Accordingly,	it	represents	a	critical	accounting	estimate.	Most	benefit	claims	are	paid	within	a	few	months	of	the member	receiving	service	from	a	physician	or	other	health	care	provider.	As	a	result,	these	liabilities	generally	are	described	as	having	a	"short-tail".	As	such,	we	expect that	substantially	all	of	the	December	31,	2009	estimate	of	benefits	payable	will	be	known	and	paid	during	2010.

Our	reserving	practice	is	to	consistently	recognize	the	actuarial	best	point	estimate	within	a	level	of	confidence	required	by	actuarial	standards.	Actuarial standards	of	practice	generally	require	a	level	of	confidence	such	that	the	liabilities	established	for	IBNR	have	a	greater	probability	of	being	adequate	versus	being insufficient,	or	such	that	the	liabilities	established	for	IBNR	are	sufficient	to	cover	obligations	under	an	assumption	of	moderately	adverse	conditions.	Adverse conditions	are	situations	in	which	the	actual	claims	are	expected	to	be	higher	than	the	otherwise	estimated	value	of	such	claims	at	the	time	of	the	estimate.	Therefore,	in many	situations,	the	claim	amounts	ultimately	settled	will	be	less	than	the	estimate	that	satisfies	the	actuarial	standards	of	practice.

We	develop	our	estimate	for	IBNR	using	actuarial	methodologies	and	assumptions,	primarily	based	upon	historical	claim	experience.	Depending	on	the	period	for which	incurred	claims	are	estimated,	we	apply	a	different	method	in	determining	our	estimate.	For	periods	prior	to	the	most	recent	three	months,	the	key	assumption used	in	estimating	our	IBNR	is	that	the	completion	factor	pattern	remains	consistent	over	a	rolling	12-month	period	after	adjusting	for	known	changes	in	claim	inventory levels	and	known	changes	in	claim	payment	processes.	Completion	factors	result	from	the	calculation	of	the	percentage	of	claims	incurred	during	a	given	period	that have	historically	been	adjudicated	as	of	the	reporting	period.	For	the	most	recent	three	months,	the	incurred	claims	are	estimated	primarily	from	a	trend	analysis	based upon	per	member	per	month	claims	trends	developed	from	our	historical	experience	in	the	preceding	months,	adjusted	for	known	changes	in	estimates	of	recent	hospital and	drug	utilization	data,	provider	contracting	changes,	changes	in	benefit	levels,	changes	in	member	cost	sharing,	changes	in	medical	management	processes,	product mix,	and	weekday	seasonality.

The	completion	factor	method	is	used	for	the	months	of	incurred	claims	prior	to	the	most	recent	three	months	because	the	historical	percentage	of	claims processed	for	those	months	is	at	a	level	sufficient	to	produce	a	consistently	reliable	result.	Conversely,	for	the	most	recent	three	months	of	incurred	claims,	the	volume	of claims	processed	historically	is	not	at	a	level	sufficient	to	produce	a	reliable	result,	which	therefore	requires	us	to	examine	historical	trend	patterns	as	the	primary	method of	evaluation.	Changes	in	claim	processes,	including	receipt	cycle	times,	claim	inventory	levels,	recoveries	of	overpayments,	outsourcing,	system	conversions,	and processing	disruptions	due	to	weather	or	other	events	affect	views	regarding	the	reasonable	choice	of	completion	factors.	The	receipt	cycle	time	measures	the	average length	of	time	between	when	a	medical	claim	was	initially	incurred	and	when	the	claim	form	was	received.	Increased	electronic	claim	submissions	from	providers	have decreased	the	receipt	cycle	time	over	the	last	few	years.	For	example,	the	average	receipt	cycle	time	has	decreased	from	15.6	days	in	2007	to	14.0	days	in	2009	which represents	a	10.3%	reduction	in	cycle	time	over	the	three	year	period.	If	claims	are	submitted	or	processed	on	a	faster	(slower)	pace	than	prior	periods,	the	actual	claim may	be	more	(less)	complete	than	originally	estimated	using	our	completion	factors,	which	may	result	in	reserves	that	are	higher	(lower)	than	required.

Medical	cost	trends	potentially	are	more	volatile	than	other	segments	of	the	economy.	The	drivers	of	medical	cost	trends	include	increases	in	the	utilization	of hospital	facilities,	physician	services,	prescription	drugs,	and	new	medical	technologies,	as	well	as	the	inflationary	effect	on	the	cost	per	unit	of	each	of	these 56

expense	components.	Other	external	factors	such	as	government-mandated	benefits	or	other	regulatory	changes,	increases	in	medical	services	capacity,	direct	to consumer	advertising	for	prescription	drugs	and	medical	services,	an	aging	population,	catastrophes,	and	epidemics	also	may	impact	medical	cost	trends.	Internal	factors such	as	system	conversions,	claims	processing	cycle	times,	changes	in	medical	management	practices	and	changes	in	provider	contracts	also	may	impact	our	ability	to accurately	predict	estimates	of	historical	completion	factors	or	medical	cost	trends.	All	of	these	factors	are	considered	in	estimating	IBNR	and	in	estimating	the	per member	per	month	claims	trend	for	purposes	of	determining	the	reserve	for	the	most	recent	three	months.	Additionally,	we	continually	prepare	and	review	follow-up studies	to	assess	the	reasonableness	of	the	estimates	generated	by	our	process	and	methods	over	time.	The	results	of	these	studies	are	also	considered	in	determining	the reserve	for	the	most	recent	three	months.	Each	of	these	factors	requires	significant	judgment	by	management.

The	completion	and	claims	per	member	per	month	trend	factors	are	the	most	significant	factors	impacting	the	IBNR	estimate.	The	portion	of	IBNR	estimated using	completion	factors	for	claims	incurred	prior	to	the	most	recent	three	months	is	less	variable	than	the	portion	of	IBNR	estimated	using	trend	factors.	The	following table	illustrates	the	sensitivity	of	these	factors	assuming	moderate	adverse	experience	and	the	estimated	potential	impact	on	our	operating	results	caused	by	reasonably likely	changes	in	these	factors	based	on	December	31,	2009	data:

(a) Reflects	estimated	potential	changes	in	benefits	payable	at	December	31,	2009	caused	by	changes	in	completion	factors	for	incurred	months	prior	to	the	most recent	three	months.

(b) Reflects	estimated	potential	changes	in	benefits	payable	at	December	31,	2009	caused	by	changes	in	annualized	claims	trend	used	for	the	estimation	of	per member	per	month	incurred	claims	for	the	most	recent	three	months.

(c) The	factor	change	indicated	represents	the	percentage	point	change.

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

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Balances\tat\tJanuary\t1 | $2,898,782 | $2,355,461 | $1,979,733 |
| Acquisitions | — | 96,021 | 41,029 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 21,934,973 | 21,092,135 | 18,015,247 |
| Prior\tyears | (252,756) | (268,027) | (242,922) |
| Total\tincurred | 21,682,217 | 20,824,108 | 17,772,325 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (19,572,740) | (18,579,247) | (15,847,574) |
| Prior\tyears | (2,064,880) | (1,797,561) | (1,590,052) |
| Total\tpaid | (21,637,620) | (20,376,808) | (17,437,626) |
| Balances\tat\tDecember\t31 | $2,943,379 | $2,898,782 | $2,355,461 |

The	following	table	summarizes	the	changes	in	estimate	for	incurred	claims	related	to	prior	years	attributable	to	our	key	assumptions.	As	previously	described, our	key	assumptions	consist	of	trend	and	completion	factors	estimated	using	an	assumption	of	moderately	adverse	conditions.	The	amounts	below	represent	the difference	between	our	original	estimates	and	the	actual	benefit	expenses	ultimately	incurred	as	determined	from	subsequent	claim	payments.

|  | 2009 | 2009 | 2008 | 2008 | 2007 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Factor |  | Factor |  | Factor |
|  | Amount | Change\t(a) | Amount | Change\t(a) | Amount | Change\t(a) |
|  |  |  | (dollars\tin\tthousands) |  |  |  |
| Trend\tfactors | $(151,171) | (3.5)% | $(175,268) | (5.2)% | $(124,957) | (4.3)% |
| Completion\tfactors | (101,585) | 0.8% | (92,759) | 1.0% | (63,985) | 0.8% |
| Medicare\tPart\tD\treconciliation | — | n/a | — | n/a | (53,980) | n/a |
| Total | $(252,756) |  | $(268,027) |  | $(242,922) |  |

(a) The	factor	change	indicated	represents	the	percentage	point	change.

As	summarized	in	the	table	above,	the	majority	of	the	favorable	development	resulted	from	trend	factors	for	the	most	recent	three	months	ultimately	being	lower than	originally	estimated	for	each	of	the	years	presented.	Some	of	the	more	significant	factors	that	drove	the	actual	trend	factors	lower	than	the	originally	estimated trends	over	the	last	three	years	include	lower	than	originally	estimated	utilization	of	hospital	and	physician	services	for	both	our	Commercial	and	Medicare	lines	of business,	as	well	as	rapid	growth	in	our	Medicare	Advantage	and	Commercial	high	deductible	products	in	new	geographic	areas	which	resulted	in	more	limited	historical information	from	which	to	base	trend	rate	estimates.

Additionally,	actual	completion	factors	ultimately	were	higher	than	our	original	completion	factors	used	to	establish	reserves	at	December	31,	2008,	2007,	and 2006,	which	were	based	upon	historical	patterns.	This	increase	in	completion	factor	percentage	primarily	resulted	from	a	shortening	of	the	cycle	time	associated	with provider	claim	submissions	and	improved	claim	recovery	patterns	associated	with	system	and	process	changes.

Finally,	first-year	Medicare	Part	D	enrollment	and	eligibility	issues	during	2006	led	to	actual	claim	settlements	with	other	health	plans	and	various	state governments	during	2007	for	amounts	less	than	originally	estimated.	Similar	adjustments	in	2009	and	2008	were	not	significant	due	to	a	lower	volume	of	new	enrollees and	subsequent	improvements	in	the	program's	enrollment	process.

We	continually	adjust	our	historical	trend	and	completion	factor	experience	with	our	knowledge	of	recent	events	that	may	impact	current	trends	and	completion factors	when	establishing	our	reserves.	Because	our	reserving	practice	is	to	consistently	recognize	the	actuarial	best	point	estimate	using	an	assumption	of	moderately adverse	conditions	as	required	by	actuarial	standards,	there	is	a	reasonable	possibility	that	variances	between	actual	trend	and	completion	factors	and	those	assumed	in our	December	31,	2009	estimates	would	fall	towards	the	middle	of	the	ranges	previously	presented	in	our	sensitivity	table,	as	has	occurred	in	previous	years.

Benefit	expenses	associated	with	military	services	and	provisions	associated	with	future	policy	benefits	excluded	from	the	previous	table	were	as	follows	for	the years	ended	December	31,	2009,	2008	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Military\tservices | $3,019,655 | $2,819,787 | $2,481,814 |
| Future\tpolicy\tbenefits | 73,130 | 64,338 | 16,392 |
| Total | $3,092,785 | $2,884,125 | $2,498,206 |

Our	TRICARE	contract	contains	provisions	whereby	the	federal	government	bears	a	substantial	portion	of	the	risk	of	financing	health	benefits.	The	federal government	both	reimburses	us	for	our	cost	of	providing	health	benefits	and	bears	responsibility	for	80%	of	any	variance	from	the	annual	target	health	care	cost	and actual	health	care	cost	as	more	fully	described	beginning	on	page	61.	Therefore,	the	impact	on	our	income	from	operations	from	changes	in	estimate	for	TRICARE benefits	payable	is	reduced	substantially	by	corresponding	adjustments	to	revenues.	The	net	decrease	to	income	from	operations	as	determined	retrospectively,	after giving	consideration	to	claim	development	occurring	in	the	current	period,	was	approximately	$7.8	million	for	2008	and	$13.7	million	for	2007.	The	impact	from changes	in	estimates	for	2009	is	not	yet	determinable	as	the	amount	of	prior	period	development	recorded	in	2010	will	change	as	our	December	31,	2009	benefits payable	estimate	develops	throughout	2010.

Future	policy	benefits	payable	of	$1,193.0	million	and	$1,164.8	million	at	December	31,	2009	and	2008,	respectively,	represent	liabilities	for	long-duration insurance	policies	including	long-term	care,	health,	and	life	insurance	policies	and	annuities	sold	to	individuals	for	which	some	of	the	premium	received	in	the	earlier years	is	intended	to	pay	anticipated	benefits	to	be	incurred	in	future	years.	These	reserves	are	recognized	on	a	net	level	premium	method	based	on	interest	rates, mortality,	morbidity,	withdrawal	and	maintenance	expense	assumptions	from	published	actuarial	tables,	modified	based	upon	actual	experience.	The	basis	for	the liability	for	future	policy	benefits	is	established	at	the	time	each	contract	is	acquired	and	would	only	change	if	our	experience	deteriorates	to	the	point	the	level	of	the liability	is	not	adequate	to	provide	for	future	policy	benefits.	Future	policy	benefits	payable	include	$571.9	million	at	December	31,	2009	and	$503.2	million	at December	31,	2008	associated	with	a	closed	block	of	long-term	care	policies	acquired	in	connection	with	the	November	30,	2007	KMG	acquisition.	Long-term	care policies	provide	for	long-duration	coverage	and,	therefore,	our	actual	claims	experience	will	emerge	many	years	after	assumptions	have	been	established.	The	risk	of	a deviation	of	the	actual	morbidity	and	mortality	rates	from	those	assumed	in	our	reserves	are	particularly	significant	to	our	closed	block	of	long-term	care	policies.	We monitor	the	loss	experience	of	these	long-term	care	policies	and,	when	necessary,	apply	for	premium	rate	increases	through	a	regulatory	filing	and	approval	process	in the	jurisdictions	in	which	such	products	were	sold.	We	filed	and	received	approval	for	certain	state	premium	rate	increases	in	2009	and	continue	to	expect	to	file	for premium	rate	increases	for	additional	states	in	2010.	To	the	extent	premium	rate	increases	and/or	loss	experience	vary	from	our	acquisition	date	assumptions,	future adjustments	to	reserves	could	be	required.	In	addition,	future	policy	benefits	payable	include	amounts	of	$225.0	million	at	December	31,	2009	and	$232.0	million	at December	31,	2008	which	are	subject	to	100%	coinsurance	agreements	as	more	fully	described	in	Note	18	to	the	consolidated	financial	statements	included	in	Item	8.— Financial	Statements	and	Supplementary	Data,	and	as	such	are	offset	by	a	related	reinsurance	recoverable	included	in	other	long-term	assets.

As	previously	discussed,	our	reserving	practice	is	to	consistently	recognize	the	actuarial	best	estimate	of	our	ultimate	liability	for	claims.	Actuarial	standards require	the	use	of	assumptions	based	on	moderately	adverse	experience,	which	generally	results	in	favorable	reserve	development,	or	reserves	that	are	considered redundant.	The	amount	of	redundancy	over	the	last	three	years	primarily	has	been	impacted	by	the	growth	in	our	Medicare	business,	coupled	with	the	application	of consistent	reserving	practices.	When	we	recognize	a	release	of	the	redundancy,	we	disclose	the	amount	that	is	not	in	the	ordinary	course	of	business,	if	material.	We believe	we	have	consistently	applied	our	methodology	in	determining	our	best	estimate	for	benefits	payable.

# Revenue	Recognition

We	generally	establish	one-year	commercial	membership	contracts	with	employer	groups,	subject	to	cancellation	by	the	employer	group	on	30-day	written	notice. Our	Medicare	contracts	with	CMS	renew	annually.	Our	military	services	contracts	with	the	federal	government	and	our	contracts	with	various	state	Medicaid	programs generally	are	multi-year	contracts	subject	to	annual	renewal	provisions.

Our	commercial	contracts	establish	rates	on	a	per	member	basis	for	each	month	of	coverage.	Our	Medicare	and	Medicaid	contracts	also	establish	monthly	rates per	member.	However,	our	Medicare	contracts	also	have	additional	provisions	as	outlined	in	the	following	separate	section.

Premium	revenues	and	ASO	fees	are	estimated	by	multiplying	the	membership	covered	under	the	various	contracts	by	the	contractual	rates.	In	addition,	we	adjust revenues	for	estimated	changes	in	an	employer's	enrollment	and	individuals	that	ultimately	may	fail	to	pay.	Enrollment	changes	not	yet	processed	or	not	yet	reported	by an	employer	group	or	the	government,	also	known	as	retroactive	membership	adjustments,	are	estimated	based	on	available	data	and	historical	trends.	We	routinely monitor	the	collectibility	of	specific	accounts,	the	aging	of	receivables,	historical	retroactivity	trends,	as	well	as	prevailing	and	anticipated	economic	conditions,	and reflect	any	required	adjustments	in	the	current	period's	revenue.

We	bill	and	collect	premium	and	administrative	fee	remittances	from	employer	groups	and	members	in	our	Medicare	and	individual	products	monthly.	We receive	monthly	premiums	and	administrative	fees	from	the	federal	government	and	various	states	according	to	government	specified	payment	rates	and	various contractual	terms.	Changes	in	revenues	from	CMS	for	our	Medicare	products	resulting	from	the	periodic	changes	in	risk-adjustment	scores	for	our	membership	are recognized	when	the	amounts	become	determinable	and	the	collectibility	is	reasonably	assured.

# Medicare	Part	D	Provisions

We	cover	prescription	drug	benefits	in	accordance	with	Medicare	Part	D	under	multiple	contracts	with	CMS.	The	payments	we	receive	monthly	from	CMS	and members,	which	are	determined	from	our	annual	bid,	represent	amounts	for	providing	prescription	drug	insurance	coverage.	We	recognize	premium	revenues	for providing	this	insurance	coverage	ratably	over	the	term	of	our	annual	contract.	Our	CMS	payment	is	subject	to	risk	sharing	through	the	Medicare	Part	D	risk	corridor provisions.	In	addition,	we	receive	and	disburse	amounts	for	portions	of	prescription	drug	costs	for	which	we	are	not	at	risk,	as	described	more	fully	below.

The	risk	corridor	provisions	compare	costs	targeted	in	our	bids	to	actual	prescription	drug	costs,	limited	to	actual	costs	that	would	have	been	incurred	under	the standard	coverage	as	defined	by	CMS.	Variances	exceeding	certain	thresholds	may	result	in	CMS	making	additional	payments	to	us	or	require	us	to	refund	to	CMS	a portion	of	the	premiums	we	received.	We	estimate	and	recognize	an	adjustment	to	premium	revenues	related	to	these	risk	corridor	provisions	based	upon	pharmacy claims	experience	to	date	as	if	the	annual	contract	were	to	terminate	at	the	end	of	the	reporting	period.	Accordingly,	this	estimate	provides	no	consideration	to	future pharmacy	claims	experience.	We	record	a	receivable	or	payable	at	the	contract	level	and	classify	the	amount	as	current	or	long-term	in	the	consolidated	balance	sheets based	on	the	expected	settlement.

The	estimate	of	the	settlement	associated	with	risk	corridor	provisions	requires	us	to	consider	factors	that	may	not	be	certain,	including	member	eligibility differences	with	CMS.	In	2009,	we	received	net	proceeds	of	$59.6	million	related	to	our	reconciliation	with	CMS	regarding	the	2008	Medicare	Part	D	risk	corridor provisions	compared	to	our	estimate	of	$55.4	million	at	December	31,	2008.	In	2008,	we	paid	$78.7	million	related	to	our	reconciliation	with	CMS	regarding	the	2007 Medicare	Part	D	risk	corridor	provisions	compared	to	our	estimate	of	$102.6	million	at	December	31,	2007.	The	net	liability	associated	with	the	2009	risk	corridor estimate,	which	will	be	settled	in	2010,	was	$144.6	million	at	December	31,	2009.

Reinsurance	and	low-income	cost	subsidies	represent	funding	from	CMS	in	connection	with	the	Medicare	Part	D	program	for	which	we	assume	no	risk. Reinsurance	subsidies	represent	funding	from	CMS	for	its	portion	of	prescription	drug	costs	which	exceed	the	member's	out-of-pocket	threshold,	or	the	catastrophic coverage	level.	Low-income	cost	subsidies	represent	funding	from	CMS	for	all	or	a	portion	of	the	deductible,	the	coinsurance	and	co-payment	amounts	above	the	out-of- pocket	threshold	for	low-income	beneficiaries.	Monthly	prospective	payments	from	CMS	for	reinsurance	and	low-income	cost	subsidies	are	based	on	assumptions submitted	with	our	annual	bid.	A	reconciliation	and	related	settlement	of	CMS's	prospective	subsidies	against	actual	prescription	drug	costs	we	paid	is	made	after	the end	of	the	year.	We	account	for	these	subsidies	as	a	deposit	in	our	consolidated	balance	sheets	and	as	a	financing	activity	in	our	consolidated	statements	of	cash	flows. We	do	not	recognize	premium	revenues	or	benefit	expense	for	these	subsidies.	Receipt	and	payment	activity	is	accumulated	at	the	contract	level	and	recorded	in	our consolidated	balance	sheets	in	other	current	assets	or	trade	accounts

payable	and	accrued	expenses	depending	on	the	contract	balance	at	the	end	of	the	reporting	period.	Gross	financing	receipts	were	$2,354.2	million	and	gross	financing withdrawals	were	$1,860.7	million	during	2009.	CMS	subsidy	activity	recorded	to	the	consolidated	balance	sheets	at	December	31,	2009	was	$11.7	million	to	other current	assets	and	$402.9	million	to	trade	accounts	payable	and	accrued	expenses.

In	order	to	allow	plans	offering	enhanced	benefits	the	maximum	flexibility	in	designing	alternative	prescription	drug	coverage,	CMS	provided	a	demonstration payment	option	in	lieu	of	the	reinsurance	subsidy	for	plans	offering	enhanced	coverage,	or	coverage	beyond	CMS's	defined	standard	benefits.	The	demonstration payment	option	is	an	arrangement	in	which	CMS	pays	a	capitation	amount	to	a	plan	for	assuming	the	government's	portion	of	prescription	drug	costs	in	the	catastrophic layer	of	coverage.	The	capitation	amount	represents	a	fixed	monthly	amount	per	member	to	provide	prescription	drug	coverage	in	the	catastrophic	layer.	We	chose	the demonstration	payment	option	for	some	of	our	plans	that	offer	enhanced	coverage	over	the	last	three	years	and	in	2010.	This	capitation	amount,	derived	from	our	annual bid	submissions,	is	recorded	as	premium	revenue.	The	variance	between	the	capitation	amount	and	actual	drug	costs	in	the	catastrophic	layer	is	subject	to	risk	sharing	as part	of	the	risk	corridor	settlement.

Settlement	of	the	reinsurance	and	low-income	cost	subsidies	as	well	as	the	risk	corridor	payment	is	based	on	a	reconciliation	made	approximately	9	months	after the	close	of	each	calendar	year.	This	reconciliation	process	requires	us	to	submit	claims	data	necessary	for	CMS	to	administer	the	program.

# Medicare	Risk-Adjustment	Provisions

CMS	has	implemented	a	risk-adjustment	model	which	apportions	premiums	paid	to	all	health	plans	according	to	health	severity.	The	CMS	risk-adjustment	model pays	more	for	members	with	predictably	higher	costs,	as	described	in	Item	1.—Business	beginning	on	page	5.	Under	this	risk-adjustment	methodology,	diagnosis	data from	inpatient	and	ambulatory	treatment	settings	are	used	to	calculate	the	risk	adjusted	premium	payment	to	us.	We	generally	rely	on	providers	to	appropriately document	all	medical	data	including	risk-adjustment	data	in	their	medical	records	and	appropriately	code	their	claim	submissions,	which	we	generally	send	to	CMS within	prescribed	deadlines.	We	estimate	risk-adjustment	revenues	based	upon	the	diagnosis	data	submitted	to	CMS	and	ultimately	accepted	by	CMS.

In	2009,	military	services	revenues	represented	approximately	12%	of	total	premiums	and	administrative	services	fees.	Military	services	revenue	primarily	is derived	from	our	TRICARE	South	Region	contract	with	the	Department	of	Defense.	The	single	TRICARE	contract	for	the	South	Region	includes	multiple	revenue generating	activities.	We	allocate	the	consideration	to	the	various	components	of	the	contract	based	on	the	relative	fair	value	of	the	components.	TRICARE	revenues consist	generally	of	(1)	an	insurance	premium	for	assuming	underwriting	risk	for	the	cost	of	civilian	health	care	services	delivered	to	eligible	beneficiaries;	(2)	health care	services	provided	to	beneficiaries	which	are	in	turn	reimbursed	by	the	federal	government;	and	(3)	administrative	services	fees	related	to	claim	processing,	customer service,	enrollment,	disease	management	and	other	services.	We	recognize	the	insurance	premium	as	revenue	ratably	over	the	period	coverage	is	provided.	Health	care services	reimbursements	are	recognized	as	revenue	in	the	period	health	services	are	provided.	Administrative	services	fees	are	recognized	as	revenue	in	the	period services	are	performed.

The	TRICARE	South	Region	contract	contains	provisions	whereby	the	federal	government	bears	a	substantial	portion	of	the	risk	associated	with	financing	the cost	of	health	benefits.	Annually,	we	negotiate	a	target	health	care	cost	amount,	or	target	cost,	with	the	federal	government	and	determine	an	underwriting	fee.	Any variance	from	the	target	cost	is	shared.	We	earn	more	revenue	or	incur	additional	costs	based	on	the	variance	of	actual	health	care	costs	versus	the	negotiated	target	cost. We	receive	20%	for	any	cost	underrun,	subject	to	a	ceiling	that	limits	the	underwriting	profit	to	10%	of	the	target	cost.	We	pay	20%	for	any	cost	overrun,	subject	to	a floor	that	limits	the	underwriting	loss	to	negative	4%	of	the	target	cost.	A	final	settlement	occurs	12

to	18	months	after	the	end	of	each	contract	year	to	which	it	applies.	We	defer	the	recognition	of	any	revenues	for	favorable	contingent	underwriting	fee	adjustments related	to	cost	underruns	until	the	amount	is	determinable	and	the	collectibility	is	reasonably	assured.	We	estimate	and	recognize	unfavorable	contingent	underwriting fee	adjustments	related	to	cost	overruns	currently	in	operations	as	an	increase	in	benefit	expenses.	We	continually	review	these	benefit	expense	estimates	of	future payments	to	the	government	for	cost	overruns	and	make	necessary	adjustments	to	our	reserves.

The	military	services	contracts	contain	provisions	to	negotiate	change	orders.	Change	orders	occur	when	we	perform	services	or	incur	costs	under	the	directive	of the	federal	government	that	were	not	originally	specified	in	our	contract.	Under	federal	regulations	we	may	be	entitled	to	an	equitable	adjustment	to	the	contract	price	in these	situations.	Change	orders	may	be	negotiated	and	settled	at	any	time	throughout	the	year.	We	record	revenue	applicable	to	change	orders	when	services	are performed	and	these	amounts	are	determinable	and	the	collectibility	is	reasonably	assured.

# Investment	Securities

Investment	securities	totaled	$7,497.2	million,	or	53%	of	total	assets	at	December	31,	2009,	and	$5,215.4	million,	or	40%	of	total	assets	at	December	31,	2008. Debt	securities,	detailed	below,	comprised	this	entire	investment	portfolio	at	December	31,	2009	and	over	99%	of	this	investment	portfolio	at	December	31,	2008.	The fair	value	of	debt	securities	were	as	follows	at	December	31,	2009	and	2008:

|  | December	31, | Percentage | December	31, | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  | 2009 | of\tTotal | 2008 | of\tTotal |
|  |  | (dollars\tin\tthousands) |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $1,009,352 | 13.5% | $599,898 | 11.5% |
| Mortgage-backed\tsecurities | \t 1,688,663 | 22.5% | \t 1,297,705 | 24.9% |
| Tax-exempt\tmunicipal\tsecurities | \t 2,224,041 | 29.7% | \t 1,689,462 | 32.5% |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 95,412 | 1.3% | 347,308 | 6.7% |
| Commercial | 279,626 | 3.7% | 260,299 | 5.0% |
| Asset-backed\tsecurities | 107,188 | 1.4% | 144,370 | 2.8% |
| Corporate\tdebt\tsecurities | \t 2,079,568 | 27.7% | 855,827 | 16.4% |
| Redeemable\tpreferred\tstock | 13,300 | 0.2% | 10,050 | 0.2% |
| Total\tdebt\tsecurities | $7,497,150 | 100.0% | $5,204,919 | 100.0% |

Approximately	99%	of	our	debt	securities	were	investment-grade	quality,	with	an	average	credit	rating	of	AA+	by	S&P	at	December	31,	2009.	Most	of	the	debt securities	that	are	below	investment-grade	are	rated	BB	or	better,	the	higher	end	of	the	below	investment-grade	rating	scale.	Our	investment	policy	limits	investments	in a	single	issuer	and	requires	diversification	among	various	asset	types.

Tax	exempt	municipal	securities	included	pre-refunded	bonds	of	$346.9	million	at	December	31,	2009	and	$694.8	million	at	December	31,	2008.	These	pre- refunded	bonds	are	secured	by	an	escrow	fund	consisting	of	U.S.	government	obligations	sufficient	to	pay	off	all	amounts	outstanding	at	maturity.	The	ratings	of	these pre-refunded	bonds	generally	assume	the	rating	of	the	government	obligations	(AAA	by	S&P)	at	the	time	the	fund	is	established.	In	addition,	certain	monoline	insurers guarantee	the	timely	repayment	of	bond	principal	and	interest	when	a	bond	issuer	defaults	and	generally	provide	credit	enhancement	for	bond	issues	related	to	our	tax exempt	municipal	securities.	We	have	no	direct	exposure	to	these	monoline	insurers.	We	owned	$587.2	million	and	$452.4	million	at	December	31,	2009	and	2008, respectively,	of	tax	exempt	securities	guaranteed	by	monoline	insurers.	The	equivalent	S&P	credit	rating	of	these	tax-exempt	securities	without	the	guarantee	from	the monoline	insurer	was	AA-.

Our	direct	exposure	to	subprime	mortgage	lending	is	limited	to	investment	in	residential	mortgage-backed	securities	and	asset-backed	securities	backed	by	home equity	loans.	The	fair	value	of	securities	backed	by	Alt-A	and	subprime	loans	was	$5.5	million	at	December	31,	2009	and	$7.6	million	at	December	31,	2008.	There	are no	collateralized	debt	obligations	or	structured	investment	vehicles	in	our	investment	portfolio.

The	percentage	of	corporate	securities	associated	with	the	financial	services	industry	was	37.3%	at	December	31,	2009	and	41.7%	at	December	31,	2008.

Duration	is	indicative	of	the	relationship	between	changes	in	market	value	and	changes	in	interest	rates,	providing	a	general	indication	of	the	sensitivity	of	the	fair values	of	our	debt	securities	to	changes	in	interest	rates.	However,	actual	market	values	may	differ	significantly	from	estimates	based	on	duration.	The	average	duration of	our	debt	securities	was	approximately	4.5	years	at	December	31,	2009.	Including	cash	equivalents,	the	average	duration	was	approximately	3.8	years.	Based	on	the duration	including	cash	equivalents,	a	1%	increase	in	interest	rates	would	generally	decrease	the	fair	value	of	our	securities	by	approximately	$340	million.

Gross	unrealized	losses	and	fair	values	aggregated	by	investment	category	and	length	of	time	that	individual	securities	have	been	in	a	continuous	unrealized	loss position	were	as	follows	at	December	31,	2009	and	2008,	respectively:

|  | Less	than	12	months | Less	than	12	months | 12	months	or	more | 12	months	or	more | Total | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair\tValue | Gross\nUnrealized\nLosses | Fair\tValue | Gross\nUnrealized\nLosses | Fair\tValue | Gross\nUnrealized\nLosses |
|  |  |  | (in\tthousands) | (in\tthousands) |  |  |
| December\t31,\t2009 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $301,843 | $(2,425) | $2,970 | $(109) | $304,813 | $(2,534) |
| Mortgage-backed\tsecurities | 823,365 | (11,005) | 6,834 | (323) | 830,199 | (11,328) |
| Tax-exempt\tmunicipal\tsecurities | 598,520 | (14,286) | 198,327 | (9,131) | 796,847 | (23,417) |
| Mortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | 1,771 | (5) | 73,178 | (10,994) | 74,949 | (10,999) |
| Commercial | 31,941 | (359) | 142,944 | (8,281) | 174,885 | (8,640) |
| Asset-backed\tsecurities | 1,930 | (19) | 2,179 | (88) | 4,109 | (107) |
| Corporate\tdebt\tsecurities | 636,833 | (9,354) | 99,830 | (11,972) | 736,663 | (21,326) |
| Total\tdebt\tsecurities | $2,396,203 | $(37,453) | $526,262 | $(40,898) | $2,922,465 | $(78,351) |

In	April	2009,	the	Financial	Accounting	Standards	Board,	or	the	FASB,	issued	new	guidance	to	address	concerns	about	(1)	measuring	the	fair	value	of	financial instruments	when	the	markets	become	inactive	and	quoted	prices	may	reflect	distressed	transactions	and	(2)	recording	impairment	charges	on	investments	in	debt securities.	The	new	guidance	highlights	and	expands	on	the	factors	that	should	be	considered	in	estimating	fair	value	when	the	volume	and	level	of	activity	for	a financial	asset	or	liability	has	significantly	decreased	and	requires	new	disclosures	relating	to	fair	value	measurement	inputs	and	valuation	techniques	(including	changes in	inputs	and	valuation	techniques).	In	addition,	new	guidance	regarding	recognition	and	presentation	of	other-than-temporary	impairments	changed	(1)	the	trigger	for determining	whether	an	other-than-temporary	impairment	exists	and	(2)	the	amount	of	an	impairment	charge	to	be	recorded	in	earnings.	We	adopted	the	provisions	of the	new	guidance	for	the	quarter	ended	June	30,	2009.	Refer	to	Note	4	and	Note	5	to	the	consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and Supplementary	Data	for	disclosures	related	to	the	implementation	of	the	new	guidance.

Under	the	new	other-than-temporary	impairment	model	for	debt	securities	held,	we	recognize	an	impairment	loss	in	income	in	an	amount	equal	to	the	full difference	between	the	amortized	cost	basis	and	the	fair	value	when	we	have	the	intent	to	sell	the	debt	security	or	it	is	more	likely	than	not	we	will	be	required	to	sell	the debt	security	before	recovery	of	our	amortized	cost	basis.	However,	if	we	do	not	intend	to	sell	the	debt	security,	we	evaluate	the	expected	cash	flows	to	be	received	as compared	to	amortized	cost	and	determine	if	a	credit	loss	has	occurred.	In	the	event	of	a	credit	loss,	only	the	amount	of	the	impairment	associated	with	the	credit	loss	is recognized	currently	in	income	with	the	remainder	of	the	loss	recognized	in	other	comprehensive	income.

When	we	do	not	intend	to	sell	a	security	in	an	unrealized	loss	position,	potential	OTTI	is	considered	using	a	variety	of	factors,	including	the	length	of	time	and extent	to	which	the	fair	value	has	been	less	than	cost;	adverse	conditions	specifically	related	to	the	industry,	geographic	area	or	financial	condition	of	the	issuer	or underlying	collateral	of	a	security;	payment	structure	of	the	security;	changes	in	credit	rating	of	the	security	by	the	rating	agencies;	the	volatility	of	the	fair	value changes;	and	changes	in	fair	value	of	the	security	after	the	balance	sheet	date.	For	debt	securities,	we	take	into	account	expectations	of	relevant	market	and	economic data.	For	example,	with	respect	to	mortgage	and	asset-backed	securities,	such	data	includes	underlying	loan	level	data	and	structural	features	such	as	seniority	and	other forms	of	credit	enhancements.	A	decline	in	fair	value	is	considered	other-than-temporary	when	we	do	not	expect	to	recover	the	entire	amortized	cost	basis	of	the	security. We	estimate	the	amount	of	the	credit	loss	component	of	a	debt	security	as	the	difference	between	the	amortized	cost	and	the	present	value	of	the	expected	cash	flows	of the	security.	The	present	value	is	determined	using	the	best	estimate	of	future	cash	flows	discounted	at	the	implicit	interest	rate	at	the	date	of	purchase.	The	risks inherent	in	assessing	the	impairment	of	an	investment	include	the	risk	that	market	factors	may	differ	from	our	expectations,	facts	and	circumstances	factored	into	our assessment	may	change	with	the	passage	of	time,	or	we	may	decide	to	subsequently	sell	the	investment.	The	determination	of	whether	a	decline	in	the	value	of	an investment	is	other	than	temporary	requires	us	to	exercise	significant	diligence	and	judgment.	The	discovery	of	new	information	and	the	passage	of	time	can significantly	change	these	judgments.	The	status	of	the	general	economic	environment	and	significant	changes	in	the	national	securities	markets	influence	the determination	of	fair	value	and	the	assessment	of	investment	impairment.	There	is	a	continuing	risk	that	further	declines	in	fair	value	may	occur	and	additional	material realized	losses	from	sales	or	other-than-temporary	impairments	may	be	recorded	in	future	periods.

Approximately	$19.6	million	of	our	unrealized	losses	at	December	31,	2009	relate	to	our	residential	and	commercial	mortgage-backed	securities.	Factors	such	as seniority,	underlying	collateral	characteristics	and	credit	enhancements	support	the	recoverability	of	these	securities.	Residential	and	commercial	mortgage-backed securities	are	primarily	composed	of	senior	tranches	having	high	credit	support,	with	99%	of	the	collateral	consisting	of	prime	loans.	All	commercial	mortgage-backed securities	are	rated	AAA	at	December	31,	2009.

All	issuers	of	securities	we	own	trading	at	an	unrealized	loss	remain	current	on	all	contractual	payments.	After	taking	into	account	these	and	other	factors previously	described,	we	believe	these	unrealized	losses	primarily	were	caused	by	an	increase	in	market	interest	rates	and	tighter	liquidity	conditions	in	the	current markets	than	when	the	securities	were	purchased.	As	of	December	31,	2009,	we	do	not	intend	to	sell	the	securities	with	an	unrealized	loss	position	in	accumulated	other comprehensive	income	and	it	is	not	likely	that	we	will	be	required	to	sell	these	securities	before	recovery	of	their	amortized	cost	basis,	and	as	a	result,	we	believe	that	the securities	with	an	unrealized	loss	are	not	other-than-temporarily	impaired	as	of	December	31,	2009.

There	were	no	material	other-than-temporary	impairments	in	2009	or	2007.	Gross	realized	losses	in	2008	included	other-than-temporary	impairments	of	$103.1 million,	primarily	due	to	investments	in	Lehman	Brothers	Holdings	Inc.	and	certain	of	its	subsidiaries,	which	filed	for	bankruptcy	protection	in	2008,	as	well	as	declines in	the	values	of	securities	primarily	associated	with	the	financial	services	industry.

# Goodwill	and	Long-lived	Assets

At	December	31,	2009,	goodwill	and	other	long-lived	assets	represented	21%	of	total	assets	and	50%	of	total	stockholders'	equity,	compared	to	23%	and	67%, respectively,	at	December	31,	2008.

We	are	required	to	test	at	least	annually	for	impairment	at	a	level	of	reporting	referred	to	as	the	reporting	unit,	and	more	frequently	if	adverse	events	or	changes	in circumstances	indicate	that	the	asset	may	be	impaired.	A	reporting	unit	either	is	our	operating	segments	or	one	level	below	the	operating	segments,	referred	to	as	a component,	which	comprise	our	reportable	Commercial	and	Government	segments.	A	component	is	considered	a	reporting	unit	if	the	component	constitutes	a	business for	which	discrete	financial	information	is	available	that	is	regularly	reviewed	by	management.	We	are	required	to	aggregate	the	components	of	an	operating	segment into	one	reporting	unit	if	they	have	similar	economic	characteristics.	Goodwill	is	assigned	to	the	reporting	unit	that	is	expected	to	benefit	from	a	specific	acquisition.

Our	strategy,	long-range	business	plan,	and	annual	planning	process	support	our	goodwill	impairment	tests.	These	tests	are	performed,	at	a	minimum,	annually	in the	fourth	quarter,	and	are	based	on	an	evaluation	of	future	discounted	cash	flows.	We	rely	on	this	discounted	cash	flow	analysis	to	determine	fair	value.	However outcomes	from	the	discounted	cash	flow	analysis	are	compared	to	other	market	approach	valuation	methodologies	for	reasonableness.	We	use	discount	rates	that correspond	to	a	market-based	weighted-average	cost	of	capital	and	terminal	growth	rates	that	correspond	to	long-term	growth	prospects,	consistent	with	the	long-term inflation	rate.	Key	assumptions	in	our	cash	flow	projections,	including	changes	in	membership,	premium	yields,	medical	and	administrative	cost	trends,	and	certain government	contract	extensions,	are	consistent	with	those	utilized	in	our	long-range	business	plan	and	annual	planning	process.	If	these	assumptions	differ	from	actual, including	the	impact	of	the	ultimate	outcome	of	health	care	reform	legislation,	if	any,	the	estimates	underlying	our	goodwill	impairment	tests	could	be	adversely affected.	Goodwill	impairment	tests	completed	in	each	of	the	last	three	years	did	not	result	in	an	impairment	loss.	The	fair	value	of	our	reporting	units	with	significant goodwill	exceeded	carrying	amounts	by	a	margin	ranging	from	approximately	33%	to	83%.	A	100	basis	point	increase	in	the	discount	rate	would	decrease	this	margin	to a	range	of	approximately	15%	to	63%.

The	ultimate	loss	of	the	TRICARE	South	Region	contract	would	adversely	affect	$49.8	million	of	the	military	services	reporting	unit's	goodwill.	In	July	2009, we	were	notified	by	the	DoD	that	we	were	not	awarded	the	third	generation	TRICARE	program	contract	for	the	South	Region	which	had	been	subject	to	competing	bids. We	filed	a	protest	with	the	GAO	in	connection	with	the	award	to	another	contractor	and	in	October	2009	we	learned	that	the	GAO	had	upheld	our	protest,	determining that	the	TMA	evaluation	of	our	proposal	had	unreasonably	failed	to	fully	recognize	and	reasonably	account	for	the	likely	cost	savings	associated	with	our	record	of obtaining	network	provider	discounts	from	our	established	network	in	the	South	Region.	On	December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO	of	its intent	to	implement	corrective	action	consistent	with	the	discussion	contained	within	the	GAO's	decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able	to determine	what	actions	TMA	will	take	in	response	to	recommendations	by	the	GAO,	nor	can	we	determine	whether	or	not	the	protest	decision	by	the	GAO	will	have	any effect	upon	the	ultimate	disposition	of	the	contract	award.

Our	current	TRICARE	South	Region	contract	covers	benefits	for	healthcare	services	provided	to	beneficiaries	through	March	31,	2010.	On	December	16,	2009, we	were	notified	by	TMA	that	it	intends	to	exercise	its	options	to	extend	the	TRICARE	South	Region	contract	for	Option	Period	VII	and	Option	Period	VIII.	The exercise	of	these	option	periods	would	effectively	extend	the	TRICARE	South	Region	contract	through	March	31,	2011.	We	will	continue	to	assess	the	fair	value	of	our military	services	reporting	unit	each	reporting	period	based	on	our	estimate	of	future	discounted	cash	flows	associated	with	the	reporting	unit,	primarily	derived	from cash	flows	associated	with	the	TRICARE	South	Region	contract.	We	will	recognize	a	goodwill	impairment	if	and	when	our	impairment	test	indicates	that	the	carrying value	of	goodwill	exceeds	the	implied	fair	value.	We	expect	that	as	the	ultimate	March	31,	2011	contract	end	date	nears,	if	our	current	contract	is	not	extended	further and	we	are	not	awarded	the	new	third	generation	TRICARE	program	contract	for	the	South	Region,	future	cash	flows	will	not	be	sufficient	to	warrant	recoverability	of all	or	a	portion	of	the	TRICARE	goodwill.	Given	these	facts,	we	would	expect	a	goodwill	impairment	during	the	second	half	of	2010.	Refer	to	Note	16	to	the consolidated	financial	statements	included	in	Item	8.—Financial	Statements	and	Supplementary	Data	for	further	discussion	of	the	TRICARE	South	Region	contract.

Long-lived	assets	consist	of	property	and	equipment	and	other	finite-lived	intangible	assets.	These	assets	are	depreciated	or	amortized	over	their	estimated	useful life,	and	are	subject	to	impairment	reviews.	We	periodically	review	long-lived	assets	whenever	adverse	events	or	changes	in	circumstances	indicate	the	carrying	value	of the	asset	may	not	be	recoverable.	In	assessing	recoverability,	we	must	make	assumptions	regarding	estimated	future	cash	flows	and	other	factors	to	determine	if	an impairment	loss	may	exist,	and,	if	so,	estimate	fair	value.	We	also	must	estimate	and	make	assumptions	regarding	the	useful	life	we	assign	to	our	long-lived	assets.	If these	estimates	or	their	related	assumptions	change	in	the	future,	we	may	be	required	to	record	impairment	losses	or	change	the	useful	life,	including	accelerating depreciation	or	amortization	for	these	assets.	There	were	no	impairment	losses	in	the	last	three	years.	Long-lived	assets	associated	with	our	military	services	business	are not	material.

# Recently	Issued	Accounting	Pronouncements

# Financial	Instruments

In	January	2010,	the	FASB	issued	new	guidance	that	expands	and	clarifies	existing	disclosures	about	fair	value	measurements.	Under	the	new	guidance,	we	will be	required	to	disclose	information	about	movements	of	assets	among	Levels	1	and	2	of	the	three-tier	fair	value	hierarchy	and	present	separately	(that	is	on	a	gross	basis) information	about	purchases,	sales,	issuances,	and	settlements	of	financial	instruments	in	the	reconciliation	of	fair	value	measurements	using	significant	unobservable inputs	(Level	3).	In	addition,	the	new	guidance	clarified	that	we	are	required	to	provide	fair	value	measurement	disclosures	for	each	class	of	financial	assets	and liabilities	and	provide	disclosures	about	inputs	and	valuation	techniques	for	fair	value	measurements	in	either	Level	2	or	Level	3.	These	new	disclosures	and clarifications	are	effective	for	us	beginning	with	the	filing	of	our	Form	10-Q	for	the	three	months	ended	March	31,	2010,	except	for	the	gross	disclosures	regarding purchases,	sales,	issuances	and	settlements	in	the	roll	forward	of	activity	in	Level	3	fair	value	measurements.	Those	disclosures	are	effective	for	us	beginning	with	the filing	of	our	Form	10-Q	for	the	three	months	ended	March	31,	2011.

# ITEM	7A. QUANTITATIVE	AND	QUALITATIVE	DISCLOSURES	ABOUT	MARKET	RISK

Our	earnings	and	financial	position	are	exposed	to	financial	market	risk,	including	those	resulting	from	changes	in	interest	rates.

The	level	of	our	pretax	earnings	is	subject	to	market	risk	due	to	changes	in	interest	rates	and	the	resulting	impact	on	investment	income	and	interest	expense.	Until October	7,	2008,	we	exchanged	the	fixed	interest	rate	under	all	of	our	senior	notes	for	a	variable	interest	rate	based	on	LIBOR	using	interest	rate	swap	agreements.	As	a result,	changes	in	interest	rates	generally	resulted	in	an	increase	or	decrease	to	investment	income	partially	offset	by	a	corresponding	decrease	or	increase	to	interest expense,	partially	hedging	our	exposure	to	interest	rate	risk.	However,	due	to	extreme	volatility	in	the	securities	and	credit	markets,	LIBOR	increased	while	the	interest rate	we	would	earn	on	invested	assets	like	cash	and	cash	equivalents	decreased.	As	a	result,	we	terminated	all	of	our	interest	rate	swap	agreements,	fixing	the	average interest	rate	under	our	senior	notes	at	6.08%.	In	exchange	for	terminating	our	rights	under	the	interest	rate	swap	agreements,	we	received	$93.0	million	in	cash	from	the counterparties	representing	the	fair	value	of	the	swap	assets.	We	may	re-enter	into	interest	rate	swap	agreements	in	the	future	depending	on	market	conditions	and	other factors.	Amounts	borrowed	under	the	revolving	credit	portion	of	our	$1.0	billion	unsecured	revolving	credit	agreement	bear	interest	at	either	a	fixed	rate	or	floating	rate based	on	LIBOR	plus	a	spread.	There	were	no	borrowings	outstanding	under	our	credit	agreement	at	December	31,	2009	and	$250.0	million	in	borrowings	outstanding at	December	31,	2008.

Interest	rate	risk	also	represents	a	market	risk	factor	affecting	our	consolidated	financial	position	due	to	our	significant	investment	portfolio,	consisting	primarily of	fixed	maturity	securities	of	investment-grade	quality	with	an	average	S&P	credit	rating	of	AA+	at	December	31,	2009.	Our	net	unrealized	position	improved	$301.3 million	from	a	net	unrealized	loss	position	of	$229.9	million	at	December	31,	2008	to	a	net	unrealized	gain	position	of	$71.4	million	at	December	31,	2009.	As	of December	31,	2009,	we	had	gross	unrealized	losses	of	$78.4	million	on	our	investment	portfolio	primarily	due	to	an	increase	in	market	interest	rates	and	tighter 66

liquidity	conditions	in	the	current	markets	than	when	the	securities	were	purchased,	and	as	such,	there	were	no	material	other-than-temporary	impairments	during	2009. While	we	believe	that	these	impairments	are	temporary	and	we	currently	do	not	have	the	intent	to	sell	such	securities,	given	the	current	market	conditions	and	the significant	judgments	involved,	there	is	a	continuing	risk	that	further	declines	in	fair	value	may	occur	and	additional	material	realized	losses	from	sales	or	other-than- temporary	impairments	may	be	recorded	in	future	periods.

Duration	is	the	time-weighted	average	of	the	present	value	of	the	bond	portfolio's	cash	flow.	Duration	is	indicative	of	the	relationship	between	changes	in	fair value	and	changes	in	interest	rates,	providing	a	general	indication	of	the	sensitivity	of	the	fair	values	of	our	fixed	maturity	securities	to	changes	in	interest	rates.	However, actual	fair	values	may	differ	significantly	from	estimates	based	on	duration.	The	average	duration	of	our	investment	portfolio,	including	cash	and	cash	equivalents,	was approximately	3.8	years	as	of	December	31,	2009.	Based	on	the	duration	including	cash	equivalents,	a	1%	increase	in	interest	rates	would	generally	decrease	the	fair value	of	our	securities	by	approximately	$340	million.

We	have	also	evaluated	the	impact	on	our	investment	income	and	interest	expense	resulting	from	a	hypothetical	change	in	interest	rates	of	100,	200	and	300	basis points	over	the	next	twelve-month	period,	as	reflected	in	the	following	table.	The	evaluation	was	based	on	our	investment	portfolio	and	our	outstanding	indebtedness	as of	December	31,	2009	and	2008.	Our	investment	portfolio	consists	of	cash,	cash	equivalents	and	investment	securities.	The	modeling	technique	used	to	calculate	the	pro forma	net	change	in	pretax	earnings	considered	the	cash	flows	related	to	fixed	income	investments	and	debt,	which	are	subject	to	interest	rate	changes	during	a prospective	twelve-month	period.	This	evaluation	measures	parallel	shifts	in	interest	rates	and	may	not	account	for	certain	unpredictable	events	that	may	effect	interest income,	including	unexpected	changes	of	cash	flows	into	and	out	of	the	portfolio,	changes	in	the	asset	allocation,	including	shifts	between	taxable	and	tax-exempt securities,	and	spread	changes	specific	to	various	investment	categories.	In	the	past	ten	years,	changes	in	3	month	LIBOR	rates	during	the	year	have	exceeded	300	basis points	twice,	have	not	changed	between	200	and	300	basis	points,	have	changed	between	100	and	200	basis	points	four	times	and	have	changed	by	less	than	100	basis points	four	times.

|  |  | Increase	(decrease)	in |  |  | Increase	(decrease)	in |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | pretax\tearnings\tgiven\tan | pretax\tearnings\tgiven\tan |  |  | pretax\tearnings\tgiven\tan |  |
|  | X\tbasis\tpoints | interest\trate\tdecrease\tof |  | X\tbasis\tpoints | interest\trate\tincrease\tof |  |
|  | (300) | (200) | (100) | 100 | 200 | 300 |
|  |  |  | (in\tthousands) |  |  |  |
| As\tof\tDecember\t31,\t2009 |  |  |  |  |  |  |
| Investment\tincome | $(24,993) | $(17,443) | $(15,075) | $36,729 | $68,447 | $101,142 |
| Interest\texpense(a) | — | — | — | — | — | — |
| Pretax | $(24,993) | $(17,443) | $(15,075) | $36,729 | $68,447 | $101,142 |
| As\tof\tDecember\t31,\t2008 |  |  |  |  |  |  |
| Investment\tincome | $(23,748) | $(17,588) | $(15,483) | $25,773 | $47,625 | $70,225 |
| Interest\texpense | 2,128 | 2,128 | 2,128 | (2,128) | (4,256) | (6,384) |
| Pretax | $(21,620) | $(15,460) | $(13,355) | $23,645 | $43,369 | $63,841 |

(a) There	were	no	borrowings	outstanding	under	the	credit	agreement	at	December	31,	2009.

# ITEM	8. FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

# CONSOLIDATED	BALANCE	SHEETS

| Cash	and	cash	equivalents | $1,613,588 | $1,970,423 |
| :--- | :--- | :--- |
| Investment\tsecurities | 6,190,062 | 4,203,538 |
| Receivables,\tless\tallowance\tfor\tdoubtful\taccounts\tof\t$50,832\tin\t2009\tand\t$49,160\tin\t2008: |  |  |
| Premiums | 811,800 | 777,672 |
| Administrative\tservices\tfees | 11,820 | 12,010 |
| Securities\tlending\tinvested\tcollateral | 119,586 | 402,399 |
| Other\tcurrent\tassets | 505,960 | 1,030,000 |
| Total\tcurrent\tassets | 9,252,816 | 8,396,042 |
| Property\tand\tequipment,\tnet | 679,142 | 711,492 |
| Other\tassets: |  |  |
| Long-term\tinvestment\tsecurities | 1,307,088 | 1,011,904 |
| Goodwill | 1,992,924 | 1,963,111 |
| Other\tlong-term\tassets | 921,524 | 959,211 |
| Total\tother\tassets | 4,221,536 | 3,934,226 |
| Total\tassets | $14,153,494 | $13,041,760 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Benefits\tpayable | $3,222,574 | $3,205,579 |
| Trade\taccounts\tpayable\tand\taccrued\texpenses | 1,307,710 | 1,077,027 |
| Book\toverdraft | 374,464 | 224,542 |
| Securities\tlending\tpayable | 126,427 | 438,699 |
| Unearned\trevenues | 228,817 | 238,098 |
| Total\tcurrent\tliabilities | 5,259,992 | 5,183,945 |
| Long-term\tdebt | 1,678,166 | 1,937,032 |
| Future\tpolicy\tbenefits\tpayable | 1,193,047 | 1,164,758 |
| Other\tlong-term\tliabilities | 246,286 | 298,835 |
| Total\tliabilities | 8,377,491 | 8,584,570 |
| Commitments\tand\tcontingencies |  |  |
| Stockholders'\tequity: |  |  |
| Preferred\tstock,\t$1\tpar;\t10,000,000\tshares\tauthorized;\tnone\tissued | — | — |
| issued\tin\t2008 | 31,634 | 31,309 |
| Capital\tin\texcess\tof\tpar\tvalue | 1,658,521 | 1,574,245 |
| Retained\tearnings | 4,429,611 | 3,389,936 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | 42,135 | (175,243) |
| Treasury\tstock,\tat\tcost,\t19,621,069\tshares\tin\t2009\tand\t19,031,229\tshares\tin\t2008 | (385,898) | (363,057) |
| Total\tstockholders'\tequity | 5,776,003 | 4,457,190 |
| Total\tliabilities\tand\tstockholders'\tequity | $14,153,494 | $13,041,760 |

The	accompanying	notes	are	an	integral	part	of	the	consolidated	financial	statements.

# CONSOLIDATED	STATEMENTS	OF	INCOME

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  | (in\tthousands,\texcept\tper\tshare\tresults) | (in\tthousands,\texcept\tper\tshare\tresults) |  |
| Revenues: |  |  |  |
| Premiums | $29,926,751 | $28,064,844 | $24,434,347 |
| Administrative\tservices\tfees | 496,135 | 451,879 | 391,515 |
| Investment\tincome | 296,317 | 220,215 | 314,239 |
| Other\trevenue | 241,211 | 209,434 | 149,888 |
| Total\trevenues | 30,960,414 | 28,946,372 | 25,289,989 |
| Operating\texpenses: |  |  |  |
| Benefits | 24,775,002 | 23,708,233 | 20,270,531 |
| Selling,\tgeneral\tand\tadministrative | 4,227,535 | 3,944,652 | 3,476,468 |
| Depreciation\tand\tamortization | 250,274 | 220,350 | 184,812 |
| Total\toperating\texpenses | 29,252,811 | 27,873,235 | 23,931,811 |
| Income\tfrom\toperations | 1,707,603 | 1,073,137 | 1,358,178 |
| Interest\texpense | 105,843 | 80,289 | 68,878 |
| Income\tbefore\tincome\ttaxes | 1,601,760 | 992,848 | 1,289,300 |
| Provision\tfor\tincome\ttaxes | 562,085 | 345,694 | 455,616 |
| Net\tincome | $1,039,675 | $647,154 | $833,684 |
| Basic\tearnings\tper\tcommon\tshare | $6.21 | $3.87 | $5.00 |
| Diluted\tearnings\tper\tcommon\tshare | $6.15 | $3.83 | $4.91 |

# CONSOLIDATED	STATEMENTS	OF	STOCKHOLDERS'	EQUITY

|  | Common	Stock | Common	Stock |  |  | Accumulated |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Capital\tIn |  | Other |  | Total |
|  | Issued |  | Excess\tof | Retained | Comprehensive | Treasury | Stockholders' |
|  | Shares | Amount | Par\tValue | Earnings | Income\t(Loss) | Stock | Equity |
|  |  |  |  | (in\tthousands) |  |  |  |
| Balances,\tJanuary\t1,\t2007 | 182,948 | $ 30,491 | $ 1,357,077 | $ 1,909,098 | $(13,205) | $ (229,575) | $3,053,886 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |
| Net\tincome | — | — | — | 833,684 | — | — | 833,684 |
| Other\tcomprehensive\tincome: |  |  |  |  |  |  |  |
| Net\tunrealized\tinvestment\tgains,\tnet\tof\ttax\texpense\tof\t$20,363 | — | — | — | — | 34,583 | — | 34,583 |
| Reclassification\tadjustment\tfor\tnet\trealized\tgains\tincluded\tin\tnet\tearnings,\tnet\tof\ttax |  |  |  |  |  |  |  |
| expense\tof\t$4,311 | — | — | — | — | (7,357) | — | (7,357) |
| Comprehensive\tincome |  |  |  |  |  |  | 860,910 |
| Common\tstock\trepurchases | — | — | — | — | — | (27,412) | (27,412) |
| Stock-based\tcompensation | — | — | 42,132 | — | — | — | 42,132 |
| Restricted\tstock\tgrants | 852 | 142 | — | — | — | — | 142 |
| Restricted\tstock\tforfeitures | (64) | (11) | 8 | — | — | — | (3) |
| Stock\toption\texercises | 3,003 | 501 | 61,528 | — | — | — | 62,029 |
| Stock\toption\tand\trestricted\tstock\ttax\tbenefit | — | — | 37,253 | — | — | — | 37,253 |
| Balances,\tDecember\t31,\t2007 | 186,739 | 31,123 | 1,497,998 | 2,742,782 | 14,021 | (256,987) | 4,028,937 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |
| Net\tincome | — | — | — | 647,154 | — | — | 647,154 |
| Other\tcomprehensive\tloss: |  |  |  |  |  |  |  |
| Net\tunrealized\tinvestment\tlosses,\tnet\tof\ttax\tbenefit\tof\t$136,967 | — | — | — | — | (239,591) | — | (239,591) |
| Reclassification\tadjustment\tfor\tnet\trealized\tlosses\tincluded\tin\tnet\tearnings,\tnet\tof\ttax |  |  |  |  |  |  |  |
| benefit\tof\t$29,090 | — | — | — | — | 50,327 | — | 50,327 |
| Comprehensive\tincome |  |  |  |  |  |  | 457,890 |
| Common\tstock\trepurchases | — | — | — | — | — | (106,070) | (106,070) |
| Stock-based\tcompensation | — | — | 55,369 | — | — | — | 55,369 |
| Restricted\tstock\tgrants | 667 | 111 | — | — | — | — | 111 |
| Restricted\tstock\tforfeitures | (83) | (14) | 12 | — | — | — | (2) |
| Stock\toption\texercises | 534 | 89 | 11,331 | — | — | — | 11,420 |
| Stock\toption\tand\trestricted\tstock\ttax\tbenefit | — | — | 9,535 | — | — | — | 9,535 |
| Balances,\tDecember\t31,\t2008 | 187,857 | 31,309 | 1,574,245 | 3,389,936 | (175,243) | (363,057) | 4,457,190 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |
| Net\tincome | — | — | — | 1,039,675 | — | — | 1,039,675 |
| Other\tcomprehensive\tincome: |  |  |  |  |  |  |  |
| Net\tunrealized\tinvestment\tgains,\tnet\tof\ttax\texpense\tof\t$131,229 | — | — | — | — | 229,724 | — | 229,724 |
| Reclassification\tadjustment\tfor\tnet\trealized\tgains\tincluded\tin\tnet\tearnings,\tnet\tof\ttax |  |  |  |  |  |  |  |
| expense\tof\t$7,137 | — | — | — | — | (12,346) | — | (12,346) |
| Comprehensive\tincome |  |  |  |  |  |  | 1,257,053 |
| Common\tstock\trepurchases | — | — | — | — | — | (22,841) | (22,841) |
| Stock-based\tcompensation | — | — | 65,870 | — | — | — | 65,870 |
| Restricted\tstock\tgrants | 978 | 163 | — | — | — | — | 163 |
| Restricted\tstock\tforfeitures | (87) | (14) | 14 | — | — | — | — |
| Stock\toption\texercises | 1,053 | 176 | 18,173 | — | — | — | 18,349 |
| Stock\toption\tand\trestricted\tstock\ttax\tbenefit | — | — | 219 | — | — | — | 219 |
| Balances,\tDecember\t31,\t2009 | 189,801 | $ 31,634 | $ 1,658,521 | $ 4,429,611 | $42,135 | $ (385,898) | $5,776,003 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Cash\tflows\tfrom\toperating\tactivities |  |  |  |
| Net\tincome | $1,039,675 | $647,154 | $833,684 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 250,274 | 220,350 | 184,812 |
| Stock-based\tcompensation | 65,870 | 55,369 | 42,132 |
| Net\trealized\tcapital\t(gains)\tlosses | (19,483) | 79,417 | (11,668) |
| Loss\t(gain)\ton\tsale\tof\tproperty\tand\tequipment,\tnet | 228 | (5) | (13,597) |
| Benefit\tfrom\tdeferred\tincome\ttaxes | (26,792) | (22,005) | (32,736) |
| Provision\tfor\tdoubtful\taccounts | 19,054 | 5,398 | 28,922 |
| Changes\tin\toperating\tassets\tand\tliabilities,\tnet\tof\teffect\tof\tbusinesses\tacquired: |  |  |  |
| Receivables | (59,966) | (152,893) | 60,745 |
| Other\tassets | 112,473 | (100,887) | 105,689 |
| Benefits\tpayable | 16,995 | 412,725 | 245,397 |
| Other\tliabilities | 13,682 | (170,140) | (317,855) |
| Unearned\trevenues | (9,281) | (10,280) | 64,482 |
| Other | 18,853 | 18,107 | 34,255 |
| Net\tcash\tprovided\tby\toperating\tactivities | 1,421,582 | 982,310 | 1,224,262 |
| Cash\tflows\tfrom\tinvesting\tactivities |  |  |  |
| Acquisitions,\tnet\tof\tcash\tacquired | (12,436) | (422,915) | (493,493) |
| Purchases\tof\tproperty\tand\tequipment | (185,450) | (261,572) | (239,244) |
| Proceeds\tfrom\tsales\tof\tproperty\tand\tequipment | 1,509 | 6 | 26,514 |
| Purchases\tof\tinvestment\tsecurities | (7,197,007) | (5,681,103) | (3,488,631) |
| Maturities\tof\tinvestment\tsecurities | 1,270,525 | 498,650 | 1,387,967 |
| Proceeds\tfrom\tsales\tof\tinvestment\tsecurities | 3,951,326 | 4,496,929 | 1,670,555 |
| Change\tin\tsecurities\tlending\tcollateral | 312,272 | 871,681 | (709,059) |
| Net\tcash\tused\tin\tinvesting\tactivities | (1,859,261) | (498,324) | (1,845,391) |
| Cash\tflows\tfrom\tfinancing\tactivities |  |  |  |
| Receipts\tfrom\tCMS\tcontract\tdeposits | 2,354,238 | 2,761,276 | 2,866,170 |
| Withdrawals\tfrom\tCMS\tcontract\tdeposits | (1,860,748) | (2,572,624) | (3,051,241) |
| Borrowings\tunder\tcredit\tagreement | — | 1,175,000 | 1,685,000 |
| Repayments\tunder\tcredit\tagreement | (250,000) | (1,725,000) | (1,335,000) |
| Proceeds\tfrom\tissuance\tof\tsenior\tnotes | — | 749,247 | — |
| Debt\tissue\tcosts | — | (6,696) | — |
| Proceeds\tfrom\tswap\ttermination | — | 93,008 | — |
| Change\tin\tsecurities\tlending\tpayable | (312,272) | (898,350) | 709,059 |
| Change\tin\tbook\toverdraft | 149,922 | (44,684) | (24,379) |
| Common\tstock\trepurchases | (22,841) | (106,070) | (27,412) |
| Excess\ttax\tbenefit\tfrom\tstock-based\tcompensation | 5,339 | 9,912 | 37,443 |
| Proceeds\tfrom\tstock\toption\texercises\tand\tother | 17,206 | 10,965 | 61,638 |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities | 80,844 | (554,016) | 921,278 |
| (Decrease)\tincrease\tin\tcash\tand\tcash\tequivalents | (356,835) | (70,030) | 300,149 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 1,970,423 | 2,040,453 | 1,740,304 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $1,613,588 | $1,970,423 | $2,040,453 |
| Supplemental\tcash\tflow\tdisclosures: |  |  |  |
| Interest\tpayments | $112,532 | $73,813 | $67,954 |
| Income\ttax\tpayments,\tnet | $627,227 | $347,353 | $443,904 |
| Details\tof\tbusinesses\tacquired\tin\tpurchase\ttransactions: |  |  |  |
| Fair\tvalue\tof\tassets\tacquired,\tnet\tof\tcash\tacquired | $12,436 | $772,811 | $1,315,492 |
| Less:\tFair\tvalue\tof\tliabilities\tassumed | — | (349,896) | (821,999) |
| Cash\tpaid\tfor\tacquired\tbusinesses,\tnet\tof\tcash\tacquired | $12,436 | $422,915 | $493,493 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# 1.	REPORTING	ENTITY

# Nature	of	Operations

Headquartered	in	Louisville,	Kentucky,	Humana	is	one	of	the	nation's	largest	publicly	traded	health	and	supplemental	benefits	companies,	based	on	our	2009 revenues	of	approximately	$31.0	billion.	References	throughout	this	document	to	"we,"	"us,"	"our,"	"Company,"	and	"Humana,"	mean	Humana	Inc.	and	its	subsidiaries. We	are	a	full-service	benefits	solutions	company,	offering	a	wide	array	of	health	and	supplemental	benefit	products	for	employer	groups,	government	benefit	programs, and	individuals.	We	derived	approximately	73%	of	our	premiums	and	administrative	services	fees	from	contracts	with	the	federal	government	in	2009.	Under	our	federal government	contracts	with	the	Centers	for	Medicare	and	Medicaid	Services,	or	CMS,	we	provide	health	insurance	coverage	for	Medicare	Advantage	members	in	Florida, accounting	for	approximately	17%	of	our	total	premiums	and	administrative	services	fees	in	2009.	CMS	is	the	federal	government's	agency	responsible	for administering	the	Medicare	program.	Under	federal	government	contracts	with	the	Department	of	Defense	we	primarily	provide	health	insurance	coverage	to	TRICARE members,	accounting	for	approximately	12%	of	our	total	premiums	and	administrative	services	fees	in	2009.

We	manage	our	business	with	two	segments:	Government	and	Commercial.	The	Government	segment	consists	of	beneficiaries	of	government	benefit	programs, and	includes	three	lines	of	business:	Medicare,	Military,	and	Medicaid.	The	Commercial	segment	consists	of	members	enrolled	in	our	medical	and	specialty	products marketed	to	employer	groups	and	individuals.	When	identifying	our	segments,	we	aggregate	products	with	similar	economic	characteristics.	These	characteristics include	the	nature	of	customer	groups	as	well	as	pricing,	benefits,	and	underwriting	requirements.	These	segment	groupings	are	consistent	with	information	used	by	our Chief	Executive	Officer.

The	accounting	policies	of	each	segment	are	the	same	and	are	described	in	Note	2.	The	results	of	each	segment	are	measured	by	income	before	income	taxes.	We allocate	all	selling,	general	and	administrative	expenses,	investment	and	other	revenue,	interest	expense,	and	goodwill,	but	no	other	assets	or	liabilities,	to	our	segments. Members	served	by	our	two	segments	often	utilize	the	same	medical	provider	networks,	in	some	instances	enabling	us	to	obtain	more	favorable	contract	terms	with providers.	Our	segments	also	share	indirect	overhead	costs	and	assets.	As	a	result,	the	profitability	of	each	segment	is	interdependent.

# 2.	SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES

# Basis	of	Presentation

Our	financial	statements	and	accompanying	notes	are	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	Our consolidated	financial	statements	include	the	accounts	of	Humana	Inc.	and	subsidiaries	that	the	Company	controls.	All	significant	intercompany	balances	and transactions	have	been	eliminated.

The	preparation	of	financial	statements	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America	requires	us	to	make	estimates and	assumptions	that	affect	the	amounts	reported	in	the	consolidated	financial	statements	and	accompanying	notes.	The	areas	involving	the	most	significant	use	of estimates	are	the	estimation	of	benefits	payable,	the	impact	of	risk	sharing	provisions	related	to	our	Medicare	and	TRICARE	contracts,	the	valuation	and	related impairment	recognition	of	investment	securities,	and	the	valuation	and	related	impairment	recognition	of	long-lived	assets,	including	goodwill.	These	estimates	are based	on	knowledge	of	current	events	and	anticipated	future	events,	and	accordingly,	actual	results	may	ultimately	differ	materially	from	those	estimates.

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued)

# Cash	and	Cash	Equivalents

Cash	and	cash	equivalents	include	cash,	time	deposits,	money	market	funds,	commercial	paper,	other	money	market	instruments,	and	certain	U.S.	Government securities	with	an	original	maturity	of	three	months	or	less.	Carrying	value	approximates	fair	value	due	to	the	short-term	maturity	of	the	investments.

Investment	securities,	which	consist	primarily	of	debt	securities,	have	been	categorized	as	available	for	sale	and,	as	a	result,	are	stated	at	fair	value.	Investment securities	available	for	current	operations	are	classified	as	current	assets.	Investment	securities	available	for	our	long-term	insurance	product	and	professional	liability funding	requirements,	as	well	as	restricted	statutory	deposits	and	venture	capital	investments,	are	classified	as	long-term	assets.	For	the	purpose	of	determining	gross realized	gains	and	losses,	which	are	included	as	a	component	of	investment	income	in	the	consolidated	statements	of	income,	the	cost	of	investment	securities	sold	is based	upon	specific	identification.	Unrealized	holding	gains	and	losses,	net	of	applicable	deferred	taxes,	are	included	as	a	component	of	stockholders'	equity	and comprehensive	income	until	realized	from	a	sale	or	other	than	temporary	impairment,	or	OTTI.

In	April	2009,	the	Financial	Accounting	Standards	Board,	or	the	FASB,	issued	new	guidance	to	address	concerns	about	(1)	measuring	the	fair	value	of	financial instruments	when	the	markets	become	inactive	and	quoted	prices	may	reflect	distressed	transactions	and	(2)	recording	impairment	charges	on	investments	in	debt securities.	FASB	also	issued	guidance	to	require	disclosures	of	fair	values	of	certain	financial	instruments	in	interim	financial	statements	to	provide	financial	statement users	with	more	timely	information	about	the	effects	of	current	market	conditions	on	their	financial	instruments.	The	new	guidance	highlights	and	expands	on	the	factors that	should	be	considered	in	estimating	fair	value	when	the	volume	and	level	of	activity	for	a	financial	asset	or	liability	has	significantly	decreased	and	requires	new disclosures	relating	to	fair	value	measurement	inputs	and	valuation	techniques	(including	changes	in	inputs	and	valuation	techniques).	In	addition,	new	guidance regarding	recognition	and	presentation	of	other-than-temporary	impairments	changed	(1)	the	trigger	for	determining	whether	an	other-than-temporary	impairment	exists and	(2)	the	amount	of	an	impairment	charge	to	be	recorded	in	earnings.	We	adopted	the	provisions	of	the	new	guidance	for	the	quarter	ended	June	30,	2009.	Refer	to Note	4	and	Note	5.

Under	the	new	other-than-temporary	impairment	model	for	debt	securities	held,	we	recognize	an	impairment	loss	in	income	in	an	amount	equal	to	the	full difference	between	the	amortized	cost	basis	and	the	fair	value	when	we	have	the	intent	to	sell	the	debt	security	or	it	is	more	likely	than	not	we	will	be	required	to	sell	the debt	security	before	recovery	of	our	amortized	cost	basis.	However,	if	we	do	not	intend	to	sell	the	debt	security,	we	evaluate	the	expected	cash	flows	to	be	received	as compared	to	amortized	cost	and	determine	if	a	credit	loss	has	occurred.	In	the	event	of	a	credit	loss,	only	the	amount	of	the	impairment	associated	with	the	credit	loss	is recognized	currently	in	income	with	the	remainder	of	the	loss	recognized	in	other	comprehensive	income.	A	transition	adjustment	to	reclassify	the	non-credit	portion	of any	previously	recognized	impairment	from	retained	earnings	to	accumulated	other	comprehensive	income	was	required	upon	adoption	if	we	did	not	intend	to	sell	and	it was	not	more	likely	than	not	that	we	would	be	required	to	sell	the	security	before	recovery	of	its	amortized	cost	basis.	We	did	not	record	a	transition	adjustment	for securities	previously	considered	other-than-temporarily	impaired	because	these	securities	were	already	sold	or	we	had	the	intent	to	sell	these	securities.

When	we	do	not	intend	to	sell	a	security	in	an	unrealized	loss	position,	potential	OTTI	is	considered	using	a	variety	of	factors,	including	the	length	of	time	and extent	to	which	the	fair	value	has	been	less	than	cost;	adverse	conditions	specifically	related	to	the	industry,	geographic	area	or	financial	condition	of	the	issuer	or underlying	collateral	of	a	security;	payment	structure	of	the	security;	changes	in	credit	rating	of	the	security	by	the	rating	agencies;	the	volatility	of	the	fair	value changes;	and	changes	in	fair	value	of	the	security	after	the	balance	sheet

date.	For	debt	securities,	we	take	into	account	expectations	of	relevant	market	and	economic	data.	For	example,	with	respect	to	mortgage	and	asset-backed	securities, such	data	includes	underlying	loan	level	data	and	structural	features	such	as	seniority	and	other	forms	of	credit	enhancements.	A	decline	in	fair	value	is	considered other-than-temporary	when	we	do	not	expect	to	recover	the	entire	amortized	cost	basis	of	the	security.	We	estimate	the	amount	of	the	credit	loss	component	of	a	debt security	as	the	difference	between	the	amortized	cost	and	the	present	value	of	the	expected	cash	flows	of	the	security.	The	present	value	is	determined	using	the	best estimate	of	future	cash	flows	discounted	at	the	implicit	interest	rate	at	the	date	of	purchase.

We	participate	in	a	securities	lending	program	to	optimize	investment	income.	We	loan	certain	investment	securities	for	short	periods	of	time	in	exchange	for collateral	initially	equal	to	at	least	102%	of	the	fair	value	of	the	investment	securities	on	loan.	The	fair	value	of	the	loaned	investment	securities	is	monitored	on	a	daily basis,	with	additional	collateral	obtained	or	refunded	as	the	fair	value	of	the	loaned	investment	securities	fluctuates.	The	collateral,	which	may	be	in	the	form	of	cash	or U.S.	Government	securities,	is	deposited	by	the	borrower	with	an	independent	lending	agent.	Any	cash	collateral	is	recorded	on	our	consolidated	balance	sheets,	along with	a	liability	to	reflect	our	obligation	to	return	the	collateral.	The	cash	collateral	is	invested	by	the	lending	agent	according	to	our	investment	guidelines,	primarily	in money	market	funds,	certificates	of	deposit,	and	short-term	corporate	and	asset-backed	securities,	and	accounted	for	consistent	with	our	investment	securities.	Collateral received	in	the	form	of	securities	is	not	recorded	in	our	consolidated	balance	sheets	because,	absent	default	by	the	borrower,	we	do	not	have	the	right	to	sell,	pledge	or otherwise	reinvest	securities	collateral.	Loaned	securities	continue	to	be	carried	as	investment	securities	on	the	consolidated	balance	sheets.	Earnings	on	the	invested	cash collateral,	net	of	expense,	associated	with	the	securities	lending	payable	are	recorded	as	investment	income.

# Receivables	and	Revenue	Recognition

Premium	revenues	are	recognized	as	income	in	the	period	members	are	entitled	to	receive	services,	and	are	net	of	estimated	uncollectible	amounts	and	retroactive membership	adjustments.	Retroactive	membership	adjustments	result	from	enrollment	changes	not	yet	processed,	or	not	yet	reported	by	an	employer	group	or	the government.	We	routinely	monitor	the	collectibility	of	specific	accounts,	the	aging	of	receivables,	historical	retroactivity	trends,	as	well	as	prevailing	and	anticipated economic	conditions,	and	reflect	any	required	adjustments	in	current	operations.

# Medicare	Part	D

We	cover	prescription	drug	benefits	in	accordance	with	Medicare	Part	D	under	multiple	contracts	with	CMS.	The	payments	we	receive	monthly	from	CMS	and members,	which	are	determined	from	our	annual	bid,	represent	amounts	for	providing	prescription	drug	insurance	coverage.	We	recognize	premium	revenues	for

providing	this	insurance	coverage	ratably	over	the	term	of	our	annual	contract.	Our	CMS	payment	is	subject	to	risk	sharing	through	the	Medicare	Part	D	risk	corridor provisions.	In	addition,	receipts	for	reinsurance	and	low-income	cost	subsidies	represent	payments	for	prescription	drug	costs	for	which	we	are	not	at	risk.

Reinsurance	and	low-income	cost	subsidies	represent	funding	from	CMS	in	connection	with	the	Medicare	Part	D	program	for	which	we	assume	no	risk. Reinsurance	subsidies	represent	funding	from	CMS	for	its	portion	of	prescription	drug	costs	which	exceed	the	member's	out-of-pocket	threshold,	or	the	catastrophic coverage	level.	Low-income	cost	subsidies	represent	funding	from	CMS	for	all	or	a	portion	of	the	deductible,	the	coinsurance	and	co-payment	amounts	above	the	out-of- pocket	threshold	for	low-income	beneficiaries.	Monthly	prospective	payments	from	CMS	for	reinsurance	and	low-income	cost	subsidies	are	based	on	assumptions submitted	with	our	annual	bid.	A	reconciliation	and	related	settlement	of	CMS's	prospective	subsidies	against	actual	prescription	drug	costs	we	paid	is	made	after	the end	of	the	year.	We	account	for	these	subsidies	as	a	deposit	in	our	consolidated	balance	sheets	and	as	a	financing	activity	in	our	consolidated	statements	of	cash	flows. We	do	not	recognize	premium	revenues	or	benefit	expense	for	these	subsidies.	Receipt	and	payment	activity	is	accumulated	at	the	contract	level	and	recorded	in	our consolidated	balance	sheets	in	other	current	assets	or	trade	accounts	payable	and	accrued	expenses	depending	on	the	contract	balance	at	the	end	of	the	reporting	period.

For	plans	where	we	provide	enhanced	benefits	and	selected	the	alternative	demonstration	payment	option	in	lieu	of	the	reinsurance	subsidy,	we	receive	a	monthly per	member	capitation	amount	from	CMS	determined	from	our	annual	bid	submissions.	The	capitation	amount	we	receive	from	CMS	for	assuming	the	government's portion	of	prescription	drug	costs	in	the	catastrophic	layer	of	coverage	is	recorded	as	premium	revenue.	The	variance	between	the	capitation	amount	and	actual	drug costs	in	the	catastrophic	layer	is	subject	to	risk	sharing	as	part	of	the	risk	corridor	settlement.	See	Note	6	for	detail	regarding	amounts	recorded	to	the	consolidated balance	sheets	related	to	the	risk	corridor	settlement	and	subsidies	from	CMS.

Settlement	of	the	reinsurance	and	low-income	cost	subsidies	as	well	as	the	risk	corridor	payment	is	based	on	a	reconciliation	made	approximately	9	months	after the	close	of	each	calendar	year.	We	continue	to	revise	our	estimates	with	respect	to	the	risk	corridor	provisions	based	on	subsequent	period	pharmacy	claims	data.

Military	services	revenue	primarily	is	derived	from	our	TRICARE	South	Region	contract	with	the	Department	of	Defense,	or	DoD.	We	allocate	the	consideration to	the	various	components	of	the	contract	based	on	the	relative	fair	value	of	the	components.	TRICARE	revenues	consist	generally	of	(1)	an	insurance	premium	for assuming	underwriting	risk	for	the	cost	of	civilian	health	care	services	delivered	to	eligible	beneficiaries;	(2)	health	care	services	provided	to	beneficiaries	which	are	in turn	reimbursed	by	the	federal	government;	and	(3)	administrative	services	fees	related	to	claim	processing,	customer	service,	enrollment,	disease	management	and	other services.	We	recognize	the	insurance	premium	as	revenue	ratably	over	the	period	coverage	is	provided.	Health	care	services	reimbursements	are	recognized	as	revenue	in the	period	health	services	are	provided.

Administrative	services	fees	are	recognized	as	revenue	in	the	period	services	are	performed.	Our	TRICARE	South	Region	contract	contains	provisions	to	share	the	risk associated	with	financing	the	cost	of	health	benefits	with	the	federal	government.	We	earn	more	revenue	or	incur	additional	costs	based	on	the	variance	of	actual	health care	costs	versus	a	negotiated	target	cost.	We	defer	the	recognition	of	any	contingent	revenues	for	favorable	variances	until	the	end	of	the	contract	period	when	the amount	is	determinable	and	the	collectibility	is	reasonably	assured.	We	estimate	and	recognize	contingent	benefit	expense	for	unfavorable	variances	currently	in	our results	of	operations.	We	continually	review	the	contingent	benefit	expense	estimates	of	future	payments	to	the	government	for	cost	overruns	relative	to	our	negotiated target	cost	and	make	necessary	adjustments	to	our	reserves.

Revenues	also	may	include	change	orders	attributable	to	our	military	services	contracts.	Change	orders	represent	equitable	adjustments	for	services	not	originally specified	in	the	contracts.	Revenues	for	these	adjustments	are	recognized	when	a	settlement	amount	becomes	determinable	and	the	collectibility	is	reasonably	assured.

Administrative	services	fees	cover	the	processing	of	claims,	offering	access	to	our	provider	networks	and	clinical	programs,	and	responding	to	customer	service inquiries	from	members	of	self-funded	groups.	Revenues	from	providing	administration	services,	also	known	as	administrative	services	only,	or	ASO,	are	recognized	in the	period	services	are	performed.	Under	ASO	contracts,	self-funded	employers	retain	the	risk	of	financing	substantially	all	of	the	cost	of	health	benefits.	However,	many ASO	customers	purchase	stop	loss	insurance	coverage	from	us	to	cover	catastrophic	claims	or	to	limit	aggregate	annual	costs.	Accordingly,	we	have	recorded	premiums and	benefit	expenses	related	to	these	stop	loss	arrangements.

Premium	and	ASO	fee	receivables	are	shown	net	of	allowances	for	estimated	uncollectible	accounts	and	retroactive	membership	adjustments.	Premiums	and	ASO fees	received	prior	to	the	service	period	are	recorded	as	unearned	revenues.

Other	revenues	primarily	relate	to	RightSourceRx ,	our	mail-order	pharmacy.	These	revenues	are	recognized	in	connection	with	the	shipment	of	the prescriptions. SM

# Policy	Acquisition	Costs

Policy	acquisition	costs	are	those	costs	that	vary	with	and	primarily	are	related	to	the	acquisition	of	new	and	renewal	business.	Such	costs	include	commissions, costs	of	policy	issuance	and	underwriting,	and	other	costs	we	incur	to	acquire	new	business	or	renew	existing	business.	We	expense	policy	acquisition	costs	related	to our	employer-group	prepaid	health	services	policies	as	incurred.	These	short-duration	employer-group	prepaid	health	services	policies	typically	have	a	one-year	term and	may	be	cancelled	upon	30	days	notice	by	the	employer	group.

Life	insurance,	annuities,	health	and	other	supplemental	policies	sold	to	individuals	are	accounted	for	as	long-duration	insurance	products	because	they	are expected	to	remain	in	force	for	an	extended	period	beyond	one	year	due	to	contractual	and	regulatory	requirements.	As	a	result,	we	defer	policy	acquisition	costs	and amortize	them	over	the	estimated	life	of	the	policies	in	proportion	to	premiums	earned.	Deferred	acquisition	costs	are	reviewed	annually	to	determine	if	they	are recoverable	from	future	income.

# Long-Lived	Assets

Property	and	equipment	is	recorded	at	cost.	Gains	and	losses	on	sales	or	disposals	of	property	and	equipment	are	included	in	administrative	expense.	Certain	costs related	to	the	development	or	purchase	of	internal-use	software	are	capitalized.	Depreciation	is	computed	using	the	straight-line	method	over	estimated	useful	lives ranging	from	3	to	10	years	for	equipment,	3	to	7	years	for	computer	software,	and	20	to	40	years	for	buildings.	Improvements	to	leased	facilities	are	depreciated	over	the shorter	of	the	remaining	lease	term	or	the	anticipated	life	of	the	improvement.

We	periodically	review	long-lived	assets,	including	property	and	equipment	and	other	intangible	assets,	for	impairment	whenever	adverse	events	or	changes	in circumstances	indicate	the	carrying	value	of	the	asset	may	not	be	recoverable.	Losses	are	recognized	for	a	long-lived	asset	to	be	held	and	used	in	our	operations	when	the undiscounted	future	cash	flows	expected	to	result	from	the	use	of	the	asset	are	less	than	its	carrying	value.	We	recognize	an	impairment	loss	based	on	the	excess	of	the carrying	value	over	the	fair	value	of	the	asset.	A	long-lived	asset	held	for	sale	is	reported	at	the	lower	of	the	carrying	amount	or	fair	value	less	costs	to	sell.	Depreciation expense	is	not	recognized	on	assets	held	for	sale.	Losses	are	recognized	for	a	long-lived	asset	to	be	abandoned	when	the	asset	ceases	to	be	used.	In	addition,	we periodically	review	the	estimated	lives	of	all	long-lived	assets	for	reasonableness.

# Goodwill	and	Other	Intangible	Assets

Goodwill	represents	the	unamortized	excess	of	cost	over	the	fair	value	of	the	net	tangible	and	other	intangible	assets	acquired.	We	are	required	to	test	at	least annually	for	impairment	at	a	level	of	reporting	referred	to	as	the	reporting	unit,	and	more	frequently	if	adverse	events	or	changes	in	circumstances	indicate	that	the	asset may	be	impaired.	A	reporting	unit	either	is	our	operating	segments	or	one	level	below	the	operating	segments,	referred	to	as	a	component,	which	comprise	our reportable	Commercial	and	Government	segments.	A	component	is	considered	a	reporting	unit	if	the	component	constitutes	a	business	for	which	discrete	financial information	is	available	that	is	regularly	reviewed	by	management.	We	aggregate	the	components	of	an	operating	segment	into	one	reporting	unit	if	they	have	similar economic	characteristics.	Goodwill	is	assigned	to	the	reporting	unit	that	is	expected	to	benefit	from	a	specific	acquisition.

We	use	a	two-step	process	to	review	goodwill	for	impairment.	The	first	step	is	a	screen	for	potential	impairment,	and	the	second	step	measures	the	amount	of impairment,	if	any.	Impairment	tests	are	performed,	at	a	minimum,	in	the	fourth	quarter	of	each	year	supported	by	our	long-range	business	plan	and	annual	planning process.	Impairment	tests	completed	for	2009,	2008	and	2007	did	not	result	in	an	impairment	loss.

Other	intangible	assets	primarily	relate	to	acquired	customer	contracts	and	are	included	with	other	long-term	assets	in	the	consolidated	balance	sheets.	Other intangible	assets	are	amortized	over	the	useful	life,	based	upon	the	pattern	of	future	cash	flows	attributable	to	the	asset.	This	sometimes	results	in	an	accelerated	method of	amortization	for	customer	contracts	because	the	asset	tends	to	dissipate	at	a	more	rapid	rate	in	earlier	periods.	Other	than	customer	contracts,	other	intangible	assets generally	are	amortized	using	the	straight-line	method.	We	review	other	finite-lived	intangible	assets	for	impairment	under	our	long-lived	asset	policy.

# Benefits	Payable	and	Benefit	Expense	Recognition

Benefit	expenses	include	claim	payments,	capitation	payments,	pharmacy	costs	net	of	rebates,	allocations	of	certain	centralized	expenses	and	various	other	costs incurred	to	provide	health	insurance	coverage	to	members,	as	well	as	estimates	of	future	payments	to	hospitals	and	others	for	medical	care	and	other	supplemental benefits	provided	prior	to	the	balance	sheet	date.	Capitation	payments	represent	monthly	contractual	fees	disbursed	to

primary	care	physicians	and	other	providers	who	are	responsible	for	providing	medical	care	to	members.	Pharmacy	costs	represent	payments	for	members'	prescription drug	benefits,	net	of	rebates	from	drug	manufacturers.	Receivables	for	such	pharmacy	rebates	are	included	in	other	current	assets	in	the	consolidated	balance	sheets. Other	supplemental	benefits	include	dental,	vision,	and	other	voluntary	benefits.

We	estimate	the	costs	of	our	benefit	expense	payments	using	actuarial	methods	and	assumptions	based	upon	claim	payment	patterns,	medical	cost	inflation, historical	developments	such	as	claim	inventory	levels	and	claim	receipt	patterns,	and	other	relevant	factors,	and	record	benefit	reserves	for	future	payments.	We continually	review	estimates	of	future	payments	relating	to	claims	costs	for	services	incurred	in	the	current	and	prior	periods	and	make	necessary	adjustments	to	our reserves.

We	reassess	the	profitability	of	our	contracts	for	providing	insurance	coverage	to	our	members	when	current	operating	results	or	forecasts	indicate	probable	future losses.	We	establish	a	premium	deficiency	liability	in	current	operations	to	the	extent	that	the	sum	of	expected	future	costs,	claim	adjustment	expenses,	and	maintenance costs	exceeds	related	future	premiums	under	contract	without	consideration	of	investment	income.	For	purposes	of	determining	premium	deficiencies,	contracts	are grouped	in	a	manner	consistent	with	our	method	of	acquiring,	servicing,	and	measuring	the	profitability	of	such	contracts.	Losses	recognized	as	a	premium	deficiency result	in	a	beneficial	effect	in	subsequent	periods	as	operating	losses	under	these	contracts	are	charged	to	the	liability	previously	established.	Because	the	majority	of	our member	contracts	renew	annually,	we	do	not	anticipate	recording	a	material	premium	deficiency	liability,	except	when	unanticipated	adverse	events	or	changes	in circumstances	indicate	otherwise.

We	believe	our	benefits	payable	are	adequate	to	cover	future	claims	payments	required.	However,	such	estimates	are	based	on	knowledge	of	current	events	and anticipated	future	events.	Therefore,	the	actual	liability	could	differ	materially	from	the	amounts	provided.

# Future	policy	benefits	payable

Future	policy	benefits	payable	include	liabilities	for	long-duration	insurance	policies	including	life	insurance,	annuities,	health,	and	long-term	care	policies	sold	to individuals	for	which	some	of	the	premium	received	in	the	earlier	years	is	intended	to	pay	anticipated	benefits	to	be	incurred	in	future	years.	These	reserves	are recognized	on	a	net	level	premium	method	based	on	interest,	mortality,	morbidity,	withdrawal	and	maintenance	expense	assumptions	from	published	actuarial	tables, modified	based	upon	actual	experience.	Changes	in	estimates	of	these	reserves	are	recognized	as	an	adjustment	to	benefit	expenses	in	the	period	the	changes	occur.

# Book	Overdraft

Under	our	cash	management	system,	checks	issued	but	not	yet	presented	to	banks	frequently	result	in	overdraft	balances	for	accounting	purposes	and	are classified	as	a	current	liability	in	the	consolidated	balance	sheets.	Changes	in	book	overdrafts	from	period	to	period	are	reported	in	the	consolidated	statement	of	cash flows	as	a	financing	activity.

We	recognize	an	asset	or	liability	for	the	deferred	tax	consequences	of	temporary	differences	between	the	tax	bases	of	assets	or	liabilities	and	their	reported amounts	in	the	consolidated	financial	statements.	These	temporary	differences	will	result	in	taxable	or	deductible	amounts	in	future	years	when	the	reported	amounts	of the	assets	or	liabilities	are	recovered	or	settled.	We	also	recognize	the	future	tax	benefits	such	as	net	operating

and	capital	loss	carryforwards	as	deferred	tax	assets.	A	valuation	allowance	is	provided	against	these	deferred	tax	assets	if	it	is	more	likely	than	not	that	some	portion	or all	of	the	deferred	tax	assets	will	not	be	realized.	Future	years'	tax	expense	may	be	increased	or	decreased	by	adjustments	to	the	valuation	allowance	or	to	the	estimated accrual	for	income	taxes.

We	record	tax	benefits	when	it	is	more	likely	than	not	that	the	tax	return	position	taken	with	respect	to	a	particular	transaction	will	be	sustained.	A	liability,	if recorded,	is	not	considered	resolved	until	the	statute	of	limitations	for	the	relevant	taxing	authority	to	examine	and	challenge	the	tax	position	has	expired,	or	the	tax position	is	ultimately	settled	through	examination,	negotiation,	or	litigation.	We	classify	interest	and	penalties	associated	with	uncertain	tax	positions	in	our	provision	for income	taxes.

# Derivative	Financial	Instruments

At	times,	we	may	use	interest-rate	swap	agreements	to	manage	our	exposure	to	interest	rate	risk.	The	differential	between	fixed	and	variable	rates	to	be	paid	or received	is	accrued	and	recognized	over	the	life	of	the	agreements	as	adjustments	to	interest	expense	in	the	consolidated	statements	of	income.	Our	interest-rate	swap agreements	convert	the	fixed	interest	rates	on	our	senior	notes	to	a	variable	rate	and	are	accounted	for	as	fair	value	hedges.	Our	interest-rate	swap	agreements,	terminated in	2008,	are	more	fully	described	in	Note	12.

# Stock-Based	Compensation

We	recognize	stock-based	compensation	expense,	as	determined	on	the	date	of	grant	at	fair	value,	straight-line	over	the	period	during	which	an	employee	is required	to	provide	service	in	exchange	for	the	award	(usually	the	vesting	period).	We	estimate	expected	forfeitures	and	recognize	compensation	expense	only	for	those awards	which	are	expected	to	vest.	We	estimate	the	grant-date	fair	value	of	stock	options	using	the	Black-Scholes	option-pricing	model.	In	addition,	we	report	certain	tax effects	of	stock-based	compensation	as	a	financing	activity	rather	than	an	operating	activity	in	the	consolidated	statement	of	cash	flows.	Additional	detail	regarding	our stock-based	compensation	plans	is	included	in	Note	13.

# Earnings	Per	Common	Share

We	compute	basic	earnings	per	common	share	on	the	basis	of	the	weighted-average	number	of	unrestricted	common	shares	outstanding.	Diluted	earnings	per common	share	is	computed	on	the	basis	of	the	weighted-average	number	of	unrestricted	common	shares	outstanding	plus	the	dilutive	effect	of	outstanding	employee stock	options	and	restricted	shares	using	the	treasury	stock	method.

# Fair	Value

Assets	and	liabilities	measured	at	fair	value	are	categorized	into	a	fair	value	hierarchy	based	on	whether	the	inputs	to	valuation	techniques	are	observable	or unobservable.	Observable	inputs	reflect	market	data	obtained	from	independent	sources,	while	unobservable	inputs	reflect	our	own	assumptions	about	the	assumptions market	participants	would	use.	The	fair	value	hierarchy	includes	three	levels	of	inputs	that	may	be	used	to	measure	fair	value	as	described	below.

Level	1—Quoted	prices	in	active	markets	for	identical	assets	or	liabilities.	Level	1	assets	and	liabilities	include	debt	and	equity	securities	that	are	traded	in	an active	exchange	market.

Level	2—Observable	inputs	other	than	Level	1	prices	such	as	quoted	prices	in	active	markets	for	similar	assets	or	liabilities,	quoted	prices	for	identical	or	similar assets	or	liabilities	in	markets	that	are	not	active,	or	other	inputs	that	are	observable	or	can	be	corroborated	by	observable	market	data	for	substantially	the	full

term	of	the	assets	or	liabilities.	Level	2	assets	and	liabilities	include	debt	securities	with	quoted	prices	that	are	traded	less	frequently	than	exchange-traded instruments	as	well	as	debt	securities	and	derivative	contracts	whose	value	is	determined	using	a	pricing	model	with	inputs	that	are	observable	in	the	market	or can	be	derived	principally	from	or	corroborated	by	observable	market	data.

Level	3—Unobservable	inputs	that	are	supported	by	little	or	no	market	activity	and	are	significant	to	the	fair	value	of	the	assets	or	liabilities.	Level	3	includes assets	and	liabilities	whose	value	is	determined	using	pricing	models,	discounted	cash	flow	methodologies,	or	similar	techniques	reflecting	our	own	assumptions about	the	assumptions	market	participants	would	use	as	well	as	those	requiring	significant	management	judgment.

Fair	value	of	actively	traded	debt	and	equity	securities	are	based	on	quoted	market	prices.	Fair	value	of	other	debt	securities	are	based	on	quoted	market	prices	of identical	or	similar	securities	or	based	on	observable	inputs	like	interest	rates	using	either	a	market	or	income	valuation	approach	and	are	generally	classified	as	Level	2. Fair	value	of	privately	held	debt	securities,	including	venture	capital	investments,	as	well	as	auction	rate	securities,	are	estimated	using	a	variety	of	valuation methodologies,	including	both	market	and	income	approaches,	where	an	observable	quoted	market	does	not	exist	and	are	generally	classified	as	Level	3.	For	privately held	debt	securities,	such	methodologies	include	reviewing	the	value	ascribed	to	the	most	recent	financing,	comparing	the	security	with	securities	of	publicly	traded companies	in	similar	lines	of	business,	and	reviewing	the	underlying	financial	performance	including	estimating	discounted	cash	flows.	For	auction	rate	securities,	such methodologies	include	consideration	of	the	quality	of	the	sector	and	issuer,	underlying	collateral,	underlying	final	maturity	dates	and	liquidity.

In	June	2009,	the	FASB	codified	existing	accounting	standards.	The	FASB	Accounting	Standards	Codification ,	or	ASC,	is	the	source	of	authoritative	U.S. generally	accepted	accounting	principles	recognized	by	the	FASB	and	supersedes	all	existing	non-SEC	accounting	and	reporting	standards.	All	ASC	content	carries	the same	level	of	authority	and	anything	outside	of	the	ASC	is	nonauthoritative.	We	adopted	the	new	guidance	in	2009,	which	changed	the	way	we	reference	accounting standards	in	our	disclosures. TM

# Subsequent	Events

We	have	evaluated	subsequent	events	for	recognition	or	disclosure	through	February	19,	2010,	the	date	these	consolidated	financial	statements	were	issued.

# 3.	ACQUISITIONS

On	October	31,	2008,	we	acquired	PHP	Companies,	Inc.	(d/b/a	Cariten	Healthcare),	or	Cariten,	for	cash	consideration	of	approximately	$256.1	million.	The Cariten	acquisition	increased	our	commercial	fully-insured	and	ASO	presence	as	well	as	our	Medicare	HMO	presence	in	eastern	Tennessee.	During	2009,	we	continued our	review	of	the	fair	value	estimate	of	certain	other	intangible	and	net	tangible	assets	acquired.	This	review	resulted	in	a	decrease	of	$27.1	million	in	the	fair	value	of other	intangible	assets,	primarily	related	to	the	fair	value	assigned	to	the	customer	contracts	acquired.	There	was	a	corresponding	adjustment	to	goodwill	and	deferred income	taxes.	The	total	consideration	paid	exceeded	our	estimated	fair	value	of	the	net	tangible	assets	acquired	by	approximately	$110.9	million	of	which	we	allocated $52.3	million	to	other	intangible	assets	and	$58.6	million	to	goodwill.	The	other	intangible	assets,	which	primarily	consist	of	customer	contracts,	have	a	weighted- average	useful	life	of	11.6	years.	The	acquired	goodwill	is	not	deductible	for	tax	purposes.

On	August	29,	2008,	we	acquired	Metcare	Health	Plans,	Inc.,	or	Metcare,	for	cash	consideration	of	approximately	$14.9	million.	The	acquisition	expanded	our Medicare	HMO	membership	in	central	Florida.

On	May	22,	2008,	we	acquired	OSF	Health	Plans,	Inc.,	or	OSF,	a	managed	care	company	serving	both	Medicare	and	commercial	members	in	central	Illinois,	for cash	consideration	of	approximately	$87.3	million,	including	the	payment	of	$3.3	million	during	2009	to	settle	a	purchase	price	contingency.	This	acquisition	expanded our	presence	in	Illinois,	broadening	our	ability	to	serve	multi-location	employers	with	a	wider	range	of	products	including	our	specialty	offerings.	The	total	consideration paid	exceeded	our	estimated	fair	value	of	the	net	tangible	assets	acquired	by	approximately	$31.1	million	of	which	we	allocated	$10.1	million	to	other	intangible	assets and	$21.0	million	to	goodwill.	The	other	intangible	assets,	which	primarily	consist	of	customer	contracts,	have	a	weighted-average	useful	life	of	9.9	years.	The	acquired goodwill	is	not	deductible	for	tax	purposes.

On	April	30,	2008,	we	acquired	UnitedHealth	Group's	Las	Vegas,	Nevada	individual	SecureHorizons	Medicare	Advantage	HMO	business,	or	SecureHorizons, for	cash	consideration	of	approximately	$185.3	million,	plus	subsidiary	capital	and	surplus	requirements	of	$40	million.	The	acquisition	expanded	our	presence	in	the Las	Vegas	market.	The	total	consideration	paid	exceeded	our	estimated	fair	value	of	the	net	tangible	assets	acquired	by	approximately	$185.3	million	of	which	we allocated	$69.3	million	to	other	intangible	assets	and	$116.0	million	to	goodwill.	The	other	intangible	assets,	which	primarily	consist	of	customer	contracts,	have	a weighted-average	useful	life	of	10.9	years.	The	acquired	goodwill	is	not	deductible	for	tax	purposes.

The	Cariten,	OSF,	and	Metcare	purchase	agreements	contain	provisions	under	which	there	may	be	future	contingent	consideration	paid	or	received,	primarily related	to	balance	sheet	settlements	associated	with	medical	claims	runout	and	Medicare	reconciliations	with	the	Centers	for	Medicare	and	Medicaid	Services,	or	CMS. Any	contingent	consideration	paid	or	received	will	be	recorded	as	an	adjustment	to	goodwill	when	the	contingencies	are	resolved.

On	November	30,	2007,	we	acquired	KMG	America	Corporation,	or	KMG,	for	cash	consideration	of	$155.2	million	plus	the	assumption	of	$36.1	million	of	long- term	debt.	KMG	provides	long-duration	insurance	benefits	including	supplemental	health	and	life	products.	The	acquisition	expanded	our	commercial	product	offerings allowing	for	significant	cross-selling	opportunities	with	our	medical	insurance	products.	The	total	consideration	paid	exceeded	our	estimated	fair	value	of	the	net	tangible assets	acquired	by	approximately	$204.5	million	of	which	we	allocated	$43.0	million	to	other	intangible	assets	and	$161.5	million	to	goodwill.	The	other	intangible assets,	which	primarily	consist	of	customer	contracts,	have	a	weighted-average	useful	life	of	19.3	years.	The	acquired	goodwill	is	not	deductible	for	tax	purposes.

On	October	1,	2007,	we	acquired	CompBenefits	Corporation,	or	CompBenefits,	for	cash	consideration	of	$369.6	million.	CompBenefits	provides	dental	and vision	insurance	benefits.	The	acquisition	expanded	our	commercial	product	offerings	allowing	for	significant	cross-selling	opportunities	with	our	medical	insurance products.	The	total	consideration	paid	exceeded	our	estimated	fair	value	of	the	net	tangible	assets	acquired	by	approximately	$354.9	million	of	which	we	allocated	$54.1 million	to	other	intangible	assets	and	$300.8	million	to	goodwill.	The	other	intangible	assets,	which	primarily	consist	of	customer	and	provider	contracts,	have	a weighted-average	useful	life	of	11.5	years.	The	acquired	goodwill	is	not	deductible	for	tax	purposes.

During	2008,	we	revised	the	fair	value	estimate	of	certain	other	intangible	assets	and	future	policy	benefit	reserves	associated	with	our	fourth	quarter	2007 acquisitions	of	CompBenefits	and	KMG.	This	resulted	in	an	increase	in	goodwill	of	$125.7	million,	primarily	related	to	refining	assumptions	used	to	calculate	the	fair value	assigned	to	the	KMG	future	policy	benefits	payable	and	customer	contracts	acquired,	net	of	related	deferred	income	taxes.

The	results	of	operations	and	financial	condition	of	Cariten,	Metcare,	OSF,	SecureHorizons,	KMG,	CompBenefits,	and	DefenseWeb	have	been	included	in	our consolidated	statements	of	income	since	the	acquisition	dates.

Investment	securities	classified	as	current	and	long-term	were	as	follows	at	December	31,	2009	and	December	31,	2008,	respectively:

|  | Amortized<br>Cost | Gross<br>Unrealized<br>Gains | Gross<br>Unrealized<br>Losses | Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) | (in\tthousands) |  |
| December\t31,\t2009 |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $1,005,203 | $6,683 | $(2,534) | $1,009,352 |
| Mortgage-backed\tsecurities | 1,675,667 | 24,324 | (11,328) | 1,688,663 |
| Tax-exempt\tmunicipal\tsecurities | 2,195,077 | 52,381 | (23,417) | 2,224,041 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 106,191 | 220 | (10,999) | 95,412 |
| Commercial | 285,014 | 3,252 | (8,640) | 279,626 |
| Asset-backed\tsecurities | 106,471 | 824 | (107) | 107,188 |
| Corporate\tdebt\tsecurities | 2,043,721 | 57,173 | (21,326) | 2,079,568 |
| Redeemable\tpreferred\tstock | 8,400 | 4,900 | — | 13,300 |
| Total\tdebt\tsecurities | $7,425,744 | $149,757 | $(78,351) | $7,497,150 |
| December\t31,\t2008 |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $587,207 | $12,759 | $(68) | $599,898 |
| Mortgage-backed\tsecurities | 1,268,956 | 28,974 | (225) | 1,297,705 |
| Tax-exempt\tmunicipal\tsecurities | 1,702,026 | 27,649 | (40,213) | 1,689,462 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 450,867 | 1,565 | (105,124) | 347,308 |
| Commercial | 313,933 | — | (53,634) | 260,299 |
| Asset-backed\tsecurities | 156,618 | 27 | (12,275) | 144,370 |
| Corporate\tdebt\tsecurities | 945,224 | 10,532 | (99,929) | 855,827 |
| Redeemable\tpreferred\tstock | 8,400 | 1,650 | — | 10,050 |
| Total\tdebt\tsecurities | 5,433,231 | 83,156 | (311,468) | 5,204,919 |
| Equity\tsecurities | 12,091 | — | (1,568) | 10,523 |
| Total | $5,445,322 | $83,156 | $(313,036) | $5,215,442 |

We	participate	in	a	securities	lending	program	where	we	loan	certain	investment	securities	for	short	periods	of	time	in	exchange	for	collateral,	consisting	of	cash or	U.S.	Government	securities,	initially	equal	to	at	least	102%	of	the	fair	value	of	the	investment	securities	on	loan.	Investment	securities	with	a	fair	value	of	$126.1 million	at	December	31,	2009	and	$437.1	million	at	December	31,	2008	were	on	loan.	At	December	31,	2009,	all	collateral	from	lending	our	investment	securities	was in	the	form	of	cash	which	has	been	reinvested	in	money	market	funds,	certificates	of	deposit,	and	short-term	corporate	and	asset-backed	securities	with	an	average maturity	of	approximately	118	days	at	December	31,	2009	compared	to	approximately	250	days	at	December	31,	2008.	These	available	for	sale	investment	securities	had an	equivalent	amortized	cost	basis	and	fair	value	of	$119.6	million	at	December	31,	2009.	At	December	31,	2008,	these	available	for	sale	investment	securities	had	an amortized	cost	basis	of	$437.2	million	and	a	fair	value	of	$402.4	million.

|  | Less	than	12	months | Less	than	12	months | 12	months	or	more | 12	months	or	more | Total | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Gross |  | Gross |  | Gross |
|  |  | Unrealized | Unrealized | Unrealized |  | Unrealized |
|  | Fair\tValue | Losses | Fair\tValue | Losses | Fair\tValue | Losses |
|  |  |  | (in\tthousands) | (in\tthousands) |  |  |
| December\t31,\t2009 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand |  |  |  |  |  |  |
| agencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $301,843 | $(2,425) | $2,970 | $(109) | $304,813 | $(2,534) |
| Mortgage-backed\tsecurities | 823,365 | (11,005) | 6,834 | (323) | 830,199 | (11,328) |
| Tax-exempt\tmunicipal\tsecurities | 598,520 | (14,286) | 198,327 | (9,131) | 796,847 | (23,417) |
| Mortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | 1,771 | (5) | 73,178 | (10,994) | 74,949 | (10,999) |
| Commercial | 31,941 | (359) | 142,944 | (8,281) | 174,885 | (8,640) |
| Asset-backed\tsecurities | 1,930 | (19) | 2,179 | (88) | 4,109 | (107) |
| Corporate\tdebt\tsecurities | 636,833 | (9,354) | 99,830 | (11,972) | 736,663 | (21,326) |
| Total\tdebt\tsecurities | $2,396,203 | $(37,453) | $526,262 | $(40,898) | $2,922,465 | $(78,351) |
| December\t31,\t2008 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand |  |  |  |  |  |  |
| agencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $146,315 | $(68) | $—\t\t\t\t $— | $—\t\t\t\t $— | $146,315 | $(68) |
| Mortgage-backed\tsecurities | 18,308 | (168) | 4,297 | (57) | 22,605 | (225) |
| Tax-exempt\tmunicipal\tsecurities | 409,787 | (22,238) | 141,730 | (17,975) | 551,517 | (40,213) |
| Mortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | 246,144 | (96,593) | 18,092 | (8,531) | 264,236 | (105,124) |
| Commercial | 153,415 | (28,404) | 106,885 | (25,230) | 260,300 | (53,634) |
| Asset-backed\tsecurities | 141,495 | (12,200) | 1,377 | (75) | 142,872 | (12,275) |
| Corporate\tdebt\tsecurities | 422,710 | (64,873) | 98,124 | (35,056) | 520,834 | (99,929) |
| Total\tdebt\tsecurities | 1,538,174 | (224,544) | 370,505 | (86,924) | 1,908,679 | (311,468) |
| Equity\tsecurities | 6,683 | (1,568) | — | — | 6,683 | (1,568) |
| Total | $1,544,857 | $(226,112) | $370,505 | $(86,924) | $1,915,362 | $(313,036) |

Approximately	99%	of	our	debt	securities	were	investment-grade	quality,	with	an	average	credit	rating	of	AA+	by	S&P	at	December	31,	2009.	Most	of	the	debt securities	that	are	below	investment-grade	are	rated	BB	or	better,	the	higher	end	of	the	below	investment-grade	rating	scale.	At	December	31,	2009,	16%	of	our	tax- exempt	municipal	securities	were	pre-refunded,	generally	with	U.S.	government	and	agency	securities,	and	26%	of	our	tax-exempt	securities	were	insured	by	bond insurers	and	have	an	equivalent	S&P	credit	rating	of	AA-	exclusive	of	the	bond	insurers'	guarantee.	Our	investment	policy	limits	investments	in	a	single	issuer	and requires	diversification	among	various	asset	types.

The	detail	of	realized	gains	(losses)	related	to	investment	securities	and	included	with	investment	income	was	as	follows	for	the	years	ended	December	31,	2009, 2008,	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Gross\trealized\tgains | $123,361 | $56,879 | $20,501 |
| Gross\trealized\tlosses | (103,878) | (136,296) | (8,833) |
| Net\trealized\tgains\t(losses) | $19,483 | $(79,417) | $11,668 |

The	contractual	maturities	of	debt	securities	available	for	sale	at	December	31,	2009,	regardless	of	their	balance	sheet	classification,	are	shown	below.	Expected maturities	may	differ	from	contractual	maturities	because	borrowers	may	have	the	right	to	call	or	prepay	obligations	with	or	without	call	or	prepayment	penalties.

|  | Amortized | Fair |
| :--- | :--- | :--- |
|  | Cost | Value |
|  | (in\tthousands) |  |
| Due\twithin\tone\tyear | $367,245 | $367,658 |
| Due\tafter\tone\tyear\tthrough\tfive\tyears | 1,699,943 | 1,726,641 |
| Due\tafter\tfive\tyears\tthrough\tten\tyears | 1,381,100 | 1,408,322 |
| Due\tafter\tten\tyears | 1,804,113 | 1,823,640 |
| Mortgage\tand\tasset-backed\tsecurities | 2,173,343 | 2,170,889 |
| Total\tdebt\tsecurities | $7,425,744 | $7,497,150 |

The	following	table	summarizes	our	fair	value	measurements	at	December	31,	2009	and	2008,	respectively,	for	financial	assets	measured	at	fair	value	on	a recurring	basis:

|  | Fair	Value | Quoted	Prices	in<br>Active	Markets<br>for	Identical<br>Assets<br>(Level	1) | Significant	Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |  |
| December\t31,\t2009 |  |  |  |  |
| Cash\tequivalents | $1,507,490 | $1,507,490 | $— | $— |
| Debt\tsecurities: |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | \t 1,009,352 | — | 1,009,352 | — |
| Mortgage-backed\tsecurities | \t 1,688,663 | — | 1,688,663 | — |
| Tax-exempt\tmunicipal\tsecurities | \t 2,224,041 | — | 2,155,227 | 68,814 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 95,412 | — | 95,412 | — |
| Commercial | 279,626 | — | 279,626 | — |
| Asset-backed\tsecurities | 107,188 | — | 105,060 | 2,128 |
| Corporate\tdebt\tsecurities | \t 2,079,568 | — | 2,071,087 | 8,481 |
| Redeemable\tpreferred\tstock | 13,300 | — | — | 13,300 |
| Total\tdebt\tsecurities | \t 7,497,150 | — | 7,404,427 | 92,723 |
| Securities\tlending\tinvested\tcollateral | 119,586 | — | 119,586 | — |
| Total\tinvested\tassets | $9,124,226 | $1,507,490 | $7,524,013 | $92,723 |
| December\t31,\t2008 |  |  |  |  |
| Cash\tequivalents | $1,549,966 | $1,549,966 | $— | $— |
| Debt\tsecurities: |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | 599,898 | — | 599,898 | — |
| Mortgage-backed\tsecurities | \t 1,297,705 | — | 1,297,705 | — |
| Tax-exempt\tmunicipal\tsecurities | \t 1,689,462 | — | 1,615,808 | 73,654 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 347,308 | — | 347,308 | — |
| Commercial | 260,299 | — | 260,299 | — |
| Asset-backed\tsecurities | 144,370 | — | 144,370 | — |
| Corporate\tdebt\tsecurities | 855,827 | — | 847,605 | 8,222 |
| Redeemable\tpreferred\tstock | 10,050 | — | — | 10,050 |
| Total\tdebt\tsecurities | \t 5,204,919 | — | 5,112,993 | 91,926 |
| Equity\tsecurities | 10,523 | 10,523 | — | — |
| Securities\tlending\tinvested\tcollateral | 402,399 | — | 402,399 | — |
| Total\tinvested\tassets | $7,167,807 | $1,560,489 | $5,515,392 | $91,926 |

During	the	years	ended	December	31,	2009	and	2008,	the	changes	in	the	fair	value	of	the	assets	measured	using	significant	unobservable	inputs	(Level	3)	were comprised	of	the	following:

|  | 2009 | 2008 |
| :--- | :--- | :--- |
|  | (in\tthousands) |  |
| Beginning\tbalance\tat\tJanuary\t1 | $91,926 | $18,698 |
| Total\tgains\tor\tlosses: |  |  |
| Realized\tin\tearnings | 90 | (3,410) |
| Unrealized\tin\tother\tcomprehensive\tincome | 4,651 | 1,080 |
| Purchases,\tsales,\tissuances,\tand\tsettlements,\tnet | (7,227) | (19,965) |
| Transfers\tinto\tLevel\t3 | 3,283 | 95,523 |
| Balance\tat\tDecember\t31 | $92,723 | $91,926 |

Level	3	assets	primarily	include	auction	rate	securities.	Auction	rate	securities	are	debt	instruments	with	interest	rates	that	reset	through	periodic	short-term auctions.	The	auction	rate	securities	we	own,	which	had	a	fair	value	of	$68.8	million	at	December	31,	2009,	or	less	than	1%	of	our	total	invested	assets,	primarily consist	of	tax-exempt	bonds	rated	AAA	and	AA	and	collateralized	by	federally	guaranteed	student	loans.	Liquidity	issues	in	the	global	credit	markets	led	to	failed auctions.	A	failed	auction	is	not	a	default	of	the	debt	instrument,	but	does	set	a	new,	generally	higher	interest	rate	in	accordance	with	the	original	terms	of	the	debt instrument.	Liquidation	of	auction	rate	securities	results	when	(1)	a	successful	auction	occurs,	(2)	the	securities	are	called	or	refinanced	by	the	issuer,	(3)	a	buyer	is found	outside	the	auction	process,	or	(4)	the	security	matures.	We	continue	to	receive	income	on	all	auction	rate	securities	and	from	time	to	time	full	and	partial redemption	calls.	Given	the	liquidity	issues,	fair	value	could	not	be	estimated	based	on	observable	market	prices	and	as	such	unobservable	inputs	were	used.

As	discussed	in	Note	2,	we	cover	prescription	drug	benefits	in	accordance	with	Medicare	Part	D	under	multiple	contracts	with	CMS.	In	2009,	we	received	net proceeds	of	$59.6	million	related	to	our	reconciliation	with	CMS	regarding	the	2008	Medicare	Part	D	risk	corridor	provisions	compared	to	our	estimate	of	$55.4	million at	December	31,	2008.	The	consolidated	balance	sheets	include	the	following	amounts	associated	with	Medicare	Part	D	as	of	December	31,	2009	and	2008:

|  | 2009 |  | 2008 | 2008 |
| :--- | :--- | :--- | :--- | :--- |
|  | Risk\nCorridor\nSettlement | CMS\nSubsidies | Risk\nCorridor\nSettlement | CMS\nSubsidies |
|  |  | (in\tthousands) |  |  |
| Other\tcurrent\tassets | $2,165 | $11,660 | $78,728 | $322,108 |
| Trade\taccounts\tpayable\tand\taccrued\texpenses | (146,750) | (402,854) | (23,311) | (219,676) |
| Net\tcurrent\t(liability)\tasset | $(144,585) | $(391,194) | $55,417 | $102,432 |

# 7.	PROPERTY	AND	EQUIPMENT,	NET

Property	and	equipment	was	comprised	of	the	following	at	December	31,	2009	and	2008:

|  | 2009 | 2008 |
| :--- | :--- | :--- |
|  | (in\tthousands) |  |
| Land | $16,206 | $16,206 |
| Buildings | 368,341 | 360,655 |
| Equipment\tand\tcomputer\tsoftware | 1,549,789 | 1,468,540 |
|  | 1,934,336 | 1,845,401 |
| Accumulated\tdepreciation | (1,255,194) | (1,133,909) |
| Property\tand\tequipment,\tnet | $679,142 | $711,492 |

Changes	in	the	carrying	amount	of	goodwill,	by	segment,	for	the	years	ended	December	31,	2009	and	2008	were	as	follows:

|  | Commercial | Government | Total |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Balance\tat\tDecember\t31,\t2007 | $1,118,323 | $545,616 | $1,663,939 |
| Acquisitions\tand\tsubsequent\tpayments/adjustments | 150,576 | 148,596 | 299,172 |
| Balance\tat\tDecember\t31,\t2008 | 1,268,899 | 694,212 | 1,963,111 |
| Acquisitions\tand\tsubsequent\tpayments/adjustments | 12,726 | 17,087 | 29,813 |
| Balance\tat\tDecember\t31,\t2009 | $1,281,625 | $711,299 | $1,992,924 |

Other	intangible	assets	primarily	relate	to	acquired	customer	contracts	and	are	included	with	other	long-term	assets	in	the	consolidated	balance	sheets. Amortization	expense	for	other	intangible	assets	was	approximately	$37.3	million	in	2009,	$37.1	million	in	2008	and	$22.4	million	in	2007.	The	following	table presents	our	estimate	of	amortization	expense	for	each	of	the	five	next	succeeding	fiscal	years:

The	following	table	presents	details	of	our	other	intangible	assets	included	in	other	long-term	assets	in	the	accompanying	consolidated	balance	sheets	at December	31,	2009	and	2008:

|  | Weighted | 2009 | 2009 | 2009 | 2008 | 2008 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Average\nLife | Cost | Accumulated\nAmortization | Net | Cost | Accumulated\nAmortization | Net |
|  |  |  |  | (in\tthousands) |  |  |  |
| Other\tintangible\tassets: |  |  |  |  |  |  |  |
| Customer\tcontracts | 11.2\tyrs | $314,885 | $117,748 | $197,137 | $341,085 | $86,288 | $254,797 |
| Provider\tcontracts | 16.0\tyrs | 42,753 | 8,281 | 34,472 | 36,253 | 4,903 | 31,350 |
| Trade\tnames\tand\tother | 11.7\tyrs | 16,986 | 5,127 | 11,859 | 22,486 | 7,345 | 15,141 |
| Total\tother\tintangible\tassets | 11.8\tyrs | $374,624 | $131,156 | $243,468 | $399,824 | $98,536 | $301,288 |

# 9.	BENEFITS	PAYABLE

Activity	in	benefits	payable,	excluding	military	services,	was	as	follows	for	the	years	ended	December	31,	2009,	2008	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Balances\tat\tJanuary\t1 | $2,898,782 | $2,355,461 | $1,979,733 |
| Acquisitions | — | 96,021 | 41,029 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 21,934,973 | 21,092,135 | 18,015,247 |
| Prior\tyears | (252,756) | (268,027) | (242,922) |
| Total\tincurred | 21,682,217 | 20,824,108 | 17,772,325 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (19,572,740) | (18,579,247) | (15,847,574) |
| Prior\tyears | (2,064,880) | (1,797,561) | (1,590,052) |
| Total\tpaid | (21,637,620) | (20,376,808) | (17,437,626) |
| Balances\tat\tDecember\t31 | $2,943,379 | $2,898,782 | $2,355,461 |

Amounts	incurred	related	to	prior	years	vary	from	previously	estimated	liabilities	as	the	claims	ultimately	are	settled.	Negative	amounts	reported	for	incurred related	to	prior	years	result	from	claims	being	ultimately	settled	for	amounts	less	than	originally	estimated	(favorable	development).	The	favorable	development experienced	over	the	last	three	years	primarily	was	attributable	to	lower	than	originally	estimated	utilization	of	hospital	and	physician	services	for	both	our	Commercial and	Medicare	lines	of	business,	rapid	growth	in	our	Medicare	Advantage	and	Commercial	high	deductible	products	in	new	geographic	areas	which	resulted	in	more limited	historical	information	from	which	to	base	trend	rate	estimates,	as	well	as	a	shortening	of	the	cycle	time	associated	with	provider	claim	submissions	and	improved claim	recovery	patterns	associated	with	system	and	process	changes.	In	addition,	first-year	Medicare	Part	D	enrollment	and	eligibility	issues	during	2006	led	to	actual claim	settlements	with	other	health	plans	and	various	state	governments	during	2007	for	amounts	less	than	originally	estimated.	Similar	adjustments	in	2009	and	2008 were	not	significant	due	to	a	lower	volume	of	new	enrollees	and	subsequent	improvements	in	the	program's	enrollment	process.

Military	services	benefits	payable	of	$279.2	million	and	$306.8	million	at	December	31,	2009	and	2008,	respectively,	primarily	consisted	of	our	estimate	of incurred	healthcare	services	provided	to	beneficiaries	which	are	in	turn	reimbursed	by	the	federal	government,	as	more	fully	described	in	Note	2.	This	amount	is generally	offset	by	a	corresponding	receivable	due	from	the	federal	government.

# 10.	INCOME	TAXES

The	provision	for	income	taxes	consisted	of	the	following	for	the	years	ended	December	31,	2009,	2008	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Current\tprovision: |  |  |  |
| Federal | $532,722 | $336,870 | $452,286 |
| States\tand\tPuerto\tRico | 56,155 | 30,829 | 36,066 |
| Total\tcurrent\tprovision | \t 588,877 | \t 367,699 | \t 488,352 |
| Deferred\tbenefit | (26,792) | (22,005) | (32,736) |
| Provision\tfor\tincome\ttaxes | $562,085 | $345,694 | $455,616 |

The	provision	for	income	taxes	was	different	from	the	amount	computed	using	the	federal	statutory	rate	for	the	years	ended	December	31,	2009,	2008	and	2007 due	to	the	following:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Income\ttax\tprovision\tat\tfederal\tstatutory\trate | $560,616 | $347,497 | $451,255 |
| States,\tnet\tof\tfederal\tbenefit\tand\tPuerto\tRico | 28,968 | 12,412 | 23,377 |
| Tax\texempt\tinvestment\tincome | (21,327) | (21,253) | (20,254) |
| Contingent\ttax\tbenefits | (16,781) | — | — |
| Other,\tnet | 10,609 | 7,038 | 1,238 |
| Provision\tfor\tincome\ttaxes | $562,085 | $345,694 | $455,616 |

Deferred	income	tax	balances	reflect	the	impact	of	temporary	differences	between	the	tax	bases	of	assets	or	liabilities	and	their	reported	amounts	in	our consolidated	financial	statements,	and	are	stated	at	enacted	tax	rates	expected	to	be	in	effect	when	the	reported	amounts	are	actually	recovered	or	settled.	Principal components	of	our	net	deferred	tax	balances	at	December	31,	2009	and	2008	were	as	follows:

|  | 2009 | 2008 |
| :--- | :--- | :--- |
|  | (in\tthousands) |  |
| Compensation\tand\tother\taccrued\texpenses | $122,395 | $117,037 |
| Future\tpolicy\tbenefits\tpayable | 103,941 | 121,259 |
| Net\toperating\tloss\tcarryforward | 97,398 | 60,342 |
| Benefits\tpayable | 36,996 | 1,543 |
| Unearned\tpremiums | 25,528 | 25,203 |
| Capital\tloss\tcarryforward | 13,169 | 9,272 |
| Professional\tliability\trisks | 6,751 | 10,331 |
| Investment\tsecurities | — | 113,854 |
| Total\tdeferred\tincome\ttax\tassets | 406,178 | 458,841 |
| Valuation\tallowance | (30,093) | (28,063) |
| Total\tdeferred\tincome\ttax\tassets,\tnet\tof\tvaluation\tallowance | 376,085 | 430,778 |
| Depreciable\tproperty\tand\tintangible\tassets | (213,291) | (211,012) |
| Prepaid\texpenses\tand\tother | (69,104) | (68,612) |
| Investment\tsecurities | (25,077) | — |
| Total\tdeferred\tincome\ttax\tliabilities | (307,472) | (279,624) |
| Total\tnet\tdeferred\tincome\ttax\tassets | $68,613 | $151,154 |
| Amounts\trecognized\tin\tthe\tconsolidated\tbalance\tsheets: |  |  |
| Other\tcurrent\tassets | $32,206 | $96,349 |
| Other\tlong-term\tassets | 36,407 | 54,805 |
| Total\tnet\tdeferred\tincome\ttax\tassets | $68,613 | $151,154 |

At	December	31,	2009,	we	had	approximately	$265.9	million	of	net	operating	losses	to	carry	forward	related	to	prior	acquisitions.	These	net	operating	loss carryforwards,	if	not	used	to	offset	future	taxable	income,	will	expire	from	2010	through	2026.	A	significant	portion	of	these	losses	are	in	a	subsidiary	that	will	not	be included	in	the	Humana	Inc.	consolidated	tax	return	until	2013,	and,	therefore,	may	not	be	used	until	that	point.	Due	to	limitations	and	uncertainty	regarding	our	ability to	use	some	of	the	carryforwards,	a	valuation	allowance	was	established	on	$82.2	million	of	net	operating	loss	carryforwards	related	to	prior	acquisitions.	For	the remainder	of	the	net	operating	loss	carryforwards,	based	on	our	historical	record	of	producing	taxable	income	and	profitability,	we	have	concluded	that	future	operating income	will	be	sufficient	to	give	rise	to	tax	expense	to	recover	all	deferred	tax	assets.

We	file	income	tax	returns	in	the	United	States	and	certain	foreign	jurisdictions.	In	2009,	the	Internal	Revenue	Service	(IRS)	completed	its	examination	of	our U.S.	income	tax	returns	for	2005	and	2006	which	did	not	result	in	any	material	adjustments.	With	few	exceptions,	which	are	immaterial	in	the	aggregate,	we	are	no longer	subject	to	state,	local	and	foreign	tax	examinations	by	tax	authorities	for	years	before	2007.

The	IRS	commenced	an	examination	of	our	U.S.	income	tax	returns	for	2007	and	2008	during	2009.	Beginning	with	the	2009	tax	year,	we	entered	into	the Compliance	Assurance	Process	(CAP)	with	the	IRS.	Under	CAP,	the	IRS	does	advance	reviews	during	the	tax	year	and	as	the	return	is	being	prepared	for	filing,	thereby eliminating	the	need	for	post-filing	examinations.	We	expect	the	IRS	will	conclude	its	audits	of	the	2007,	2008,	and	2009	tax	years	in	2010.	As	of	December	31,	2009, we	are	not	aware	of	any	material	adjustments	the	IRS	may	propose.

The	liability	for	unrecognized	tax	benefits	was	$16.8	million	and	$16.0	million	at	December	31,	2008	and	2007,	respectively.	The	only	change	to	the	liability during	the	twelve	months	ended	December	31,	2008	was	accrued	interest.	This	liability,	which	was	released	in	2009	as	a	result	of	settlements	associated	with	the completion	of	the	audit	of	our	U.S.	income	tax	returns	for	2005	and	2006,	reduced	tax	expense	$16.8	million	in	2009.	As	of	December	31,	2009,	we	do	not	have	material uncertain	tax	positions	reflected	in	our	consolidated	balance	sheet.

The	carrying	value	of	long-term	debt	outstanding	was	as	follows	at	December	31,	2009	and	2008:

|  | December	31,<br>2009 | December	31,<br>2008 |
| :--- | :--- | :--- |
|  | (in\tthousands) |  |
| Long-term\tdebt: |  |  |
| Senior\tnotes: |  |  |
| $500\tmillion,\t6.45%\tdue\tJune\t1,\t2016 | $540,907 | $546,206 |
| $500\tmillion,\t7.20%\tdue\tJune\t15,\t2018 | 508,799 | 509,540 |
| $300\tmillion,\t6.30%\tdue\tAugust\t1,\t2018 | 323,862 | 325,984 |
| $250\tmillion,\t8.15%\tdue\tJune\t15,\t2038 | 267,070 | 267,234 |
| Total\tsenior\tnotes | 1,640,638 | 1,648,964 |
| Credit\tagreement | — | 250,000 |
| Other\tlong-term\tborrowings | 37,528 | 38,068 |
| Total\tlong-term\tdebt | $1,678,166 | $1,937,032 |

Our	senior	notes,	which	are	unsecured,	may	be	redeemed	at	our	option	at	any	time	at	100%	of	the	principal	amount	plus	accrued	interest	and	a	specified	make- whole	amount.	The	7.20%	and	8.15%	senior	notes	are	subject	to	an	interest	rate	adjustment	if	the	debt	ratings	assigned	to	the	notes	are	downgraded	(or	subsequently upgraded)	and	contain	a	change	of	control	provision	that	may	require	us	to	purchase	the	notes	under	certain	circumstances.

We	had	been	parties	to	interest-rate	swap	agreements	to	exchange	the	fixed	interest	rate	under	our	senior	notes	for	a	variable	interest	rate	based	on	LIBOR.	As	a result,	the	carrying	value	of	the	senior	notes	had	been	adjusted	to	reflect	changes	in	value	caused	by	an	increase	or	decrease	in	interest	rates.	During	2008,	we	terminated all	of	our	swap	agreements.	The	cumulative	adjustment	to	the	carrying	value	of	our	senior	notes	was	$103.4	million	as	of	the	termination	date	which	is	being	amortized as	a	reduction	to	interest	expense	over	the	remaining	term	of	the	senior	notes,	resulting	in	a	weighted-average	effective	interest	rate	fixed	at	6.08%.	The	unamortized carrying	value	adjustment	was	$92.9	million	as	of	December	31,	2009	and	$100.7	million	as	of	December	31,	2008.

Our	5-year	$1.0	billion	unsecured	revolving	credit	agreement	expires	in	July	2011.	Under	the	credit	agreement,	at	our	option,	we	can	borrow	on	either	a	revolving credit	basis	or	a	competitive	advance	basis.	The	revolving	credit	portion	bears	interest	at	either	a	fixed	rate	or	floating	rate	based	on	LIBOR	plus	a	spread.	The	spread, currently	50	basis	points,	varies	depending	on	our	credit	ratings	ranging	from	27	to	80	basis	points.	We	also	pay	an	annual	facility	fee	regardless	of	utilization.	This facility	fee,	currently	12.5	basis	points,	may	fluctuate	between	8	and	20	basis	points,	depending	upon	our	credit	ratings.	In	addition,	a	utilization	fee	of	10	basis	points	is payable	for	each	day	in	which	borrowings	under	the	facility	exceed	50%	of	the	total	$1.0	billion	commitment.	The	competitive	advance	portion	of	any	borrowings	will bear	interest	at	market	rates	prevailing	at	the	time	of	borrowing	on	either	a	fixed	rate	or	a	floating	rate	based	on	LIBOR,	at	our	option.

The	terms	of	the	credit	agreement	include	standard	provisions	related	to	conditions	of	borrowing,	including	a	customary	material	adverse	event	clause	which could	limit	our	ability	to	borrow	additional	funds.	In	addition,	the	credit	agreement	contains	customary	restrictive	and	financial	covenants	as	well	as	customary	events	of default,	including	financial	covenants	regarding	the	maintenance	of	a	minimum	level	of	net	worth	and	a	maximum	leverage	ratio.	We	are	in	compliance	with	the financial	covenants.

The	fair	value	of	our	long-term	debt	was	$1,596.4	million	and	$1,503.4	million	at	December	31,	2009	and	2008,	respectively.	The	fair	value	of	our	long-term debt	is	determined	based	on	quoted	market	prices	for	the	same	or	similar	debt,	or,	if	no	quoted	market	prices	are	available,	on	the	current	rates	estimated	to	be	available to	use	for	debt	with	similar	terms	and	remaining	maturities.

Upon	issuance	of	our	senior	notes,	we	entered	into	interest-rate	swap	agreements	with	major	financial	institutions	to	convert	our	interest-rate	exposure	on	our senior	notes	from	fixed	rates	to	variable	rates	to	more	closely	align	interest	costs	with	floating	interest	rates	received	on	our	cash	equivalents	and	investment	securities. Our	swap	agreements,	which	were	considered	derivative	instruments,	exchanged	the	fixed	interest	rate	under	all	our	senior	notes	for	a	variable	interest	rate	based	on LIBOR.	The	notional	amount	of	the	swap	agreements	was

equal	to	the	par	amount	of	our	senior	notes.	These	swap	agreements	were	qualified	and	designated	as	a	fair	value	hedge.	The	gain	or	loss	on	the	swap	agreements	as	well as	the	offsetting	loss	or	gain	on	the	senior	notes	was	recognized	in	current	earnings.	We	included	the	gain	or	loss	on	the	swap	agreements	in	interest	expense,	the	same line	item	as	the	offsetting	loss	or	gain	on	the	related	senior	notes.	The	gain	or	loss	due	to	hedge	ineffectiveness	was	not	material	for	2008	or	2007.

During	2008,	we	terminated	all	of	our	interest-rate	swap	agreements	for	cash	consideration	of	$93.0	million.	We	recognized	a	$10.4	million	impairment	charge	as a	realized	investment	loss	associated	with	the	termination	of	a	swap	with	a	subsidiary	of	Lehman,	which	subsequently	filed	for	bankruptcy	protection.

# 13.	EMPLOYEE	BENEFIT	PLANS

# Employee	Savings	Plan

We	have	defined	contribution	retirement	and	savings	plans	covering	eligible	employees.	Our	contribution	to	these	plans	is	based	on	various	percentages	of compensation,	and	in	some	instances,	on	the	amount	of	our	employees'	contributions	to	the	plans.	The	cost	of	these	plans	amounted	to	approximately	$102.5	million	in 2009,	$79.6	million	in	2008,	and	$69.7	million	in	2007,	all	of	which	was	funded	currently	to	the	extent	it	was	deductible	for	federal	income	tax	purposes.	The Company's	cash	match	is	invested	pursuant	to	the	participant's	contribution	direction.	Based	on	the	closing	stock	price	of	$43.89	on	December	31,	2009,	approximately 15%	of	the	retirement	and	savings	plan's	assets	were	invested	in	our	common	stock,	or	approximately	4.5	million	shares,	representing	3%	of	the	shares	outstanding	as	of December	31,	2009.	At	December	31,	2009,	approximately	7.9	million	shares	of	our	common	stock	were	reserved	for	issuance	under	our	defined	contribution	retirement and	savings	plans.

We	have	plans	under	which	options	to	purchase	our	common	stock	and	restricted	stock	awards	have	been	granted	to	executive	officers,	directors	and	key employees.	The	terms	and	vesting	schedules	for	stock-based	awards	vary	by	type	of	grant.	Generally,	the	awards	vest	upon	time-based	conditions.	For	prospective	grants of	stock	options	or	restricted	stock	awards	on	or	after	January	1,	2010,	our	equity	award	program	includes	a	retirement	provision	that	treats	all	employees	with	a combination	of	age	and	years	of	service	with	the	Company	totaling	65	or	greater,	with	a	minimum	required	age	of	55	and	a	minimum	requirement	of	5	years	of	service, as	retirement-eligible.	Upon	exercise,	stock-based	compensation	awards	are	settled	with	authorized	but	unissued	company	stock.	The	compensation	expense	that	has been	charged	against	income	for	these	plans	was	as	follows	for	the	years	ended	December	31,	2009,	2008,	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Stock-based\tcompensation\texpense\tby\ttype: |  |  |  |
| Stock\toptions | $19,555 | $18,202 | $15,408 |
| Restricted\tstock\tawards | 46,315 | 37,167 | 26,724 |
| Total\tstock-based\tcompensation\texpense | 65,870 | 55,369 | 42,132 |
| Tax\tbenefit\trecognized | (24,128) | (20,282) | (15,568) |
| Stock-based\tcompensation\texpense,\tnet\tof\ttax | $41,742 | $35,087 | $26,564 |

The	tax	benefit	recognized	in	our	consolidated	financial	statements	is	based	on	the	amount	of	compensation	expense	recorded	for	book	purposes.	The	actual	tax benefit	realized	in	our	tax	return	is	based	on	the	intrinsic

value,	or	the	excess	of	the	market	value	over	the	exercise	or	purchase	price,	of	stock	options	exercised	and	restricted	stock	awards	vested	during	the	period.	The	actual tax	benefit	realized	for	the	deductions	taken	on	our	tax	returns	from	option	exercises	and	restricted	stock	vesting	totaled	$16.3	million	in	2009,	$16.9	million	in	2008, and	$48.0	million	in	2007.	There	was	no	capitalized	stock-based	compensation	expense.

The	stock	plans	provide	that	one	restricted	share	is	equivalent	to	1.7	stock	options.	At	December	31,	2009,	there	were	12,818,855	shares	reserved	for	stock	award plans,	including	4,797,304	shares	of	common	stock	available	for	future	grants	assuming	all	stock	options	or	2,821,944	shares	available	for	future	grants	assuming	all restricted	shares.

# Stock	Options

Stock	options	are	granted	with	an	exercise	price	equal	to	the	average	market	value	of	the	underlying	common	stock	on	the	date	of	grant.	Our	stock	plans,	as approved	by	the	Board	of	Directors	and	stockholders,	define	average	market	value	as	the	average	of	the	highest	and	lowest	stock	prices	reported	by	the	New	York	Stock Exchange	on	a	given	date.	Exercise	provisions	vary,	but	most	options	vest	in	whole	or	in	part	1	to	3	years	after	grant	and	expire	7	to	10	years	after	grant.	Upon	grant, stock	options	are	assigned	a	fair	value	based	on	the	Black-Scholes	valuation	model.	Compensation	expense	is	recognized	on	a	straight-line	basis	over	the	total	requisite service	period,	generally	the	total	vesting	period,	for	the	entire	award.	For	stock	options	granted	on	or	after	January	1,	2010	to	retirement	eligible	employees,	the compensation	expense	is	recognized	on	a	straight-line	basis	over	the	shorter	of	the	requisite	service	period	or	the	period	from	the	date	of	grant	to	an	employee's	eligible retirement	date.

The	weighted-average	fair	value	of	each	option	granted	during	2009,	2008,	and	2007	is	provided	below.	The	fair	value	was	estimated	on	the	date	of	grant	using	the Black-Scholes	pricing	model	with	the	weighted-average	assumptions	indicated	below:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
| Weighted-average\tfair\tvalue\tat\tgrant\tdate | $14.24 | $17.95 | $21.07 |
| Expected\toption\tlife\t(years) | 4.6 | 5.1 | 4.8 |
| Expected\tvolatility | 39.2% | 28.2% | 28.9% |
| Risk-free\tinterest\trate\tat\tgrant\tdate | 1.9% | 2.9% | 4.5% |
| Dividend\tyield | \t None | \t None | \t None |

When	valuing	employee	stock	options,	we	stratify	the	employee	population	into	three	homogenous	groups	that	historically	have	exhibited	similar	exercise behaviors.	These	groups	are	executive	officers,	directors,	and	all	other	employees.	We	value	the	stock	options	based	on	the	unique	assumptions	for	each	of	these employee	groups.

We	calculate	the	expected	term	for	our	employee	stock	options	based	on	historical	employee	exercise	behavior	and	base	the	risk-free	interest	rate	on	a	traded zero-coupon	U.S.	Treasury	bond	with	a	term	substantially	equal	to	the	option's	expected	term.

The	volatility	used	to	value	employee	stock	options	is	based	on	historical	volatility.	We	calculate	historical	volatility	using	a	simple-average	calculation methodology	based	on	daily	price	intervals	as	measured	over	the	expected	term	of	the	option.

Activity	for	our	option	plans	was	as	follows	for	the	year	ended	December	31,	2009:

|  | Shares	Under<br>Option | Average<br>Exercise	Price |
| :--- | :--- | :--- |
| Options\toutstanding\tat\tDecember\t31,\t2008 | 5,777,115 | $42.70 |
| Granted | 1,460,742 | 40.11 |
| Exercised | (1,052,855) | 17.43 |
| Expired | (34,137) | 60.48 |
| Forfeited | (92,544) | 60.67 |
| Options\toutstanding\tat\tDecember\t31,\t2009 | 6,058,321 | $46.10 |
| Options\texercisable\tat\tDecember\t31,\t2009 | 3,383,787 | $44.09 |

As	of	December	31,	2009,	outstanding	stock	options	had	an	aggregate	intrinsic	value	of	$33.5	million,	and	a	weighted-average	remaining	contractual	term	of	4.3 years.	As	of	December	31,	2009,	exercisable	stock	options	had	an	aggregate	intrinsic	value	of	$27.3	million,	and	a	weighted-average	remaining	contractual	term	of	3.2 years.	The	total	intrinsic	value	of	stock	options	exercised	during	2009	was	$23.7	million,	compared	with	$18.3	million	during	2008	and	$133.9	million	during	2007. Cash	received	from	stock	option	exercises	totaled	$18.4	million	in	2009,	$12.1	million	in	2008,	and	$62.7	million	in	2007.

Total	compensation	expense	not	yet	recognized	related	to	nonvested	options	was	$25.5	million	at	December	31,	2009.	We	expect	to	recognize	this	compensation expense	over	a	weighted-average	period	of	approximately	2.0	years.

# Restricted	Stock	Awards

Restricted	stock	awards	are	granted	with	a	fair	value	equal	to	the	market	price	of	our	common	stock	on	the	date	of	grant.	Compensation	expense	is	recorded straight-line	over	the	vesting	period,	generally	three	years	from	the	date	of	grant.	For	restricted	stock	awards	granted	on	or	after	January	1,	2010	to	retirement	eligible employees,	the	compensation	expense	is	recognized	on	a	straight-line	basis	over	the	shorter	of	the	vesting	period	or	the	period	from	the	date	of	grant	to	an	employee's eligible	retirement	date.

|  | Shares | Weighted-<br>Average<br>Grant-Date<br>Fair	Value |
| :--- | :--- | :--- |
| Nonvested\trestricted\tstock\tat\tDecember\t31,\t2008 | 2,007,301 | $62.12 |
| Granted | 978,064 | 41.16 |
| Vested | (656,054) | 54.34 |
| Forfeited | (86,484) | 57.46 |
| Nonvested\trestricted\tstock\tat\tDecember\t31,\t2009 | 2,242,827 | $55.44 |

The	fair	value	of	shares	vested	during	the	years	ended	was	$35.6	million	in	2009,	$28.7	million	in	2008,	and	$3.4	million	in	2007.	Beginning	in	2005,	a	greater proportion	of	stock	awards	granted	to	employees,	excluding	executive	officers,	were	restricted	stock	awards	with	a	three-year	vesting	schedule	as	opposed	to	stock options,

which	resulted	in	an	increase	in	the	fair	value	of	shares	vested	from	2007	to	2008.	Total	compensation	expense	not	yet	recognized	related	to	nonvested	restricted	stock awards	was	$42.9	million	at	December	31,	2009.	We	expect	to	recognize	this	compensation	expense	over	a	weighted-average	period	of	approximately	1.7	years.	There are	no	other	contractual	terms	covering	restricted	stock	awards	once	vested.

In	addition	to	restricted	stock	awards,	we	granted	36,746	restricted	stock	units	to	directors	in	2009	with	a	weighted-average	grant	date	fair	value	of	$33.95.	As	of December	31,	2009,	102,728	restricted	stock	units	were	outstanding,	primarily	associated	with	director	compensation.

# 14.	EARNINGS	PER	COMMON	SHARE	COMPUTATION

Detail	supporting	the	computation	of	basic	and	diluted	earnings	per	common	share	was	as	follows	for	the	years	ended	December	31,	2009,	2008	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  | (in\tthousands,\texcept\tper\tshare\tresults) | (in\tthousands,\texcept\tper\tshare\tresults) |  |
| Net\tincome\tavailable\tfor\tcommon\tstockholders | $1,039,675 | $647,154 | $833,684 |
| Weighted-average\toutstanding\tshares\tof\tcommon\tstock\tused\tto\tcompute\tbasic |  |  |  |
| earnings\tper\tcommon\tshare | 167,364 | 167,172 | 166,871 |
| Dilutive\teffect\tof: |  |  |  |
| Employee\tstock\toptions | 677 | 1,173 | 2,251 |
| Restricted\tstock | 1,030 | 842 | 698 |
| Shares\tused\tto\tcompute\tdiluted\tearnings\tper\tcommon\tshare | 169,071 | 169,187 | 169,820 |
| Basic\tearnings\tper\tcommon\tshare | $6.21 | $3.87 | $5.00 |
| Diluted\tearnings\tper\tcommon\tshare | $6.15 | $3.83 | $4.91 |

Restricted	stock	and	stock	options	to	purchase	5,675,241	shares	in	2009,	3,243,933	shares	in	2008,	and	1,017,381	shares	in	2007	were	anti-dilutive	and,	therefore, were	not	included	in	the	computations	of	diluted	earnings	per	common	share.

# 15.	STOCKHOLDERS'	EQUITY

# 16.	COMMITMENTS,	GUARANTEES	AND	CONTINGENCIES

# Leases

We	lease	facilities,	computer	hardware,	and	other	furniture	and	equipment	under	long-term	operating	leases	that	are	noncancelable	and	expire	on	various	dates through	2019.	We	sublease	facilities	or	partial	facilities	to	third	party	tenants	for	space	not	used	in	our	operations.	Rent	with	scheduled	escalation	terms	are	accounted	for on	a	straight-line	basis	over	the	lease	term.	Rent	expense	and	sublease	rental	income,	which	are	recorded	net	as	an	administrative	expense,	for	all	operating	leases	were as	follows	for	the	years	ended	December	31,	2009,	2008	and	2007:

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Rent\texpense | $160,927 | $142,885 | $121,163 |
| Sublease\trental\tincome | (9,049) | (9,283) | (10,254) |
| Net\trent\texpense | $151,878 | $133,602 | $110,909 |

Future	annual	minimum	payments	due	subsequent	to	December	31,	2009	under	all	of	our	noncancelable	operating	leases	with	initial	terms	in	excess	of	one	year are	as	follows:

|  | Minimum | Sublease |  |
| :--- | :--- | :--- | :--- |
|  | Lease | Rental | Net\tLease |
|  | Payments | Receipts | Commitments |
|  |  | (in\tthousands) |  |
| For\tthe\tyears\tending\tDecember\t31: |  |  |  |
| 2010 | $133,634 | $(1,431) | $132,203 |
| 2011 | \t 119,680 | (788) | 118,892 |
| 2012 | 99,004 | (439) | 98,565 |
| 2013 | 76,540 | (147) | 76,393 |
| 2014 | 59,875 | (114) | 59,761 |
| Thereafter | \t 110,180 | (721) | 109,459 |
| Total | $598,913 | $(3,640) | $595,273 |

# Purchase	Obligations

We	have	agreements	to	purchase	services,	primarily	information	technology	related	services,	or	to	make	improvements	to	real	estate,	in	each	case	that	are enforceable	and	legally	binding	on	us	and	that	specify	all	significant	terms,	including:	fixed	or	minimum	levels	of	service	to	be	purchased;	fixed,	minimum	or	variable price	provisions;	and	the	appropriate	timing	of	the	transaction.	We	have	purchase	obligation	commitments	of	$65.9	million	in	2010,	$41.8	million	in	2011,	$16.0	million in	2012,	$11.6	million	in	2013,	and	$4.1	million	thereafter.	Purchase	obligations	exclude	agreements	that	are	cancelable	without	penalty.

We	generally	rely	on	providers	to	appropriately	document	all	medical	data	including	risk-adjustment	data	in	their	medical	records	and	appropriately	code	their claim	submissions,	which	we	generally	send	to	CMS	as	the

basis	for	our	payment	received	from	CMS	under	the	actuarial	risk-adjustment	model.	The	CMS	audits	involve	a	review	of	a	sample	of	provider	medical	records	for	the contracts	being	audited.	Rates	paid	to	Medicare	Advantage	plans	are	established	under	a	bid	model,	the	actuarial	process	whereby	our	premium	is	based	on	a comparison	of	our	beneficiaries'	risk	scores,	derived	from	medical	diagnoses,	to	those	enrolled	in	the	government's	original	Medicare	program.	As	a	result,	we	believe that	an	actuarially	sound	adjustment	of	payments	from	these	audits	would	need	to	take	into	account	the	level	of	coding	accuracy	and	provider	medical	record documentation	completeness	under	the	government's	original	Medicare	program,	since	the	risk	adjustment	system,	bids,	benefit	structures	and	payment	rates	were premised	on	that	data.	This	would	help	to	ensure	that	the	audit	methodology	applied	to	Medicare	Advantage	plans	accurately	calculates	the	economic	impact	of	the	audit findings.	Additionally,	our	payment	received	from	CMS,	as	well	as	benefits	offered	and	premiums	charged	to	members,	is	based	on	bids	that	did	not,	by	CMS	design, include	any	assumption	of	retroactive	audit	payment	adjustments.	We	believe	that	applying	a	retroactive	audit	adjustment	after	CMS	acceptance	of	bids	would improperly	alter	this	process	of	establishing	member	benefits	and	premiums.

Our	military	services	business,	which	accounted	for	approximately	12%	of	our	total	premiums	and	ASO	fees	for	the	year	ended	December	31,	2009,	primarily consists	of	the	TRICARE	South	Region	contract.	The	original	5-year	South	Region	contract	expired	March	31,	2009.	Through	an	Amendment	of	Solicitation/ Modification	of	Contract	to	the	TRICARE	South	Region	contract,	an	additional	one-year	option	period,	the	sixth

option	period,	which	runs	from	April	1,	2009	through	March	31,	2010,	was	exercised	by	the	government.	The	Amendment	also	provides	for	two	additional	six-month option	periods:	the	seventh	option	period	runs	from	April	1,	2010	through	September	30,	2010	and	the	eighth	option	period	runs	from	October	1,	2010	through March	31,	2011.	Exercise	of	each	of	the	seventh	and	eighth	option	periods	is	at	the	government's	option.	On	December	16,	2009,	we	were	notified	by	Department	of Defense	TRICARE	Management	Activity,	or	TMA,	that	it	intends	to	exercise	its	options	to	extend	the	TRICARE	South	Region	contract	for	Option	Period	VII	and Option	Period	VIII.	The	exercise	of	these	option	periods	would	effectively	extend	the	TRICARE	South	Region	contract	through	March	31,	2011.	The	contract's transition	provisions	require	the	continuation	of	certain	activities,	primarily	claims	processing,	during	a	wind-down	period	lasting	approximately	six	months	following the	expiration	date.	Claims	incurred	on	or	prior	to	the	expiration	date	would	continue	to	be	processed	during	the	wind-down	period	under	the	terms	existing	prior	to	the expiration	date.

In	July	2009,	we	were	notified	by	the	Department	of	Defense	that	we	were	not	awarded	the	third	generation	TRICARE	program	contract	for	the	South	Region which	had	been	subject	to	competing	bids.	We	filed	a	protest	with	the	Government	Accountability	Office,	or	GAO,	in	connection	with	the	award	to	another	contractor citing	discrepancies	between	the	award	criteria	and	procedures	prescribed	in	the	request	for	proposals	issued	by	the	DoD	and	those	that	appear	to	have	been	used	by	the DoD	in	making	its	contractor	selection.	In	October	2009,	we	learned	that	the	GAO	had	upheld	our	protest,	determining	that	the	TMA	evaluation	of	our	proposal	had unreasonably	failed	to	fully	recognize	and	reasonably	account	for	the	likely	cost	savings	associated	with	our	record	of	obtaining	network	provider	discounts	from	our established	network	in	the	South	Region.	On	December	22,	2009,	we	were	advised	that	TMA	notified	the	GAO	of	its	intent	to	implement	corrective	action	consistent with	the	discussion	contained	within	the	GAO's	decision	with	respect	to	our	protest.	At	this	time,	we	are	not	able	to	determine	what	actions	TMA	will	take	in	response	to recommendations	by	the	GAO,	nor	can	we	determine	whether	or	not	the	protest	decision	by	the	GAO	will	have	any	effect	upon	the	ultimate	disposition	of	the	contract award.

# Legal	Proceedings

# Securities	Litigation

In	March	and	April	of	2008,	Humana's	directors	and	certain	of	its	officers	(collectively,	the	"Derivative	Defendants")	were	named	as	defendants	in	two substantially	similar	shareholder	derivative	actions	filed	in	the	Circuit	Court	for	Jefferson	County,	Kentucky	(Del	Gaizo	v.	McCallister	et	al.,	No.	08-CI-003527,	filed	on March	27,	2008;	and	Regiec	v.	McCallister	et	al.,	No.	08-CI-04236,	filed	on	April	16,	2008).	Humana	was	named	as	a	nominal	defendant.	On	May	12,	2008,	the	Circuit Court	entered	an	order	that	consolidated	the	state	court	derivative	actions	into	a	single	action	captioned	In	re	Humana	Inc.	Derivative	Litigation,	No.	08-CI-003527,	and stayed	that	consolidated	action	pending	the	outcome	of	a	motion	to	dismiss	a	federal	securities	class	action,	which	was	premised	on	the	same	allegations	and	asserted	that Humana	and	certain	of	its	officers	and	directors	made	materially	false	and	misleading	statements	regarding	Humana's	anticipated	earnings	per	share	for	the	first	quarter of	2008	and	for	the	fiscal	year	of	2008.	The	federal	case,	styled	In	re	Humana	Inc.	Securities	Litigation,

No.	3:08-CV-162-JHM-DW,	was	dismissed	with	prejudice	on	June	23,	2009,	and	no	appeal	was	filed.	On	September	21,	2009,	the	plaintiffs	filed	in	the	state	court	action a	consolidated	shareholder	derivative	complaint	(the	"Consolidated	Derivative	Complaint"),	which,	as	noted	above,	is	premised	on	the	same	events	underlying	the related	federal	securities	class	action.	The	Consolidated	Derivative	Complaint	alleges,	among	other	things,	that	some	or	all	of	the	Derivative	Defendants	(i)	failed	to correct	Humana's	allegedly	inadequate	controls	relating	to	its	bids	filed	with	respect	to	its	stand-alone	Medicare	Part	D	prescription	drug	plans	(PDPs)	for	2008, (ii)	caused	Humana	to	misrepresent	its	business	prospects,	(iii)	failed	to	correct	Humana's	earnings	guidance,	and	(iv)	caused	Humana	to	charge	co-payments	for	its PDPs	that	were	based	on	incorrect	estimates.	The	Consolidated	Derivative	Complaint	asserts	claims	against	the	Derivative	Defendants	for	breach	of	fiduciary	duty, corporate	waste,	and	unjust	enrichment.	The	Consolidated	Derivative	Complaint	also	asserts	claims	against	certain	directors	and	officers	of	Humana	for	allegedly breaching	their	fiduciary	duties	by	engaging	in	insider	sales	of	Humana	common	stock	and	misappropriating	Humana	information.	The	Consolidated	Derivative Complaint	seeks	the	following	relief,	among	other	things:	(i)	damages	in	favor	of	Humana;	(ii)	an	order	directing	Humana	to	take	actions	to	reform	and	improve	its internal	governance	and	procedures,	including	holding	shareholder	votes	on	certain	corporate	governance	policies	and	resolutions	to	amend	Humana's	Bylaws	or Articles	of	Incorporation;	(iii)	restitution	and	disgorgement	of	the	Derivative	Defendants'	alleged	profits,	benefits,	and	other	compensation;	(iv)	an	award	of	plaintiffs' legal	costs	and	expenses;	and	(v)	other	relief	that	the	court	deems	just	and	proper.	Neither	Humana	nor	the	Derivative	Defendants	have,	as	of	yet,	answered	or	otherwise responded	to	the	Consolidated	Derivative	Complaint.

# Provider	Litigation

Humana	Military	Healthcare	Services,	Inc.	("HMHS")	has	been	named	as	a	defendant	in	Sacred	Heart	Health	System,	Inc.,	et	al.	v.	Humana	Military	Healthcare Services	Inc.,	Case	No.	3:07-cv-00062	MCR/EMT	(the	"Sacred	Heart"	Complaint),	a	class	action	lawsuit	filed	on	February	5,	2007	in	the	U.S.	District	Court	for	the Northern	District	of	Florida	asserting	contract	and	fraud	claims	against	HMHS.	The	Sacred	Heart	Complaint	alleges,	among	other	things,	that,	HMHS	breached	its network	agreements	with	a	class	of	hospitals,	including	the	seven	named	plaintiffs,	in	six	states	that	contracted	for	reimbursement	of	outpatient	services	provided	to beneficiaries	of	the	Department	of	Defense's	TRICARE	health	benefits	program	("TRICARE").	The	Complaint	alleges	that	HMHS	breached	its	network	agreements when	it	failed	to	reimburse	the	hospitals	based	on	negotiated	discounts	for	non-surgical	outpatient	services	performed	on	or	after	October	1,	1999,	and	instead	reimbursed them	based	on	published	CHAMPUS	Maximum	Allowable	Charges	(so-called	"CMAC	rates").	HMHS	denies	that	it	breached	the	network	agreements	with	the	hospitals and	asserted	a	number	of	defenses	to	these	claims.	The	Complaint	seeks,	among	other	things,	the	following	relief	for	the	purported	class	members:	(i)	damages	as	a	result of	the	alleged	breach	of	contract	by	HMHS,	(ii)	taxable	costs	of	the	litigation,	(iii)	attorneys	fees,	and	(iv)	any	other	relief	the	court	deems	just	and	proper.	Separate	and apart	from	the	class	relief,	named	plaintiff	Sacred	Heart	Health	System	Inc.	requests	damages	and	other	relief	the	court	deems	just	and	proper	for	its	individual	claim against	HMHS	for	fraud	in	the	inducement	to	contract.	On	September	25,	2008,	the	district	court	certified	a	class	consisting	of	"all	institutional	healthcare	service providers	in	TRICARE	former	Regions	3	and	4	which	had	network	agreements	with	[HMHS]	to	provide	outpatient	non-surgical	services	to	CHAMPUS/TRICARE beneficiaries	as	of	November	18,	1999,	excluding	those	network	providers	who	contractually	agreed	with	[HMHS]	to	submit	any	such	disputes	with	[HMHS]	to arbitration."	HMHS	is	challenging	the	certification	of	this	class	action.	On	October	9,	2008,	HMHS	petitioned	the	U.S.	Court	of	Appeals	for	the	Eleventh	Circuit pursuant	to	Federal	Rule	of	Civil	Procedure	23(f)	for	permission	to	appeal	on	an	interlocutory	basis.	On	November	14,	2008,	the	Court	of	Appeals	granted	HMHS's petition.	On	November	21,	2008,	the	district	court	stayed	proceedings	in	the	case	pending	the	result	of	the	appeal	on	the	class	issue	or	until	further	notice.	Oral	argument before	the	Court	of	Appeals	was	held	on	January	14,	2010.	On	March	2,	2009,	in	a	case	styled	Southeast	Georgia	Regional	Medical	Center,	et	al.	v.	HMHS,	the	named plaintiffs	filed	an	arbitration

demand,	seeking	relief	on	the	same	grounds	as	the	plaintiffs	in	the	Sacred	Heart	litigation.	The	arbitration	plaintiffs	are	seeking	certification	of	a	class	consisting	of	all institutional	healthcare	service	providers	who	had	contracts	with	HMHS	to	provide	outpatient	non-surgical	services	and	whose	agreements	provided	for	dispute resolution	through	arbitration.	HMHS	submitted	its	response	to	the	demand	for	arbitration	on	May	1,	2009.

Humana	intends	to	defend	each	of	these	actions	vigorously.

# Other	Lawsuits	and	Regulatory	Matters

Our	current	and	past	business	practices	are	subject	to	review	by	various	state	insurance	and	health	care	regulatory	authorities	and	other	state	and	federal	regulatory authorities.	These	authorities	regularly	scrutinize	the	business	practices	of	health	insurance	and	benefits	companies.	These	reviews	focus	on	numerous	facets	of	our business,	including	claims	payment	practices,	competitive	practices,	commission	payments,	privacy	issues,	utilization	management	practices,	and	sales	practices.	Some of	these	reviews	have	historically	resulted	in	fines	imposed	on	us	and	some	have	required	changes	to	some	of	our	practices.	We	continue	to	be	subject	to	these	reviews, which	could	result	in	additional	fines	or	other	sanctions	being	imposed	on	us	or	additional	changes	in	some	of	our	practices.	In	addition,	we	have	responded	and	are continuing	to	respond	to	requests	for	information	regarding	certain	provider-payment	practices	from	various	states'	attorneys	general	and	departments	of	insurance.

On	September	10,	2009,	the	Office	of	Inspector	General	(OIG)	of	the	United	States	Department	of	Health	and	Human	Services	issued	subpoenas	to	us	and	our subsidiary,	Humana	Pharmacy,	Inc.,	seeking	documents	related	to	our	Medicare	Part	D	prescription	plans	and	the	operation	of	RightSourceRx ,	our	mail	order pharmacy	in	Phoenix,	Arizona.	We	are	responding	to	the	subpoena. SM

We	also	are	involved	in	various	other	lawsuits	that	arise,	for	the	most	part,	in	the	ordinary	course	of	our	business	operations,	including	employment	litigation, claims	of	medical	malpractice,	bad	faith,	nonacceptance	or	termination	of	providers,	anticompetitive	practices,	improper	rate	setting,	failure	to	disclose	network discounts	and	various	other	provider	arrangements,	general	contractual	matters,	intellectual	property	matters,	and	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,	improper	policy terminations,	challenges	to	our	implementation	of	the	new	Medicare	prescription	drug	program	and	other	litigation.

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

The	outcome	of	the	securities	litigation,	provider	litigation,	and	other	current	or	future	suits	or	governmental	investigations	cannot	be	accurately	predicted	with certainty,	and	it	is	reasonably	possible	that	their	outcomes	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

# 17.	SEGMENT	INFORMATION

We	manage	our	business	with	two	segments:	Government	and	Commercial.	The	Government	segment	consists	of	beneficiaries	of	government	benefit	programs, and	includes	three	lines	of	business:	Medicare,	Military,	and	Medicaid.	The	Commercial	segment	consists	of	members	enrolled	in	our	medical	and	specialty 103

products	marketed	to	employer	groups	and	individuals.	When	identifying	our	segments,	we	aggregated	products	with	similar	economic	characteristics.	These characteristics	include	the	nature	of	customer	groups	as	well	as	pricing,	benefits,	and	underwriting	requirements.	These	segment	groupings	are	consistent	with information	used	by	our	Chief	Executive	Officer.

The	accounting	policies	of	each	segment	are	the	same	and	are	described	in	Note	2.	The	results	of	each	segment	are	measured	by	income	before	income	taxes.	We allocate	all	selling,	general	and	administrative	expenses,	investment	and	other	revenue,	interest	expense,	and	goodwill,	but	no	other	assets	or	liabilities,	to	our	segments. Members	served	by	our	two	segments	often	utilize	the	same	provider	networks,	in	some	instances	enabling	us	to	obtain	more	favorable	contract	terms	with	providers.

Our	segments	also	share	indirect	overhead	costs	and	assets.	As	a	result,	the	profitability	of	each	segment	is	interdependent.

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Revenues: |  |  |  |
| Premiums: |  |  |  |
| Medicare\tAdvantage | $16,413,301 | $13,777,999 | $11,173,417 |
| Medicare\tstand-alone\tPDP | 2,327,418 | 3,380,400 | 3,668,425 |
| Total\tMedicare | 18,740,719 | 17,158,399 | 14,841,842 |
| Military\tservices | 3,426,739 | 3,218,270 | 2,839,790 |
| Medicaid | 646,195 | 591,535 | 555,594 |
| Total\tpremiums | 22,813,653 | 20,968,204 | 18,237,226 |
| Administrative\tservices\tfees | 108,442 | 85,868 | 73,659 |
| Investment\tincome | 179,141 | 115,162 | 182,616 |
| Other\trevenue | 3,709 | 1,782 | 1,705 |
| Total\trevenues | 23,104,945 | 21,171,016 | 18,495,206 |
| Operating\texpenses: |  |  |  |
| Benefits | 19,038,423 | 18,007,907 | 15,279,610 |
| Selling,\tgeneral\tand\tadministrative | 2,360,176 | 2,223,153 | 2,042,249 |
| Depreciation\tand\tamortization | 139,728 | 124,094 | 108,291 |
| Total\toperating\texpenses | 21,538,327 | 20,355,154 | 17,430,150 |
| Income\tfrom\toperations | 1,566,618 | 815,862 | 1,065,056 |
| Interest\texpense | 69,012 | 30,622 | 37,525 |
| Income\tbefore\tincome\ttaxes | $1,497,606 | $785,240 | $1,027,531 |

Premium	and	administrative	services	revenues	derived	from	our	contracts	with	the	federal	government,	as	a	percentage	of	our	total	premium	and	ASO	revenues, were	approximately	73%	for	2009,	72%	for	2008	and	71%	for	2007.

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Revenues: |  |  |  |
| Premiums: |  |  |  |
| Fully-insured: |  |  |  |
| PPO | $3,188,598 | $3,582,692 | $3,664,019 |
| HMO | 2,996,560 | 2,586,711 | 1,998,981 |
| Total\tfully-insured | 6,185,158 | 6,169,403 | 5,663,000 |
| Specialty | 927,940 | 927,237 | 534,121 |
| Total\tpremiums | 7,113,098 | 7,096,640 | 6,197,121 |
| Administrative\tservices\tfees | 387,693 | 366,011 | 317,856 |
| Investment\tincome | 117,176 | 105,053 | 131,623 |
| Other\trevenue | 237,502 | 207,652 | 148,183 |
| Total\trevenues | 7,855,469 | 7,775,356 | 6,794,783 |
| Operating\texpenses: |  |  |  |
| Benefits | 5,736,579 | 5,700,326 | 4,990,921 |
| Selling,\tgeneral\tand\tadministrative | 1,867,359 | 1,721,499 | 1,434,219 |
| Depreciation\tand\tamortization | 110,546 | 96,256 | 76,521 |
| Total\toperating\texpenses | 7,714,484 | 7,518,081 | 6,501,661 |
| Income\tfrom\toperations | 140,985 | 257,275 | 293,122 |
| Interest\texpense | 36,831 | 49,667 | 31,353 |
| Income\tbefore\tincome\ttaxes | $104,154 | $207,608 | $261,769 |

# 18.	REINSURANCE

Certain	blocks	of	insurance	assumed	in	acquisitions,	primarily	life,	long-term	care,	and	annuities	in	run-off	status,	are	subject	to	reinsurance	where	some	or	all	of the	underwriting	risk	related	to	these	policies	has	been	ceded	to	a	third	party.	In	addition,	a	large	portion	of	our	reinsurance	takes	the	form	of	100%	coinsurance agreements	where,	in	addition	to	all	of	the	underwriting	risk,	all	administrative	responsibilities,	including	premium	collections	and	claim	payment,	have	also	been	ceded to	a	third	party.	We	acquired	these	policies	and	related	reinsurance	agreements	with	the	purchase	of	stock	of	companies	in	which	the	policies	were	originally	written.	We acquired	these	companies	for	business	reasons	unrelated	to	these	particular	policies,	including	the	companies'	other	products	and	licenses	necessary	to	fulfill	strategic plans.

A	reinsurance	agreement	between	two	entities	transfers	the	underwriting	risk	of	policyholder	liabilities	to	a	reinsurer	while	the	primary	insurer	retains	the contractual	relationship	with	the	ultimate	insured.	As	such,	these	reinsurance	agreements	do	not	completely	relieve	us	of	our	potential	liability	to	the	ultimate	insured. However,	given	the	transfer	of	underwriting	risk,	our	potential	liability	is	limited	to	the	credit	exposure	which	exists	should	the	reinsurer	be	unable	to	meet	its obligations	assumed	under	these	reinsurance	agreements.

Reinsurance	recoverables	represent	the	portion	of	future	policy	benefits	payable	that	are	covered	by	reinsurance.	Amounts	recoverable	from	reinsurers	are estimated	in	a	manner	consistent	with	the	methods	used	to	determine	future	policy	benefits	payable	as	detailed	in	Note	2.	Reinsurance	recoverables,	included	in	other long-	term	assets,	were	$378.3	million	at	December	31,	2009	and	$365.8	million	at	December	31,	2008.	The	percentage	of	these	reinsurance	recoverables	resulting	from 100%	coinsurance	agreements	was	59%	at	December	31,	2009	and	63%	at	December	31,	2008.	Premiums	ceded	were	$33.0	million	in	2009,	$34.2	million	in	2008	and $13.4	million	in	2007.

We	evaluate	the	financial	condition	of	these	reinsurers	on	a	regular	basis.	These	reinsurers	are	well-known	and	well-established,	as	evidenced	by	the	strong financial	ratings	at	December	31,	2009	presented	below:

The	all	other	category	represents	approximately	20	reinsurers	with	individual	balances	less	than	$45	million.	Two	of	these	reinsurers	have	placed	$27.1	million	of cash	and	securities	in	trusts,	an	amount	at	least	equal	to	the	recoverable	from	the	reinsurer.

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# To	the	Board	of	Directors	and	Shareholders

In	our	opinion,	the	accompanying	consolidated	balance	sheets	and	the	related	consolidated	statements	of	income,	of	stockholder's	equity	and	of	cash	flows, present	fairly,	in	all	material	respects,	the	financial	position	of	Humana	Inc.	and	its	subsidiaries	("Company")	at	December	31,	2009	and	2008,	and	the	results	of	their operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2009	in	conformity	with	accounting	principles	generally	accepted	in	the United	States	of	America.	In	addition,	in	our	opinion,	the	financial	statement	schedules	listed	in	the	index	appearing	under	Item	15(a)(2)	present	fairly,	in	all	material respects,	the	information	set	forth	therein	when	read	in	conjunction	with	the	related	consolidated	financial	statements.	Also	in	our	opinion,	the	Company	maintained,	in all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2009,	based	on	criteria	established	in	Internal	Control—Integrated Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).	The	Company's	management	is	responsible	for	these	financial statements	and	financial	statement	schedules,	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal control	over	financial	reporting,	included	in	Management's	Report	on	Internal	Control	over	Financial	Reporting	appearing	under	Item	9A.	Our	responsibility	is	to express	opinions	on	these	financial	statements,	on	the	financial	statement	schedules,	and	on	the	Company's	internal	control	over	financial	reporting	based	on	our integrated	audits.	We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards require	that	we	plan	and	perform	the	audits	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement	and	whether	effective internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audits	of	the	financial	statements	included	examining,	on	a	test	basis,	evidence supporting	the	amounts	and	disclosures	in	the	financial	statements,	assessing	the	accounting	principles	used	and	significant	estimates	made	by	management,	and evaluating	the	overall	financial	statement	presentation.	Our	audit	of	internal	control	over	financial	reporting	included	obtaining	an	understanding	of	internal	control	over financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and	operating	effectiveness	of	internal	control	based	on	the assessed	risk.	Our	audits	also	included	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe	that	our	audits	provide	a reasonable	basis	for	our	opinions.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	and	directors	of	the	company;	and	(iii)	provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

# /s/				PRICEWATERHOUSECOOPERS	LLP

Louisville,	Kentucky

# QUARTERLY	FINANCIAL	INFORMATION

# (Unaudited)

A	summary	of	our	quarterly	unaudited	results	of	operations	for	the	years	ended	December	31,	2009	and	2008	follows:

|  | First | Second | Third | Fourth |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands,\texcept\tper\tshare\tresults) | (in\tthousands,\texcept\tper\tshare\tresults) |  |
| Total\trevenues | $7,711,661 | $7,898,889 | $7,716,819 | $7,633,045 |
| Income\tbefore\tincome\ttaxes | 293,762 | 439,950 | 469,348 | 398,700 |
| Net\tincome | 205,717 | 281,780 | 301,519 | 250,659 |
| Basic\tearnings\tper\tcommon\tshare | 1.23 | 1.68 | 1.80 | 1.49 |
| Diluted\tearnings\tper\tcommon\tshare | 1.22 | 1.67 | 1.78 | 1.48 |

|  | First | Second | Third | Fourth |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tthousands,\texcept\tper\tshare\tresults) | (in\tthousands,\texcept\tper\tshare\tresults) |  |
| Total\trevenues | $6,959,704 | $7,350,862 | $7,148,170 | $7,487,636 |
| Income\tbefore\tincome\ttaxes | 123,928 | 325,014 | 282,860 | 261,046 |
| Net\tincome | 80,170 | 209,896 | 183,008 | 174,080 |
| Basic\tearnings\tper\tcommon\tshare | 0.48 | 1.26 | 1.10 | 1.04 |
| Diluted\tearnings\tper\tcommon\tshare | 0.47 | 1.24 | 1.09 | 1.03 |

# ITEM	9. CHANGES	IN	AND	DISAGREEMENTS	WITH	ACCOUNTANTS	ON	ACCOUNTING	AND	FINANCIAL	DISCLOSURE

# ITEM	9A. CONTROLS	AND	PROCEDURES

# Management's	Responsibility	for	Financial	Statements	and	Other	Information

We	are	responsible	for	the	preparation	and	integrity	of	the	consolidated	financial	statements	appearing	in	our	Annual	Report.	The	consolidated	financial statements	were	prepared	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	and	include	amounts	based	on	our	estimates	and	judgments. All	other	financial	information	in	this	report	has	been	presented	on	a	basis	consistent	with	the	information	included	in	the	financial	statements.

Our	control	environment	is	the	foundation	for	our	system	of	internal	control	over	financial	reporting	and	is	embodied	in	our	Business	Ethics	Policy.	It	sets	the tone	of	our	organization	and	includes	factors	such	as	integrity	and	ethical	values.	Our	internal	control	over	financial	reporting	is	supported	by	formal	policies	and procedures	which	are	reviewed,	modified	and	improved	as	changes	occur	in	business	conditions	and	operations.

The	Audit	Committee	of	the	Board	of	Directors,	which	is	composed	solely	of	independent	outside	directors,	meets	periodically	with	members	of	management,	the internal	auditors	and	our	independent	registered	public	accounting	firm	to	review	and	discuss	internal	controls	over	financial	reporting	and	accounting	and	financial reporting	matters.	Our	independent	registered	public	accounting	firm	and	internal	auditors	report	to	the	Audit	Committee	and	accordingly	have	full	and	free	access	to	the Audit	Committee	at	any	time.

# Evaluation	of	Disclosure	Controls	and	Procedures

We	have	established	disclosure	controls	and	procedures	to	ensure	that	material	information	relating	to	the	Company,	including	its	consolidated	subsidiaries,	is made	known	to	members	of	senior	management	and	the	Board	of	Directors.

Based	on	our	evaluation	as	of	December	31,	2009,	we	as	the	principal	executive	officer,	the	principal	financial	officer	and	the	principal	accounting	officer	of	the Company	have	concluded	that	the	Company's	disclosure	controls	and	procedures	(as	defined	in	the	Securities	Exchange	Act	of	1934)	are	effective	to	ensure	that	the information	required	to	be	disclosed	by	the	Company	in	the	reports	that	it	files	or	submits	under	the	Securities	Exchange	Act	of	1934	is	recorded,	processed,	summarized and	reported	as	specified	in	Securities	and	Exchange	Commission	rules	and	forms.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

We	are	responsible	for	establishing	and	maintaining	effective	internal	control	over	financial	reporting	as	defined	in	Rule	13a-15(f)	under	the	Securities	Exchange Act	of	1934.	The	Company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control over	financial	reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the transactions	and	dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with authorizations	of	management	and	directors	of	the	company;	and	(iii)	provide	reasonable	assurance	regarding

prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may deteriorate.

We	assessed	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	December	31,	2009.	In	making	this	assessment,	we	used	the	criteria set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	Internal	Control—Integrated	Framework.	Based	on	our	assessment, we	determined	that,	as	of	December	31,	2009,	the	Company's	internal	control	over	financial	reporting	was	effective	based	on	those	criteria.

The	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2009	has	been	audited	by	PricewaterhouseCoopers	LLP,	our	independent registered	public	accounting	firm,	who	also	audited	the	Company's	consolidated	financial	statements	included	in	our	Annual	Report	on	Form	10-K,	as	stated	in	their report	which	appears	on	page	107.

# Changes	in	Internal	Control	over	Financial	Reporting

There	have	been	no	changes	in	the	Company's	internal	control	over	financial	reporting	during	the	quarter	ended	December	31,	2009	that	have	materially	affected, or	are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Michael	B.	McCallister

President	and	Chief	Executive	Officer

James	H.	Bloem

Senior	Vice	President,	Chief	Financial	Officer	and	Treasurer

Steven	E.	McCulley

Vice	President	and	Controller,	Principal	Accounting	Officer

# ITEM	9B. OTHER	INFORMATION

# PART	III

# ITEM	10. DIRECTORS,	EXECUTIVE	OFFICERS	AND	CORPORATE	GOVERNANCE

# Directors

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	caption	"Election	of	Directors"	of	such	Proxy	Statement.

# Executive	Officers	of	the	Registrant

Set	forth	below	are	names	and	ages	of	all	of	our	current	executive	officers	as	of	February	19,	2010,	their	positions,	and	the	date	first	elected	an	officer:

(1) Mr.	McCallister	was	elected	President,	Chief	Executive	Officer	and	a	member	of	the	Board	of	Directors	in	February	2000.	Mr.	McCallister	joined	the	Company in	June	1974.

(2) Mr.	Murray	currently	serves	as	Chief	Operating	Officer,	having	held	this	position	since	February	2006.	Prior	to	that,	Mr.	Murray	held	the	position	of	Chief Operating	Officer—Market	and	Business	Segment	Operations	from	September	2002	to	February	2006.	Mr.	Murray	joined	the	Company	in	December	1989.

(3) Mr.	Bloem	currently	serves	as	Senior	Vice	President,	Chief	Financial	Officer	and	Treasurer,	having	held	this	position	since	July	2002.	Mr.	Bloem	joined	the Company	in	February	2001.

(4) Mr.	Goodman	currently	serves	as	Senior	Vice	President	and	Chief	Service	and	Information	Officer,	having	held	this	position	since	September	2002. Mr.	Goodman	joined	the	Company	in	April	1999.

(5) Ms.	Hathcock	currently	serves	as	Senior	Vice	President	and	Chief	Human	Resources	Officer,	having	held	this	position	since	May	1999	when	she	joined	the Company.

(6) Mr.	Kusserow	currently	serves	as	Senior	Vice	President	and	Chief	Strategy	Officer,	having	held	this	position	since	February	2009	when	he	joined	the	Company. Prior	to	joining	the	Company,	Mr.	Kusserow	served	as	Managing	Director	of	Private	Equity	at	the	Chicago-based	investment	firm	B.C.	Ziegler	and	Company.	He also	served	as	Managing	Director	and	Chief	Investment	Officer	of	the	Ziegler	HealthVest	Fund,	where	he	focused	on	early-stage	investments	in	health	care services	and	health	care	IT.	From	2004	to	2007,	he	was	Managing	Director	of	San	Ysidro	Capital	Partners	LLC,	a	health	care	services	consulting	and	investment advisory	firm.

(7) Mr.	Liston	currently	serves	as	Senior	Vice	President—Senior	Products,	having	held	this	position	since	July	2008.	Prior	to	that,	Mr.	Liston	held	the	position	of Senior	Vice	President—Strategy	and	Corporate	Development	from	July	2000	to	June	2008.	Mr.	Liston	joined	the	Company	in	December	1994.

(8) Mr.	Madabhushi	currently	serves	as	Senior	Vice	President	and	Chief	Innovation	and	Marketing	Officer	and	manages	Humana's	Government	Relations	and Corporate	Communications	organizations	and	international	businesses,	having	held	this	position	since	April	2009	when	he	joined	the	Company.	Prior	to	joining the	Company,	Mr.	Madabhushi	had	24	years	of	global	business	management	experience,	including	15	years	with	Citigroup,	the	New	York-based	banking conglomerate.	Mr.	Madabhushi	most	recently	served	as	Executive	Vice	President	and	Chief	Marketing	Officer	of	the	Global	Cards	division	of	Citigroup.	As Executive	Vice	President	of	Citigroup's	Credit	Cards	Business	from	2006	to	2008,	he	managed	the	bank's	value,	cash	and	rewards	businesses,	as	well	as	the automotive	and	telecommunications	sectors.	He	also	headed	the	new	product	development	and	new	payment	technologies	groups.	From	2003	to	2005	he	was Chairman	and	Chief	Executive	Officer	of	Diners	Club	North	America.

(9) Ms.	Margulis	currently	serves	as	Senior	Vice	President—Government	Relations,	having	held	this	position	since	January	2000.	Ms.	Margulis	joined	the	Company in	November	1985.

(10) Mr.	Todoroff	currently	serves	as	Senior	Vice	President	and	General	Counsel,	having	held	this	position	since	August	2008.	Prior	to	joining	the	Company, Mr.	Todoroff	served	as	Vice	President,	Senior	Corporate	Counsel	and	Corporate	Secretary	for	Aetna	Inc.	from	2006	through	July	2008.	Mr.	Todoroff	joined Aetna's	Legal	Department	in	1995	and	held	various	positions	of	increasing	responsibility.

(11) Mr.	McCulley	currently	serves	as	Vice	President	and	Controller	(Principal	Accounting	Officer),	having	held	this	position	since	August	2004.	Prior	to	that,	he served	as	Vice	President	and	Controller	from	January	2001	to	August	2004.	Mr.	McCulley	joined	the	Company	in	May	1990.

Executive	officers	are	elected	annually	by	our	Board	of	Directors	and	serve	until	their	successors	are	elected	or	until	resignation	or	removal.	There	are	no	family relationships	among	any	of	our	executive	officers.

# Section	16(a)	Beneficial	Ownership	Reporting	Compliance

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	caption	"Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	of	such	Proxy	Statement.

# Code	of	Ethics	for	Chief	Executive	Officer	and	Senior	Financial	Officers

We	have	adopted	a	Code	of	Ethics	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers,	violations	of	which	should	be	reported	to	the	Audit	Committee. The	code	may	be	viewed	through	the	Investor	Relations	section	of	our	web	site	at	www.humana.com.	Any	amendment	to	or	waiver	of	the	application	of	the	Code	of Ethics	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers	will	be	promptly	disclosed	through	the	Investor	Relations	section	of	our	web	site	at www.humana.com.

# Code	of	Business	Conduct	and	Ethics

Since	1995,	we	have	operated	under	an	omnibus	Code	of	Ethics	and	Business	Conduct,	known	as	the	Humana	Inc.	Principles	of	Business	Ethics,	which	includes provisions	ranging	from	restrictions	on	gifts	to	conflicts	of	interest.	All	employees	and	directors	are	required	to	annually	affirm	in	writing	their	acceptance	of	the	code. The	Humana	Inc.	Principles	of	Business	Ethics	was	adopted	by	our	Board	of	Directors	in	February	2004	as	the	document	to	comply	with	the	New	York	Stock	Exchange Corporate	Governance	Standard	303A.10.	The	Humana	Inc.	Principles	of	Business	Ethics	is	available	on	our	web	site	at	www.humana.com.	Any	waiver	of	the application	of	the	Humana	Inc.	Principles	of	Business	Ethics	to	directors	or	executive	officers	must	be	made	by	the	Board	of	Directors	and	will	be	promptly	disclosed	on our	web	site	at	www.humana.com.

# Corporate	Governance	Items

We	have	made	available	free	of	charge	on	or	through	the	Investor	Relations	section	of	our	web	site	at	www.humana.com	our	annual	reports	on	Form	10-K, quarterly	reports	on	Form	10-Q,	proxy	statements,	and	all	of	our	other	reports,	and,	if	applicable,	amendments	to	those	reports	filed	or	furnished	pursuant	to Section	13(a)

of	the	Exchange	Act,	as	soon	as	reasonably	practicable	after	we	electronically	file	such	material	with,	or	furnish	it	to,	the	SEC.	Also	available	on	our	Internet	web	site	is information	about	our	Board	of	Directors,	including:

•a	determination	of	independence	for	each	member;

•the	name,	membership,	role,	and	charter	of	each	of	the	various	committees	of	our	Board	of	Directors;

•the	name(s)	of	the	directors	designated	as	a	financial	expert	under	rules	and	regulations	promulgated	by	the	SEC;

•the	process	for	designating	a	lead	director	to	act	at	executive	sessions	of	the	non-management	directors;

•the	pre-approval	process	of	non-audit	services	provided	by	our	independent	accountants;

•our	by-laws	and	Certificate	of	Incorporation;

•our	Majority	Vote	policy;

•our	Related	Persons	Transaction	Policy;

•the	process	by	which	interested	parties	can	communicate	with	directors;

•the	process	by	which	stockholders	can	make	director	nominations	(pursuant	to	our	By-laws);

•our	Corporate	Governance	Guidelines;

•our	Insider	Trading	Policy;

•stock	ownership	guidelines	for	directors	and	for	executive	officers;

•the	Humana	Inc.	Principles	of	Business	Ethics	and	any	waivers	thereto;	and

•the	Code	of	Ethics	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers	and	any	waivers	thereto.

Any	waivers	or	amendments	for	directors	or	executive	officers	to	the	Humana	Inc.	Principles	of	Business	Ethics	and	the	Code	of	Ethics	for	the	Chief	Executive Officer	and	Senior	Financial	Officers	will	be	promptly	displayed	on	our	web	site.	Additional	information	about	these	items	can	be	found	in,	and	is	incorporated	by reference	to,	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held	on	April	20,	2010.

# Material	Changes	to	the	Procedures	by	which	Security	Holders	May	Recommend	Nominees	to	the	Registrant's	Board	of	Directors

# Audit	Committee	Financial	Expert

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	caption	"Corporate	Governance-Audit	Committee"	of	such	Proxy	Statement.

# Audit	Committee	Composition	and	Independence

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	caption	"Corporate	Governance-Committee	Composition"	of	such	Proxy	Statement.

# ITEM	11. EXECUTIVE	COMPENSATION

Additional	information	required	by	this	Item	is	incorporated	herein	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to be	held	on	April	20,	2010	appearing	under	the	captions	"Compensation	Committee	Interlocks	and	Insider	Participation,"	"Director	Compensation,"	"Compensation Discussion	and	Analysis,"	"Organization	&	Compensation	Committee	Report,"	and	"Executive	Compensation	of	the	Company"	of	such	Proxy	Statement.

# ITEM	12. SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL	OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER	MATTERS

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	captions	"Security	Ownership	of	Certain	Beneficial	Owners	of	Company	Common	Stock"	and	"Equity	Compensation	Plan Information"	of	such	Proxy	Statement.

# ITEM	13. CERTAIN	RELATIONSHIPS	AND	RELATED	TRANSACTIONS,	AND	DIRECTOR	INDEPENDENCE

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	captions	"Certain	Transactions	with	Management	and	Others"	and	"Independent	Directors"	of	such	Proxy	Statement.

# ITEM	14. PRINCIPAL	ACCOUNTING	FEES	AND	SERVICES

The	information	required	by	this	Item	is	herein	incorporated	by	reference	from	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held on	April	20,	2010	appearing	under	the	caption	"Audit	Committee	Report"	of	such	Proxy	Statement.

# PART	IV

# ITEM	15. EXHIBITS,	FINANCIAL	STATEMENT	SCHEDULES

(a) The	financial	statements,	financial	statement	schedules	and	exhibits	set	forth	below	are	filed	as	part	of	this	report.

(1) Financial	Statements—The	response	to	this	portion	of	Item	15	is	submitted	as	Item	8	of	Part	II	of	this	report.

(2) The	following	Consolidated	Financial	Statement	Schedules	are	included	herein:

# Schedule	I	Parent	Company	Financial	Information

# Schedule	II	Valuation	and	Qualifying	Accounts

# All	other	schedules	have	been	omitted	because	they	are	not	applicable.

3(a) Restated	Certificate	of	Incorporation	of	Humana	Inc.	filed	with	the	Secretary	of	State	of	Delaware	on	November	9, 1989,	as	restated	to	incorporate	the	amendment	of	January	9,	1992,	and	the	correction	of	March	23,	1992	(incorporated herein	by	reference	to	Exhibit	4(i)	to	Humana	Inc.'s	Post-Effective	Amendment	No.1	to	the	Registration	Statement	on Form	S-8	(Reg.	No.	33-49305)	filed	February	2,	1994).

		(b) By-Laws	of	Humana	Inc.,	as	amended	on	January	4,	2007	(incorporated	herein	by	reference	to	Exhibit	3	to	Humana Inc.'s	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2006).

4(a) Indenture,	dated	as	of	August	5,	2003,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York,	as	trustee (incorporated	herein	by	reference	to	Exhibit	4.1	to	Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2003).

		(b) First	Supplemental	Indenture,	dated	as	of	August	5,	2003,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York,	as trustee	(incorporated	herein	by	reference	to	Exhibit	4.2	to	Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the quarter	ended	September	30,	2003).

		(c) Second	Supplemental	Indenture,	dated	as	of	May	31,	2006,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York Trust	Company,	N.A.,	as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.1	to	Humana	Inc.'s	Current	Report	on Form	8-K	filed	on	May	31,	2006).

		(d) Third	Supplemental	Indenture,	dated	as	of	June	5,	2008,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York Trust	Company,	N.A.,	as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.1	to	Humana	Inc.'s	Current	Report	on Form	8-K	filed	on	June	5,	2008).

		(e) Fourth	Supplemental	Indenture,	dated	as	of	June	5,	2008,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York Trust	Company,	N.A.,	as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.3	to	Humana	Inc.'s	Current	Report	on Form	8-K	filed	on	June	5,	2008).

		(f) Indenture,	dated	as	of	March	30,	2006,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York	Trust	Company, N.A.,	as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.2	to	Humana	Inc.'s	Registration	Statement	on	Form	S-3 filed	on	March	31,	2006).

		(g) There	are	no	instruments	defining	the	rights	of	holders	with	respect	to	long-term	debt	in	excess	of	10	percent	of	the total	assets	of	Humana	Inc.	on	a	consolidated	basis.	Other	long-term	indebtedness	of	Humana	Inc.	is	described	herein	in Note	11	to	Consolidated	Financial	Statements.	Humana	Inc.	agrees	to	furnish	copies	of	all	such	instruments	defining the	rights	of	the	holders	of	such	indebtedness	not	otherwise	filed	as	an	Exhibit	to	this	Annual	Report	on	Form	10-K	to the	Commission	upon	request.

10(a)* 1996	Stock	Incentive	Plan	for	Employees	(incorporated	herein	by	reference	to	Annex	A	to	Humana	Inc.'s	Proxy Statement	with	respect	to	the	Annual	Meeting	of	Stockholders	held	on	May	9,	1996).

				(b)* 1996	Stock	Incentive	Plan	for	Employees	as	amended	in	1998	(incorporated	herein	by	reference	to	Exhibit	C	to	Humana Inc.'s	Proxy	Statement	with	respect	to	the	Annual	Meeting	of	Stockholders	held	on	May	14,	1998).

				(c)* Humana	Inc.	Non-Qualified	Stock	Option	Plan	for	Employees	(incorporated	herein	by	reference	to	Exhibit	99	to	Humana Inc.'s	Registration	Statement	on	Form	S-8	(Registration	Statement	No.	333-86801),	filed	on	September	9,	1999).

				(d)* Form	of	Company's	Stock	Option	Agreement	under	the	1996	Stock	Incentive	Plan	for	Employees	(Non-Qualified	Stock Options)	(incorporated	herein	by	reference	to	Exhibit	10(a)	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	August 26,	2004).

				(e)* Form	of	Company's	Stock	Option	Agreement	under	the	1996	Stock	Incentive	Plan	for	Employees	(Incentive	Stock Options)	(incorporated	herein	by	reference	to	Exhibit	10(b)	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	August 26,	2004).

				(f)* Form	of	Company's	Stock	Option	Agreement	under	the	Amended	and	Restated	2003	Stock	Incentive	Plan	(Non-Qualified Stock	Options	with	Non-Compete/Non-Solicit),	filed	herewith.

				(g)* Form	of	Company's	Stock	Option	Agreement	under	the	Amended	and	Restated	2003	Stock	Incentive	Plan	(Incentive Stock	Options	with	Non-Compete/Non-Solicit),	filed	herewith.

				(h)* Humana	Inc.	Amended	and	Restated	2003	Stock	Incentive	Plan	(incorporated	herein	by	reference	to	Appendix	A	to Humana	Inc.'s	Proxy	Statement	with	respect	to	the	Annual	Meeting	of	Stockholders	held	on	April	27,	2006).

				(i)* Humana	Inc.	Executive	Management	Incentive	Compensation	Plan,	as	amended	and	restated	February	1,	2008 (incorporated	herein	by	reference	to	Appendix	A	to	Humana	Inc.'s	Proxy	Statement	with	respect	to	the	Annual	Meeting	of Stockholders	held	on	April	24,	2008).

				(j)* Form	of	Change	of	Control	Agreement	amended	on	October	23,	2008	(incorporated	herein	by	reference	to	Exhibit	10(n) to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2008).

				(k)* Employment	Agreement,	dated	as	of	May	16,	2008,	by	and	between	Humana	Inc.	and	Michael	B.	McCallister (incorporated	herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	May	21,	2008).

				(l)* Trust	under	Humana	Inc.	Deferred	Compensation	Plans	(incorporated	herein	by	reference	to	Exhibit	10(p)	to	Humana Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	1999).

				(m)* The	Humana	Inc.	Deferred	Compensation	Plan	for	Non-Employee	Directors	(as	amended	on	August	28,	2008) (incorporated	by	reference	to	Exhibit	10(q)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended December	31,	2008).

				(n)* Severance	policy	as	amended	and	restated	on	October	23,	2007	(incorporated	herein	by	reference	to	Exhibit	10(r)	to Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2007).

				(o)* Summary	of	Changes	to	Humana	Inc.	Retirement	Plans,	as	amended	(incorporated	herein	by	reference	to	Exhibit	10.3	to Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2003).

				(p)* Humana	Supplemental	Executive	Retirement	and	Savings	Plan,	as	amended	and	restated	on	December	13,	2007, (incorporated	herein	by	reference	to	Exhibit	10(u)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year ended	December	31,	2007).

				(q)* Letter	agreement	with	Humana	Inc.	officers	concerning	health	insurance	availability	(incorporated	herein	by	reference	to Exhibit	10(mm)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	1994).

				(r)* Executive	Long-Term	Disability	Program	(incorporated	herein	by	reference	to	Exhibit	10(a)	to	Humana	Inc.'s	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004).

				(s)* Indemnity	Agreement	(incorporated	herein	by	reference	to	Appendix	B	to	Humana	Inc.'s	Proxy	Statement	with	respect	to the	Annual	Meeting	of	Stockholders	held	on	January	8,	1987).

				(t)* Form	of	Company's	Restricted	Stock	Agreement	under	the	1996	Stock	Incentive	Plan	(incorporated	herein	by	reference to	Exhibit	10(cc)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2004).

				(u)* Form	of	Company's	Restricted	Stock	Agreement	with	Non-Solicit	under	the	Amended	and	Restated	2003	Stock	Incentive Plan,	filed	herewith.

				(v)* Summary	of	the	Company's	Financial	Planning	Program	for	our	executive	officers	(incorporated	herein	by	reference	to Humana	Inc.'s	Current	Report	on	Form	8-K	filed	December	21,	2005).

				(w)* Form	of	Company's	Combined	Option	and	Restricted	Stock	Agreement	with	Non-Compete/Non-Solicit	under	the Amended	and	Restated	2003	Stock	Incentive	Plan,	filed	herewith.

				(x)* Form	of	Company's	Restricted	Stock	Agreement	with	Non-Compete/Non-Solicit	under	the	Amended	and	Restated	2003 Stock	Incentive	Plan,	filed	herewith.

				(y)* Form	of	Company's	Restricted	Stock	Unit	Agreement	with	Non-Compete/Non-Solicit	under	the	Amended	and	Restated 2003	Stock	Incentive	Plan,	filed	herewith.

				(z) Five-Year	Credit	Agreement,	dated	as	of	July	14,	2006	(incorporated	herein	by	reference	to	Exhibit	10	to	Humana	Inc.'s Current	Report	on	Form	8-K	filed	on	July	19,	2006).

		(aa) Agreement	between	the	United	States	Department	of	Defense	and	Humana	Military	Healthcare	Services,	Inc.,	a	wholly owned	subsidiary	of	Humana	Inc.,	dated	as	September	1,	2003	(incorporated	herein	by	reference	to	Exhibit	10(gg)	to Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2004).

		(bb)** Amendment	of	Solicitation/Modification	of	Contract,	dated	as	of	January	16,	2009,	by	and	between	Humana	Military Healthcare	Services,	Inc.	and	the	United	States	Department	of	Defense	TRICARE	Management	Activity	(incorporated herein	by	reference	to	Exhibit	10	to	Humana	Inc.'s	Current	Report	on	Form	8-K,	filed	on	March	3,	2009).

		(cc) Form	of	CMS	Coordinated	Care	Plan	Agreement	(incorporated	herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2005).

		(dd) Form	of	CMS	Private	Fee	for	Service	Agreement	(incorporated	herein	by	reference	to	Exhibit	10.2	to	Humana	Inc.'s Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2005).

		(ee) Addendum	to	Agreement	Providing	for	the	Operation	of	a	Medicare	Voluntary	Prescription	Drug	Plan	(incorporated herein	by	reference	to	Exhibit	10.3	to	Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30, 2005).

		(ff) Addendum	to	Agreement	Providing	for	the	Operation	of	an	Employer/Union-only	Group	Medicare	Advantage Prescription	Drug	Plan	(incorporated	herein	by	reference	to	Exhibit	10.4	to	Humana	Inc.'s	Quarterly	Report	on	Form	10- Q	for	the	quarter	ended	September	30,	2005).

				(gg) Addendum	to	Agreement	Providing	for	the	Operation	of	an	Employer/Union-only	Group	Medicare	Advantage-Only	Plan (incorporated	herein	by	reference	to	Exhibit	10.5	to	Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2005).

				(hh) Addendum	to	Agreement	Providing	for	the	Operation	of	a	Medicare	Advantage	Regional	Coordinated	Care	Plan (incorporated	herein	by	reference	to	Exhibit	10.6	to	Humana	Inc.'s	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2005).

				(ii) Explanatory	Note	regarding	Medicare	Prescription	Drug	Plan	Contracts	between	Humana	and	CMS	(incorporated	herein by	reference	to	Exhibit	10(nn)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31, 2005).

				(jj) Form	of	Company's	Restricted	Stock	Unit	Agreement	with	Non-Solicit	under	the	Amended	and	Restated	2003	Stock Incentive	Plan,	filed	herewith.

* Exhibits	10(a)	through	and	including	10(y)	are	compensatory	plans	or	management	contracts.

** Pursuant	to	Rule	24b-2	of	the	Securities	Exchange	Act	of	1934,	as	amended,	confidential	portions	of	this	exhibit	have	been	omitted	and	filed	separately	with	the Securities	and	Exchange	Commission	pursuant	to	a	request	for	confidential	treatment.

† Submitted	electronically	with	this	report.

Attached	as	Exhibit	101	to	this	report	are	the	following	documents	formatted	in	XBRL	(Extensible	Business	Reporting	Language):	(i)	the	Consolidated	Balance Sheets	at	December	31,	2008	and	2009;	(ii)	the	Consolidated	Statements	of	Income	for	the	years	ended	December	31,	2007,	2008	and	2009;	(iii)	the	Consolidated Statements	of	Cash	Flows	for	the	years	ended	December	31,	2007,	2008	and	2009;	and	(iv)	Notes	to	Consolidated	Financial	Statements,	tagged	as	blocks	of	text. Pursuant	to	applicable	securities	laws	and	regulations,	we	are	deemed	to	have	complied	with	the	reporting	obligation	relating	to	the	submission	of	interactive	data files	in	such	exhibits	and	are	not	subject	to	liability	under	any	anti-fraud

provisions	of	the	federal	securities	laws	as	long	as	we	have	made	a	good	faith	attempt	to	comply	with	the	submission	requirements	and	promptly	amend	the interactive	data	files	after	becoming	aware	that	the	interactive	data	files	fail	to	comply	with	the	submission	requirements.	Users	of	this	data	are	advised	pursuant to	Rule	406T	of	Regulation	S-T	that	this	interactive	data	file	is	deemed	not	filed	or	part	of	a	registration	statement	or	prospectus	for	purposes	of	sections	11	or	12 of	the	Securities	Act	of	1933,	is	deemed	not	filed	for	purposes	of	section	18	of	the	Securities	Exchange	Act	of	1934,	and	otherwise	is	not	subject	to	liability	under these	sections. 119

# CONDENSED	BALANCE	SHEETS

| Cash	and	cash	equivalents | $345,792 | $249,061 |
| :--- | :--- | :--- |
| Investment\tsecurities | 319,792 | 1,406 |
| Receivable\tfrom\toperating\tsubsidiaries | 469,635 | 328,665 |
| Securities\tlending\tcollateral | 961 | 955 |
| Other\tcurrent\tassets | 210,261 | 336,141 |
| Total\tcurrent\tassets | 1,346,441 | 916,228 |
| Property\tand\tequipment,\tnet | 471,671 | 489,843 |
| Investments\tin\tsubsidiaries | 7,197,247 | 6,552,295 |
| Other\tlong-term\tassets | 29,505 | 29,384 |
| Total\tassets | $ 9,044,864 | $7,987,750 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Payable\tto\toperating\tsubsidiaries | $ 1,169,445 | $1,055,420 |
| Current\tportion\tof\tnotes\tpayable\tto\toperating\tsubsidiaries | 27,600 | 27,600 |
| Book\toverdraft | 63,573 | 29,309 |
| Other\tcurrent\tliabilities | 277,518 | 446,143 |
| Securities\tlending\tpayable | 1,000 | 1,000 |
| Total\tcurrent\tliabilities | 1,539,136 | 1,559,472 |
| Long-term\tdebt | 1,642,083 | 1,900,949 |
| Notes\tpayable\tto\toperating\tsubsidiaries | 8,550 | 8,550 |
| Other\tlong-term\tliabilities | 79,092 | 61,589 |
| Total\tliabilities | 3,268,861 | 3,530,560 |
| Commitments\tand\tcontingencies |  |  |
| Stockholders'\tequity: |  |  |
| Preferred\tstock,\t$1\tpar;\t10,000,000\tshares\tauthorized;\tnone\tissued | — | — |
| Common\tstock,\t$0.16\n\t2/3\tpar;\t300,000,000\tshares\tauthorized;\t189,801,119\tshares\tissued\tin\t2009\tand\t187,856,684\tshares |  |  |
| issued\tin\t2008 | 31,634 | 31,309 |
| Capital\tin\texcess\tof\tpar\tvalue | 1,658,521 | 1,574,245 |
| Retained\tearnings | 4,429,611 | 3,389,936 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | 42,135 | (175,243) |
| Treasury\tstock,\tat\tcost,\t19,621,069\tshares\tin\t2009\tand\t19,031,229\tshares\tin\t2008 | (385,898) | (363,057) |
| Total\tstockholders'\tequity | 5,776,003 | 4,457,190 |
| Total\tliabilities\tand\tstockholders'\tequity | $ 9,044,864 | $7,987,750 |

See	accompanying	notes	to	the	parent	company	financial	statements.

# CONDENSED	STATEMENTS	OF	OPERATIONS

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Revenues: |  |  |  |
| Management\tfees\tcharged\tto\toperating\tsubsidiaries | $1,057,185 | $947,635 | $829,515 |
| Investment\tand\tother\tincome,\tnet | 3,741 | (2,872) | 22,403 |
|  | \t 1,060,926 | \t 944,763 | \t 851,918 |
| Expenses: |  |  |  |
| Selling,\tgeneral\tand\tadministrative | 836,005 | \t 767,405 | \t 683,562 |
| Depreciation | 162,028 | \t 134,461 | \t 119,076 |
| Interest | 104,204 | 79,212 | 71,258 |
|  | \t 1,102,237 | \t 981,078 | \t 873,896 |
| Loss\tbefore\tincome\ttaxes\tand\tequity\tin\tnet\tearnings\tof\tsubsidiaries | (41,311) | (36,315) | (21,978) |
| Benefit\tfor\tincome\ttaxes | (44,247) | (19,493) | (16,103) |
| Income\t(loss)\tbefore\tequity\tin\tnet\tearnings\tof\tsubsidiaries | 2,936 | (16,822) | (5,875) |
| Equity\tin\tnet\tearnings\tof\tsubsidiaries | \t 1,036,739 | \t 663,976 | \t 839,559 |
| Net\tincome | $1,039,675 | $647,154 | $833,684 |

# CONDENSED	STATEMENTS	OF	CASH	FLOWS

|  | 2009 | 2008 | 2007 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tthousands) |  |
| Net\tcash\tprovided\tby\toperating\tactivities | $911,090 | $547,813 | $682,374 |
| Cash\tflows\tfrom\tinvesting\tactivities: |  |  |  |
| Acquisitions | (5,867) | (341,288) | (548,251) |
| Purchases\tof\tinvestment\tsecurities | (597,858) | (7,528) | (25,147) |
| Proceeds\tfrom\tsale\tof\tinvestment\tsecurities | 2,309 | 28,868 | 100,001 |
| Maturities\tof\tinvestment\tsecurities | 278,443 | 2,489 | 15,213 |
| Purchases\tof\tproperty\tand\tequipment,\tnet | (142,931) | (195,517) | (139,962) |
| Capital\tcontributions\tto\toperating\tsubsidiaries | (132,257) | (467,750) | (307,340) |
| Change\tin\tsecurities\tlending\tcollateral | — | 400,292 | (400,211) |
| Net\tcash\tused\tin\tinvesting\tactivities | (598,161) | (580,434) | (1,305,697) |
| Cash\tflows\tfrom\tfinancing\tactivities: |  |  |  |
| Borrowings\tunder\tcredit\tagreement | — | 1,175,000 | 1,685,000 |
| Repayments\tunder\tcredit\tagreement | (250,000) | (1,725,000) | (1,335,000) |
| Proceeds\tfrom\tissuance\tof\tsenior\tnotes | — | 749,247 | — |
| Debt\tissue\tcosts | — | (6,696) | — |
| Proceeds\tfrom\tswap\ttermination | — | 93,008 | — |
| Repayment\tof\tnotes\tissued\tto\toperating\tsubsidiaries | — | — | (9,450) |
| Change\tin\tbook\toverdraft | 34,264 | (27,720) | 876 |
| Change\tin\tsecurities\tlending\tpayable | — | (400,292) | 400,211 |
| Common\tstock\trepurchases | (22,841) | (106,070) | (27,412) |
| Tax\tbenefit\tfrom\tstock-based\tcompensation | 5,339 | 9,912 | 37,443 |
| Proceeds\tfrom\tstock\toption\texercises\tand\tother | 17,040 | 10,965 | 61,643 |
| Net\tcash\t(used\tin)\tprovided\tby\tfinancing\tactivities | (216,198) | (227,646) | 813,311 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | 96,731 | (260,267) | 189,988 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 249,061 | 509,328 | 319,340 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $345,792 | $249,061 | $509,328 |

# NOTES	TO	CONDENSED	FINANCIAL	STATEMENTS

Parent	company	financial	information	has	been	derived	from	our	consolidated	financial	statements	and	excludes	the	accounts	of	all	operating	subsidiaries.	This information	should	be	read	in	conjunction	with	our	consolidated	financial	statements.

# 2.	TRANSACTIONS	WITH	SUBSIDIARIES

# Management	Fee

Through	intercompany	service	agreements	approved,	if	required,	by	state	regulatory	authorities,	Humana	Inc.,	our	parent	company,	charges	a	management	fee	for reimbursement	of	certain	centralized	services	provided	to	its	subsidiaries	including	information	systems,	disbursement,	investment	and	cash	administration,	marketing, legal,	finance,	and	medical	and	executive	management	oversight.

# Dividends

Cash	dividends	received	from	subsidiaries	and	included	as	a	component	of	net	cash	provided	by	operating	activities	were	$774.1	million	in	2009,	$296.0	million in	2008	and	$377.0	million	in	2007.

# Guarantee

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

# Notes	Receivables	from	Operating	Subsidiaries

We	funded	certain	subsidiaries	with	surplus	note	agreements.	These	notes	are	generally	non-interest	bearing	and	may	not	be	entered	into	or	repaid	without	the prior	approval	of	the	applicable	Departments	of	Insurance.

# Notes	Payable	to	Operating	Subsidiaries

We	borrowed	funds	from	certain	subsidiaries	with	notes	generally	collateralized	by	real	estate.	These	notes,	which	have	various	payment	and	maturity	terms,	bear interest	ranging	from	1.90%	to	6.65%	and	are	payable	in	2010	and	2014.	We	recorded	interest	expense	of	$1.3	million,	$1.9	million	and	$2.7	million	related	to	these notes	for	the	years	ended	December	31,	2009,	2008	and	2007,	respectively.	During	2007,	we	repaid	a	$9.5	million	note	payable	to	operating	subsidiaries	in	connection with	the	sale	of	the	underlying	building.

# NOTES	TO	CONDENSED	FINANCIAL	STATEMENTS—(Continued)

During	2008,	we	funded	a	subsidiary's	2008	acquisition	of	UnitedHealth	Group's	Las	Vegas,	Nevada	individual	SecureHorizons	Medicare	Advantage	HMO business	with	contributions	from	Humana	Inc.,	our	parent	company,	of	$225.0	million,	included	in	capital	contributions	in	the	condensed	statement	of	cash	flows.	Refer to	Note	3	of	the	notes	to	consolidated	financial	statements	in	the	Annual	Report	on	Form	10-K	for	a	description	of	acquisitions.

The	release	of	the	liability	for	unrecognized	tax	benefits	in	2009	as	a	result	of	settlements	associated	with	the	completion	of	the	audit	of	our	U.S.	income	tax returns	for	2005	and	2006,	reduced	tax	expense	$16.8	million	in	2009.	Refer	to	Note	10	of	the	notes	to	consolidated	financial	statements	in	the	Annual	Report	on	Form 10-K	for	a	description	of	income	taxes.

Refer	to	Note	11	of	the	notes	to	consolidated	financial	statements	in	the	Annual	Report	on	Form	10-K	for	a	description	of	debt.

# (in	thousands)

|  | Balance	at<br>Beginning<br>of	Period | Acquired<br>Balances | Charged<br>(Credited)	to<br>Costs	and<br>Expenses | Charged	to<br>Other<br>Accounts	(1) | Deductions<br>or<br>Write-offs | Balance	at<br>End	of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Allowance\tfor\tloss\ton\treceivables: |  |  |  |  |  |  |
| 2009 | $49,160 | $— | $19,054 | $1,730 | $(19,112) | $50,832 |
| 2008 | 68,260 | — | 5,398 | (2,611) | (21,887) | 49,160 |
| 2007 | 45,589 | — | 28,922 | 796 | (7,047) | 68,260 |
| Deferred\ttax\tasset\tvaluation\tallowance: |  |  |  |  |  |  |
| 2009 | (28,063) | — | (2,030) | — | — | (30,093) |
| 2008 | — | (28,063) | — | — | — | (28,063) |
| 2007 | — | — | — | — | — | — |

(1) Represents	changes	in	retroactive	membership	adjustments	to	premium	revenues	as	more	fully	described	in	Note	2	to	the	consolidated	financial	statements.

# SIGNATURES

Pursuant	to	the	requirements	of	Sections	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	Company	has	duly	caused	this	report	to	be	signed	on	its	behalf	by the	undersigned,	thereto	duly	authorized.

Senior	Vice	President,

Chief	Financial	Officer	and	Treasurer

(Principal	Financial	Officer)

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Company	and	in the	capacities	and	on	the	date	indicated.

| /s/				STEVEN	E.	MCCULLEY | Vice	President	and	Controller	(Principal	Accounting | February	19,	2010 |
| :--- | :--- | :--- |
| Steven\tE.\tMcCulley | Officer) |  |
| /s/\t\t\t\tDAVID\tA.\tJONES,\tJR. | Chairman\tof\tthe\tBoard | February\t19,\t2010 |
| David\tA.\tJones,\tJr. |  |  |
| /s/\t\t\t\tFRANK\tA.\tD'AMELIO | Director | February\t19,\t2010 |
| Frank\tA.\tD'Amelio |  |  |
| /s/\t\t\t\tW.\tROY\tDUNBAR | Director | February\t19,\t2010 |
| W.\tRoy\tDunbar |  |  |
| /s/\t\t\t\tKURT\tJ.\tHILZINGER | Director | February\t19,\t2010 |
| Kurt\tJ.\tHilzinger |  |  |
| /s/\t\t\t\tMICHAEL\tB.\tMCCALLISTER | Director,\tPresident\tand\tChief\tExecutive\tOfficer | February\t19,\t2010 |
| Michael\tB.\tMcCallister |  |  |
| /s/\t\t\t\tWILLIAM\tJ.\tMCDONALD | Director | February\t19,\t2010 |
| William\tJ.\tMcDonald |  |  |
| /s/\t\t\t\tWILLIAM\tE.\tMITCHELL | Director | February\t19,\t2010 |
| William\tE.\tMitchell |  |  |
| /s/\t\t\t\tDAVID\tB.\tNASH,\tM.D. | Director | February\t19,\t2010 |
| David\tB.\tNash,\tM.D. |  |  |
| /s/\t\t\t\tJAMES\tJ.\tO'BRIEN | Director | February\t19,\t2010 |
| James\tJ.\tO'Brien |  |  |
| /s/\t\t\t\tMARISSA\tT.\tPETERSON | Director | February\t19,\t2010 |



Question: what was the percent of the change of the expected volatility from 2008 to 2009
Calculation: volatility_change = 39.2 - 28.2
percent_change = volatility_change / 28.2
answer = percent_change * 100
Answer: 39%